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Fitch Upgrades Mongolian Mining to 'B+'; Outlook Stable www.fitchratings.com

Fitch Ratings - Hong Kong - 10 Nov 2024: Fitch Ratings has upgraded coal producer Mongolian Mining Corporation's (MMC) Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'B+' from 'B'. The Outlook is Stable. Fitch has also upgraded MMC's senior unsecured notes due 2026 to 'B+' from 'B' with a Recovery Rating of 'RR4'. The notes are jointly and severally issued by MMC and its wholly owned subsidiary, Energy Resources LLC.

The upgrade reflects our assessment of reduced regulatory volatility for the mining operations following an upgrade of Mongolia's sovereign rating to 'B+' from 'B' in September 2024. MMC's IDR is constrained by the concentration of end customers, small scale and high country-risk for the mining operations in Mongolia.

Key Rating Drivers

Reduced Regulatory Volatility: We believe the regulatory volatility for MMC's mining operations has reduced with lower policy uncertainty after parliamentary elections in June as well as Mongolia's stronger ability to withstand shocks due to larger foreign-exchange reserves, lower debt and more manageable external debt maturities compared to Fitch's previous forecasts. Nevertheless, Mongolia is still highly vulnerable to external conditions.

Robust Operations: Border throughput after the Covid-19 pandemic reached about 900 trucks a day on average in 2023 and averaged around 1,000 trucks a day in 9M24, exceeding the average of about 600-700 trucks on average before Covid-19. MMC also benefited from a new mining commodity trading platform that expanded its customer reach. Over 50% of revenue was through the trading platform in 9M24. As a result, MMC's run-of-mine coal output reached to 14.6 million tonnes (mt) in 2023 and 13mt in 9M24 from around 10mt in 2019.

MMC sold 6.7mt of washed coking coal products in 2023 and 6mt in 9M24, compared with the historical annual average of 4.5mt-5mt. The average selling price (ASP) per tonne of washed hard coking coal remained strong at USD160 in 2023 and USD174 in 1H24, against USD147 in 2022.

Strong Financial Profile: We expect the EBITDA margin to trend down in 2024-2027 as coking coal prices fall but will remain above 40% (2023: 47%), supported by steady volume and a low-cost position. We forecast EBITDA net leverage to remain below 0.4x in 2024-2027, after decreasing to 0.4x in 2023 from 3.4x in 2022. We expect high interest coverage to continue in 2024-2027, after EBITDA interest coverage reached 15.4x in 2023.

Acquisitions Drive Diversification and Growth: MMC started diversifying into other metals through its latest acquisition of 50% of gold and precious metal exploration company Erdene Mongol LLC. However, the coal segment will remain its dominant revenue contributor in the short to medium term. We do not expect aggressive M&A in 2024-2027, as management has indicated a cautious approach to acquisitions. Still, we will evaluate any debt-funded investment larger than Fitch expects as an event-driven risk and assess the effects on MMC's financial flexibility and credit profile.

Geographical Concentration: We believe that MMC's main end-customer base is in northern China, even though the concentration of the top 10 customers decreased to 54% in 2023 from 93% in 2019. MMC's heavy reliance on Chinese customers makes it vulnerable to economic conditions and regulatory changes in China. This was particularly evident in the Covid-19 pandemic when border throughput fell sharply, resulting in MMC's sales volume dropping to 1.6 mt in 2021, from an average of 5mt historically.

In addition, MMC's cash cost is on the first quartile of the global coking-coal cost curve, but its cost advantage is limited to northern China due to additional transportation costs beyond the region, which we believe will put MMC in the higher quartiles of the global coking-coal cost curve.

Small Scale, Single Product: MMC's scale is small by EBITDA compared with Fitch-rated coal miners globally. We expect EBITDA to be slightly above USD400 million in 2024-2027 (2023: USD481 million) due to stable volumes and a lower coking coal ASP. Washed coking coal products were 99% of total revenue in 2023, in line with historical levels. Its 2023 coal reserve statement shows total marketable coking coal reserves of just under 300mt, or a reserve life slightly over 20 years. MMC's small scale and product concentration constrain its business profile.

Country Risk Remains High: MMC's mining assets are all in Mongolia and are subject to local regulations. We believe the volatile mining regulations have a meaningful impact on MMC's financials. This was the case during the pandemic when the effective rate for the royalty reference price was raised to over 20%, from 5%-8%, increasing financial pressure on MMC. The reference price has fallen and stabilised after the pandemic and the mining product exchange has established a more transparent reference price from October 2023, but the record of stable regulation is short.

Derivation Summary

MMC can be compared with Guangyang Antai Holdings Limited (B/Stable), which has revenue of more than 7x that of MMC. Guangyang Antai's EBITDA is smaller than that of MMC due to its low-single-digit EBITDA margin while MMC's is high at over 40%. We expect MMC to be in a net cash position on average during 2024-2027, while Guangyang Antai's EBITDA net leverage will be around 3.0x.

MMC is a single-product coal miner, similar to Indonesia-based miner peers PT Indika Energy Tbk (BB-/Stable) and PT Golden Energy Mines Tbk (GEMS, BB-/Stable). Its operational profile in terms of mine life is over 20 years, against GEMS's slightly under 20 years and Indika's around 16 years. Still, MMC's concentrated customer base and Mongolia's volatile mining regulations compare unfavourably with that of rated peers.

Compared to Indika, MMC is slightly larger in terms of EBITDA due to a high EBITDA margin of above 40%, against Indika's margin in the low teens. MMC's EBITDA net leverage is lower at 0.4x than Indika's 1.7x in 2023. Compared with GEMS, MMC is smaller in terms of EBITDA, but MMC's EBITDA margin is higher than GEMS' 25%. GEMS also has better leverage, with a net cash position in 2023.

Key Assumptions

Fitch's Key Assumptions Within the Rating Case for the Issuer:

- Total annual coal sales volume on average slightly below 8mt a year in 2024-2027;

- Mid-single-digit coal revenue decline a year in 2024-2026 as coking coal prices trend down;

- EBITDA margin to remain above 40% in 2024-2027, supported by steady volume and normalised costs;

- Capex to average over 15% of revenue a year during 2024-2027.

- No dividend payments in 2024-2027 based on current expectations.

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 scale and diversification.

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

- EBITDA net leverage above 3.0x for a sustained period;

- Adverse changes in mining regulations that affect the operating environment in Mongolia.

Liquidity and Debt Structure

Comfortable Liquidity: MMC had cash on hand of USD279 million at end-June 2024, with no short-term maturities within the next 12 months.

The company has redeemed of all outstanding perpetual notes with face value of USD122.5 million on 2 October 2024 with available cash. MMC's USD220 million bonds issued with Energy Resources LLC mature in 2026, and we estimate the company will generate enough cash to redeem them without the need for refinancing. MMC also has USD30 million of unused committed bank facilities available.

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 14.1mt of run-of-mine coal in 2023, which yielded around 6.7mt of washed coking coal as a primary product and 2mt of middlings 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.

MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS

Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.

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 https://www.fitchratings.com/topics/esg/products....

Published Date:2024-11-11

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Fitch Upgrades Mongolian Mining to 'B+'; Outlook Stable www.fitchratings.com

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