Mongolian Mining Corporation’s (MMC, B/Stable) 1H20 results showed that the coking-coal miner’s financial profile deterioration was worse than Fitch Ratings’ expectations due to the disruptions caused by the coronavirus pandemic. Nonetheless, MMC is not expected to breach the negative leverage sensitivity trigger of 3.5x on a sustained basis, despite Fitch’s revised expectations of a sharp increase in 2020 FFO net leverage, although its rating headroom has diminished substantially from its end-2019 leverage of 2.1x.

MMC’s 1H20 revenue fell by 52% yoy to USD157.5 million and its EBITDA, excluding one-off and non-cash items, also declined 59% to USD48.8 million, led by a 40% decrease in coking-coal sales volume due to suspended coal export shipments and a 17% drop in average selling price to USD122/tonne for hard coking coal. Fitch estimates free cash flow was close to zero in 1H20. Total capex (capitalised stripping cost and sustaining capex) decreased by 24% year-on-year to USD35.5 million, which was higher than our expectations as MMC had a difficult first-half operating environment and preserving more cash would have been beneficial. This led to an end-June cash balance of only USD20.8 million. MMC said it will aim to keep its 2H20 capex at the first-half level.

Fitch is starting to see signs of a recovery in the current quarter after the weak first-half performance. Chinese steel prices and producer utilisation rates have been increasing as many construction sites have resumed operations after the rainy season. China’s July? manufacturing purchasing managers’ index of 52.8 was the highest since February 2011, an indication the Chinese manufacturing sector is performing well. Current coking coal stocks at Chinese end-users, including steel mills and coke plants, are lower yoy. A potentially tighter coking coal market in 2H20 could be beneficial for MMC and help improve its financial profile and rebuild its cash position as China is its largest market?.

Fitch thinks MMC’s weakened financial profile is temporary and will continue to adopt a through-the-cycle view and focus on their projected financial expectations for MMC for end-2021 to 2022. Fitch projects China’s GDP growth will accelerate to 7.5% in 2021, before returning to an estimated trend rate of 5.5% in 2022. The expected strong rebound in China’s GDP growth will likely boost coking coal demand, which will help in normalising MMC’s export sales. Fitch forecasts MMC’s FFO net leverage will temporarily increase to 3.5x by end-2020 (2019: 2.1x), from our earlier forecast of 3.4x, and decline to below 3.5x from 2021-2022.

Fitch believes MMC will still be able to generate free cash flow during difficult times, with a stabilising net working capital position, or no further working capital outflow, and a somewhat flexible capex plan. Furthermore, MMC has no immediate liquidity concerns as it has no short-term debt due as of end-June 2020. However, MMC’s rating is still constrained by its small scale, single-product focus and limited cost competitiveness outside of northern China, leaving the rating commensurate with that of Fitch-rated ‘B’ category regional coal miners. (Fitch)