Wednesday, May 28, 2014

Mongolian Mining Corp. Rating Affirmed At #CCC+#, Removed From CreditWatch Outlook Negative

SINGAPORE--27 May--Standard & Poor's

SINGAPORE (Standard & Poor's) May 27, 2014--Standard & Poor's Ratings Services said today that it had affirmed its 'CCC+' long-term corporate credit rating on Mongolia-based coal miner Mongolian Mining Corp. (MMC) and the 'CCC+' long-term issue rating on the company's senior unsecured notes maturing 2017. At the same time, we removed the ratings from CreditWatch, where they were originally placed with negative implications on Aug. 30, 2013. The outlook on the corporate credit rating is negative.

"We affirmed the ratings and removed them from CreditWatch because we believe MMC's liquidity pressure has eased," said Standard & Poor's credit analyst Xavier Jean.

We expect the company to be able to postpone or settle part or all of its US$105 million in promissory notes due to its 11% shareholder Kerry Group over the next two to three months. That, along with receipts of about US$90 million from asset sales, refinancing of MMC's amortizing bank loans in February 2014, and a fairly sizable coking coal inventory, should support the company's liquidity over the next 12 months.

Kerry's multiple postponements of promissory note payments when they came due over the past 18 months indicate to us that Kerry offers good implicit support to MMC and has some commitment to the company's operations.

We also believe that MMC's still-fragile liquidity situation provides Kerry with an added economic incentive to postpone or settle the promissory notes. Payment of the first installment of the promissory notes in July 2014 would materially reduce MMC's cash balance, increase liquidity pressure, and raise the risk of financial distress. That could then further translate into a substantial decline in the economic value of Kerry's shareholding in MMC as well as uncertain recovery prospects on the outstanding portion of the promissory notes.

Finally, we believe Kerry is supportive of MMC's medium-term cost reduction and revenue enhancement initiatives, including the development of a short railway line that would reduce transportation costs. Notwithstanding execution risks, those initiatives could stabilize MMC's profitability and cash flows over the next six to nine months, allow the company to benefit from even modest increases in coking coal prices, and underpin the medium-term sustainability of its business model.

We expect MMC's liquidity to remain "weak," as our criteria define the term, over the next 12 months. Our forecast of continuing subdued coking coal prices, elevated financing charges, and deferred stripping costs that we estimate to be US$60 million at least for the next 12 months will continue to translate into negative free operating flows for the rest of 2014 and 2015.
"The negative outlook reflects our view that MMC's liquidity will remain weak over the next 12 months, absent a material increase in the company's gross profit per ton of coking coal sold," said Mr. Jean.

We could lower the rating by more than one notch if: (1) MMC fails to postpone or settle its promissory notes; or (2) the company's liquidity deteriorates more than we expect because of much lower internal cash flows than our forecast or the company's failure to manage its working capital over the next 12 months. Liquidity sources, including cash holding and other sources of liquidity (for example monetizing its inventory) of less than US$60 million could indicate such deterioration in MMC's liquidity position.

We view the likelihood of a revision in the outlook to stable over the next 12 months as low, given MMC's liquidity position and subdued coking coal prices. However, we could revise the outlook to stable if MMC restores its liquidity position to levels that we consider sustainable for more than 12 months. That could materialize if the company's liquidity substantially improves because of additional external funding, equity raising, or a material and lasting improvement in operating cash flows.

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