MINEX Forum

Tag: Mongolia

  • United States – Mongolia Memorandum of Understanding on Mineral Resources

    United States – Mongolia Memorandum of Understanding on Mineral Resources

    On June 27, 2023, in Ulaanbaatar, Mongolia, a significant memorandum was signed between the U.S. Department of State, represented by Under Secretary of State for Economic Growth, Energy, and the Environment, Jose W. Fernandez, and Mongolia’s Ministry of Mining and Heavy Industry, represented by Minister Ganbaatar Jambal. This Memorandum of Understanding (MOU) is dedicated to fostering collaboration on the development and governance of mineral resources.

    This MOU highlights the commitment of both the United States and Mongolia to promote responsible practices within their respective mineral resource sectors and to jointly enhance the resilience and security of critical mineral supply chains in the Indo-Pacific region.

    The United States and Mongolia share a mutual interest in harnessing mineral resources for economic growth, resource security, and overall economic development. Both nations possess valuable technical expertise, operational know-how, and sector management capabilities that can be effectively utilized through this close partnership.

    Under the terms of this MOU, the United States will actively engage with Mongolia to facilitate sustainable exploration and development of its mineral resource potential. Collaboration avenues include joint geoscience fieldwork, educational workshops, knowledge-sharing through peer exchanges, comprehensive training programs, and discussions concerning investment and regulatory frameworks. This collaborative effort may encompass cooperation between government agencies, academic institutions, and private sector entities from both countries.

    For additional information, please reach out to ENR-PD-Clearances@state.gov.

  • Erdene Resource Development Corp reveals positive Feasibility update on Byan Khundii Project

    Erdene Resource Development Corp reveals positive Feasibility update on Byan Khundii Project

    Erdene Resource Development Corp (TSX:ERD, OTC:ERDCF) CEO Peter Akerley joined Steve Darling from Proactive to share news the company has announced the results of an updated independent Feasibility Study for the open-pit Bayan Khundii Gold Project in southwest Mongolia.

    Akerley telling Proactive the numbers have been much improved including after-tax Net Present Value of 170 million (NPV5%) and 35.3% Internal Rate of Return, increasing to US$196 million and 38.95% IRR, respectively, at the current gold price of US$1,900/oz.

    Life of Mine Earnings Before Interest, Taxes and Depreciation of US$451 million, increasing to US$495 million at a US$1,900/oz gold price. Total recovered gold of 476,000 ounces, a 25% increase compared to the 2020 Feasibility Study from an average gold recovery rate of 93%.

    Measured and Indicated Resources of 674,700 ounces of gold at an average grade of 2.6 g/t gold, and 319,000 ounces of silver at an average grade of 1.38 g/t silver. The company also sees room for growth with adjacent high-grade resources and recent discoveries provide a high probability for expansion.

    The company, with its strategic alliance with MMC, Mongolia’s largest independent miner, is moving towards production. Early construction works are underway with the first gold and cash flow expected in 2025.

  • Fitch Places Mongolian Mining on Watch Negative

    Fitch Places Mongolian Mining on Watch Negative

    At the same time, Fitch has assigned a ‘B(EXP)’ expected rating to MMC’s proposed US-dollar senior exchange notes and new issuance with a Recovery Rating of ‘RR4’. The final rating is contingent upon the receipt of final documents conforming to information already received.

    The proposed notes will mature on the third anniversary of the exchange settlement date and will be jointly and severally issued by MMC and its wholly owned subsidiary, Energy Resources LLC.

    We do not consider the proposed debt exchange transaction as default avoidance, despite the maturity extension for MMC’s existing USD350 million senior secured notes due April 2024, as we believe MMC is able to accumulate sufficient cash to repay the notes, even without the proposed issuance.

    The RWN takes into consideration the low cash buffer that will be available after the repayment of the notes due 2024, should the exchange offer fail, to manage variances in the operating environment. The inherent volatility and lack of predictability of the post repayment cash position is more consistent with a rating level that is one notch lower. We will remove the RWN and affirm the rating with a Stable Outlook if the exchange is completed at the terms communicated.

    KEY RATING DRIVERS

    Exchange to Address Refinancing Risk: The exchange offer is at par value, using a combination of cash and new notes, subject to a minimum acceptance of 75% of outstanding principal. A successful transaction would reduce the funding requirements for MMC’s 2024 notes and would be credit positive, as it would improve the company’s maturity profile.

    Sufficient Cash for Repayment: If the proposed exchange fails, we expect that MMC would have the capacity to repay its 2024 notes with cash generated from operations, taking into consideration our forecast of a lower average selling price (ASP) in 2H23 and 1Q24. The outstanding balance of MMC’s 2024 notes was USD350 million at mid-August 2023. The company had a cash balance of over USD200 million at end-June 2023, up from USD65 million at end-2022.

    We expect MMC could generate over USD250 million in EBITDA between June 2023 to 1Q24, which, after taking into consideration other cash flow uses, such as interest, taxes and capex, together with the USD50 million in an unused committed facility, would leave the company with sufficient cash for the bond repayment and continued operation.

    Limited Cash Buffer Post Repayment: We expect MMC to have over USD350 million of cash available as of end 1Q24 without the exchange offer, with an additional USD50 million in an unutilised committed facility. We calculate that the company will have a cash buffer of around USD50 million after the USD350 million principal repayment after subtracting the minimum USD50 million of cash required to maintain its operation. However, the inherent variances of MMC’s operating environment can result in the buffer varying widely, which is commensurate with a one-notch lower rating.

    Robust Operational Improvements: MMC’s coking-coal operation has normalised, with Covid-19 pandemic-related disruption at the border with China having eased in 1Q23. Average daily throughput rose to about 800 trucks in 1H23, surpassing pre-pandemic and the 1H22 level of around 240 trucks. MMC ramped up processing volume to 6.8 million tonnes in 1H23, from 0.9 million tonnes in 1H22, ahead of our expectations. Meanwhile, the realised ASP for hard coking coal exceeded USD160/tonne, from a 2022 average of USD147/tonne.

    We expect the ASP to fall in 2H23, but for average ASP in 2023 to remain above 2022 levels. We also expect washed hard coking coal sales volume to reach 5.5 million tonnes, against our previous forecast of 5.0 million tonnes (2022: 3.5 million tonnes). As a result, the EBITDA margin should improve to over 40%, from around 24% in 2022, with greater free cash flow from the higher volume, stronger pricing assumptions and lower costs. We also forecast net leverage to drop to below 1.0x (2022: 3.0x), supported by a strong ASP and margin expansion.

    Small Scale, Single Product: MMC is small by revenue compared with Fitch-rated coal miners globally. Washed hard coking coal accounted for over 95% of its total revenue in 2022. Its latest coal reserve statements show total marketable coal reserves of just under 400 million tonnes, or a reserve life of around 35 years. MMC’s small scale and product concentration constrain its business profile to the ‘b’ category. MMC is looking to diversify away from coking coal, but we believe it will remain its dominant revenue contributor in the short to medium term.

    Regional Cost Advantage: MMC’s cash costs, including royalties, are in the second quartile of the global coking-coal cost curve, but its cost advantage is only in the northern part of China due to the proximity of its mines to steel mills in the area. Land transportation costs to Chinese customers averaged at about USD13/tonne in 1H23, limiting MMC’s cost competitiveness and putting it in the higher quartile of the global cost curve. Delivery beyond northern China would raise costs, limiting its customer-base to mainly northern China.

    DERIVATION SUMMARY

    The RWN reflects the narrow buffer provided by MMC’s Fitch-estimated cash balance after the principal repayment on the 2024 notes, which may not protect MMC from volatile market conditions should the exchange offer not proceed. MMC has a smaller revenue scale compared with rated peers, such as Guangyang Antai Holdings Limited (B/Stable), PT Indika Energy Tbk (BB-/Stable) and PT Golden Energy Mines Tbk (GEMS, BB-/Stable).

    Guangyang Antai’s revenue is more than 10x times that of MMC, while Indika’s revenue scale is more than 7x larger and GEMS’ 5x. However, MMC margin is much higher than that of Guangyang Antai and similar to that of Indika and GEM. MMC is a single-product coal miner, similar to the peers. Its operational profile in terms of mine life is similar to that of GEMS, whose mine life is over 25 years. Indika’s mine life is shorter, at around 15 years.

    MMC’s leverage and financial flexibility profile is weaker than that of GEMS. GEMS has more stable free cash flow generation ability, much lower leverage and well-distributed amortising debt. Both MMC and Indika have had choppy free cash flow generation in the past few years and concentrated debt maturities. Nevertheless, Indika has better interest coverage and much lower leverage. We expect lower leverage at MMC compared with Guangyang Antai, but both companies have had weak FCF generation in the past few years.

    KEY ASSUMPTIONS

    Fitch’s Key Assumptions within our Rating Case for the Issuer:

    – No exchange offer is considered

    – Hard coking coal ASP of USD150/tonne in 2023 and over USD140/tonne in 2024, consistent with Fitch’s price deck assumptions

    – Total sales volume over 8.5 million tonnes in 2023, dropping to just under 7.0 million tonnes from 2024

    – EBITDA margin to average at slightly below 40% in 2023-2025, supported by higher volume, a strong ASP and normalised costs

    – Capex at average at around 10% of revenue in 2023-2025

    – No dividend payments in 2023-2025

    RATING SENSITIVITIES

    Factors that could, individually or collectively, lead to positive rating action/upgrade:

    – We will remove the RWN and affirm the ratings with a Stable Outlook upon completion of the exchange offer at the terms communicated.

    Factors that could, individually or collectively, lead to negative rating action/downgrade:

    – Failure to complete the exchange offer or secure other means of funding to reduce refinancing risk by end-3Q23

    BEST/WORST CASE RATING SCENARIO

    International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

    LIQUIDITY AND DEBT STRUCTURE

    Adequate Liquidity: MMC had USD208 million of cash on hand and USD50 million in unutilised credit facilities at end June 2023. However, this is insufficient to repay the notes due in April 2024, which had a face value of USD350 million in mid-August 2023. Nevertheless, we expect that the company will be able to accumulate additional cash in 2H23 and 1Q24 to meet the principal repayment and retain a cash buffer to sustain its operation.

    ISSUER PROFILE

    MMC is the largest producer and exporter of high-quality hard coking coal in Mongolia. It owns and operates the Ukhaa Khudag and Baruun Naran open-pit coking coal mines in South Gobi province. MMC processed 6.6 million tonnes of run-of-mine coal in 2022, which yielded around 3.0 million tonnes of washed coking coal as a primary product and 1.2 million tonnes of washed thermal coal as a secondary product.

    REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

    The principal sources of information used in the analysis are described in the Applicable Criteria.

    ESG CONSIDERATIONS

    The highest level of ESG credit relevance is a score of ‘3’, unless otherwise disclosed in this section. A score of ‘3’ means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch’s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores

  • Mongolia harnesses surging mining exports

    Mongolia harnesses surging mining exports

    HIGH commodity prices and rising coal exports are propelling economic growth in Mongolia, allowing the country to develop its robust mineral resources, expand its services sector, and invest in green agriculture and energy.

    Mongolia exported 31.7 million tonnes of coal in 2022, an increase in volume of 102 per cent, or 16 million tonnes, from 2021 and an increase in export revenue of 135 per cent, or US$6.5 billion, due to higher coal prices, according to data from the Mongolian Customs General Administration.

    These figures undergirded economic growth of 4.7 per cent in 2022, with Mongolia forecast to grow by 5.2 per cent in 2023.

    As the world’s largest landlocked country, Mongolia relies on China for roughly 80 per cent of its exports, 60 per cent of its imports and 40 per cent of its GDP. It exported 29.8 million tonnes of coal to China in 2022, which was up 104 per cent from 2021 and accounted for 94 per cent of Mongolia’s total coal exports.

    China’s economic recovery in the first quarter of 2023 is enabling Mongolia’s cross-border trade with its southern neighbour to return to pre-pandemic levels. Mongolia exported 13.8 million tonnes of coal – of which 13.5 million tonnes went to China – from January to March, for a total of US$2.2 billion, up 232.2 per cent year-on-year.

    In February Mongolia also started conducting coal-trading contracts through auctions on the Mongolian Stock Exchange, ending the practice of direct contracts with foreign buyers. Using so-called border prices that factor in transport fees, the new electronic trading platform brings transparency and ease to the coal export process.

     

    New rail connections

    Recovery in coal exports has catalysed the construction of new railway projects to connect the country’s mines to the Chinese border.

    Last September Mongolia inaugurated a 233km railway from the Tavan Tolgoi coal field to the Chinese border that will have the capacity to transport 30 million to 50 million tonnes of coal to China per year and lower transport costs from US$32 per tonne using truck delivery to US$8 per tonne.

    In November the country commissioned the railway link from Zuunbayan to Khangi to transport coal, iron ore and other bulk commodities, including from multinational mining company Rio Tinto’s Oyu Tolgoi project.

    Several other shorter railway projects are also intended to facilitate cross-border trade with China.

    For instance, construction began in May on a 7.1-km railway from the Mongolia border point Shivee Khuren to the Chinese border, which is expected to be completed by October and will facilitate coal and copper shipments.

    Two other shorter border connections – from Gashuun Sukhait in Mongolia to Ganqimaodu in China and from Khangi to Mandula in China – are also mostly completed and will further facilitate cross-border trade.

    The construction of new railways is part of a larger strategy to link Mongolia to the broader region.

    In May 2023 China and Mongolia agreed on a series of economic and transport initiatives to bolster Mongolia as a trade route for China-Russia trade. Mongolia accounts for roughly 90 per cent of China-Russia freight, making a tri-nation economic corridor a key segment of Beijing’s Belt and Road Initiative.

    Mongolia relies on Russia for electricity, petrol, aviation fuel, liquefied petroleum gas and diesel, about 60 per cent of which comes from its northern neighbour. With the spike in prices since 2021, stronger links with its main energy supplier could improve its deficit.

     

    Diversification efforts

    In recent years Mongolia has taken steps to improve its domestic infrastructure to diversify its mining-based economy. Between 2016 and 2020 the government constructed a motorway system that connects all 21 provinces to the capital Ulaanbaatar.

    Western sanctions on Russia following its invasion of Ukraine in early 2022 led to difficulty importing key supplies, including food, as well as the loss of valuable airline navigation fees as airlines that formerly flew over Russia and Mongolia between Europe and Asia have been forced to fly over the North Pole or along a more southerly route.

    The conflict has caused a substantial rise in food prices, including for basic staples such as rice and flour, which are essential products for the country’s livestock herders.

    To address food insecurity and diversify its economy, the government is keen to encourage more foreign investment from China in non-mining sectors.

    In May Tuvdendorj Gendendorj, deputy minister of economy and development, called for greater investment in agriculture, including meat processing, dairy farming and raising goats for cashmere, as well as tourism.

    The agriculture sector reached a seven-year high of 12 per cent growth in 2022, supported by favourable weather conditions and increased livestock slaughter. The sector is forecast to grow by 0.9 per cent in 2023, 5.5 per cent in 2024 and 5.5 per cent in 2025, according to the World Bank. China may be incentivised to invest in agri-business in Mongolia given its rising demand for meat.

     

    Investment in sustainability

    Mongolia is also looking to harness green agri-business initiatives to address long-term food security. The Asian Development Bank (ADB) approved a US$448 million investment programme in March to support green and inclusive development.

    The programme seeks to promote a transformative model for green territorial development and green urban-rural linkages, with secondary towns becoming anchors of climate-smart agri-businesses that promote sustainable, resilient and low-carbon rangeland management. Rangelands cover more than 82 per cent of the country and are critical to the livestock industry.

    Another pressing concern is the intensification of the sandstorms originating in the Gobi Desert, caused by deforestation and higher regional temperatures. With China and Mongolia both suffering, the two countries have agreed to form a joint research team to study the problem this summer.

    Mongolia is also making a push into green energy. In April the country’s largest financial institution, Khan Bank, issued the first-ever green bond to spur the development of renewable energy, energy efficiency, green buildings, green mobility and climate-smart agriculture. The bond is valued at US$60 million, with the Dutch entrepreneurial development bank FMO providing US$35 million, the International Finance Corporation US$15 million and MicroVest Capital Management US$10 million.

    Although the country currently depends on coal and oil for more than 99 per cent of its energy needs, it has 12MW of installed hydropower capacity. In April Chinese engineering company PowerChina started construction on the 90MW Erdeneburen hydropower plant, which will provide power to five provinces in the western part of the country, with US$1 billion in financing from China.

    Mongolia’s vast tracts of rangeland offer ample space for solar and wind power. The country is estimated to have a combined wind and solar power potential of 2,600GW, more than enough to meet domestic demand.

    In 2020 the ADB loaned Mongolia US$100 billion to develop the country’s first utility-scale battery energy storage system, which should be ready in 2024.

  • Mongolia, U.S. to deepen cooperation on rare earths mining

    Mongolia, U.S. to deepen cooperation on rare earths mining

    Mongolia, U.S. to deepen cooperation on rare earths mining

    Mongolia has extensive deposits of rare earths and copper, which are vital for high-tech applications including defense equipment and for President Joe Biden’s efforts to electrify the auto market to help stave off climate change.

    Oyun-Erdene spoke to Reuters after he met Vice President Kamala Harris on Wednesday and agreed to sign an “Open Skies” civil aviation agreement, among pledges of further economic cooperation.

    Cooperation with the United States, which he called Mongolia’s “important strategic third neighbor,” would be deepened under a memorandum of understanding signed in June between his country’s ministry of mining and heavy industry and the U.S. State Department, he said.

    At the same time, Mongolia hopes to have good relations with its neighbor China, which controls most of the world’s rare earthdeposits.

    Oyun-Erdene said his country was also in talks with Tesla Chief Executive Elon Musk over possible investment and cooperation in the electric vehicle sector and space, but he would not meet the tech billionaire during this visit.

    The politician called the United States Mongolia’s “guiding Polar Star for our democratic journey.”

    The Biden administration has focused on developing its relationships with countries throughout Asia to counter China’s growing might and the so-called “no limits” partnership between Beijing and Moscow.

  • Erdene to pour first gold at Mongolia mine in 2025

    Erdene to pour first gold at Mongolia mine in 2025

    Erdene Resource Development (TSX: ERD)(MSE: ERDN) said on Tuesday it expects to pour first gold at its Bayan Khundii project in southwestern Mongolia in late 2025, when it will become one the country’s primary producers of the precious metal

    Announcing results of an updated independent feasibility study for Bayan Khundi, chief executive officer Peter Akerley said the mine will be one of the world’s highest grade open-pit gold operations.

    Highlights of the study include a base case after-tax Net Present Value (NPV) of US$170 million, using a 5% discount rate, and 35.3% internal rate of return (IRR), increasing to US$196 million and 38.95% IRR, respectively, at the current gold price of US$1,900 per ounce.

    Production is expected to average 74,200 ounces of gold a year at an all-in sustaining cost of $869 per ounce over its 6.5-year mine life.

    Compared with the 2020 feasibility study, total recovered ounces increased 25% to 476,000 ounces thanks mainly to the incorporation of additional resources from Bayan Khundii and the Dark Horse Mane deposit.

    “Through our strategic alliance with MMC, Mongolia’s largest independent miner, we are moving rapidly towards production,” Akerley said. “In the meantime, we continue to explore, discover and develop the other mineral deposits in our Khundii minerals district.”

    While coal has been one of Mongolia’s main mining exports, the country has been investing in sustainable development, with initiatives in green agriculture and renewable energy.

    The country is hots to Rio Tinto’s (ASX, LON: RIO) Oyu Tolgoi, which will become the world’s fourth-biggest source of copper at its peak, in 2030.