06 February 2020 by jbchevrel
Teck Resources (TCK) is a Canadian diversified mining company (copper, steelmaking coal, zinc and energy mostly) which came back in the CDX IG last MAR19 after having spent 3.5 years in CDX HY after Fitch upgrade to BBB- (=) in FEB19 and Moody’s to Baa3 (=) in JAN19. It’s been trading in a ~100-200 range over the past 2y. we now c120bp. it peaked ~1,500bp (GFC) and ~2,000bp (commodity crash in 2015). While we are a long way from that, base commodities are still on the back foot. It feels like the corona-virus was just one more concern adding onto an already weak global growth outlook. On the micro side of things, TCK has announced that coal sales for Q120 are being affected by bad weather causing rail and terminal performance issues. Heavy snow and extreme cold in JAN20 as well as rock and mud slides have affected rail lines and adjacent highways. Ongoing heavy rains have delayed remediation work and the expected impact is ~1Mt of coal sales in Q120. In addition to the poor weather, mine site clean coal inventory is running high and is expected to limit Q120 coal production if the weather aint improve. TCK also noted that the raw coal feed belt at Elkview experienced a mechanical failure which is expected to prevent raw coal processing through the plant for in the area of 2 weeks. We could see some under-performance of TCK CDS on those macro/micro developments. For reference, Q120 sales were expected to be in the area of 6Mt, although no previous Q120 sales guidance had been provided. For 2020, TCK previously guided that coal sales would be similar to 2019, in the area of 25Mt. From the recent history, the rule of thumb seems close to 0.5Mt coal sales ~$40M EBITDA. For reference TCK is expected to have generated $4.5B EBITDA in 2019 from $6.3B $5.6B $3.4B in 2018-15. FCF was +$1.1B from -$0.6B in 2015. Although it is still sensitive to volatility in commodities prices, TCK is more resilient from a credit perspective than it used to be before 2015/16 commodity slump. The debt has been more than halved, dividend payout was slashed from 50%+ to ~5%, net leverage was taken to below 1x, and liquidity has improved to ~$6B.