Teck credit rating at risk due to poor commodity price
Teck President and CEO Don Lindsay
Teck Resources Ltd. (TSX:TCK.B)(NYSE:TCK) reported increased profit in 2015’s second quarter but as commodity prices slide, the company sees a greater risk of its credit rating being demoted from investment-grade.
“…our credit ratings are recently put on negative outlooks by S&P and Moody’s due to the current economic environment,” said Ron Millos, Teck CFO. “Our investment grade credit ratings continue to be a priority for us.
“However, if commodity price moves further against us, there is a limit to what makes sense to defend it.”
President and CEO Don Lindsay said market analysts are speculating Teck could issue equity to buy back debt to defend its credit rating, but he said this will not happen.
Millos said some of the actions it has taken to keep the company’s rating from sliding include cutting capital spending, reducing annual dividends and decreasing its coal operations.
In May, the company temporarily idled six coal mines , including five in British Columbia. This move affected approximately 4,400 workers, mostly in B.C.
When asked to discuss potential future cuts to coal production, Lindsay said this decision won’t be made until September.
The company reported profit of $79 million in Q1 – up from $72 million in the same period last year. Profit itself was down but a tax adjustment related to deferred balance of a 2% increase in the Alberta corporate tax rate resulted in a positive adjustment of $14 million.
Earnings per share during the quarter were $0.14, compared with $0.13 last year.
"All of our operations have remained cash flow positive after sustaining capital investment and our balance sheet remains strong with over $6.5 billion of liquidity,” Lindsay said.
“This has been achieved notwithstanding a material drop in the U.S. dollar spot coal price since the beginning of 2015.”
Teck said the drop in the loonie and lower oil prices have contributed to decreased costs for copper and coal.
“Prices for all of our major commodities fell significantly in the quarter, putting downward pressure on margins and profits,” the company said in its Q2 results news release. “This has been partly offset by the weaker Canadian dollar.
“Our focus on cost reduction has partially mitigated the effects of lower prices.”
Shares of Teck fell to a six-year low of $9.93 July 23. As of press time, shares had fallen further, to $9.61 per share – down almost 8% compared with before the company's Q2 results were announced.
– With files from Nelson Bennett