Miners struggle with debt refinancing after prices slump

Competition from Australia and dwindling demand add to woes for Chinese and Mongolian producers

PUBLISHED : Tuesday, 24 September, 2013, 12:00am
UPDATED : Friday, 27 September, 2013, 5:35pm

The coal sector is taking a beating, with prices down 35 per cent from their November 2011 peak.

Cheap Australian coal is undercutting prices to the point where mining is unprofitable for regional producers, particularly Mongolian mines. Firms that borrowed to fund expansion during coal's boom year of 2011 are now on the hook to refinance debt, and banks and bond markets are baulking.

Winsway Coking Coal, which transports Mongolian coal to the mainland, asked investors last month to exchange an outstanding US$460.5 million bond for a new one and lose more than half their capital in the process. Investors who accepted the deal did so in the knowledge that rejecting it would likely send the firm into default.

As it was, Moody's Investors Service described the offer as a technical default in itself. "The [Winsway] transaction will constitute a distressed debt exchange, which is a default event under Moody's definition," it said.

Elsewhere, Mongolian Mining has asked banks and investors to extend repayment of various debts.

The company negotiated twice with investors to extend the maturity of an US$85 million convertible bond, originally due in December last year, and that on two promissory notes worth US$52.5 million each, with both now falling due next year.

Standard & Poor's said in an August 30 note that the company was also negotiating to extend bank loans and cash flows would likely be insufficient to pay US$131 million in bank loans and US$105 million in promissory notes due next year.

Events such as these are throwing up red flags. The rating agencies have in recent months downgraded Winsway, Mongolian Mining and Hidili Industry International Development, and S&P advised in July that Yanzhou Coal Mining was on watch for a downgrade.

All the big regional coal miners are facing heavy competition from Australia, which has lower transport costs because it can ship its coal to China by sea.

Australian coal costs just US$15 a tonne to ship to China's east coast, according to brokerage firm Jefferies. By comparison, Mongolian miners have to ship in all their coal by truck at a cost of US$61 a tonne. The Australian producers' advantage is reflected in their rising share of the mainland market.

The coal sector is also being hurt by overcapacity in the mainland's steel industry, with prices of steel products falling an average of 6.5 per cent in the first half of the year. The central government wants to rationalise the sector, which will result in fewer producers and less output, crimping coal demand.

It also wants to clean up its industrial economy to make it less polluting.

"Chinese power production is 85 per cent coal-fired. If hydropower, nuclear and gas power grow rapidly, then coal gets what is left over. All of that is really headwind for coal consumption," said Michael Parker, an analyst at Sanford C. Bernstein.

This adds up to a poor business environment for Chinese and Mongolian coal miners, which are all loss-making apart from Shenhua - which benefits from an integrated upstream and downstream business model - and banks and bond investors are reluctant to let the most leveraged firms roll over their debts.

"This is a very challenging period for coal miners. They are quite vulnerable to refinancing risk," said Christopher Lee, corporate ratings analyst, Asia-Pacific, at S&P. "A lot of these firms have to pay significantly more [to issue a bond] than a year ago. Business is poor and the market and sentiment is quite negative."

To address such liquidity concerns, Hidili is looking to sell two coal mines to raise about 914 million yuan (HK$1.2 billion), according to a report by China International Capital Corp.

Reflecting the high risk of its debt, Hidili bonds due in 2015 yield a hefty 25 per cent.

The coal firms' problems are compounded by the fact they have been expanding aggressively.

Hidili went from having a cash surplus in 2008 to gearing of more than 100 per cent today, with little impact on output.

Winsway bought coal mines in Canada for C$983 million (HK$7.4 billion) in 2011 and in that same year Yanzhou Coal spent 3.3 billion yuan on Australian mines, 1.6 billion yuan on Canadian potash permits and 2.8 billion yuan on an Inner Mongolian mine.

Mongolian Mining spent US$616 million in 2011 to buy a mine and for general capital expenditure.

Firms now find themselves needing to pay to complete their various projects - an unopened mine is worthless, after all - and persuade investors and banks to roll over debt, all in the context of plummeting coal prices and unforgiving Australian competition.

"These are long-dated projects and the ground has moved fast for the Chinese coal-mining industry," Parker said. "A year and a half ago, the consensus was that power consumption growth would stay in the double digits."

 

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