JPM-Mongolian Mining Corporation Choppy 1H, but gold keeps us focused-20250728

Mongolian Mining Corporation (MMC) reported weaker operational data for 2Qwith a 25%yoy fall in sales. We expect 1H25 earnings to be weak given salesvolume is down 16%yoy and Mongolian benchmark coal prices fell by ~39%. Thiswill not surprise as we have penciled in a 60% fall in EBITDA in 2025. We takecomfort that MMC is entering this downcycle on a strong footing and withliquidity. Another mitigating factor is that coking coal prices have recoveredrecently due to tighter mine inspections and announcements of large infrastructureproject. More importantly, MMC's gold mine project is on track and expected tocommence operations in the third quarter. The maiden contribution from this goldmine will provide a buffer to MMC's earnings. We remain comfortable with thecredit story and thus reiterate our OW recommendation on MMC and its 8.44%’30s bonds at 9% yields.

•MMC has disclosed its second quarter operational data. In 2Q25, it mined3.43mt of ROM coal (-7% qoq/-28% yoy) and produced approximately 2.18mtof washed coking coal products (+3% qoq/-2% yoy). The washed coking coalproducts sold amounted to approximately 1.74 mt (+9% qoq/-25% yoy). Thesequential increase was due to seasonality factors, as 1Q is usually weak dueto the Lunar New Year holiday in China. Notably, there was a sharp fall in salesvolume in 2Q, which is disappointing compared to MMC’s managementguidance. While it expected overall industry coking coal demand to be softerthis year due to slower growth in China, it had anticipated some buffer fromgaining market share in the US and Australian markets. Nevertheless, 2024 isa high base for comparison, and 2Q25 sales volume remains 10% higher thanthe 2Q23 level.

•On the positive side, there are signs that coking coal prices have bottomedout. China’s coking coal price has recently picked up due to news of Chineseauthorities conducting inspections at coal mines in eight provinces. This maybe supportive of MMC’s earnings in the second half. Based on China primecoking Yichuan prices (Bloomberg: CCKPYCHU), prices have risen by 15%since mid-July. Some recent news flows are positive for the sector. Last week,Chinese authorities started construction of a CNY1.2tn hydropower dam inTibet, the world's largest, that is projected to generate up to 60,000 megawattsof power, nearly three times the capacity of the Three Gorges Dam, accordingto news wires (e.g., Bloomberg). While the project is projected to take 10 yearsto complete, it still signals the government’s intentions for large-scaleinfrastructure to support the economy.