Mongolia’s mining industry, once a beacon of hope for the country, is now under a harsh spotlight. Demonstrators gathered on Ulaanbaatar's Freedom Square on March 30 to protest against foreign mining concessions, just a few days after a foreign-listed coal miner, once hailed as a model for the next generation of Mongolia's fledgling corporations, defaulted on $600mn of debt.

The numbers of protestors are disputed – AP reported thousands, others say it was in the mere hundreds – and one of the rally leaders is under investigation for embezzling millions from a government railway construction project; but they called on the parliament to be dissolved and a new government formed over alleged corruption and the economic crisis that has caused growth to fall from 17.3%, the world’s fastest, four years ago, to just 1% expected this year. A sign of the country's fall from international grace is that on March 29 the government was forced to pay nearly triple the interest when refinancing $500mn in debt from just three years ago.

For many Mongolians like those on the main square, the main culprits are the foreign corporations, which are perceived to have bought up the country’s rich mineral resources for a song, and then not shared the wealth with the general population. However, this ignores the fact that many miners are struggling as prices for commodities fall amid a slowdown in China, which is the biggest market for Mongolia’s resources.

Take the coalmining companies. Depressed global coal prices mean the sector earned the country last year a third of what it did in 2012. ($555mn vs $1.9bn)

This resulted in Mongolian Mining Corporation (MMC) announcing on March 23 that it had failed to make certain repayments on the principal instalments and interest on its bank facilities with BNP Paribas and Industrial and Commercial Bank of China without securing any waiver or forbearance from the two banks. This represented a cross-default event under the indentures of its $600mn of senior notes.

Moody’s Investors Service said MMC has been in negotiations with its bondholders and other lenders since January 2016 to restructure its debt, and has proposed entering into forbearance agreements with its lenders. Moody's last September downgraded its rating on the miner to ‘Ca’ with a negative outlook from ‘Caa2’. It saw a high likelihood that MMC would be unable to make payments on its $600mn in debt due in 2017 after reporting that its cash balance had fallen by nearly three-quarters to $70mn at the end of last June.

Investors have also been fleeing the stock. From a high of HKD7.45 hit five years ago, the shares have fallen virtually continuously to close at just HKD0.05 on March 30. “The company is faring badly,” says Ankhbayar Bilguun, chief executive officer at Mongolian Investment Banking Group (MIBG), pointing to falling prices for coal products and inefficiencies in bulk transport of the product.

The biggest strikes against MMC is the world turning its back on coal as countries try to convert to more environmentally clean energy. Another is slowing growth in China. Market oversupply has caused prices to slide by a quarter to $83 a tonne from the start of 2015, Moody's said in September.

More specifically for Mongolia, the country badly needs a railway link between its mines and China to cut down on shipping costs, says Ankhbayar. He adds that Mongolian coal miners are also suffering from an out-of-sync tax code. “Companies are getting squeezed by coal exporting companies, pressured by their buyers to accept lower coal prices,” says Bilguun. “However, companies are required to pay taxes based on prices from a Chinese index, not taking into account the contract price agreed upon.”

Political winds

But as the protests in Ulaanbaatar show, it’s not just market factors that are beating MMC and its peers.

During the 2010-2012 mining boom in Mongolia, MMC was hailed as the model for Mongolian-run companies, and buying its shares on the Hong Kong stock exchange was a way for many investors to gain exposure to the mineral-rich country. “This company was probably one of the largest coal-driven positive investor sentiment [stories] for Mongolia,” says Bilguun, adding that its proximity to China and the quality of its coal made the miner “so much superior to competitors' assets" during its IPO in 2010.

For many, it would set the benchmark for Mongolia's young elites in business on how well Mongolian management teams could steer a public company. But in addition to the declining market conditions, MMC had trouble keeping account of its affairs at home as the government began dropping contracts held with the company.

In 2013 MMC lost a contract to build a key railway route to the Chinese-Mongolian border when the government established its own railway company. Then in 2014 it missed out on a deal to take over management of the state-owned Tavan Tolgoi coal mine, which holds reserves of about 1.8bn tonnes. On the day MMC and consortium partners Sumitomo of Japan and Shenhua of China expected to sign a contract after months of negotiations, the speaker of the parliament, Zandaakhuu Enkhbold, stepped in. He blocked the deal potentially worth $4bn on the grounds that it had not received consent from the legislature.

The blocking of the deal was a sign of division between the prime minister, Chimed Saikhanbileg, and the speaker, even though they hail from the same party. And it was especially noteworthy since the tender bid for the project looked especially tailored for MMC. The tender required a consortium that included a Mongolian-owned entity with at least three years’ experience washing coal — a process that provides a higher price for the coal — and MMC was the only valid option at the time.

Since the obstructive Mongolian People’s Party (MPP) was ousted from the grand coalition in 2015, Prime Minister Saikhanbileg’s Democratic Party has had a freer hand to push ahead with approvals for some big projects in the mining, railway and power sectors. Currently, the state-owned holding company for mining licenses is negotiating a new investment deal for the Tavan Tolgoi coal mine, but analysts believe a deal is unlikely before the next election, scheduled for June 29.

In the meantime, MMC has hired J.P. Morgan Securities (Asia Pacific) and SC Lowy Financial as restructuring advisers for negotiations with investors. “With MMC’s bonds trading at $0.16 cents on the dollar, there is ample room for a debt restructuring which bondholders may find attractive,” says Nick Cousyn, chief operating officer for Ulaanbaatar-based brokerage BDSec.

Unfortunately, there appears little respite for MMC’s business anytime soon. The International Energy Agency has cut its five-year coal demand forecast for a third year amid slowing economic growth in China, from an increase of 2.1% a year to just 0.8%. It also noted that anti-climate change policies would keep prices under pressure.