975.HK - Mongolian Mining Corp

[rukawa]

There is a pretty interesting writeup about this on VIC.

https://www.valueinvestorsclub.com/idea/Mongolian_Mining_Corp/138955

[wachtwoord]

Very interesting read thanks for posting.

 

I wonder whether it's possible to inform myself sufficiently though for this to be something else than going on the posters word. I tried googling a bit and it's not easy to find recent news thus far. I'll try some more if nothing else because the situation is so interesting. Thanks! :)

[valcont]

I looked at it back in early October when the shares were trading above 30c. From what I can recall, this was pretty much a macro bet on Mongolia. They were still negotiating with IMF but it was a done deal more or less. One thing to keep in mind is that they sell the unwashed coal ,as opposed to the washed Australian coal , which is way cheaper (about 1/3rd the price). I looked at one of Mongolian newspaper's article that claimed MMC will be washing the coal adding incremental revenue. I don't know how much of that is true considering I translated that article. It seems like a good bet at 22c but you have to be updated on Mongolian politics, Chinese coal prices, restructuring outcome etc.Eerily similar to FELP which makes me leery that I'm falling to some psychological bias that I don't know of yet.

[wachtwoord]

I looked at it back in early October when the shares were trading above 30c. From what I can recall, this was pretty much a macro bet on Mongolia. They were still negotiating with IMF but it was a done deal more or less. One thing to keep in mind is that they sell the unwashed coal ,as opposed to the washed Australian coal , which is way cheaper (about 1/3rd the price). I looked at one of Mongolian newspaper's article that claimed MMC will be washing the coal adding incremental revenue. I don't know how much of that is true considering I translated that article. It seems like a good bet at 22c but you have to be updated on Mongolian politics, Chinese coal prices, restructuring outcome etc.Eerily similar to FELP which makes me leery that I'm falling to some psychological bias that I don't know of yet.

 

I noticed the similarity with FELP as well. It's just FELP but with more complexity, less accessible material, less known politics/culture and no Picasso (or other knowledgeable individual with connections). Perhaps with even more upside potential too though ....

[hswoon]

[valcont]

I noticed the similarity with FELP as well. It's just FELP but with more complexity, less accessible material, less known politics/culture and no Picasso (or other knowledgeable individual with connections). Perhaps with even more upside potential too though ....

 

Its been going down this month since Mongolia pissed off China by inviting Dalai Lama. This is the shit you have to deal with when it comes to anything China related. Have to be updated with the Dalai Lama's itinerary and Taiwan's presidents phone calls.

 

Picasso, Look what Mongolian president is holding in that picture. You have to get involve now.

[wachtwoord]

lol insta-buy  8)

[Picasso]

I noticed the similarity with FELP as well. It's just FELP but with more complexity, less accessible material, less known politics/culture and no Picasso (or other knowledgeable individual with connections). Perhaps with even more upside potential too though ....

 

Its been going down this month since Mongolia pissed off China by inviting Dalai Lama. This is the shit you have to deal with when it comes to anything China related. Have to be updated with the Dalai Lama's itinerary and Taiwan's presidents phone calls.

 

Picasso, Look what Mongolian president is holding in that picture. You have to get involve now.

 

Haha!  I looked at this a while back but passed.  Way outside my circle of competence... Entertaining to watch though.

[valcont]

Here is a PWC report that was prepared for the bondholders. I like reading about coal these days and its a fascinating read on the Chinese's coal economy, its drivers and the players. Amazing that these guys were running losses to capture the market share even though they knew their debt levels

 

Anyways the gist of the valuation is presented via three scenarios.

 

A base case where the PWC think that the MMC will be able to secure the TT mining project ( one of the world's largest site for the coking coal) AND the Mongolian government will finish the railway project from Mongolia to the Chinese steel belt by 2020. If that happens, MMC will payoff the debt by 2022 and will have $400m USD cash.

 

A bull case which is similar to the base case but uses Management's projected sales prices which are much higher than the brokers consensus. Note the prices for the base case are derived by doing a regression analysis on the forecasted prices.

 

In a downside scenario, the MMC will operate on an "As Is" basis and will be unable to pay off the debt.

 

I think the biggest unknown is the railway project. From what I had read, Mongolian government typically over promises and under delivers (who doesn't)

2020 is really ambitious.

 

Then you have a currency risk. Mongolian currency is slightly better than bitcoin but this thing can swing.

 

I called the bottom on this and initiated a starter position at 18c and  thought I had a cool $6K in profits sitting under my account for not doing much. But then I realized , I bought it in HKD which is 1/7th of the USD and a measly $850 in profit. I hate foreign currencies.

MMC-JPL.pdf

[valcont]

The easiest and the fastest double. Thanks Rukawa.

[muscleman]

http://www.mmc.mn/upload/2016-11-03_e_00975ann-20161103.pdf

 

The senior notes are trading at 50 cents on the dollar at this monent. The negotiation with debt holders needs to be closely watched.

If coal prices remain firm through 2020, what do you guys think the earnings will be at that time?

[muscleman]

I bought a significant position in its senior secured debt.

 

Excluding equity, the estimated payout will be 66, so there is very little risk of losing money at 50 cents.

 

Upside is pretty good.

In base case, Senior debt+CVR+perpertual notes = 88.

3-5 years of 8% interest.

Total return in 5 years will be 124 over cost basis of 50. Note that the perpetual notes due date is 3 years out not 5, so this is just a rough estimate.

And on top of that, there is 1 bn shares issued to debt holders, which is also worth 5-7 cents.

 

 

Equity:

Note that the consortium deal allows China Shenhua to take 49% ownership for just $200 million. That's at half the current market prices. Pretty significant dilution.

 

Assuming they get back to the peak 2012 operating performance, at that time the earnings was USD 3 cents per share. Now share count is 6x, after consortium deal, so applying a 10 P/E shares will be worth 5 cents. Current stock price is 4 cents. Almost no upside.

 

However the 2012 production level was 4.5 Mt. If they ramp up to the planned 30 mt after rail road completion in 2020, then earnings can be 7x more, and shares will be worth 35 cents. That's nearly a 10 begger. However this assumes no more dilution and no more political surprises. But if this does happen, the 1 bn shares issued to current debt holders can be worth the current 50 cents on the dollar along, so including the new senior notes offered in the restructuring plan, total return will be 3x. So 3x for debt vs 10x for equity, in the most optimistic assumptions. 2x for debt in a bear case and no upside for equity in the bear case.

 

 

Overall I think both debt and equity can do well in a risk adjusted matter.

 

[valcont]

I bought a significant position in its senior secured debt.

 

Excluding equity, the estimated payout will be 66, so there is very little risk of losing money at 50 cents.

 

Upside is pretty good.

In base case, Senior debt+CVR+perpertual notes = 88.

3-5 years of 8% interest.

Total return in 5 years will be 124 over cost basis of 50. Note that the perpetual notes due date is 3 years out not 5, so this is just a rough estimate.

And on top of that, there is 1 bn shares issued to debt holders, which is also worth 5-7 cents.

 

 

Equity:

Note that the consortium deal allows China Shenhua to take 49% ownership for just $200 million. That's at half the current market prices. Pretty significant dilution.

 

Assuming they get back to the peak 2012 operating performance, at that time the earnings was USD 3 cents per share. Now share count is 6x, after consortium deal, so applying a 10 P/E shares will be worth 5 cents. Current stock price is 4 cents. Almost no upside.

 

However the 2012 production level was 4.5 Mt. If they ramp up to the planned 30 mt after rail road completion in 2020, then earnings can be 7x more, and shares will be worth 35 cents. That's nearly a 10 begger. However this assumes no more dilution and no more political surprises. But if this does happen, the 1 bn shares issued to current debt holders can be worth the current 50 cents on the dollar along, so including the new senior notes offered in the restructuring plan, total return will be 3x. So 3x for debt vs 10x for equity, in the most optimistic assumptions. 2x for debt in a bear case and no upside for equity in the bear case.

 

 

Overall I think both debt and equity can do well in a risk adjusted matter.

 

Which platform did you use to buy the senior notes? I couldn't find it on IB or the Fidelity.

 

BTW Senior notes are PIKs which means coupons are accrued until maturity not paid out.

[valcont]

contd:

 

Since the notes are PIKs, In the downside case both note holders and equity gets wiped out. In the base case, equity makes more. You may have a middle of the road result in which senior notes can be profitable but this is a pretty black and white bet.

[muscleman]

I bought a significant position in its senior secured debt.

 

Excluding equity, the estimated payout will be 66, so there is very little risk of losing money at 50 cents.

 

Upside is pretty good.

In base case, Senior debt+CVR+perpertual notes = 88.

3-5 years of 8% interest.

Total return in 5 years will be 124 over cost basis of 50. Note that the perpetual notes due date is 3 years out not 5, so this is just a rough estimate.

And on top of that, there is 1 bn shares issued to debt holders, which is also worth 5-7 cents.

 

 

Equity:

Note that the consortium deal allows China Shenhua to take 49% ownership for just $200 million. That's at half the current market prices. Pretty significant dilution.

 

Assuming they get back to the peak 2012 operating performance, at that time the earnings was USD 3 cents per share. Now share count is 6x, after consortium deal, so applying a 10 P/E shares will be worth 5 cents. Current stock price is 4 cents. Almost no upside.

 

However the 2012 production level was 4.5 Mt. If they ramp up to the planned 30 mt after rail road completion in 2020, then earnings can be 7x more, and shares will be worth 35 cents. That's nearly a 10 begger. However this assumes no more dilution and no more political surprises. But if this does happen, the 1 bn shares issued to current debt holders can be worth the current 50 cents on the dollar along, so including the new senior notes offered in the restructuring plan, total return will be 3x. So 3x for debt vs 10x for equity, in the most optimistic assumptions. 2x for debt in a bear case and no upside for equity in the bear case.

 

 

Overall I think both debt and equity can do well in a risk adjusted matter.

 

Which platform did you use to buy the senior notes? I couldn't find it on IB or the Fidelity.

 

BTW Senior notes are PIKs which means coupons are accrued until maturity not paid out.

 

IB.

In TWS just type in the company name and it will show you debt and equity.

 

[muscleman]

contd:

 

Since the notes are PIKs, In the downside case both note holders and equity gets wiped out. In the base case, equity makes more. You may have a middle of the road result in which senior notes can be profitable but this is a pretty black and white bet.

 

Well, that really depends on how extreme you think it can go. If the mine gets nuked then definitely bond gets wiped out as well.

What I am thinking is that even after four years of torturing by the DP parliament, the bonds can still come out at 88%, but number of shares have increased from 3 bn to 9 bn and soon to be 18 bn after consortium, the downside for debt must be less than equity. But this is just my personal opinion.

 

Note that my above statement about the shares are not entirely accurate. MMC owns 100% ER. The consortium gives China Shenhua 49% of ER for $200M, so the number of shares for MMC won't increase to 18bn. But the economic effects are the same.

 

I do think equity here is a very interesting opportunity.

[valcont]

I bought a significant position in its senior secured debt.

 

Excluding equity, the estimated payout will be 66, so there is very little risk of losing money at 50 cents.

 

Upside is pretty good.

In base case, Senior debt+CVR+perpertual notes = 88.

3-5 years of 8% interest.

Total return in 5 years will be 124 over cost basis of 50. Note that the perpetual notes due date is 3 years out not 5, so this is just a rough estimate.

And on top of that, there is 1 bn shares issued to debt holders, which is also worth 5-7 cents.

 

 

Equity:

Note that the consortium deal allows China Shenhua to take 49% ownership for just $200 million. That's at half the current market prices. Pretty significant dilution.

 

Assuming they get back to the peak 2012 operating performance, at that time the earnings was USD 3 cents per share. Now share count is 6x, after consortium deal, so applying a 10 P/E shares will be worth 5 cents. Current stock price is 4 cents. Almost no upside.

 

However the 2012 production level was 4.5 Mt. If they ramp up to the planned 30 mt after rail road completion in 2020, then earnings can be 7x more, and shares will be worth 35 cents. That's nearly a 10 begger. However this assumes no more dilution and no more political surprises. But if this does happen, the 1 bn shares issued to current debt holders can be worth the current 50 cents on the dollar along, so including the new senior notes offered in the restructuring plan, total return will be 3x. So 3x for debt vs 10x for equity, in the most optimistic assumptions. 2x for debt in a bear case and no upside for equity in the bear case.

 

 

Overall I think both debt and equity can do well in a risk adjusted matter.

 

Thanks for IB tip. I realized that I didn't have permissions to buy the Bonds in HK exchange, that's why they weren't showing up.

 

I am assuming you bought the senior notes. The perpetuals are PIKs only with 0% at issuance, 5% a year after the expansion event and +1% every year after.

 

The senior notes have this payout schedule based on premium hard coking Australian coal prices:

 

Benchmark Coal Price <= USD110.0 0% cash/5% paid-in- kind (“PIK”)

Benchmark Coal Price => USD110.0/t: 1% cash/4% PIK

Benchmark Coal Price => USD112.5/t: 2% cash/3% PIK

Benchmark Coal Price => USD115.0/t: 3% cash/2% PIK

Benchmark Coal Price => USD120.0/t: 4% cash/1% PIK

Benchmark Coal Price => USD125.0/t: 5% cash

Benchmark Coal Price => USD130.0/t: 6% cash

Benchmark Coal Price => USD135.0/t: 7% cash

Benchmark Coal Price => USD140.0/t: 8% cash

 

The price is hovering at $270/mt now but the futures are indicating prices dropping to $145/mt. So 8% cash interest (16% at 50cent face value) with the assets pledged is actually not a bad deal while you wait.

 

I think the execution of the railway project will decide the fate of the equity and the bonds. They are projecting 27mt tonnes capacity so a timely construction will make it a multi bagger. However, I don't know much about Mongolian construction prowess although the Chinese can build this thing quickly.

 

Here is a guy who has written some insightful articles about the project.

 

https://fronteranews.com/author/nickc/

 

 

 

 

 

[rukawa]

I place zero trust in the debt. The key assumption people appear to be making with the debt is that if treated in the normal way, debt should be less risky than the equity. I think the opposite is true in this case if you believe the VIC article:

 

In one of the craziest bankruptcies I have ever seen, the creditors have agreed to take a

massive haircut on their debt (US $750m becomes $570m) with the new bonds paying interest in PIK

format along with varied payments based on coal prices. In exchange, creditors are getting 10% of the

equity.

 

What should have happened is that the creditors should have mostly wiped out the equity and taken probably 90% of the company. The reason that didn't happen is because equity is controlled by a political party that controls the government. Basically the way I view this is as a corrupt country where party insiders with large equity stakes who control the government own the equity. I want to ride along with them not with the foreign banks who own the debt. They could for instance spinoff the best assets into a separate company or just have large special dividends. Its in their interests to do everything they can to screw bond holders as they already have done in the past.

 

PIK bonds are really PN as in Pay Never bonds.

[hswoon]

If anyone is still watching this stock, noteholders representing 94% of principal amount have accepted the RSA.

 

http://www.mmc.mn/upload/2017-01-19_e_00975ann-20170119.pdf

[muscleman]

If anyone is still watching this stock, noteholders representing 94% of principal amount have accepted the RSA.

 

http://www.mmc.mn/upload/2017-01-19_e_00975ann-20170119.pdf

 

 

I am one of them.  ;)

[AccentricInv]

http://www.wsj.com/articles/new-china-mongolia-mining-deal-economic-windfall-or-environmental-threat-1485000058

[constala]

I am trying to figure out the forward share count of MMC if the Consortium works and China Shenhua puts $200m in exchange for 49% of ER as put in the various corporate presentations.

 

Current share count: 9.263m+10% newly issued free of payment in Debt to Equity Swap restructuring: 1.029m so Before Consortium I have 10.292m shares.

 

Now I would like to know what China Shenhua gets exactly, 49% of the MMC's subsidiary ER does not make much sense does it? Will ER get a separate listing? Don't they get 49% of MMC future shares instead post 200m cap infusion so shall we assume a big dilution? I mean 20.18m future share count? Has anyone viewed the Consortium Termsheet and could help me thanks chaps!

[Guest cherzeca]

sorry for being out of know, but where do you see that shenhua gets 49% (of whatever) for $200MM?

[constala]

JPL report (see posts above in this this thread or MMC website)

 

page 23 "China Shenhua will contribute additional equity of US$200m, as well as a US$450m shareholder loan, in exchange for a 49% equity interest in ER"

 

 

[Guest cherzeca]

JPL report (see posts above in this this thread or MMC website)

 

page 23 "China Shenhua will contribute additional equity of US$200m, as well as a US$450m shareholder loan, in exchange for a 49% equity interest in ER"

 

right, thanks.  this was the 2014 arrangement. does anyone know if it still holds?