Mongolian Mining Corporation's (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, reported Fitch Ratings on July 6.
“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,” the international credit rating agency warned.
Fitch believes the Mongolian coking coal producer’s liquidity is adequate despite the current border closure. It estimates readily available cash was above 30 million USD at the end of the first half of 2021 compared with 20 million USD in the same period of 2020. The company is also expected to have access to additional funding if needed.
“Mongolian Mining Corporation 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,” Fitch said.
Based on Fitch’s base case, the border disruption, resuming through the most of the second quarter of 2021 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. This would allow the coal producer to resume normal operations and coal exports in early August, making up for some of the volume lost in the first half of the year. Fitch forecasts that this would lead to 2021 export volume at least 20 percent below 2020 volume. In this scenario, net funds from operations leverage to likely to remain above the negative trigger of 3.5x at end-2021, but as Fitch noted, it could improve sufficiently from currently elevated levels. This could help establish a deleveraging path as free cash flow turns sustainably positive. This, in conjunction with sufficient liquidity, appears to support 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, Mongolian Mining Corporation’s key market. This demand should be sustainable given the strong economic rebound of the Chinese economy. These positive market fundamentals contrast markedly with the situation in 2016 when the company missed a coupon payment of about 27 million USD 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 that the coal producer could recover more quickly than projected in its base case as testing of drivers for COVID-19 was completed on July 6 on both sides of the border, and border throughput resumed immediately. This potential upside was not factored in the base case.
Mongolian Mining Corporation’s next coupon payment of 20.4 million USD on its 2024 US dollar notes is due on October 15, 2021. Fitch anticipates the company to be able meet this obligation, provided that it returns 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 Fitch’s 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 normalization in net leverage and the free cash flow recovery on which the current ratings are contingent and lead to rating action. We are therefore monitoring the border situation and Mongolian Mining Corporation’s liquidity and cash flow profile closely,” the credit rater shared.
