OREANDA-NEWS. Fitch Ratings has downgraded the Issuer Default Rating (IDR) for Teck Resources Limited (Teck; NYSE: TCK; TSE: TCKb) to 'B+' from 'BB+' along with Teck's outstanding debt. About C$9.6 billion in debt and $4.2 billion in senior unsecured credit facilities are affected by these rating actions. A full list of rating actions follows at the end of this release.

The downgrade reflects the risk that metal and metallurgical coal prices will be lower for longer resulting in weak earnings which, coupled with high capital spending for the Fort Hills project, will delay Teck's ability to generate free cash flow and reduce financial leverage to levels where FFO leverage is less than 4.25x beyond 2018, as well as liquidity risks around refinancing upcoming maturities as well as the 2017 credit facility.

The Rating Outlook remains Negative.

KEY RATING DRIVERS

The ratings reflect expectations for tight liquidity, elevated financial leverage, weak demand growth and excess supply in metallurgical coal and to a lesser degree in copper and zinc. Teck has been focused on reducing costs and capital spending to preserve cash while funding Fort Hills during a weak commodity price environment. The company has also been monetizing precious metals streams, cut its dividends and stated that it could monetize infrastructure assets but has stated that it would not raise equity finance.

Commodity Price Exposure

The outlook for metallurgical coal prices is weak given persistent oversupply. Fitch expects this condition to persist through 2016 and result in lower profits and cash flow. Teck guides that a $1/tonne change in its coal realizations impacts profits by C$23 million. For 2015, Teck realized $93/tonne on its coal sales on average. Fitch expects the average hard coking coal benchmark to be $85/tonne in 2016 down from $102/tonne on average in 2015. Teck expects profitability in 2016 to benefit from lower stripping costs; Teck guides to a range of total cost per tonne of C$91 - C$97 ($65-$69 at an exchange rate assumption of C$1.4=$1) compared with C$99 ($76 at the exchange rate of C$1.3=$1) in 2015.

Teck reports that a $0.01/lb. change in copper prices impacts profits by C$6 million. Average copper realizations were $2.50/lb. in 2015 compared with the year to Feb. 29, 2016 average of $2.06/lb. and Fitch's 2016 assumption of $2.18/lb.
Teck reports that a $0.01/lb. change in Zinc prices impacts profits by C$9 million. Average zinc realizations were $0.87/lb. in 2015 compared with the year to Feb. 29, 2016 average of $0.73/lb. and Fitch's 2016 assumption of $0.78/lb.

Fort Hills

Teck guides to C$960 million in spending on the Fort Hills oil sands project in Canada in 2016 out of a total remaining spend of C$1.3 billion. The Fort Hills project is a partnership among Suncor Energy Inc. (50.8%), Total E&P Canada Ltd. (29.2%) and Teck (20%). Production is not anticipated to start before the end of 2017 but is expected to be at 90% capacity within 12 months.

Although oil prices remain under near term pressure, Fitch acknowledges the diversification benefits of petroleum and recognizes the quality of the Fort Hills project. The project is expected to have cash costs in the range of C$20 -C$24/barrel of bitumen, excluding sustaining capex of roughly C$3/barrel, and a 50 year mine life.

Total capital guidance for the year is C$1.98 billion including C$540 million of capitalized stripping and C$305 million of sustaining capital.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Teck include:

--Production at guidance and fairly flat after 2016;
--Coal and Copper unit cost decline with currency and fuel impacts as well as cost initiatives;
--Fitch's Mid-cycle Commodity Price Assumptions for commodities prices;
--Capital Expenditures at guidance; and fairly flat through 2017 given Fort Hill's spending.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating actions include:

--Revolving credit facilities extended by at least 1 year with no reduction in aggregate amounts and no security granted.
--Leverage expected to be below 4.25x by the end of 2018.
--The metallurgical coal market returns to balance faster than expected.
--A sustainable, meaningful reduction in debt and financial leverage.

Negative: Future developments that may, individually or collectively, lead to negative rating actions include:

--Expectations of reduced economics of the Fort Hills project.
--Expectation that available liquidity declines below C$2 billion.
--Expectations that FFO Adjusted leverage would be sustained above 5x for an extended period.

LIQUIDITY

Adequate Liquidity

Fitch estimates cash burn for 2016 and 2017 could exceed C$2 billion in aggregate. Near term debt maturities are C$28 million in 2016 and C$855 million in 2017 (comprised primarily of two $300 million notes). In addition, Fitch estimates that Teck will require an additional C$457 million of letters of credit in 2016 and an additional C$100 million in 2017 in connection with the Fort Hills project.

At Dec. 31, 2015, liquidity included $3 billion available under the revolving credit facility maturing in July 2020, $460 million available under the $1.2 billion revolving credit facility maturing in June 2017, and C$1.9 billion in cash on hand. Fitch estimates minimum required cash to be C$400 million. The credit facilities require Teck to maintain a debt to total capitalization ratio of not more than 0.5x. At Dec. 31, 2015, the ratio was 0.37x. Fitch does not expect this covenant to be breached, but would note that the covenant does not exclude non-cash impairments.

Absent asset sales, extension of the $1.2 billion revolver, or note issuance, Fitch estimates about C$1.1 billion of liquidity at the end of 2017 based on the Dec. 31, 2015 exchange rate of C$1.38/$1.00.

The company has identified infrastructure assets sales as an opportunity to improve liquidity but has not commented on targets or timing.

Fitch expects that the company will seek to extend the maturity of its revolving credit facilities and that terms could tighten and security could be demanded.

Negative pledge clauses under the company's indentures prohibit granting of security on principal property and shares of restricted subsidiaries unless the notes are equally and rateably secured with standard exemptions including indebtedness up to 10% of consolidated net tangible assets.

Principal property represents the Elkview Mine, the Fording River Mine, the Highland Valley Copper Mine and the Red Dog Mine and any other mineral property and other fixed assets located in Canada or the U.S. which is greater than 10% of consolidated net tangible assets. Restricted subsidiaries are subsidiaries with substantially all assets or operations in Canada or the U.S. and which owns or leases a principal property or primarily owns or holds securities of restricted subsidiaries. Teck reports that as of Dec. 31, 2015, consolidated net tangible assets were C$32 billion, 10% of which is approximately C$3.2 billion.

High Financial Leverage

Total Debt-to-EBITDA was 4.7x at Dec. 31, 2015 and Fitch expects the ratio to peak in 2016 above 6x but to remain over 4.5x through 2018. FFO adjusted leverage was 4.13 as of Dec. 31, 2015 and Fitch believes the ratio could remain above 4.25x through 2018.

Corporate Profile

The credit benefits from Teck's long lived reserves, leading low cost position in zinc, its leading position in the seaborne hard metallurgical coal market, and solid core position in copper.

Globally, Teck is the second largest seaborne hard coking coal producer after BHP-Mitsubishi Alliance and is at about the mid-point of the cost curve (FOB port). Teck is in the top 15 largest copper producers, globally, with about average costs and the third largest zinc producer, in the lowest quartile on costs. Mine lives are generally over 20 years.

Coal accounted for 37%, Zinc accounted for 33% and copper accounted for 30% of segment operating EBITDA in 2015. Canada accounted for about 55% of 2015 gross profit before depreciation by region and operations are also in the U.S. (21%), Chile (2%) and Peru (14%).

FULL LIST OF RATING ACTIONS

Teck Resources Limited

--Issuer Default Rating (IDR) to 'B+' from 'BB+';
--Senior Unsecured Credit Facilities to 'B+/RR4' from 'BB+/RR4'; and
--Senior Unsecured Notes to 'B+/RR4' from 'BB+/RR4'.

The Rating Outlook remains Negative.