Moody's Investors Service has downgraded the corporate family and senior unsecured bond ratings of Mongolian Mining Corporation (MMC) to Ca from Caa2.
The ratings outlook is negative.
RATINGS RATIONALE
"The downgrade reflects the risk of high probability of default by MMC as its cash holdings and operating cash flow are inadequate to address its near-term payment obligations", says Dylan Yeo, Moody's lead analyst for MMC.
MMC's cash balance drastically declined to $70 million at end-June 2015 from $253 million at end-December 2014.
The prolonged oversupply situation in the coking coal market has caused coking coal prices to slide significantly during 2015. At end-August, the Queensland benchmark coking coal price fell to $83 per tonne from more than $110 per tonne at the start of 2015.
MMC has little scope to reduce its cost base after implementing various cost cuts over the last 18 months and reducing its production to a contractually required minimum.
As a result the company reported an operating loss before tax of $86 million in 1H 2015. It does not have positive cash flow to service its debt payments under the current weak coal price environment.
At the same time MMC has limited ability to raise alternative liquidity. The company tapped the equity market for a rights issuance in 2014 and divested most of its non-core assets in the last few years.
It has $43 million of receivables from the Government of Mongolia (B2 negative) with respect to the termination of a concession agreement on railway infrastructure in 2012. Receipt of these funds is still under negotiation with the government.
Moody's estimates that the company's internal cash resources will be inadequate to meet payment obligations which include (1) interest payments of $32 million in the next six months; and (2) loan amortization of $30 million in the next six months.
In addition, $69 million of promissory notes due to shareholders is coming due in September 2015. Moody's, however, noted that the shareholders had historically extended the maturity of the promissory notes.
"The downgrade also reflects the lower expected recovery to the senior unsecured bond holders," says Yeo.
MMC's cash holdings declined by $183 million in 1H 2015, and its total debt declined by $59 million. In addition, the operating loss in 1H 2015 eroded the company's equity by $100 million.
This financial deterioration has reduced the likely recovery for the senior unsecured bond holders.
The negative ratings outlook reflects uncertainty over MMC's liquidity position and the high likelihood that it will default on bond repayments if accelerated. Such a default would result in losses for bond holders.
Given the negative outlook, there is a low probability of an upgrade in the near term.
Further downgrade pressure could emerge if the company cannot meet its payment obligations, undergoes a distressed debt exchange, or the deterioration in the recovery level for its rated offshore senior unsecured notes exceeds Moody's expectations.
The principal methodology used in these ratings was Global Mining Industry published in August 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Mongolian Mining Corporation (MMC) is the largest privately owned coal mining company in Mongolia. Established in 2005, it listed on the Hong Kong Stock Exchange in October 2010. It has two coal mines located in the Gobi Desert. The Ukhaa Khudag mine, which produced 4.6 million tonnes of coking coal in 2014, and the Baruu Naran mine, which was acquired in 2011.
Source: www.moodys.com
Moody's Investors Service has downgraded the corporate family and senior unsecured bond ratings of Mongolian Mining Corporation (MMC) to Ca from Caa2.
The ratings outlook is negative.
RATINGS RATIONALE
"The downgrade reflects the risk of high probability of default by MMC as its cash holdings and operating cash flow are inadequate to address its near-term payment obligations", says Dylan Yeo, Moody's lead analyst for MMC.
MMC's cash balance drastically declined to $70 million at end-June 2015 from $253 million at end-December 2014.
The prolonged oversupply situation in the coking coal market has caused coking coal prices to slide significantly during 2015. At end-August, the Queensland benchmark coking coal price fell to $83 per tonne from more than $110 per tonne at the start of 2015.
MMC has little scope to reduce its cost base after implementing various cost cuts over the last 18 months and reducing its production to a contractually required minimum.
As a result the company reported an operating loss before tax of $86 million in 1H 2015. It does not have positive cash flow to service its debt payments under the current weak coal price environment.
At the same time MMC has limited ability to raise alternative liquidity. The company tapped the equity market for a rights issuance in 2014 and divested most of its non-core assets in the last few years.
It has $43 million of receivables from the Government of Mongolia (B2 negative) with respect to the termination of a concession agreement on railway infrastructure in 2012. Receipt of these funds is still under negotiation with the government.
Moody's estimates that the company's internal cash resources will be inadequate to meet payment obligations which include (1) interest payments of $32 million in the next six months; and (2) loan amortization of $30 million in the next six months.
In addition, $69 million of promissory notes due to shareholders is coming due in September 2015. Moody's, however, noted that the shareholders had historically extended the maturity of the promissory notes.
"The downgrade also reflects the lower expected recovery to the senior unsecured bond holders," says Yeo.
MMC's cash holdings declined by $183 million in 1H 2015, and its total debt declined by $59 million. In addition, the operating loss in 1H 2015 eroded the company's equity by $100 million.
This financial deterioration has reduced the likely recovery for the senior unsecured bond holders.
The negative ratings outlook reflects uncertainty over MMC's liquidity position and the high likelihood that it will default on bond repayments if accelerated. Such a default would result in losses for bond holders.
Given the negative outlook, there is a low probability of an upgrade in the near term.
Further downgrade pressure could emerge if the company cannot meet its payment obligations, undergoes a distressed debt exchange, or the deterioration in the recovery level for its rated offshore senior unsecured notes exceeds Moody's expectations.
The principal methodology used in these ratings was Global Mining Industry published in August 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Mongolian Mining Corporation (MMC) is the largest privately owned coal mining company in Mongolia. Established in 2005, it listed on the Hong Kong Stock Exchange in October 2010. It has two coal mines located in the Gobi Desert. The Ukhaa Khudag mine, which produced 4.6 million tonnes of coking coal in 2014, and the Baruu Naran mine, which was acquired in 2011.
Source: www.moodys.com