Fitch Ratings-Tokyo/Hong Kong-06 July 2021: Mongolian Mining Corporation's (MMC; B/Stable) rating headroom has tightened due to ongoing disruptions of throughput at the Chinese-Mongolian border as a result of the Covid-19 pandemic, says Fitch Ratings. We believe the company has sufficient liquidity and financial flexibility for now. Should border disruptions persist through August, however, the company's credit metrics could weaken to the point where we may take rating action.

Fitch believes MMC's liquidity is adequate despite the current border closure. We estimate readily available cash was above USD30 million at end-1H21 compared with USD20 million at end-1H20. We believe the company has access to additional funding if needed. MMC has considerable operational flexibility, which should allow it to reduce monthly cash burn to a low single-digit US dollar amount by suspending mining and processing operations and scaling back capex to a minimum. We therefore think MMC's liquidity buffer will be sufficient to weather the border disruptions for now.

We expect the disruptions, which continued through most of 2Q21 and prevented border throughput for most of June amid a spike in new Covid-19 cases in Mongolia, to be resolved by end-July 2021 in our base case. This would allow MMC to resume normal operations and coal exports in early August, making up for some of the volume lost in 1H21. We forecast this would lead to 2021 export volume at least 20% below 2020 volume. In this scenario, we expect net FFO leverage to remain above our negative trigger of 3.5x at end-2021, but to improve sufficiently from currently elevated levels to establish a deleveraging path as free cash flow (FCF) turns sustainably positive. This, in conjunction with sufficient liquidity, supports the current ratings.

The macroeconomic environment also remains supportive on the back of robust coal prices amid strong demand for coal from Chinese steel mills in northern China, MMC's key market. We believe this demand is sustainable given the strong economic rebound of the Chinese economy. These positive market fundamentals contrast markedly with the situation in 2016 when MMC missed a coupon payment of about USD27 million and defaulted amid decade-low coking coal prices.

The current disruptions also differ from those in 2020 as preventive measures have since been implemented at border crossing points and vaccination is progressing on both sides of the border, lowering the risk of prolonged border closures. Fitch acknowledges MMC could recover more quickly than projected in our base case as testing of drivers for Covid-19 was completed on 6 July on both sides of the border and border throughput resumed today. We have not factored this potential upside into our base case as we cannot rule out temporary disruptions.

MMC's next coupon payment of USD20.4 million on its 2024 US dollar notes is due on 15 October 2021. We believe MMC should be able meet this obligation, based on our expectation of a return to normal operations in August and rapid ramp-up of exports thereafter. Its liquidity buffer should also provide some flexibility in a downside scenario if disruptions persist beyond our current expectations. However, the border closure has led to diminished ratings headroom. A disruption in exports that is longer than we anticipated would delay the normalisation in net leverage and the FCF recovery on which the current ratings are contingent and lead to rating action. We are therefore monitoring the border situation and MMC's liquidity and cash flow profile closely.

Contact:

Roman Schorr

Director

+81 3 3288 2673

Fitch Ratings Japan Limited

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4-8 Kojimachi, Chiyoda-ku

Tokyo, Japan 102-0083