Fitch Ratings has affirmed Mongolia-based coal producer Mongolian Mining Corporation’s (MMC) Long-Term Foreign-Currency Issuer Default Rating (IDR) of ‘B’. The Outlook is Stable. Fitch has also affirmed MMC’s senior unsecured rating of ‘B’ with a Recovery Rating of ‘RR4’.

MMC’s rating is constrained by its small scale, single-product focus on hard coking coal and the limited cost competitiveness outside of northern China, its main market. However, MMC has flexibility in capital expenditure (capex), which should give it a sufficient buffer to continue generating free cash flow (FCF) during coal price downturns.

Fitch estimates MMC’s leverage exceeded our negative guidance and FCF was mildly negative in 2020 due to Covid-19-related disruption of border throughput. The disruptions have been mostly resolved, and we expect earnings and cash flow to improve significantly in 2021 on strong market fundamentals driven by stable demand from China’s steel sector and robust coking coal prices.

Some tail risks from the pandemic remain as potential outbreaks in Mongolia could disrupt border throughput. However, preventive measures seem to be effective as evident from the uptick in border throughput. MMC expects throughput to recover to about 700 trucks per day, broadly in line with 2019, with room for further improvement as logistical bottlenecks have been removed. Therefore, we do not expect any major disruption of MMC’s operations and export sales comparable to the instability in 2020. (Fitch Ratings)