Standard & Poor's Ratings Service Monday removed Canadian coal and base metals miner Teck from CreditWatch with negative implications, and affirmed S&P's ‘BB+' long-term corporate credit and senior secured debt ratings on the company.
However, S&P retained its negative outlook for Teck.
We believe that the recent extension of the company's credit facilities, as well as successful placement of the proposed notes, substantially addresses near-term maturity risks, although weak demand for its core metals products combined with high financing costs have slown the pace of debt reduction, and have contributed to a speculative-grade credit profile, said S&P Credit Analyst Donald Marleau.
Teck incurred US$9.8 billion in debt late last year to acquire the remaining 60% of the Elk Valley Coal Partnership, which the company did not already own. However, S&P said, Teck has a business profile that we consider satisfactory for a diversified metals and mining company with low-cost, long-lived mines.
While noting that market conditions in Teck's core commodities have improved to date, S&P nevertheless advises that stronger metals prices are susceptible to declining quickly amid the prevailing economic uncertainty. As such, we expect that Teck will continue selling assets to reduce debt, and we believe that prospects are good for the company to reduce debt significantly without cutting into its core assets.
In his analysis, Marleau wrote, The company's reserve base is solid in our view, with more than 15 years of proven and probable reserves for its most significant assets and we believe it has good prospects to extend mine lives by converting its large resources into reserves. Teck is among the world's largest producers of zinc and seaborne hard coking coal and a significant producer of copper and lead, giving it a diversified source of earnings.
Teck's key profit drivers-the Teck Coal, Red Dog, Highland Valley, and the Antamina mining operations-have in our opinion competitive cost profiles that support solid midcycle cash flow and profitability, which are offset by high-cost, mature assets (such as Highland Valley) that have a high degree of operating leverage, which contributes to high earnings volatility.
Teck's operating earnings remain strong in our view, but heavy financing costs have reduced the company's cash flow protection measures, Marleau advised. He warned that debt leverage and interest coverage ratios will likely weaken through 2009 along with weaker metallurgical coal prices and volumes, and as attractive copper hedges roll off.
We believe that debt reduction in 2009 and 2010 will depend heavily on Teck's ability to monetize assets, and its cash from operations is heavily levered to met coal prices and volumes, he added. As such the company will need to maintain about C$1 billion of free operating cash flow for debt reduction in the next several years to maintain the ratings. Moreover, the company could breach covenants on its bridge and term credit facilities later in 2009 if weaker metals prices coincide with its persistently high debt levels.