Hong Kong-listed Mongolian Mining Corp, which operates two coal mines in Ukhaa Khudag and Baruun Naran, both located in the Southern Gobi province of Mongolia, is faced with a looming debt challenge amid a slump in coking coal prices.
Coking coal prices in its main market China have fallen about 25% in the last two years, increasing MMC's net loss to $58.1 million in 2013 from $2.5 million in the previous year and drawing attention to some of the debt repayments that the company has to make from next year.
In an interview with FinanceAsia in Hong Kong, Dr Battsengel Gotov, chief executive officer of Mongolian Mining Corp (MMC), said the company has no major capital expenditure plans and that any rebound in coking coal prices will help MMC generate enough cash to pay down its debt.
“Without any expected cash outflow we have confidence to settle out debt obligations,” Gotov told FinanceAsia. “We don’t need prices to double in order to be able meet our debt obligations in 2015. We just need a slight recovery in pricing by maybe 15%," he said, adding that if prices rise to $100 per tonne the company will generate sufficient cash to meet all its debt obligations.
The average selling price of MMC's coking coal is currently $85 per tonne.
Coking coal is used in steel-making and many of China's steel makers are struggling amid a cyclical downturn in the industry, exacerbating a glut in the supply of coking coal. “The supply and demand equilibrium is out of order. This is why we see the sharp fall in prices which started in early 2012 and still continues,” Gotov said.
Gotov expects the oversupply of coking coal to ease this year, as major miners globally are cutting back coal production. Last week, Glencore Xstrata closed its Ravensworth coal mine in Australia and other major names such as BHP Billiton have also cut back. However, he does not expect prices to rebound swiftly.
“Short term for 2014, we expect we will still see depressed pricing for coking coal,” Gotov said. “We don’t expect any meaningful price improvements until the demand supply equilibrium is restored but we believe this will be restored.”
Looming debt challenges
The company managed to reduce its debt repayments due in 2014 from $102 million to $34 million by refinancing a $130 million outstanding loan with BNP Paribas. The loan was previously extended by South Africa's Standard Bank but was transferred to BNP Paribas, when the latter took over Standard Bank’s loan portfolio in Asia.
In March, MMC entered into a facilities agreement with BNP and Chinese bank ICBC for a $150 million loan, which refinanced the $130 million loan. In an e-mail, the company's CFO Ulemj Baskhuu said that the final maturity of the facility is December 2016.
According to Gotov, the reduction in debt payments in 2014 gives the company “breathing space.” As of December 31, 2013, Mongolian Mining had cash of $76.5 million.
But it still has repayments of $115 million and $127 million falling due in 2015 and 2016, respectively, and in 2017, its $600 million high-yield bond matures. This debt repayment profile is a concern among analysts.
"In 2014 their repayment amount is a lot smaller as they managed to push back payment but it doesn't solve the total amount, which they will have to pay in 2015 and 2016. And then they will face a huge amount, which is the senior note in 2017," said one analyst at a bank who declined to be named. "They will still have a very difficult time to repay the entire debt," the analyst said.
In addition, the company issued a $52.5 million promissory note to QGX Holdings which matured on March 31, 2014, according to its results announced in March. Company CFO Baskhuu in an e-mail said the maturity of the promissory note has been extended.
The company is also trying to keep a lid on costs and has taken steps to improve its liquidity position. It reduced its cash cost by 16% in 2013 from the previous year and sold its paved road for coal transportation in February to state-owned Erdenes MGL for $90.3 million.
MMC plans to build a 15-km cross-border railway with a consortium including Chinese state-owned Shenhua group, Mongolian stated-owned Erdenes Tavan Tolgoi, and Tavan Tolgoi.
Gotov said the planned cross-border railway will help reduce transportation costs from about $8.8 per tonne to $1-2 per tonne. "[The cross-border railway] eliminates the cross-border trucking which is expensive," Gotov said. "We expect to start this year and conclude this year," he said, meaning the cost-savings could kick in from 2015.
When asked how much the project would cost, Gotov said it would be difficult to judge until the feasibility study is completed.
MMC had originally originally planned to use the proceeds from the $600 million bond to build a much longer railway but the Mongolian government in November 2012 unexpectedly decided to take over the country's railway infrastructure projects, including MMC's railway.
The company will receive 84.3 billion tugriks ($59 million) in compensation and is still deciding whether or not to take a stake in the railway project, which is expected to be completed in 2016. "[The amount is] still outstanding as our receivables from the government, because [the] company has the option to claim cash or convert to equity in this railway project," Gotov said.