New Terminal to Assist Mongolian Mining Recovery; Border Reopening Behind Expectation
The introduction of a new terminal should ultimately help Mongolia’s mining business to recover, says Fitch Ratings. However, border disruptions continue to cripple Mongolian Mining Corporation’s (MMC; B/Stable) plan to return to normal operations in August 2021, causing its rating headroom to tighten further.
We estimate sufficient liquidity to serve its coupon obligations in October 2021 irrespective of the operational status. However, the company’s credit metrics may weaken to the point where we may take rating action if border disruptions continue to worsen and completion of the new terminal falls behind schedule.
In the new, custom-bonded terminal, which is likely to begin operations in September 2021, Mongolian truck drivers will unload coal inside the Mongolian border and Chinese truck drivers will pick up the shipment on the other side without leaving the restricted area. This arrangement will reduce human contact and lower the potential for transmission of Covid-19 infections.
For the remainder of 2021, we assume the new terminal will have annualised traffic of 9 million tonnes, with the terminal shared among three coal producers. From 2022 we assume annualised traffic of 18 million tonnes. The new terminal will boost MMC’s export volume significantly.
The border reopened in the last week of July 2021, but closed again in the last week of August 2021 as a few truck drivers tested positive (not MMC drivers), and the border reopened on 31 August. Mongolia is rolling out a more extensive vaccine programme, which MMC believes will alleviate the Covid situation. The company now expects daily average throughput to be around 175-200 trucks per day.
The 15 October 2021 coupon payment is for USD20.4 million on MMC’s 2024 notes. It had USD37 million in cash on hand at end-June 2021. Since then, the company has pre-sold more inventory and received cash for the pre-sales, paid suppliers, and incurred capex for construction of the new terminal. We estimate the cash balance at end-August is close to the end-June level. Capex obligation for the remainder of 2021 is minimal, and cash burn remains low as operations remain suspended. MMC has also signed two committed revolving credit facilities with local financial institutions, and these facilities can be used as a liquidity buffer.
Fitch has revised our 2021 annual export forecast volume for MMC to around 30% below 2020’s level from at least 20% below. In this scenario, we estimate net funds from operations (FFO) leverage to remain above our negative trigger of 3.5x by end-2021, but to improve from the current level. Nevertheless, the liquidity profile will also improve, benefiting from new committed revolving credit facilities. We believe the current rating level is still appropriate at this stage.
We expect a recovery in MMC’s financials in 4Q21. Operations should return to normal in 2022, and the rating headroom will widen if the new terminal can begin operations as planned in September 2021 and with an improvement in the Covid situation. However, a worsening Covid situation and operational lags at the new terminal may cause MMC’s credit profile to deteriorate – and may lead to rating action.
Source: Fitch Ratings