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ANNUAL RESULTS 2018 18 MARCH 2019
UHG mine, Umnugobi province, Mongolia.
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Disclaimer
FORWARD-LOOKING STATEMENTS
We have included in this presentation forward-looking statements. All statements that are not historical facts, including statements about our intentions, beliefs,
expectations or predictions for the future, are forward-looking statements. The reliance on any forward-looking statement involves risks and uncertainties, and
although we believe the assumptions on which the forward-looking statements are based are reasonable, any or all of those assumptions could prove to be inaccurate
and as a result, the forward-looking statements based on those assumptions could also be incorrect.
We undertake no obligation to publicly update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future
events or otherwise, except as required by applicable laws, rules and regulations. In light of these and other risks and uncertainties, the inclusion of forward-looking
statements should not be regarded as representations by us that our plans and objectives will be achieved.
All numbers in this presentation are approximate rounded values for particular items.
1
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COMPANY OVERVIEW
OPERATING ENVIRONMENT
BUSINESS OVERVIEW
Agenda
FINANCIAL OVERVIEW
APPENDIX
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KEY FINANCIALS
Company overview Mongolia’s Sole Fully Integrated Coal Mining Company
3
World-class high quality and sizeable coal resources at Ukhaa Khudag (“UHG “) and Baruun Naran (“BN”) mines
Total pro-forma P&P Reserves: 499Mt1
Total pro-forma M&I&I Resources: 1,062Mt1
Located ~245 km from the Chinese border with close proximity to end customers, well positioned to capitalize the high growth potential in Northern China
The leading and sole fully integrated coal mine in Mongolia, with established full set of captive infrastructure including coal handling and processing plant (“CHPP”), power plant, water facilities and transportation logistics
Mature sales platform with direct sales to end users instead of traders
Well established long-term relationship with blue chip companies in China including Shenhua Inner Mongolia Coal and Coking Co., Ltd (later changed to “China Energy Coal and Coking Co., Ltd”), Baotou Iron & Steel, and etc.
Enhanced operational efficiency through a number of cost initiatives and best-in-class operational practices
The first Mongolian company listed on the main board of an international stock exchange – the Hong Kong Stock Exchange (“HKEx”)
The Company has “B-”, Outlook Stable rating from S&P
HIGHLIGHTS
USD mln FY 2017 FY 2018
Cash2 7.5 33.0
Senior Loan2,3 31.2 23.7
Senior Notes2,3 412.5 412.5
Total Assets2 1,631.4 1,718.0
Total Equity2 770.9 817.3
Revenue 476.4 590.7
EBITDA 177.1 218.3
EBITDA Margin (%) 37.2% 37.0%
Total Debt2 / Capital 36.5% 34.8%
Total Debt2 / EBITDA 2.5x 2.0x
Notes: 1Resources data as of 31 December 2018, reserves data as of 1 January 2019. 2 As of 31 December. 3 Shown and calculated from the face value of the senior loan and the senior notes.
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Company overview Corporate Key Milestones
4 Notes: 1 Based on Built-Operate-Transfer arrangement with the government.
Successful listing at HKEx raising USD616 mln
IPO net proceeds
OCT 2010
Acquisition of BN mine for USD569 mln
JUN 2011
Mining operation at BN mine
commenced
FEB 2012
Issuance of USD600 mln 5-year
senior notes. First corporate bond
from Mongolia
MAR 2012
Stage 3 CHPP plant commenced
bringing total capacity to 15Mtpa
AUG 2013
Debt restructuring • Senior notes
USD412.5 mln • Senior loan
USD31.2 mln • Perpetual notes
USD195 mln • 1.03 bln new
shares to creditors
MAY 2017
Water supply facility operation
commenced
SEP 2011
Mining operation at UHG mine commenced
APR 2009
Stage 1 CHPP plant commenced
with operation capacity of 5Mtpa
JUN 2011
Constructed ~240km UHG-GS
paved road (transferred to the
Government of Mongolia in 2014)1
AUG 2011
18MW power plant commenced at
UHG mine
SEP 2011
Successful Rights Issue of USD195 mln
net proceeds
DEC 2014
Stage 2 CHPP plant commenced
bringing total capacity to 10Mtpa
FEB 2012
Tax stabilization certificate is granted
to Energy Resources LLC for 24 years period
AUG 2015
10-year cooperation agreement on coal
sales with China Energy Coal and Coking Co., Ltd to supply up to 3Mt of
hard coking coal (“HCC”) and 1Mt of semi-soft
coking coal (“SSCC”) per annum
MAY 2018
10-year cooperation agreement on coal sales with Baotou
Iron & Steel Co., Ltd to supply up
to 5Mt of coal products per annum
MAY 2017
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Global CSR Award 2013 - MMC won the Silver “Best Workplace Practice Award” at the Global CSR Summit and Awards 2013, which has attracted entries from more than 500 world leading corporations.
Global CSR Award 2012 - the Company was selected as a finalist for the “Best Community Program Award” with the leading corporations such as Procter & Gamble, Standard Chartered, Huawei, DHL and FedEx.
Water Stewardship Award 2013 - the National Water Management Committee of the Government of Mongolia awarded the Company’s water management activities at UHG mine, which includes belt-press dewatering technologies.
Water Innovation Award 2018 – Awarded by the International Finance Corporation after MMC’s multiple initiatives for rainwater harvesting and increasing water recycling rate in the Gobi region
Top 10 Enterprises in Mongolia (eight times during 2009-2018 period) – Awarded by the Mongolian National Chamber of Commerce and Industry
National Quality Award 2018 – Awarded by the Government of Mongolia for successful introduction of the Integrated Management System into its operations for the first time in Mongolian mining industry
Company overview Sustainable and Responsible Mining
5
MMC became the first Mongolian mining company to introduce a comprehensive international management systems such as ISO 9001:2015 Quality management systems, ISO 14001:2015 Environmental management systems and OHSAS 18001:2007 Occupational health and safety management systems in 2018
The continued effort to reduce the number of incidents and related frequency rates is the testament to the commitment of the Group’s management to the concept of Zero Harm in terms of health, safety and environment. Since the commencement of MMC’s public reporting, there were 2 semi-annual periods of zero Lost Time Injury being recorded.
MMC is committed to supporting community development and local employment, and invested in housing complex development together with social infrastructure such as school and kindergarten open for employees and local community children. Today, about 50% of the staff are local residents. In addition, MMC implements various community development programs in the areas of health, education, cultural heritage preservation and local business development, such as providing interest-free loans to local small and medium businesses.
MMC has established forest belt covering 15 ha area to combat desertification and 2.5 ha nursery field dedicated for mine reclamation activities.
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COMPANY OVERVIEW
OPERATING ENVIRONMENT
BUSINESS OVERVIEW
Agenda
FINANCIAL OVERVIEW
APPENDIX
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MONGOLIAN INDUSTRIAL OUTPUT
Source: National Statistics Office of Mongolia, World Bank, IMF. Note: 1 2014-2018 GDP data form National Statistics Office of Mongolia, 2017E-2021E GDP forecast data from IMF.
MONGOLIAN TOTAL FDI
MONGOLIAN GDP GROWTH1
629 764 861 921 1,044 2,313 2,060 1,999 2,626 3,382
6,397 5,857 7,067 9,386
11,231 9,338 8,681
9,927
12,933
15,657
0
5,000
10,000
15,000
20,000
2014 2015 2016 2017 2018
MN
T b
ln
7.9
2.4 1.2
5.3
6.9
(0.2)
5.1 6.3 4.9 5.0 5.2
(3)
0
3
6
9
2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E
%
Real GDP Growth IMF Estimate
720 607 545 613 717
1,272 790 941
1,671 1,752
1,992
1,397 1,486
2,284 2,469
64% 57%
63%
73% 71%
0
1,000
2,000
3,000
4,000
2014 2015 2016 2017 2018
USD
mln
% of Mining sector FDI
Operating environment Mongolian Economy Outlook Remains Positive
4,792 3,678 3,484
4,934 6,070
83% 79% 71%
80% 87%
0
2,500
5,000
7,500
10,000
2014 2015 2016 2017 2018
USD
mln
Minerals Export Minerals Export % of Total Export
MONGOLIAN MINERALS EXPORT
Manufacturing Electricity, water supply Mining and quarrying
Mining sector Other sectors
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Infrastructure remains a key focus in China’s inter-regional integration and the government relies on construction expenditure to further boost economic growth
In an effort to boost development in western China, the Chinese government has approved 152 infrastructure projects worth a total of CNY3.8 tn since 2012
Around 200 projects within the energy & utilities sector is recorded in pre-construction or under-construction phases, worth approximately USD190 bln
China’s de-capacity strategy has led to closures of illegal and inefficient steel mills while the remaining Chinese steel makers are being encouraged to swap to bigger blast furnaces. This requires steelmakers to seek higher quality coking coal with superior chemical properties to bridge the production gap
Coal production capacity in China was reduced by 700.9 Mt during 2016-2018
China’s demand for imported coal is expected to defy the downward trend, driven by a loss of low sulphur premium HCC, shift in blast furnace size, and location driving a continued reliance on high quality imports
Operating environment Robust Economic Growth In China Supports Steel Sector
8
CHINA COKING COAL MARKET
Source: Fenwei.
CHINA CRUDE STEEL PRODUCTION
808 832 928 920 910 900
0
300
600
900
1,200
2016 2017 2018 2019E 2020E 2021E
Mt
534 515 511 515 512 512
444 446 435 461 461 460
59.3 69.9 64.9 63.0 62.7 62.5
0
150
300
450
600
2016 2017 2018 2019E 2020E 2021E
Mt
Consumption Production Import
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0
90
180
270
360
Feb-16 Sep-16 Apr-17 Nov-17 Jun-18 Jan-19
USD
FOB Aus (low vol) FOB Aus (mid vol) CFR North China (low vol)
Operating environment Stabilized pricing facilitated by supply and demand balance
9
CHINA COKING COAL PRICES1
COKING COAL STOCKS AT CHINA END USERS
Source: Fenwei, Platts. Note: 1 VAT inclusive.
COKING COAL STOCKS AT CHINA PORTS
SEABORNE COKING COAL PRICES
0
600
1200
1800
2400
Feb-16 Sep-16 Apr-17 Nov-17 Jun-18 Jan-19
CN
Y
EXW Jingtang (mid vol) FOR Luilin #4 EXW Baotou FOR Tangshan
0
4
8
12
16
Feb-16 Sep-16 Apr-17 Nov-17 Jun-18 Jan-19
Mt
0
2
4
6
8
Feb-16 Sep-16 Apr-17 Nov-17 Jun-18 Jan-19
Mt
Jingtang Rizhao Lianyungang Qingdao Fangcheng Steel mills Coke plants
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Operating environment Regulatory highlights
10
EXPLORATION LICENSES
Only Mongolian legal entities are entitled to hold exploration licenses Exploration licenses granted by Mineral Resources and Petroleum Authority of Mongolia (“MRPAM”) for an initial term of 3 years and license holders may apply for 3 successive
additional periods of 3 years each (maximum period of 12 years) Exploration license holders are subject to annual fees and annual minimum exploration spending, and are also subject to various environmental protection obligations
MINING LICENSES Mining licenses are granted by the MRPAM for an initial term of 30 years and are renewable for 2 successive periods of 20 years (maximum period of 70 years). Only Mongolian legal entities are entitled to hold mining licenses
CORPORATE INCOME TAX
The corporate income tax rate in Mongolia is 10% on annual taxable income of up to MNT3.0 bln, plus 25% of the exceeding amount on annual taxable income in excess of MNT3.0 bln Taxable income is calculated as revenue minus deductible expenses. Some operating and other expenses are not deductible for tax purposes according to the Corporate Entity Income Tax
Law of Mongolia A withholding tax of 20% is applicable on revenue generated within Mongolia by foreign entity unless governed by a Double Taxation Treaty
VALUE ADDED TAX
10% VAT applicable on all goods sold and services performed within Mongolia Company exporting unprocessed mineral products cannot claim VAT credits and must bear VAT cost of producing such goods Processed coal products are subject to zero percent output VAT
ROYALTIES Mining license holders exporting coal are allowed to pay their royalties based on their actual contract pricing, which shall be adjusted with reference to the closest border crossing point used for export from Mongolia.
Domestic consumption: 2.5% of coal reference price International consumption-sliding scale: 5% base royalty rate of coal reference price, plus progressive royalty rate based on product (i.e. unwashed and washed coal) market price
increase level as follows Processed coal is subject to the lowest level of progressive royalty rate of 0–3%, whereas raw/unprocessed coal is subject to 0–5%
LAW ON INVESTMENT
Tax stabilization certificates are granted to entities that have fulfilled the requirements set out in the Law on Investment of Mongolia based on a different number of factors including (i) industry, (ii) investment size, and (iii) location of investment.
In 2015, Energy Resources LLC having fulfilled the requirements as set out in the law has received the tax stabilization certificate for a period of 24 years, based on its investment size, for tax rates of CIT, customs fee, VAT and royalty
REHABILITATION REQUIREMENTS
Long-term management of permanent engineered structures (for example, spillways, roads, waste dumps) Achievement of environmental closure standards Relinquishment of the site with associated permanent structures and community development infrastructure and programs to new owners Environmental legislation is evolving in a manner that will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental
assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees
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COMPANY OVERVIEW
OPERATING ENVIRONMENT
BUSINESS OVERVIEW
Agenda
FINANCIAL OVERVIEW
APPENDIX
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Business overview Sizeable coking coal resources and reserves base
12
JORC (2012) Statement1 UHG BN THG Pro-Forma
Total
Total resources2 (Mt) 663 326 73 1,062
- Above 300m 442 231 54 727
- Below 300m 221 95 19 335
Total ROM coal reserves3 324 175 - 499
- Coking 311 175 - 486
- Thermal 13 0 - 13
Total marketable reserves3 191 91 - 282
- Coking 153 71 - 224
- Middling 25 20 - 45
- Thermal 13 0 - 13
Notes: 1 Due to rounding, discrepancy may exist between sub-totals and totals. Rounding rules refer to Clause 25 of the JORC Code (2012). 2 Includes Measured, Indicated and Inferred Resource category as at 31 December 2018. 3 Includes Proved and Probable Reserve category as at 1 January 2019.
Overview: The Company owns and operates two open-pit coking coal mines, namely the UHG deposit located within the Tavan Tolgoi coal formation and the BN deposit, both of which are located in the South Gobi province of Mongolia
Location: UHG mine is located ~540 km south of Ulaanbaatar, the capital city of Mongolia, and ~245 km from the Mongolia-China border crossing Gashuunsukhait-Ganqimaodu (“GS-GM”). BN mine is located ~30 km south-west of UHG mine
License: UHG mining license was granted in 2006 and BN mining license was granted in 2008. The Company performed exploration work during 2011-2012 at Tsaikhar Khudag (“THG”) area and was granted the THG mining license in June 2013. All licenses permit the Company to engage in coal mining activities for an initial period of 30-years, extendable twice by 20-years each
Resources: The latest UHG, BN and THG Coal Resources statements were prepared as at 31 December 2018. Based on the latest estimates, pro-forma total Coal Resources are 1,062 Mt
Reserves: The latest Coal Reserves statements for UHG and BN deposits were prepared as at 1 January 2019. The estimates were prepared based on open cut, multi seam, truck and excavator mining methods. Based on the updated statements, pro-forma total run-of-mine (“ROM”) Coal Reserves of UHG and BN deposits are 499 Mt
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In 2018, total CHPP ROM coal infeed was 10.0 Mt representing an
increase of 25% compared to 2017.
The Company works closely with its customers by providing higher quality coal products suitable for tighter industry standards in China. As such, starting from 4Q2018, the Company has adjusted contractual specifications for HCC product by lowering indicative ash content at dry basis from 11.0% to 10.5%.
1.8 2.2
4.1 4.8
5.9 7.0
0
3
6
9
12
2017 2018
Mt
Primary product Secondary product
Business overview Tailoring production output with export logistics conditions
13
WASHED COAL PRODUCTION
Note: 1 Combined stripping ratio of UHG and BN mines.
ROM COAL PRODUCTION
At UHG mine a total of 44.3 million bank cubic metres (“bcm”) of prime
overburden was removed and 9.5 Mt of ROM coal mined with an actual stripping ratio 4.67 bcm per ROMt.
At BN mine a total of 9.7 million bcm of prime overburden was removed and 1.4 Mt of ROM coal mined with an actual stripping ratio of 6.98 bcm per ROM tonne.
During 2018, the Company achieved the highest total ROM coal production rate since commencement of the both UHG and BN mines operation.
8.2 9.5
1.4 8.3
10.9
4.4 5.0
0
5
10
15
20
2017 2018
Mt
UHG BN Stripping ratio (bcm/ROMt)1
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Business overview Continued inefficiencies at the border crossing
14
Source: the Company data. Note: 1 Combined average throughput of all coal trucks crossing GM border per operating day.
GM BORDER CROSSING DAILY AVERAGE THROUGHPUT1
GS-GM
Existing border crossing
Proposed border crossing
Potential route
UHG
TKH
CHINA
MONGOLIA BN
Khangi-Mandal
Tsagaandel Uul-Ulzii
1,075
1,221
724
576 494
847 936
639
0
400
800
1,200
1,600
1Q2017 2Q2017 3Q2017 4Q2017 1Q2018 2Q2018 3Q2018 4Q2018
Tru
cks
The cross-border logistic bottlenecks remain as the main factor limiting potential increase for coal export volumes from Mongolia to China via GS-GM border crossing point.
1Q2018 GM border crossing average throughput was the lowest in the recent two years. While the situation has improved since 2Q2018, it still remains below the levels recorded in 1H2017.
In 4Q2018, Chinese customs were installing new automatic clearance system at GM, which resulted in a slowdown of the throughput.
Turnaround time required for coal export is extended due to border crossing inefficiencies, which resulted in increased third party contractor tariffs.
The Company has completed during 1H2018 increase of its trucking fleet by additional 150 double-trailer trucks, each capable to carry 130 tonnes per shipment.
In response to the border crossing inefficiencies, from time to time, Mongolian regulators have taken actions to temporarily suspend export customs clearance at mines in TT area and required the exporters to utilize trans-shipment facilities at TKH. Following the directions imposed by regulators, the Company used two modes for export transportation, either direct shipments from UHG to GM or two-step shipments from UHG to TKH and further from TKH to GM.
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Area A
Business overview Target market region
15
China Railway Corporation railway
China Shenhua railway
UHG-GS paved road
Customers
UHG
MONGOLIA Area C
Area B
CHINA
BN
GS-GM
Source: Fenwei, National Bureau of Statistics of China.
Mt Crude steel production
Province 2017 2018 Change
(YoY)
1 Inner Mongolia 19.8 23.1 17%
2 Hebei 191.2 237.3 24%
3 Gansu 5.6 8.0 43%
4 Tianjin 18.1 20.2 12%
5 Xinjiang 11.1 11.6 5%
6 Ningxia 2.3 2.5 9%
7 Shanxi 44.3 53.9 22%
8 Shandong 71.5 71.8 0%
9 Liaoning 64.2 68.7 7%
10 Others 403.6 431.2 7%
Total 831.7 928.3 12%
9
8
4 2
7 6
1 3 5
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COMPANY OVERVIEW
OPERATING ENVIRONMENT
BUSINESS OVERVIEW
Agenda
FINANCIAL OVERVIEW
APPENDIX
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47.3
82.4
82.4
0
30
60
90
120
2017 2018
USD
mln
3.6 3.9
0.8 0.8
4.4 4.7
$130.3 $139.7
0
2
4
6
8
2017 2018
Mt
HCC Others ASP of HCC/t
Financial overview Increasing revenue stream
17
REVENUE AND PROFIT FROM OPERATIONS
ADJUSTED EBITDA3
Note: 1 ASP is a blended average of HCC. 2 Includes mainly SSCC and middlings. 3 Earnings before interest, taxes, depreciation and amortisation adjusted by share option expenses and other non-cash items.
NET PROFIT
SALES VOLUME AND ASP1
124.0 153.7
476.4
590.7
0
200
400
600
800
2017 2018
USD
mln
177.1
218.3
0
70
140
210
280
2017 2018
USD
mln
Net profit excluding debt restructuring gain Debt restructuring gain
Revenue Profit from operations
263.0
310.3
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Financial overview Operating costs impacted by border crossing inefficiencies
18
PROCESSING COST
HCC OPERATING CASH COST AT GM3
Note: 1 Combined average mining cost for UHG and BN mines. 2 Combined weighted average transportation cost from UHG to GM, including third party contractors. 3 Washed HCC operating cash cost delivered at GM including mining, processing, handling, transportation, logistics, royalties, fees and other costs. In 2018, SSCC operating cash cost at GM was USD58.8 per tonne due to higher processing yield, lower royalties and lower site administration expenses.
TRANSPORTATION COST2
MINING COST
11.7 11.5
1.4 2.2
13.1 13.7
0
5
10
15
20
2017 2018
USD
/RO
Mt
Cash cost Non-cash cost
1.9 2.1
3.4 2.5
5.3 4.6
0
2
4
6
8
2017 2018
USD
/RO
Mt
Cash cost Non-cash cost
19.8 24.8
20.1
25.5
0
8
16
24
32
2017 2018
USD
/t
Cash cost Non-cash cost
54.4 62.7
6.4 6.8
60.8 69.5
0
20
40
60
80
2017 2018
USD
/t
DAP GM cost Royalties
1
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443.7 436.2
2.5 2.0
0
200
400
600
800
31-Dec-17 31-Dec-18
USD
mln
Debt Debt to EBITDA ratio
Financial overview Solid financial metrics
19
CAPEX
TOTAL ASSETS AND GEARING RATIO
Note: 1 Calculated from the face value of debts.
EQUITY AND DEBT TO EQUITY RATIO1
DEBT AND DEBT TO EBITDA RATIO1
19.3 16.0
0
8
16
24
32
2017 2018
USD
mln
CAPEX (exc. capitalised stripping cost)
770.9 817.3
0.6 0.5
0
400
800
1,200
1,600
31-Dec-17 31-Dec-18
USD
mln
Equity Debt to equity
1,631.4 1,718.0
29% 28%
0
700
1,400
2,100
2,800
31-Dec-17 31-Dec-18
USD
mln
Total Asset Gearing ratio
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Financial overview Finance costs breakdown
20
2018 NET FINANCE COSTS 2017 NET FINANCE COSTS
In accordance with IFRS, the principal amounts of USD412.5 mln Senior Notes and USD31.2 mln Senior Loan were initially recognized at fair values of USD378.0 mln and USD29.2 mln, respectively, on 4 May 2017.
The difference between the face value and initially recognised fair value of Senior Notes and Senior Loan is amortised over the term of the facilities using the effective interest rate calculation.
In addition, Senior Notes and Senior Loan are considered as hybrid financial instruments containing a derivative component of interest rate linked to benchmark coal price and cash sweep premium. Changes in fair values of the derivative components are reflected as gain/loss of derivatives in the Net Finance Cost section of the Profit and Loss Statement.
35.1 2.3 4.3
7.8 0.9 0.6 51.0
0
20
40
60
80
Accruedinterest
Withholdingtax
Effectiveinterest rate
Fair valuechange ofderivatives
Foreignexchangeloss, net
Others Net financecosts
USD
mln
35.5 2.7 6.7
9.3 0.8 0.4 55.4
0
20
40
60
80
Accruedinterest
Withholdingtax
Effectiveinterest rate
Fair valuechange ofderivatives
Foreignexchangeloss, net
Others Net financecosts
USD
mln
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THANK YOU Mongolian Mining Corporation 16F Central Tower Sukhbaatar District Ulaanbaatar 14200 Mongolia www.mmc.mn [email protected]
