Monday, March 31, 2014

Mongolian Mining Seeks Debt Extension Amid Coal Price Slump

Mongolian Mining Corp. (975) is looking to extend the maturity of a note due today as expanding supplies of coking coal push prices to record lows.

“It’s still not finalized but definitely we will not be paying on the current maturity date,” Chief Executive Battsengel Gotov said, speaking on March 28 about a promissory note issued to QGX Holdings Ltd. in November 2012. “They understand our position and we’re telling them that ‘OK, one day we’ll pay but maybe not today.’”

The Ulaanbaatar-based miner has already amended the maturity of its $52.5 million promissory note once before, postponing repayment from Nov. 22 until today, according to the company’s annual results. Gotov declined to comment on the length of the latest extension, saying it was still being discussed. MMC last year rescheduled payment of a second $52.5 million promissory note until December 2014, the earnings announcement shows.

Coal producers are struggling as an oversupply of the raw material used to make steel weighs on prices. While miners, including Glencore Xstrata Plc, scale back output at some mines, Australian shipments are still set to increase this year, extending the overhang. SouthGobi Resources Ltd., which also mines coal in Mongolia, said last week it’s seeking additional financing to avoid a default on $250 million of debt.

MMC’s selling price averaged about $80 to $85 a metric ton this year, falling from $92.1 a ton in 2013 and $108.4 in 2012, according to Gotov. Mongolia accounted for 20 percent of China’s coking coal imports in 2013, down from 45 percent in 2011 and trailing Australia, according to presentation slides provided by the company.
Price Rebound

Benchmark coking coal has dropped 17 percent this year to a record-low $113.45 a ton, adding to an about 50 percent slide in the previous three years. Prices may start to rebound toward the end of the year or in early 2015 as miners globally pull back production, Gotov said.

The company paid the latest coupon on $600 million of 8.875 percent dollar-denominated bonds last week, Gotov said. The debt’s interest rate is still more attractive than on loans from domestic banks, he said, adding “I’m still very confident this bond issue was not the first and last for us.”

The yield on the March 2017 securities climbed two basis points to 25.24 percent as of 4:55 p.m. in Hong Kong, according to Bloomberg generic pricing. The price dropped to 67.02 cents from 67.04 cents on the dollar, after posting its biggest one-day gain in two months on March 28.
Rail Project

MMC plans to start building a 15 kilometer railway across the Chinese border in May to reduce its transportation costs, according to Gotov. The miner agreed in October to work with Shenhua Group Corp., Erdenes Tavan Tolgoi LLC and Tavan Tolgoi JSC on the project, according to a company press release.

“I believe any meaningful cost savings really will come from infrastructure,” he said. “We will continue to put an accent on improving efficiencies and maintaining our competitive cost structure.”

The rail link will cut the cost of transporting coal, which is now trucked into China, to $1 to $2 per ton from $8.8 last year. The consortium plans to finalize its agreement next month, said Gotov, declining to provide an estimate of the project’s expense because feasibility studies are under way.

Mongolian miners “have cheap coal but the high transportation cost to get them to buyers ultimately makes them unattractive,” said Amit Jain, a credit analyst in Bangalore at SJS Markets Ltd. on March 27, after upgrading MMC’s bonds to buy from neutral earlier this month. “MMC has made good efforts to reduce their operating costs, and I expect to see improvement in their credit metrics.”

To contact the reporters on this story: Rachel Evans in Hong Kong at; Michelle Yun in Hong Kong at
To contact the editors responsible for this story: Katrina Nicholas at Andrew Monahan, Ken McCallum

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