Mongolian Mining Corporation

The Company

Mongolian Mining Corporation (MMC) is a coking coal production and export company headquartered in Ulaanbaatar, Mongolia, and was the first local coking coal producer to be listed on the Hong Kong Stock Exchange. The company participates in the mining, processing and manufacturing of coal products, and owns and operates an open-pit coking coal mine at the Ukhaa Khudag deposit in the Tavan Tolgoi coal formation and a second mine at the Baruun Naran deposit, both of which are located in the South Gobi region.

MMC is also involved in the construction of a coal handling and preparation plant that will help support its mining business activities. Last but not least, MMC has operations related to its majority interest in QGX Coal as well as its indirectly owned subsidiary Khangad Exploration, which also holds a mining licence for the Baruun Naran coking coal deposit.

Performance

Coking coal is primarily used in steel manufacturing. Today, many of China’s steelmakers are struggling due to a cyclical downturn in the industry, which has exacerbated the glut in the coking coal market. As a result, coking coal prices in China – MMC’s primary market – have fallen by approximately 25% in the last two years, with the average selling price of MMC’s coking coal now at around $85 per tonne. This has increased the company’s net losses and drawn greater attention to some of the debt repayments the company needs to make in the coming years.

MMC reduced its debt repayments due in 2014 from $102m to $34m by refinancing a $130m outstanding loan with BNP Paribas. In March 2014 MMC entered into a facility agreement with BNP Paribas and the Industrial and Commercial Bank of China for a $150m loan to refinance the prior loan. The final maturity of the facility is December 2016. While the reduction in debt repayments due gives the company some much-needed breathing room, it still has repayments of $115m and $127m falling due in 2015 and 2016, respectively, and in 2017 MMC’s $600m high-yield bond matures, making the company’s debt profile a serious concern.

Development Strategy

MMC plans to build a 15-km cross-border railway with a consortium that includes Chinese state-owned Shenhua Group and Mongolian state-owned Erdenes Tavan Tolgoi and Tavan Tolgoi. The planned railway should help reduce transportation costs from about $8.8 per tonne to $1-2 per tonne, providing meaningful cost savings as early as 2015.

The continued development of the massive Tavan Tolgoi deposit in Mongolia should provide a significant boost to MMC and all of Mongolia’s coal producing companies over the next five years. Improvements in rail infrastructure should also facilitate greater volumes of coal exports to China in the medium term. Rail infrastructure development would lead to greater cost-efficiencies and enhanced margins, helping MMC to pay back more of its debt. More specifically, the Mongolian government’s recent approval of the Erdenet-Ovoot-Arts Suuri Railway will increase supply chain connectivity for MMC and other companies operating in the sector in the north of the country, enabling them to better reach the massive Chinese market. According to expert predictions, China will remain reliant on coking coal over the coming years, thereby increasing export demand for companies like MMC.

At present, the bulk of MMC’s coking coal for export arrives at the Chinese border unwashed, and is therefore sold at a discount in comparison with Chinese domestic and seaborne coking coal, due to its lower quality. The construction of a coal handling and processing plant in Mongolia will enable MMC to move further up the value chain and export more valuable, washed coal to Chinese consumers.

Overall, MMC operates in a relatively uncertain mining and macroeconomic environment. As such, both the company and investors must remain conscious of the constant wrangling between the Mongolian government and foreign investors over mining contracts and legislation. Both of these variables are considered to be threats to the continued flow of exports to China and the success of companies such as MMC.

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The Report: Mongolia 2015

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