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Re: CPTMatt post# 656

Tuesday, 12/12/2017 9:56:35 PM

Tuesday, December 12, 2017 9:56:35 PM

Post# of 1138
HK traders aren't impressed tonight. I wonder how S&P projects MMC to actually get their product to market.

Here's the full verbiage from S&P ...

http://www.thailand4.com/.fin/2017-12-12/e3eae71eb60c1af41121cd70122c0176/

Mongolian Mining Corp. Rating Raised To #B-# Post Debt Res Outlook Stable
Stocks and Financial Services Press Releases Tuesday December 12, 2017 17:30
SINGAPORE--12 Dec--S&P Global Ratings
SINGAPORE (S&P Global Ratings) Dec. 12, 2017--S&P Global Ratings today raised its long-term corporate credit rating on Mongolian Mining Corp. to 'B-' from 'D'. The outlook is stable.
The upgrade reflects MMC's improved capital structure and lengthened maturity profile, after its distressed debt restructuring, which involved a "haircut" of about 20% of its debts (bank facility, senior notes, and promissory notes). The rating action comes after the completion of our review of MMC's operations and new capital structure.

Under the restructured terms, MMC's interest payments are more flexible, whereby amounts will be accrued as payment-in-kind (PIK) when the coal price is low. Debt amortization starts with a small amount in the fourth quarter of 2018 only. The next big debt maturity will not be until September 2022. The company's total debt amounts to about US$638 million post restructuring. This consists of a new senior secured facility and new senior secured notes issued by its wholly owned subsidiary, Energy Resources LLC, and new subordinated perpetual securities issued by MMC. We consider the perpetual securities to have minimal equity content because there is material step-up in the sixth year that makes the effective maturity less than 10 years.

Despite the improved capital structure, MMC remains highly sensitive to volatile coking coal prices, in our view. By our estimate, if the average selling price (ASP) per ton of its hard coking coal (HCC) falls by 35% to US$85 from our base case over the next 12 months, EBITDA would decline by 55% to about US$120 million. The company's EBITDA margin would decline to 24%-26% (from 38%-40%). Even if absolute debt remains the same, its debt-to-EBITDA ratio could rapidly spike above 5x from our base case of 2.3x-2.5x.

Under such a moderately stressed pricing environment, we view the fluctuation of operating results as highly volatile. This is despite our assumption that there is no production cut and MMC could lower costs by 20%-25% on mining, transportation, royalties, and, less significantly, on distribution as well as reduction on stripping activities. Accordingly, we continue to view the company's financial risk profile as highly leveraged.

We consider MMC's liquidity buffer to be dependent on benign industry conditions so that the company need not borrow externally to meet its liquidity needs. MMC lacks credible banking relationships and capital market access to meet its cash flow shortfall. By our estimate, if the ASP of its HCC approaches US$80, not far from our assumed downside situation of US$85 (equivalent to benchmark HCC price FOB Australia of US$125-US$135 per ton by our estimate), MMC would start running short of internal liquidity and need to borrow externally to stay viable.

In the downside scenario, we have assumed that the operating partners, especially the mining contractors, would insist on receiving the scheduled repayment of overdue payables, which amounts to about US$100 million over 2017-2018. It is uncertain whether the partners are willing to keep supporting MMC in another industry downturn despite their established relationships with the company over the last trough cycle.

MMC's business position remains vulnerable, in our view, unchanged from pre-debt restructuring. MMC operates a single mine in a land-locked country. Its other mine remains suspended. MMC faces high transportation costs and frequent bottlenecks, given the lack of sufficient cross-border infrastructure. The company has a high customer concentration; four steel mill customers account for half of its revenues.

Despite its vulnerable business position, we believe MMC's capital structure is sustainable, given that we expect the company to generate positive free operating cash flow of more than US$100 million over the next 12 months. Our base case considers benign industry conditions, where demand from China remains upbeat and pricing conditions favorable. We assume the company's ASP of HCC would be about US$130 (equivalent to benchmark HCC price of US$160-US$180 by our estimate) and EBITDA of about US$270 million, both at peak levels in 2018. Debt-to-EBITDA will also appear favorable below 3x. Under this base case, MMC has sufficient downside pricing headroom (about US$50) to meet its liquidity needs solely with internal accruals.

We expect the company's debt to reduce on amortization of its senior secured facility starting in the fourth quarter of 2018. Our base case assumes that MMC would maximize the production potential of its Ukhaa Khudag (UHG) mine under a favorable pricing environment, with HCC volume sales at a record high of 5 million tons in 2018. This represents a material change from 2014-2015 when coal prices were low and the HCC production was minimal.

MMC's new debt terms give the company more breathing space amid a potential industry downturn. The PIK feature for interest payments associated with the senior secured facility and senior secured notes would help MMC lower cash needs amid a downturn. Specifically, when benchmark prices (Australian coking coal FOB) decline below US$125, up to 100% of interest payment will accrue to principal. This alleviates default risks related to otherwise rigid fixed terms. In addition, MMC has the option to defer cash distribution on perpetual notes with no limitation. We have assumed no cash distribution.

Our rating on MMC is capped by our sovereign credit rating on Mongolia (B-/Stable/B), a country dependent on resources exports. This is because under a sovereign distress scenario where commodity prices decline significantly, we expect MMC's liquidity source will be materially lower than liquidity needs.

The stable outlook reflects our view that MMC will generate positive free operating cash flows and the company can meet all its liquidity needs with sufficient buffer over the next 12 months. We also expect the company's HCC production to be stable (4 million-6 million tons) and HCC selling prices to be favorable at above US$90/ton (equivalent to benchmark HCC price FOB Australia of US$140-US$150 per ton by our estimate).

We may lower the rating on MMC if the company's free operating cash flows are negative, such that it requires external funding or another distressed exchange becomes likely. This scenario could occur if MMC's HCC realized selling price approaches US$80/ton. We could also downgrade MMC if we lower the sovereign rating on Mongolia.

Given the PIK flexibility for interest payment, we believe a default is less likely to come from a missed interest payment. Instead, it's most likely to come from an unsustainable capital structure due to materially weakening coal prices. If this PIK flexibility disappears in future refinancing, it may cause negative pressure on the rating.

The likelihood of an upgrade is limited over the next 12 months. However, we could upgrade MMC if we raise the sovereign rating on Mongolia and MMC strengthens its liquidity and capital structure. This would entail a credible record in refinancing, building cash balance, or arranging committed credit lines enough to weather a less-conducive industry environment. It would also entail a stronger balance sheet in MMC with absolute debt reduction such that its debt-to-EBITDA ratio could remain below 3x sustainably, assuming moderately stressed coal prices.
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