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Fitch Affirms Mongolian Mining's IDR at 'B'; off RWN; Outlook Stable; Assigns Final 'B' to USD Notes www.fitchratings.com
Fitch Ratings has affirmed Mongolian coal producer Mongolian Mining Corporation's (MMC) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B'. The Outlook is Stable. Fitch also assigned a 'B' final rating to the US dollar senior exchange notes due September 2026, with a Recovery Rating of 'RR4'. The notes are jointly and severally issued by MMC and its wholly owned subsidiary, Energy Resources LLC.
The ratings were removed from Rating Watch Negative (RWN), on which they were placed on 28 August 2023, as MMC completed the exchange offer, improving its liquidity and debt maturity profile.
MMC's IDR is constrained by its customer concentration, limited scale and volatility of mining regulations in Mongolia.
KEY RATING DRIVERS
Refinancing Risk Removed: MMC's refinancing risk is mitigated after completing the exchange offer, with a larger cash buffer enhancing liquidity and more spread-out debt maturities. After the exchange offer and new note issuance, MMC's maturity profile improved significantly with USD84 million of notes maturing in 2024 and USD180 million in 2026, compared with USD350 million in 2024 previously. We expect MMC's cash balance at end-2023 to be slightly under USD150 million, which is sufficient to cover USD84 million due in April 2024 and provides a sufficient cash buffer to maintain operations.
Regional Customer Concentration: MMC's sole customer base is in northern China, limiting its operational flexibility. MMC's heavy reliance on Chinese customers caused major business disruptions during Covid-19-related border closures between Mongolia and China. Border throughput decreased to 100-200 trucks a day, on average, with periods of complete closure, from around 700 trucks a day pre-Covid. Sales volume dropped to 1.6 million tonnes (mt) in 2021 from an average of 5mt historically.
Transportation costs are another factor for MMC's customer base concentration. MMC's cash costs, including royalties, are in the second quartile of the global coking-coal cost curve, but its cost advantage is only in northern China due to the proximity of its mines to steel mills in the area. Land transportation costs to Chinese customers averaged about USD13/tonne in 1H23 (2022: USD30/tonne), putting it in the higher quartile of the global cost curve.
Volatile Mining Regulatory Environment: Volatility in Mongolian mining regulations can have significant impact on MMC's financials. This was the case during Covid when the Mongolian government increased the royalty reference rate, raising the effective royalty rate from 5%-8% to over 20%. Pre-Covid, the realised average selling price (ASP) and reference price used for the royalty calculation were similar with the minimal price gap. The price gap rose from 2Q21 and only started narrowing in 2H22, and in this period the ASP was around USD150-160/tonne while reference price was over USD300/tonne.
Robust Operational Improvements: MMC's coking-coal operation has normalised, with Covid-related disruptions at the border with China easing in 1Q23. Average daily throughput rose to about 800 trucks in 1H23, surpassing pre-pandemic levels and the 1H22 level of around 240 trucks. MMC ramped up processing volume to 6.8mt in 1H23, from 900,000 tonnes in 1H22, beating our expectations. Meanwhile, the ASP for hard coking coal exceeded USD160/tonne, against USD147/tonne in 2022.
We expect the ASP to fall in 2H23, but for the full-year ASP to remain above the 2022 level. We also expect washed hard coking-coal sales volume to reach 5.5mt (2022: 3.5mt). As a result, we forecast EBITDA margin to improve to over 40%, from around 24% in 2022, with greater free cash flow (FCF) from the higher volume, stronger pricing assumptions and lower costs. We also forecast net leverage to drop to below 1.0x (2022: 3.0x), supported by a strong ASP and margin expansion.
Small Scale, Single Product: MMC is small by revenue compared with Fitch-rated coal miners globally. Washed coking coal products accounted for over 98% of its total revenue in 2022. Its latest coal reserve statements show total marketable coal reserves of just under 400mt, or a reserve life of around 35 years. MMC's small scale and product concentration constrain its business profile to the 'b' category. MMC is looking to diversify away from coking coal, but we believe it will remain its dominant revenue contributor in the short to medium term.
DERIVATION SUMMARY
MMC has a smaller revenue scale than rated peers, such as Guangyang Antai Holdings Limited (B/Stable), PT Indika Energy Tbk (BB-/Stable) and PT Golden Energy Mines Tbk (GEMS, BB-/Stable).
Guangyang Antai's revenue is more than 10x times that of MMC, while Indika's revenue scale is more than 7x larger and GEMS's 5x. Even so, MMC's margin is much higher than that of Guangyang Antai and similar to that of Indika and GEM. MMC is a single-product coal miner, similar to the peers. Its operational profile in terms of mine life is over 30 years compared with slightly under 20 years for GEMS and around 16 years for Indika. However, MMC's concentrated customer base and the volatilities in Mongolia's mining regulations compare unfavorably to its rated peers
MMC's leverage and financial flexibility profile is weaker than that of GEMS. GEMS has more stable FCF generation, much lower leverage and wider financing channels. Both MMC and Indika have had choppy FCF generation in the past few years. Still, Indika has better interest coverage and much lower leverage. We expect lower leverage at MMC compared with Guangyang Antai, but both companies have had weak FCF generation in the past few years.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
- Hard coking coal ASP of over USD150/tonne in 2023 and USD140/tonne in 2024, consistent with trend in Fitch's price deck assumptions;
- Total sales volume over 8.5mt in 2023, before dropping to just under 7mt from 2024;
- EBITDA margin to improve to an average of over 40% in 2023-2025, supported by volume improvement, strong ASP and normalised costs;
- Capex to average around 10% of revenue during 2023-2025;
- No dividend payments in 2022-2025.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- Positive rating action is not envisaged in light of MMC's limited diversification in end customers and the volatility of Mongolian mining regulations.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Negative FCF for a sustained period;
- EBITDA net leverage above 3.5x for a sustained period;
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: We expect MMC to have cash on hand of just under USD150 million at end-2023, which is sufficient to cover the USD84 million of notes due in April 2024. We forecast MMC to generate over USD200 million in FCF in 2024 and 2025, and therefore, it will have sufficient cash to redeem the USD180 million of notes due in 2026 without the need for refinancing.
ISSUER PROFILE
MMC is the largest producer and exporter of high-quality hard coking coal in Mongolia. It owns and operates the Ukhaa Khudag and Baruun Naran open-pit coking coal mines in South Gobi province. MMC processed 6.6mt of run-of-mine coal in 2022, which yielded around 3.0mt of washed coking coal as a primary product and 1.2mt of washed thermal coal as a secondary product.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit http://www.fitchratings.com/topics/esg/products....
Published Date:2023-09-18
