The Mongolian Mining Corporation (MMC) is the first local coking coal producer in Mongolia which has been listed on the Hong Kong Stock Exchange (Stock Code: 975). The company owns and operates two open-pit coking coal mines: Ukhaa Khudag (UHG) and Baruun Naran (BN), both in South Gobi province in Mongolia. The UHG deposit is located within the Tavan Tolgoi coal formation, one of the world’s largest untapped coking and thermal coal deposits, some 560 km from Ulaanbaatar, while the UHG mine is situated around 240 km from the Mongolian-Chinese border and about 600 km from Baotou, China, a railway transport hub providing access for Mongolian coal to the largest steel producing provinces in China. The BN coal deposit is located 30 km from the UHG mine. MMC’s operations have grown rapidly from a greenfield project in 2009 to a world-standard mining complex producing almost 10m tonnes a year in 2013. In 2010, after only one year of operations, the company was listed on the Hong Kong Stock Exchange. MMC was the first Mongolian company to offer its shares internationally. The listing was well received by international investors due to the optimistic outlook on the price of coal at that time. However, the share price has been stagnant since 2011 even though production has grown steadily. Of course, China’s reduced appetite for coking coal and subsequent lower coking coal prices were among the major reasons for the cheaper share price. Nationalism has led the country to favour more strict foreign investment policies and because of those measures, investors have shied away from investing in MMC and Mongolian coal in general. In addition, the fact that the company could not construct the railway to China even though it raised $600m disappointed investors. In March 2014 MMC reported a 25% increase in earnings before interest, taxes, depreciation and amortisation (EBITDA) for the year ending December 31, 2013 of $111m, compared to a profit of $74m the previous year. The increase in EBITDA has been generated as a result of actions taken to control costs and boost productivities when revenue decreased to $437m from $475m, due to a 15% decrease in the average selling price of hard coking coal compared to the previous year.
It is also noteworthy that, for the same period, the group’s production increased to record levels of output in its mining, processing, transportation and sales activities. In addition to being a supplier of coking coal products, MMC is successfully building a fully-integrated coking coal mining, processing, transportation and marketing platform.
We believe that the environment for the coal industry in Mongolia is still very severe given the oversupply situation of the industry globally and in China. Therefore, coal prices may be under pressure for the remainder of 2014. However, MMC is well positioned in the Mongolian coal industry, with a 31% market share of coal exports. In addition, with module three successfully commissioned in 2013, the company’s total installed processing capacity has reached 15m tonnes per annum. Also, further efforts to reduce costs in 2014, especially in transportation and processing, will have a significant impact on improving the cost competitiveness of the company.
Therefore, even with the rather dull coal market, MMC will probably be able to generate certain cash flow. However, the amount of the debt which is due in 2017 is quite significant considering the current environment. So, further efforts by the company to reduce costs and generate revenue in a timely manner are encouraged. Therefore, severe challenges for the company will still continue in 2014. However, we believe MMC will continue to be a leading coal producer in Mongolia and is well positioned among Mongolian coal producers once the coal market enters into the recovery phase in the future.
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