(The following statement was released by the rating agency)
Sept 26 -
Summary analysis -- Mongolian Mining Corp. ------------------------ 26-Sep-2012
CREDIT RATING: B+/Stable/-- Country: Mongolia
Mult. CUSIP6: 60937C
Credit Rating History:
Local currency Foreign currency
14-Mar-2012 B+/-- B+/--
The rating on Mongolian Mining Corp. (MMC) reflects the company's mineral concentration in
coking coal, customer concentration risks, and its exposure to an untested and evolving
regulatory environment in Mongolia (BB-/Positive/B). MMC's reduced project development risk and
first-quartile cost position partly offset these weaknesses.
Our outlook for coking coal prices remains uncertain for the next 12 months. Demand from
China, which is MMC's major export market, remains muted. We believe this will likely limit a
rapid, substantial, and sustainable price recovery over the next six months. While China's
recently announced US$150 billion stimulus program could temporarily push up the demand for
steel, the possibility of lasting effects remains unclear, in our view. Still, current
coking coal prices of US$140-US$150 per ton are inching toward the production costs of higher
cost producers. This could trigger supply cuts and provide some cushion from a significant fall
MMC's financial performance for the first six months of 2012 was weaker than we had
anticipated. Sales declined due to lower demand and a seasonal slowdown during the Chinese new
year. The company's gross profit per ton of coal sold before depreciation and amortization at
about US$33 was also below our expectation. Nevertheless, the company's sale of its raw coal
inventory at a lower average price partly explains the weakening in per ton profitability. We
expect some further pressure on the gross profit per ton over the next six months as coking
prices remain weak and despite our forecast of mostly stable production and transportation
costs. MMC's leverage increased significantly to about 4.3x for the six months ended June 30,
2012, from about 3.3x in 2011, largely due to an issuance of US$600 million in senior notes
during the first quarter of 2012. MMC is using a part of the notes proceeds to raise the
production of washed coking coal over the next 12 months.
MMC's liquidity is "adequate," as defined in our criteria. The company's liquidity is
sensitive to coking coal prices and sales volumes. Nevertheless, we believe the company can fund
its short-term debt repayment and non-railway-related capital spending with its cash balance and
internal cash flows.
We expect MMC's liquidity sources to exceed its liquidity needs by about 1.2x or more over
the next 12 months. We also anticipate that the company's liquidity sources will exceed its
needs even if EBITDA declines by 20%. Our liquidity assessment incorporates the following
factors and assumptions:
-- Liquidity sources include about US$451.2 million in cash and cash
equivalents as of June 30, 2012, and funds from operations.
-- Liquidity needs include our expectation of about US$50 million in capital expenditure
that MMC intends to fund from internal sources. We expect the company to use additional debt to
fund a potential US$200 million-US$250 million in railway-related spending in 2013. We note,
however, that railway-related spending is not committed.
-- Liquidity needs also include about US$52.1 million in short-term debt and US$82.9 million
in a convertible bond.
-- We have not factored any dividend distribution in 2013.
The stable outlook reflects our view that MMC's sales will increase and that the company
will maintain its profitability over the next two years, further supporting its cash flow
We could raise the rating if we have better visibility over MMC's financial performance and
the company's financial risk profile improves such that its ratio of total debt to EBITDA is
less than 2x and the ratio of funds from operations to total debt is above 35% on a sustained
We could lower the rating if: (1) MMC's production or coal sales are lower than we expect
due to muted demand or an interruption in production; or (2) gross profit per ton falls below
US$35 on a sustainable basis because of lower coking coal prices and higher mining costs or
royalty. A downgrade trigger could be a debt-to-EBITDA ratio of more than 3.5x and a ratio of
funds from operations to total debt of less than 20% on a sustained basis.