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Rating Action:

Moody's downgrades Mongolian Mining to Ca; outlook negative

01 Sep 2015

Hong Kong, September 01, 2015 -- Moody's Investors Service has downgraded the corporate family and senior unsecured bond ratings of Mongolian Mining Corporation (MMC) to Ca from Caa2.

The ratings outlook is negative.

RATINGS RATIONALE

"The downgrade reflects the risk of high probability of default by MMC as its cash holdings and operating cash flow are inadequate to address its near-term payment obligations", says Dylan Yeo, Moody's lead analyst for MMC.

MMC's cash balance drastically declined to $70 million at end-June 2015 from $253 million at end-December 2014.

The prolonged oversupply situation in the coking coal market has caused coking coal prices to slide significantly during 2015. At end-August, the Queensland benchmark coking coal price fell to $83 per tonne from more than $110 per tonne at the start of 2015.

MMC has little scope to reduce its cost base after implementing various cost cuts over the last 18 months and reducing its production to a contractually required minimum.

As a result the company reported an operating loss before tax of $86 million in 1H 2015. It does not have positive cash flow to service its debt payments under the current weak coal price environment.

At the same time MMC has limited ability to raise alternative liquidity. The company tapped the equity market for a rights issuance in 2014 and divested most of its non-core assets in the last few years.

It has $43 million of receivables from the Government of Mongolia (B2 negative) with respect to the termination of a concession agreement on railway infrastructure in 2012. Receipt of these funds is still under negotiation with the government.

Moody's estimates that the company's internal cash resources will be inadequate to meet payment obligations which include (1) interest payments of $32 million in the next six months; and (2) loan amortization of $30 million in the next six months.

In addition, $69 million of promissory notes due to shareholders is coming due in September 2015. Moody's, however, noted that the shareholders had historically extended the maturity of the promissory notes.

"The downgrade also reflects the lower expected recovery to the senior unsecured bond holders," says Yeo.

MMC's cash holdings declined by $183 million in 1H 2015, and its total debt declined by $59 million. In addition, the operating loss in 1H 2015 eroded the company's equity by $100 million.

This financial deterioration has reduced the likely recovery for the senior unsecured bond holders.

The negative ratings outlook reflects uncertainty over MMC's liquidity position and the high likelihood that it will default on bond repayments if accelerated. Such a default would result in losses for bond holders.

Given the negative outlook, there is a low probability of an upgrade in the near term.

Further downgrade pressure could emerge if the company cannot meet its payment obligations, undergoes a distressed debt exchange, or the deterioration in the recovery level for its rated offshore senior unsecured notes exceeds Moody's expectations.

The principal methodology used in these ratings was Global Mining Industry published in August 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Mongolian Mining Corporation (MMC) is the largest privately owned coal mining company in Mongolia. Established in 2005, it listed on the Hong Kong Stock Exchange in October 2010. It has two coal mines located in the Gobi Desert. The Ukhaa Khudag mine, which produced 4.6 million tonnes of coking coal in 2014, and the Baruu Naran mine, which was acquired in 2011.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

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The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Dylan Yeo
Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's downgrades Mongolian Mining to Ca; outlook negative
No Related Data.
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