Mongolian Mining Corporation (0975.HK) Annual Results 2013

Transcription

1 Mongolian Mining Corporation (975.HK) Annual Results March 214

2 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. Note: All numbers in this presentation are approximate rounded values for particular item 2

3 Agenda Operating Environment Business Review Financial Review Outlook UHG open pit: currently 135 m deep, 28 m wide and 226 m long. 3

4 Operating Environment China achieved robust industry performance despite headwinds Steel production Coke production (Mt) 8 6 CAGR : 7.8% (Mt) CAGR : 7.6% Coking coal consumption Coking coal imports (Mt) (Mt) CAGR : 6.9% CAGR : 21.6% % 2% 15% 1% 2 2 7% 9% 8% 9% 5% % China coking coal imports % in China coking coal consumption China s coking coal imports will likely continue to grow Source: World Steel Association, China Coal Resources 4

5 Operating Environment Excess supply eclipsed strong demand growth China s growing demand for imported coking coal Mongolia, 45% 211 : 45 Mt Others, 7% Source: China Coal Resources Australia, 23% USA, 1% Canada, 7% Russia, 8% Mongolia, 36% Others, 8% 212 : 54 Mt 213 : 75 Mt USA, 8% Australia, 26% Russia, 9% Canada, 13% Mongolia, 2% Others, 6% USA, 8% MMC strengthened position as leading Mongolian coal exporter Russia, 11% Australia, 4% Canada, 15% 211 : 21 Mt 212 : 21 Mt 213 : 18 Mt MMC exports 23% MMC exports 27% MMC exports 31% Others 77% Others 73% Others 69% Mongolia is an important supplier of coking coal for China Note: Starting 212 MMC is exporting washed coal, while all other exporters are selling raw coal. In 213, on raw coal basis, MMC coal export would have been 8.6 Mt, which is over 47% of total Mongolian exports ; Source: Company data, NSO 5

6 Operating Environment Regulatory updates State Policy on Mineral Sector Law on Common Minerals Support Measures for Coal Export Regulations on Water Usage The Policy, approved on January 16, 214, focuses on ensuring the principal interests of the nation by developing a transparent and responsible mining sector which relies upon the private sector, and aims to develop diversified and balanced economic structure in the short and mid-term. Concerning the coal industry, the Policy emphasizes that the state shall provide support on the development of coal processing, coking and chemical plants; construction of power plants based on coal deposits; production of smokeless, liquid fuel and gas from thermal coal and production of liquid fuels from shale oil. In terms of strategically important deposits, the Policy emphasize improvements to an operational and economic productivity and the advancement of public-private partnerships through enhancing government control and coordination and responsibility on deposits of strategic importance. The Law, adopted on 9 Jan 214, establishes a detailed legal framework on exploration and mining related activities for common minerals, which were previously regulated by the Mineral Law 26. Exploration and mining licenses on common minerals are to be granted at municipal level by a governor of an aimag or city. Exploration licenses shall be granted for an initial 3 year period and can be extended once for another 2 years, whereas mining licenses shall be granted initially for 15 years and can be extended twice for 1 years each time Following the GoM decision (16 Aug 213) to support coal exports, the GoM purchased from MMC the UHG-GS paved road. Payment was settled on 13 Feb 214. Decision was made to construct cross border narrow gauge railway link at the GS-GM border point, to be used primarily for coal transportation. This will have a significant positive impact, decrease cross border transportation costs, and will support the Group s plans to increase coal exports. The construction is expected to be completed within 214. On 2 Dec 213 the Citizens Representatives Khural of Umnugobi aimag nullified a previous Resolution to stop water utilization for mining industry intended to start from 1 Jan 216. The reasoning had been to preserve water resources for potable and pastoral purposes, with permits and licenses required to conduct exploration and drilling of wells and water utilization by the mining industry from 1 Aug 213. With the restrictions nullified, there will be no restriction on the Company s permits and licenses for water utilization In accordance with Article 15 of the Law on Environmental Resource Utilization Fee, the GoM defined the relevant rates to be used for calculating the water reserve utilization fee. Accordingly, the underground water utilization fee used for industrial purposes was increased by 6.4 times from MNT15 to MNT959 per cubic metre, and the water utilization fee for domestic purposes increased by 1.9 times from MNT5 to MNT96 per cubic metre. With the operation of the new Belt Filter Press commencing from 14 Nov 213, and with expectations that it will reduce the industrial raw water requirement for coal processing by 35%, the Company expects the total cost component for water utilization fee to remain low. 6

7 Operating Environment Investment environment Foreign Investment Regulations On 19 Apr 213, an Amendment to the Law on the Regulation of Foreign Investment Business Entities Operating in Sectors of Strategic Importance (SEFIL) was approved by the Parliament Subsequently, on 3 Oct 213, the Strategic Entity Foreign Investment Law (212) and Law on Foreign Investment (1993) were nullified by Parliament upon enactment of the new Law on Investment. This new Law provides a comprehensive framework for both foreign and domestic investments, and came into effect on 1 November 213. The New Law Stabilizes Taxes It aims to provide sustainable investment protection for investors, and introduces non-discriminatory principles for the treatment of both foreign and domestic investments via tax stabilization regimes. The four main taxes include the legal entities income tax, customs tax, value added tax and royalty tax on minerals, which can be stabilized per as this Law for a period of 5-18 years. The length of stabilization is dependent on the investment amount, location and industry sector(s) of the investment, and is set upon the granting of the stabilization certificate. The stabilization period can be prolonged by 1.5 times for projects involving investments of more than MNT5 billion that have significant importance for long term sustainable economic and social growth and / or if such projects and aim to produce import substitutions and export products. The New Law Eases Investment Approvals The Law on Investment also allows for projects with an investment amount of over MNT5 billion to enter into an investment agreement with the Minister for Economic Development upon investors request In accordance with the Investment Law, the strategically important sectors are the mining, banking and finance, media and communications sectors. Requirements for mandatory approval on investments to be made in strategically important sectors were softened. Only foreign state-owned enterprises are now obliged to seek approval from the Ministry in Charge of Economic Development rather than from the Parliament or Government, as was previously required when investment exceeded 33% of the total issued shares of an entity intending to operate in one or more of those sectors. No requirements are imposed on private investments in strategically important sectors. 7

8 Operating Environment Business Review Financial Review Outlook CAT 793D Mining Truck: target capacity 99 bcm or 228 tonnes, and capable of traveling at 6 kph. 8

9 Business Review Substantial increase in resource and reserve base ROM Coal Reserve (Mt) MMC UHG BN JORC Reserves as at 31 Dec 212 Proved Probable Total Coking Thermal Total Coking Thermal Total Coking Thermal Total Resources and Reserve optimization Total combined ROM Coal Reserve increased from 46 Mt as at 31 Dec 211 to 48 Mt as at 31 Dec 212. The increase of 2 Mt, excluding mining depletion of 9.4 Mt in 212, represents a total increase of 6.4%. Of the total of combined ROM Coal Reserve, the coking coal component increased by 33 Mt at UHG and 19 Mt at BN. 49 Mt of Resource was converted to Reserve at UHG (+17%), and coking coal in the BN ROM Coal Reserve now equals to 85% of the total. Minimal exploration conducted at UHG in 213, and none at BN, with Resource and Reserve update pending guidelines under JORC 212. (Mt) 1,2 1, JORC Resources (M+I+I) and Reserves (P+P) 1, Resources UHG Deposit Reserves BN Deposit (incl. THG mining license area) Source: (1) RPM, UHG JORC Reserve Report, Jun 213 ; (2) MMC, UHG JORC Resource Report, Aug 212 ; (3) RPM, BN JORC Reserve Report, Jun 213; (4) MBGS, BN JORC Resource Report, Nov 212; (5) MBGS, THG JORC Resource Report, May 213 Integrated development of both mines RungePincockMinarco (RPM) prepared the Life-of-Mine (LOM) study as basis for the update of UHG and BN JORC Reserves as of 31 Dec 212. The LOM study deliberately targeted integration of coal mining and processing schedules at BN and UHG mines to realize synergistic value. Based upon this study, the Group s mining operations are capable of supplying up to 15.8 Mtpa of ROM coking coal to CHPP until 24. In the LOM study, thermal coal production ramp up from UHG and BN mines scheduled from 216 onward, matching the expected completion of the TT-GS railway. High quality coal resource and reserve base underpin significant coking coal output for the next 28 years 9

10 Business Review MMC has established itself as the largest coal mining company in Mongolia Large scale open pit mining operations Operational efficiency, reliability and safety MMC recorded total ROM coal production of 9.7 Mt in 213, a 2.7% YoY increase. Its full year stripping ratio of 5.6 bcm per ROM tonne was steady in comparison to 212 despite the increased depth of mining. Continued ramp up at UHG resulted in total material movement (coal and overburden) of 59. Mbcm in 213, a 1.3% YoY increase, and a 33% increase in available mining capacity between the start and end of the year. Targeted KPI adjustment with mining and blasting contractors has driven alignment of mining team with delivery of value to the coal chain, with impact noticeable and sustained with regard to cost reductions. ROM coal mining was strategically reduced in 1H to draw down existing ROM stockpile inventories, reducing cash outflow. UHG and BN mines were integrated under unified management with regard to mining, maintenance and technical services to minimize cash costs and operational cash outflows throughout 213 Unification allowed for controlled reduction in output from BN mine in 1H 213 via redeployment of personnel and equipment to UHG without impacting the meeting of the CHPP feed requirement. Consolidation of support services under unified management guided standardization of OHS&E controls consistently across subsidiaries. At total of 44,843 man hours of training was delivered to the Group's personnel, contractors and visitors via 24,26 individually recorded training sessions targeting OHS&E specific topics. Mining operational focus aligned to maximize delivery of overall coal chain value 1

11 Business Review Coal processing capacity to15 Mtpa completed Processing entirety of ROM production Processing cost savings achieved 8 (US$/t) % Cash Non cash Module III was successfully commissioned in 2H 213, increasing total installed nameplate processing capacity to 15 Mtpa. Total ROM Feed of 1.7 Mt was achieved in 213, up 44.5% YoY, utilizing two modules exceeding relative nameplate capacity. Primary yield was 5.1%, producing 5.3 Mt of washed coking coal, up 36.1% YoY. 2H primary yield improved to 53.9% on basis of feed blend. Secondary yield was 21.6%, with 2.3 Mt of washed thermal (middling) coal produced, up 39.6% YoY. Depletion of lower grade ROM stockpiles in 1H 213 impacted yields, but achieved overall benefit of reduced operational cash outflow. Owner operation allowed processing cost reduction of 4%, and power and water cost reduction of 25% and 5%, respectively. % -2% -4% -6% -8% -1% Power Water Contractor fee Maintenance -25% Major drivers of cost reduction -5% Improved operational efficiency by pushing capacity utilization -1% -43% 11

12 Business Review Improved transportation efficiency Maximizing utilization of own trucking fleet Transportation cost reduction (US$/t) % Long haul (UHG-TKH) Short haul (TKH-GM) Long haul transport fleet utilization was successfully maximized in 213, with productivity of roundtrip in long haul (UHG-TKH) up 67%. Long haul transportation cost reduced from US$11.9 to 8.1 per tonne, with main cost savings in fuel by 19% and maintenance by 17 % by utilizing own trucks UHG-GS Paved Road and Border Crossing facilities were transferred to the GoM, with compensation of US$9.3m received in Feb 214. Agreed a compensation with GoM for UHG-GS railway project, with access to 5% of capacity maintained. GoM Resolution issued with regard to construction of narrow gauge cross border railway from GM to GS with completion target within 4Q 214. Major drivers of long haul cost reduction Monthly trip Fuel cost Contractor fee Maintenance 67% Strategically maximizing productivity and efficiency in the transportation and logistics chain 6% 2% -2% -6% -1% -19% -99% -17% 12

13 Business Review MMC has established itself as the largest coal mining company in Mongolia ROM coal production and strip ratio (Mt) H 211 2H 211 1H 212 2H 212 1H 213 2H 213 UHG Coal BN Coal MMC Strip Ratio Coal processing (Mt) H 211 2H 211 1H 212 2H 212 1H 213 2H 213 Primary Product Middlings Coal sales Share in Mongolian coal exports (Mt) (Mt) % 23% % H 211 2H 211 1H 212 2H 212 1H 213 2H 213 Washed HCC Other products MMC Others MMC% in Mongolian Export MMC is realizing first mover advantage in the country Note: Starting in 212 MMC is exporting washed coal, while all other exporters are selling raw coal. In 213, on raw coal Basis, MMC coal exports would have been 8.6 Mt, which is over 47% of total Mongolian exports; Source: Company data, NSO 13

14 Operating Environment Business Review Financial Review Outlook MW UHG Power Plant: incorporates an air cooling system with water consumption, which is most suitable for the arid Gobi climate 14

15 Financial Review Financial performance HCC sales volume and ASP (US$/t) Revenue (Mt) (US$m) % Gross profit EBITDA 1 and EBITDA margin (US$m) (US$m) 25.4% 8 4.3% % Successful cost reduction measurements led to higher gross profit and EBITDA 1 Earnings before interest, taxes, depreciation, amortization, allowance for doubtful debts and share options 15

16 Financial Review Continued efforts in cost management Mining costs Processing costs (US$/ROMt) % 15.7 (US$/ROMt) % Cash Non cash Transportation costs Total operating cash cost at GM 1 (US$/t) % (US$/t) % Long haul (UHG-TKH) Short haul (TKH-GM) Operational efficiency resulted in successful production cost savings 1 Net washed HCC delivered cash cost at GM, includes mining, processing, handling, transportation, logistics, site administration, inventory losses, royalties and fees 16

17 Mining Processing & Handling Transport - long haul Logistics Transport - short haul Royalties Customs & Air pollution fee Site admin Inventory losses Financial Review Continued efforts in cost management HCC operating cash cost structure (%) in 213 5% 44.8% 4% 3% 2% 1% 11.6% 1.2% 13.4% 8.4% 3.5% 3.3% 3.3% 1.5% % Focusing on further optimization and efficiency 1 Mining costs includes contractor fee, plant rate, fuel, blasting and explosives, other mining related costs and stripping activity asset depreciation 2 Logistics costs include logistics, (.6%) road (.8%) and handling costs (2.1%) 3 The effective royalty rate for HCC was 5.9% 17

18 Financial Review EBITDA supported by cost reductions Adjusted EBITDA 1 (US$m) Coal sales price decrease (39.4) Mining cost decrease 1.2 Processing cost decrease 13.4 Transport & logistics cost decrease 37.4 Tax & fee decrease 1. Other cost decreases Earnings before interest, taxes, depreciation, amortization, allowing for doubtful debts and share option Company s revenues declined by 7.8% due to lower prices Notable reduction in costs include processing and transportation costs, which each declined by US$13.4m and US$28.5m, respectively Incremental cost savings were recorded in SG&A, site administration costs and inventory loss cash costs included in other costs EBITDA of US$11.9m in 213 reflects impacts of IFRIC 2 standard for surface mining that requires depreciation stripping activity assets. US$16m is part of mining cost counted as D&A, which decreases cash cost impacting EBITDA As a result EBITDA margin has increased from 15.5% in 212 to 25.4% in 213 Impact of weak coking coal price mitigated by successful cost reductions 18

19 Financial Review Successfully accomplished development phase Capital expenditures (US$m) CHPP Water and Power Others Road Railway Note: Others include workers camp, township, airport, trucks, workshops, main office building, warehouse and other PPE MMC s planned capital expenditures have been completed 19

20 Financial Review Improved short term liquidity profile Debt profile as at 31 Dec 213 (US$m) Debt profile as at 1 March 214 (US$m) Term loan Project loan Senior note Note: Debt profile excludes US$4m revolving credit line from a local bank and US$15mm promissory note 2

21 Operating Environment Business Review Financial Review Outlook Elm in a nursery field, a typical example of the local flora and the most suitable species to be used for environmental reclamation work. 21

22 Outlook To continue focus on cost and production efficiency Key corporate and operational targets and objectives for 214 The management maintains a positive outlook over the long-term as the demographic fundamentals associated with industrialization will continue to create demand for steel across Asia and other emerging markets. Recently, Chinese government declared that it will maintain a GDP growth rate of 7.5% for 214. Also, Chinese crude steel output may grow by around 3% to surpass 8 Mt in 214, according to CISA, which would represent an incremental increase of over 2 Mt However, oversupply is expected to persist in 214 as significant downward pressure continues to weigh on coking coal prices. The management will focus on maintaining a competitive cost structure by virtue of its robust production profile and efficient cost control measures. As such, the following key strategies will be pursued to face headwinds in this challenging environment: (i) maximizing asset utilization to drive unit fixed costs down; (ii) supporting initiatives to improve transportation infrastructure and capability, particularly cross border railway development, to gain access to Chinese railway network to reach its customers in PRC; (iii) exploring opportunities to expand and diversify its business operations through potential strategic cooperation and joint venture agreements; and (iv) continuing its strong commitment to safety, the environment and socially responsible operations. For 214, the management will target to maximize asset utilization and reach full utilization of the CHPP capacity and increase its sales volume to around 6. Mt of washed HCC and 2.Mt of washed thermal coal by sales volume, subject to market conditions. 22

23 Thank You Mongolian Mining Corporation 16F Central Tower Sukhbaatar District Ulaanbaatar 142 Mongolia UHG mine site aerial view