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Moody’s Investors Service has slashed Teck Resources Ltd.’s credit rating to junk status as the miner struggles with low coal prices and huge capital spending requirements.
Moody’s announced on Monday that it cut its rating on Teck to Ba1 from Baa3, which is the lowest investment-grade level. It cited the Vancouver-based company’s “significant” financial leverage and “material” free cash flow consumption. Teck had US$8.65 billion of debt at the end of June.
“We expect prolonged commodity price weakness and sizable investment spending will cause Teck’s financial leverage to remain well in excess of typical investment grade thresholds through at least 2017,” Moody’s senior credit officer Darren Kirk said in a statement.
The downgrade could have a significant impact on the company’s future borrowing costs, especially if the other rating agencies follow suit. Fortunately for Teck, it has strong liquidity and no immediate need to borrow more money.
The company is a victim of bad timing. Steelmaking coal prices have collapsed just as Teck is in the midst of a $2.9 billion investment in the Fort Hills oil sands project in Alberta. Put together, those two factors have strained its balance sheet and caused alarm at the rating agencies.
The downgrade does not come as a shock to Teck or its shareholders. On a conference call in July, chief executive Don Lindsay warned the company could lose its investment-grade rating in the short term. He said Teck would not take any extreme measures (such as an equity issue) to prevent a credit downgrade. The miner does not want to consider issuing equity while its stock price sits at current depressed levels.
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