Mongolian miner SouthGobi seeks financing as debt default looms

PUBLISHED : Wednesday, 26 March, 2014, 6:34am
UPDATED : Wednesday, 26 March, 2014, 6:34am

Mongolian coal miner SouthGobi Resources is seeking additional financing to avoid a default on US$250 million in debt, hurt by low prices and weaker-than-expected demand from Chinese buyers.

Based on forecasts for this year, SouthGobi will not have enough cash flow to meet obligations including interest payments on debentures held by China Investment Corp, the Vancouver-based company said on Monday.

The stock fell in Toronto to the lowest level since its 2003 initial public offering.

Its Hong Kong-traded shares plunged yesterday by as much 13 per cent to HK$4.80, a record low, before closing down 10.67 per cent at HK$4.94.

SouthGobi, controlled by a Rio Tinto unit, operates the Ovoot Tolgoi coking-coal mine, which lies about 40 kilometres from Mongolia's border with China.

Prices for coking coal have fallen to a three-year low amid slowing economic growth in China, the biggest market for the steelmaking ingredient, and an increase in supply from Australia.

"We expected a pick up and we haven't been seeing that," SouthGobi president and chief executive Ross Tromans said in Hong Kong yesterday.

"Liquidity issues in China affect how much people are buying. It's noticeable that some of them don't have as much liquidity as they've had in the past, and that's had an impact because they're also waiting for their customers to pay them."

The company said on Monday that its fourth-quarter loss widened to US$138.7 million from US$56.6 million a year earlier. It expects coal prices in China to remain under pressure this year, which will continue to affect the company's margins and liquidity.

Chief financial officer Bertrand Troiano said SouthGobi would look at a range of financing options including loans and equity, adding that the debt market was "difficult".

The company was also looking to secure prepayments from customers and cut non-critical expenses to improve liquidity, he said.

Mongolia's share of the imported coking coal market in China fell to 20 per cent last year, from 36 per cent in 2012 and 45 per cent in 2011, according to Hong Kong-listed Mongolian Mining Corp, the largest privately owned coking coal producer in Mongolia.