SouthGobi Resources announces fourth quarter and full year 2014 financial and operating results
March 30, 2015
SouthGobi Resources announces fourth quarter and full year 2014 financial and operating results
HONG KONG - SouthGobi Resources Ltd. (TSX: SGQ, HK: 1878) (“SouthGobi” or the "Company"). The Company today announced its financial and operating results for the quarter and the year ended December 31, 2014. All figures are in U.S. Dollars unless otherwise stated.
Significant Events and Highlights
The Company’s significant events and highlights for the year ended December 31, 2014 and subsequent period to March 30, 2015 are as follows:
- The Company continues to operate under difficult market conditions resulting from strong seaborne and domestic supply coupled with soft demand in China. Chinese coking coal imports fell by 17.2% in 2014 and 12.6% in the fourth quarter of 2014 compared to the same periods last year. Coal prices in China stabilized in the fourth quarter of 2014, mainly due to winter restocking from end users, after hitting seven year lows in the third quarter. However, the gains made in the fourth quarter of 2014 have been erased since the beginning of 2015 due to sluggish demand, which has continued beyond the Chinese New Year holiday. The Company’s sales volumes and revenues are expected to remain under pressure through 2015 as Chinese coal import volume and prices continue to decline.
- Production of raw coal by the Company remained low at 0.21 million tonnes in the fourth quarter of 2014 compared to 1.73 million tonnes in the fourth quarter of 2013. This lower production level is due to the Company’s decision in June, in response to market conditions, to reduce its production and place approximately half of its workforce on furlough. This furlough is anticipated to remain in place until market conditions improve.
- On January 7, 2014, the Company reported the public announcement regarding the Ontario Action against certain of the Company’s current and former senior officers and directors, and its former auditors, in relation to the Company’s restatement of financial statements, as disclosed on November 8, 2013, November 11, 2013, November 14, 2013 and December 12, 2013.
- Messrs. Lindsay Dove and Sean Hinton did not stand for re-election at the Annual General Meeting held on May 6, 2014 and ceased to be directors at that date.
- On May 25, 2014, the Company announced that Turquoise Hill Resources Ltd. (“Turquoise Hill”) had agreed to provide a $10 million shareholder loan facility (the “Turquoise Hill Loan Facility”).
- On June 20, 2014, the Company announced that the exemption granted to the Company in relation to its secondary listing status on the HKEX in 2010 by the Hong Kong Securities and Futures Commission pertaining to Takeovers, Mergers and Share Repurchases (the “Takeovers Code”) had
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been withdrawn and that the Company would be considered a public company in Hong Kong for matters relating to the Takeovers Code.
- On July 30, 2014, the Company reported that Turquoise Hill had entered into a share purchase agreement (“SPA”) with National Resources Holdings Limited (“NUR”) to sell Common Shares representing 29.95% of the Company’s total issued and outstanding Common Shares.
- On August 26, 2014, the Court of Justice in Mongolia returned the tax investigation case against the Company’s subsidiary SouthGobi Sands LLC (“SGS”) and three of its former employees to the Prosecutor General for further investigations.
- On August 31, 2014, the Company announced that Turquoise Hill had agreed to a limited deferral of repayment of all funds owing and due by the Company under the Turquoise Hill Loan Facility.
- On September 28, 2014, the Company announced the completion of the construction of a paved coal highway to the Shivee Khuren Border Crossing.
- On November 12, 2014, the Company announced the December 1, 2014, retirement of Ms. Kay Priestly as Chair, the appointment of current independent director Mr. Gordon Lancaster to the position of interim Chair and the appointment of Mr. Jeffery Tygesen as a non-executive director.
- On November 20, 2014, the Company announced that it was delaying the payment of the November 2014 installment of cash interest due to the China Investment Corporation (“CIC”) under the terms of the Convertible Debenture (the “November CIC Payment”).
- On December 1, 2014, the Company announced that it had entered into private placement and CIC had agreed to extend the cure period agreed for the November CIC Payment to December 4, 2014.
- On December 2, 2014, NUR signed an amendment agreement (“Amendment Agreement”) to the previously announced and signed Sale and Purchase agreement dated July 29, 2014 with Turquoise Hill in respect of the sale of 56,102,000 Common Shares of the Company held by Turquoise Hill. In respect of the transaction contemplate, the Amendment Agreement provides, among other matters, for an extension to the closing date from November 30, 2014 to April 30, 2015.
- On December 3, 2014, the Company successfully completed private placements for the issue of 24,360,773 Common Shares for gross proceeds of US$9.0 million (US$8.9 million net after fees) at CAD $0.42 per share.
- On December 4, 2014 Turquoise Hill agreed on a limited deferral of repayment on the $3.8 million principal owing under the Turquoise Hill Loan Facility. The Turquoise Hill Loan Facility matured on August 30, 2014 and is no longer available for further drawdowns by the Company. This limited deferral is subject to certain conditions and limitations, including the completion by April 30, 2015 of the transaction contemplated by the Sale and Purchase Agreement and the Amendment Agreement between Turquoise Hill and NUR.
- On December 12, 2014 the Company announced the stepping down of the President and Chief Executive Officer Ross Tromans, and appointment of Enkh-Amgalan Sengee as President and Chief Executive Officer. Mr. Tromans remained with the Company and on the Board of Directors (the “Board”) until December 31, 2014.
- On December 30, 2014 the Company was notified that the Capital City Prosecutor (head of the Capital Prosecutor’s Office, Ulaanbaatar, Mongolia) had decided to dismiss the allegations for money laundering against the Company’s three former employees. This was consistent with the report issued by the experts appointed by the State Investigations Agency (“SIA”) on June 30, 2013 and again in January 2014.
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In respect of the ongoing tax investigation case in Mongolia, on January 30, 2015 the panel of appointed judges from the Second District Criminal Court of Justice found the Company’s three former employees guilty of tax evasion and gave sentences ranging from 5 years and 6 months to 5 years and 10 months of imprisonment in the correctional facilities of strict regimen in Mongolia. Although SGS was not a party to the criminal proceedings, the court declared it to be financial liable as a “civil defendant” for a penalty of MNT 35.3 billion (approximately US$18.2 million on February 1, 2015). The Company strongly believes it has not committed tax evasion, firmly rejects the Court’s verdict and what have been gross violations of Mongolian law through the investigations and the Court process. Therefore the Company filed an appeal of the Second District Criminal Court of Justice’s verdict on February 18, 2015. On February 26, 2015 the President of Mongolia issued a decree of pardon to the three former employees and following the pardon they were released from imprisonment and departed Mongolia. On March 25, 2015, the hearing of the appeal of the Tax Verdict took place. The Tax Verdict was upheld and the appeal by the Company was dismissed. It is the view of the Company that there is a lack of evidence to support both the Tax Verdict and the Appeal Verdict and, accordingly, the Company will continue to defend itself through all available legal means including a final appeal. The tax penalty would only be payable after a final appeal.
- On February 24, 2015 the Company announced it had entered into a private placement for proceeds of up to US$7.5 million with Novel Sunrise Investments Limited (“Novel Sunrise”) as a proposed new significant investor and strategic partner. The completion of the private placement and related transactions was subject to acceptance of notice of the placement by the Toronto Stock Exchange (“TSX”) pursuant to the financial hardship provisions of the TSX Company Manual. As a result of relying on the financial hardship provisions, the Company was placed on remedial delisting review as of February 25, 2015. A meeting of the TSX Continued Listing Committee to consider this matter has been scheduled for May 19, 2015.
- On February 24, 2015 the Company was advised by Turquoise Hill that they had entered into a Sale and Purchase Agreement (“Novel SPA”) with Novel Sunrise for the purchase of 48,705,155 Common Shares currently held by Turquoise Hill. The closing of the Novel SPA is subject to certain terms and closing conditions.
- On March 3, 2015 following the successful closing of the first tranche of the Novel Sunrise private placement, including the receipt of US$3.5 million, the Company issued 10,131,113 Mandatory Convertible Units to Novel Sunrise and in accordance with the terms of the agreement Mr. Ted Chan was appointed as the Executive Director of the Company.
- On March 13, 2015, Mr. Enkh-Amgalan Sengee, tendered his resignation as President and Chief Executive Officer. Mr. Ted Chan, assumed the duties formerly handled by Mr. Sengee until further notice.
- On March 18, 2015, the Company announced that Mr. Jeffery Tygesen resigned as a non-executive director.
- As at the date hereof, the Company, together with the new strategic partner, Novel Sunrise, has developed a funding plan in order to pay the interest due under the CIC Convertible Debenture, meet the Company’s obligations as they fall due and achieve its business objectives in 2015 and beyond. However, there is no guarantee that the Company will be able to implement this funding plan or secure other sources of financing. See section “Liquidity and Capital Resources” for details. As at March 30, 2015, the Company had cash of $4.2 million.
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OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS
Summary of Annual Operational Data
Year ended December 31, 2014 2013 Sales Volumes, Prices and Costs
Premium semi-soft coking coal Coal sales (millions of tonnes) 0.02 0.54 Average realized selling price (per tonne) (i) $ 26.77 $ 36.61 Standard semi-soft coking coal Coal sales (millions of tonnes) 0.86 2.27 Average realized selling price (per tonne) (i) $ 19.52 $ 23.41 Thermal coal Coal sales (millions of tonnes) 1.16 0.45 Average realized selling price (per tonne) (i) $ 10.99 $ 13.43 Total
| Coal sales(millions of tonnes) | 2.04 | 3.26 |
| Average realized selling price(per tonne) (i) | $14.76 | $24.25 |
| Raw coal production (millions of tonnes) | 1.57 | 3.06 |
Direct cash costs of product sold (per tonne) (ii) $ 8.33 $ 10.58 Mine administration cash costs of product sold (per tonne) (ii) $ 2.69 $ 2.23 Total cash costs of product sold (per tonne) (ii) $ 11.02 $ 12.81
Other Operational Data
Production waste material moved (millions of bank 5.47 8.45 cubic meters)
Strip ratio (bank cubic meters of waste material per tonne of 3.51 2.76 coal produced)
Lost time injury frequency rate (iii) 0.21 0.00
(i) Average realized selling price is presented before deduction of royalties and selling fees.
(ii) A non-International Financial Reporting Standards (“IFRS”) financial measure, refer to “Non-IFRS Financial Measures” section. Cash costs of product sold exclude idled mine asset cash costs.
(iii) Per 200,000 man hours and calculated based on a rolling 12 month average.
Overview of Annual Operational Data
The Company has operated under difficult market conditions throughout 2014 which have affected the Company’s results in respect of sales prices, mix and volumes. In 2014, the Company sold 2.04 million tonnes of coal compared to 3.26 million in 2013.
The Company’s production in 2014 was lower than 2013, at 1.57 million tonnes compared to 3.06 million tonnes. During 2014, the Company paced its production to market demand and focused on reducing its stockpiles. As a result the Company operated significantly below its operating capacity through-out 2014. Following a review of operations the Company placed approximately half of its workforce on furlough in mid June 2014 which is currently ongoing and is expected to last until market conditions improve. The results for 2013 were impacted by reduced operating levels as the operations at the Ovoot Tolgoi Mine recommenced on March 22, 2013 after a period of full curtailment since the end of the second quarter of 2012.
The Company maintained a strong safety record throughout 2014. As at December 31, 2014, the Company has a lost injury time frequency rate of 0.21 per 200,000 man hours based on a rolling 12 month average.
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Summary of Annual Financial Results
Year ended December 31, $ in thousands, except per share information 2014 2013 Revenue (i),(ii) $ 24,494 $ 58,636
| Cost of sales(ii) | (82,132) | (112,627) |
| Gross loss excluding idled mine asset costs | (21,698) | (23,552) |
| Gross loss including idled mine asset costs | (57,638) | (53,991) |
| Other operating expenses | (14,840) | (126,040) |
| Administration expenses | (8,944) | (15,629) |
| Evaluation and exploration expenses | (1,312) | (1,169) |
| Loss from operations | (82,734) | (196,829) |
| Finance costs | (21,848) | (21,162) |
| Finance income | 1,586 | 5,566 |
| Share of losses of joint venture | (101) | (53) |
| Income tax expense | (586) | (24,983) |
| Net loss | (103,683) | (237,464) |
Basic loss per share $ (0.55) $ (1.30) Diluted loss per share $ (0.55) $ (1.30)
(i) Revenue is presented after deduction of royalties and selling fees.
(ii) Revenue and cost of sales relate to the Company’s Ovoot Tolgoi Mine within the Mongolian Coal Division operating segment. Refer to note 4 of the consolidated financial statements for further analysis regarding the Company’s reportable operating segments.
Royalty regime in Mongolia
The royalty regime in Mongolia is evolving and has been subject to change since 2012. The Government of Mongolia implemented a trial period from October 1, 2012 to March 31, 2013, during which the royalty imposed on coal sales was determined using the actual contracted sales price per tonne. Subsequently, from April 1, 2013 to March 31, 2014, the royalty on all coal sales exported out of Mongolia was based on a set reference price per tonne published monthly by the Government of Mongolia.
The Government of Mongolia implemented a new royalty regime effective April 1, 2014, referred to as the “flexible tariff” royalty regime. From April 1, 2014, the royalty per tonne for export coal sales has been calculated based on the actual contracted sales price per tonne, whereby the contracted sales price includes the costs of transporting the coal to the Mongolia-China border. If transportation costs are not included in the contracted sales price between a buyer and seller, the following costs are required to be included in the contracted sales price for purposes of calculating the royalty per tonne: transportation costs and costs associated with transportation such as customs documentation fees, insurance, loading and unloading costs. In the event the actual contracted sales price calculated as described above differs by more than 10% from the contracted sales price of coal products with the same classification and quality being exported by other legal entities in Mongolia through the same border crossing, the calculated contracted sales price is deemed non-market under Mongolian tax law and the royalty per tonne is calculated based on a reference price that will be determined by the Government of Mongolia.
The Company currently sells coal from the Ovoot Tolgoi Mine ex mine gate and the coal is exported through the Shivee Khuren Border Crossing. The Company’s average realized selling price excludes transportation costs.
On July 4, 2014, the Government of Mongolia made further amendments to the royalty regime. From July 4, 2014 onwards, the royalty is to be initially calculated and paid monthly based on the Government reference price. On a quarterly basis the royalty amount is to be adjusted to reflect the contracted sales price and additional documentation needs to be submitted to the Mongolian Tax Authority. Once the quarterly statement has been approved by the Mongolian Tax Authority, any adjustments between the
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monthly payments for the quarter and the quarterly submission are adjusted in the next months’ royalty calculation.
On January 1 2015, this “flexible tariff” royalty regime ended and royalty payments have reverted to the previous regime which is based on a set reference price per tonne published monthly by the Government of Mongolia. The Company and other Mongolian coal producers are actively engaging the Mongolian authorities to seek the continuation of the “flexible tariff” regime.
Overview of Annual Financial Results
The Company recorded an $82.7 million loss from operations in 2014 compared to a $196.8 million loss from operations in 2013. The 2014 operations were impacted by continuing difficult market conditions which resulted in lower sales volumes and prices compared to 2013. This reduction in prices was offset by lower royalty expenses, lower administration expenses and lower impairment losses in 2014.
Revenue was $24.5 million in 2014 compared to $58.6 million in 2013. The Company sold 2.04 million tonnes of coal at an average realized selling price of $14.76 per tonne in 2014 compared to sales of 3.26 million tonnes at an average realized selling price of $24.25 per tonne in 2013. The reduction in the average realized selling price resulted from continuous difficult market conditions as well as differences in product mix in 2014 compared to 2013. The product mix in 2014 consisted of approximately 43% of Standard semi-soft coking coal with minimal sales of Premium semi-soft coking coal compared to approximately 86% of sales consisting of either Premium or Standard semi-soft coking coal in 2013.
The Company’s revenue is presented after deduction of royalties and selling fees. Following the change in the royalty regime in Mongolia regime on April 1, 2014, the Company’s effective royalty rate for 2014, based on the Company’s average realized selling price of $14.76 per tonne, was 12.5% or $1.85 per tonne compared to 19.1% or $4.53 per tonne based on the average realized selling price of $24.25 per tonne in 2013.
Cost of sales was $82.1 million in 2014 compared to $112.6 million in 2013. Cost of sales comprises operating expenses, share-based compensation expense, equipment depreciation, depletion of mineral properties, coal stockpile inventory impairments and idled mine asset costs. Operating expenses in cost of sales reflect the total cash costs of product sold (a non-IFRS financial measure, see Non-IFRS Financial Measures section for further analysis) during the period.
Year ended December 31, $ in thousands 2014 2013
| Operating expenses Share-based compensation expense Depreciation and depletion Impairment of coal stockpile inventories | $ 22,472 230 7,235 16,256 | $ 41,746 (293) 20,000 20,735 |
|---|---|---|
| Cost of sales from mine operations Cost of sales related to idled mine assets | 46,193 35,939 | 82,188 30,439 |
| Cost of sales | $ 82,132 | $ 112,627 |
Operating expenses in cost of sales were $22.5 million in 2014 compared to $41.7 million in 2013. The overall decrease in operating expenses is the result of both (i) the lower variable costs which are linked to production levels which are down to 1.57 million tonnes in 2014 compared to 3.06 million tonnes in 2013; and (ii) the continued focus on cost saving initiatives, including the furlough which commenced in mid- June 2014. The total cash cost of product sold decreased from $12.81 per tonne in 2013 to $11.02 per tonne in 2014.
Cost of sales in 2014 and 2013 included coal stockpile impairments of $16.3 million and $20.7 million, respectively, to reduce the carrying value of the Company’s coal stockpiles to their net realizable value. The coal stockpile impairments recorded in both 2014 and 2013 reflect the challenging coal market conditions and primarily related to the Company’s higher-ash products.
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Cost of sales related to idled mine asset costs primarily consisted of period costs, which were expensed as incurred and included mainly depreciation expense. Cost of sales related to idled mine assets in 2014 included $30.3 million related to depreciation expenses for idled equipment (2013: $25.1 million).
Other operating expenses were $14.8 million in 2014 compared to $126.0 million in 2013.
Year ended December 31,
| Public infrastructure Sustainability and community relations Foreign exchange loss/(gain) Provision for doubtful trade and other receivables Impairment loss on available-for-sale financial asset Loss on disposal of property, plant and equipment Impairment of property, plant and equipment Impairment of prepaid expenses and deposits Impairment of materials and supplies inventories Gain on disposal of mining licenses Other | $ - 253 (1,151) 567 1,766 - 8,879 3,780 2,981 (2,235) - | $ 7 235 1,659 200 3,067 895 72,669 30,152 14,962 - 2,194 |
|---|---|---|
| Other operating expenses | $ 14,840 | $ 126,040 |
Compared to 2013, the decrease in other operating expenses is primarily related to lower impairment charges in 2014.
The Company recognized an impairment loss of $1.8 million in 2014 related to its investment in Aspire compared to an impairment loss of $3.1 million in 2013. The Company’s investment in Aspire is accounted for as an available-for-sale financial asset and carried at its fair value. The Company disposed all its investment in Aspire during 2014 and did not hold any Aspire shares as at December 31, 2014.
In 2014, the Company recognized an impairment loss of $3.4 million related to prepaid toll washing fees under the Ejin Jinda contract. The impairment charge, which was recorded in the second quarter of 2014, was a result of the continued delay in starting the commercial operations at the wet washing facility and the continued soft coal market in China. The Company also recognized in 2014 an impairment charge of $3.0 million in respect of surplus materials and supplies inventories as the Company continued to operate below capacity in 2014. In comparison, in 2013, the Company recognized a total of $15.0 million in impairment in respect of material and supplies inventory.
Given the difficult market conditions and the associated delays in projects and the commissioning of equipment, the Company recorded $8.9 million of impairment charges to reduce various items of property, plant and equipment to their recoverable amounts for the year ended December 31, 2014 (2013: $72.7 million).
A gain of $2.2 million was recorded from the disposal of mining licenses in 2014. In the second quarter of 2014, $1.8 million was recorded after the Company completed the sale of the Tsagaan Tolgoi mining license. A further $0.4 million was recorded in the fourth quarter of 2014 after the partial sale of exploration license 9449X.
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Administration expenses were $8.9 million in 2014 compared to $15.6 million in 2013.
Year ended December 31, $ in thousands 2014 2013
Corporate administration $ 2,591 $ 3,269
| Legal and professional fees | 2,680 | 8,252 |
| Salaries and benefits | 2,955 | 3,748 |
| Share-based compensation expense | 590 | 167 |
| Depreciation | 128 | 193 |
Administration expenses $ 8,944 $ 15,629
Administration expenses were lower in 2014 compared to 2013 primarily due to lower professional fees during the year. Professional fees in 2013 included $4.3 million of fees related to the internal investigations led by a tripartite committee referred to in section “Regulatory Issues and Contingencies”. The tripartite committee substantially completed the investigative phase of its activities during 2013; therefore no substantial additional professional fees incurred in 2014.
Corporate administration costs were also lower in 2014 compared to 2013 reflecting the Company’s cost reduction initiatives.
Evaluation and exploration expenses $1.3 million in 2014 compared to $1.2 million in 2013. The Company continued to minimize evaluation and exploration expenditures in 2014 in order to preserve the Company’s financial resources. Evaluation and exploration activities and expenditures in 2014 were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining and exploration licenses.
Finance costs were $21.8 million and $21.2 million in 2014 and 2013 respectively which primarily consisted of interest expense on the $250.0 million CIC Convertible Debenture.
Finance income was $1.6 million in 2014 compared to $5.6 million in 2013 primarily relating to unrealized gains on the change in fair value of the embedded derivatives in the CIC Convertible Debenture ($1.6 million and $5.5 million respectively for 2014 and 2013). The fair value of the embedded derivatives in the CIC Convertible Debenture is driven by many factors including: the Company’s common share price, U.S. Dollar and Canadian Dollar exchange rates and share price volatility.
Income tax expense was $0.6 million in 2014 compared to an expense of $25.0 million in 2013. In 2014 $0.5 million relates to taxes paid in respect of the sale of the Tsagaan Tolgoi mining license. The $25.0 million expense for 2013 related to deductible temporary differences and adjustments to the amount of loss carry-forwards recognized. No corresponding amounts in respect of deferred tax balances were recorded in 2014.
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Summary of Quarterly Operational Data
| 2014 | 2013 | |||||||
| Quarter Ended | 31-Dec | 30-Sep | 30-Jun | 31-Mar | 31-Dec | 30-Sep | 30-Jun | 31-Mar |
| Sales Volumes, Prices and Costs Premium semi-soft coking coal Coal sales (millions of tonnes) Average realized selling price (per tonne) (i) Standard semi-soft coking coal Coal sales (millions of tonnes) Average realized selling price (per tonne) (i) Thermal coal Coal sales (millions of tonnes) Average realized selling price (per tonne) (i) Total Coal sales (millions of tonnes) Average realized selling price (per tonne) (i) Raw coal production (millions of tonnes) Direct cash costs of product sold (per tonne) (ii) Mine administration cash costs of product sold (per tonne) (ii) Total cash costs of product sold (per tonne) (ii) Other Operational Data Production waste material moved (millions of bank cubic meters) Strip ratio (bank cubic meters of waste material per tonne of coal produced) Lost time injury frequency rate (iii) | 0.02 $ 2 6.77 0.14 $ 1 8.32 0.21 $ 1 1.69 0.37 $ 1 5.04 0.21 $ 8.09 $ 2.44 $ 1 0.53 0.55 2.61 | - $ - 0.31 $ 17.41 0.34 $ 10.66 0.65 $ 13.87 0.17 $ 7 .38 $ 2 .30 $ 9 .68 0.20 1.20 0.17 | - $ - 0.12 $ 20.33 0.51 $ 10.72 0.63 $ 12.52 0.55 $ 8 .23 $ 2 .49 $ 10.72 2.17 3.97 0.15 | - $ - 0.29 $ 22.00 0.10 $ 12.07 0.39 $ 19.54 0.64 $ 10.43 $ 3 .80 $ 14.23 2.55 4.02 | 0.21 $ 37.54 1.40 $ 24.49 0.11 $ 12.60 1.72 $ 25.30 1.73 $ 11.13 $ 1 .39 $ 12.52 3.77 2.18 | 0.04 $ 37.50 0.87 $ 21.67 0.03 $ 13.07 0.94 $ 22.05 1.13 $ 9 .41 $ 2 .20 $ 11.61 1.57 1.39 | 0.21 $ 32.46 - $ - 0.11 $ 13.98 0.32 $ 26.26 0.17 $ 11.49 $ 7 .14 $ 18.63 2.71 15.55 | 0.08 $ 45.81 - $ - 0.20 $ 13.67 0.28 $ 22.75 0.02 $ 10.22 $ 1 .46 $ 11.68 0.40 26.21 |
| 0.21 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
(i) Average realized selling price is presented before deduction of royalties and selling fees.
(ii) A non-IFRS financial measure, refer to “Non-IFRS Financial Measures” section. Cash costs of product sold exclude idled mine asset cash costs.
(iii) Per 200,000 man hours and calculated based on a rolling 12 month average.
Overview of Quarterly Operational Data
Due to difficult market conditions, the Company has paced production with demand for its coal products. Although a seasonally strong period, the fourth quarter of 2014 remained anemic with only a modest increase in coal prices. As a result, the Company operated significantly below capacity during the quarter and its production increased only slightly from 0.17 million tonnes in the third quarter of 2014 to 0.21 million tonnes in the fourth quarter of 2014. Since mid-June 2014 following a review of operations, the Company further reduced its production and placed approximately half of its workforce on furlough. This furlough is expected to continue until market conditions improve for the Company.
The Company maintained a strong safety record and completed the fourth quarter of 2014 without a lost time injury. As at December 31, 2014, the Company has a lost injury time frequency rate of 0.21 per 200,000 man hours based on a rolling 12 month average while the Company ended 2013 without a lost time injury.
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Summary of Quarterly Financial Results
| 2014 | 2013 | |||||||
| Quarter Ended | 31-Dec | 30-Sep | 30-Jun | 31-Mar | 31-Dec | 30-Sep | 30-Jun | 31-Mar |
| Financial Results Revenue (i), (ii) Cost of sales (ii) Gross loss excluding idled mine asset costs Gross loss including idled mine asset costs Other operating expenses Administration expenses Evaluation and exploration expenses Loss from operations Finance costs Finance income Share of earnings/(losses) of joint venture Income tax recovery/(expense) Net loss Basic loss per share Diluted loss per share | 5,054 (19,757) (821) (14,703) (11,989) (1,924) (911) (29,527) (6,351) 317 (40) (40) (35,641) $ (0.19) $ (0.19) | 7,611 (23,922) (2,178) (16,311) (2) (2,530) (122) (18,965) (5,257) 135 (32) - (24,119) $ ( 0.13) $ ( 0.13) | 6,691 (20,086) (8,497) (13,395) (1,776) (2,253) (107) (17,531) (5,215) 127 (3) (546) (23,168) $ ( 0.12) $ ( 0.12) | $ 5,137 (18,366) (10,202) (13,229) (1,073) (2,237) (172) (16,711) (5,025) 1,007 (26) - (20,755) $ ( 0.11) $ ( 0.11) | $ 32,457 (40,359) (4,141) (7,900) (109,682) (3,668) (489) (121,740) (5,167) 1,301 (15) (13,109) (138,730) $ ( 0.75) $ ( 0.75) | $ 15,652 (33,486) (13,323) (17,834) (1,003) (4,204) (186) (23,227) (5,382) 124 (66) (13,377) (41,928) $ ( 0.23) $ ( 0.23) | $ 6,129 (17,477) (5,593) (11,348) (14,925) (4,024) (221) (30,518) (5,617) 3,366 44 (416) (33,141) $ ( 0.18) $ ( 0.18) | $ 4,398 (21,305) (494) (16,907) (431) (3,733) (273) (21,344) (4,996) 775 (17) 1,916 (23,666) $ ( 0.13) $ ( 0.13) |
(i) Revenue is presented after deduction of royalties and selling fees.
(ii) Revenue and cost of sales relate to the Company’s Ovoot Tolgoi Mine within the Mongolian Coal Division operating segment. Refer to note 4 of the consolidated financial statements for further analysis regarding the Company’s reportable operating segments.
Overview of Quarterly Financial Results
The Company recorded a $29.5 million loss from operations in the fourth quarter of 2014 compared to a $121.7 million loss from operations in the fourth quarter of 2013. Continuing difficult market conditions resulted in lower sales prices and volumes in the fourth quarter of 2014 compared to the fourth quarter of 2013. This reduction in prices and volumes was offset by a lower royalty rate, lower administration expenses and lower impairment charges in the fourth quarter of 2014 compared to the fourth quarter of 2013.
Revenue was $5.1 million in the fourth quarter of 2014 compared to $32.5 million in the fourth quarter of 2013. The Company sold 0.37 million tonnes of coal at an average realized selling price of $15.04 per tonne in the fourth quarter of 2014 compared to sales of 1.72 million tonnes at an average realized selling price of $25.30 per tonne in the fourth quarter of 2013. Revenue decreased in the fourth quarter of 2014 compared to the fourth quarter of 2013 as a result of the combination of lower sales volumes and lower sales prices. The average realized selling price in the fourth quarter of 2014 compared to the fourth quarter of 2013 was also impacted by differences in product mix. The majority of the Company’s sales in the fourth quarter of 2014 were of Thermal coal product while Standard semi-soft coking coal comprised the majority of sales in the fourth quarter of 2013.
The Company’s revenue is presented after deduction of royalties and selling fees. Following the change in the Mongolia’s royalty regime starting April 1, 2014, the Company’s effective royalty rate for the fourth quarter of 2014, based on the Company’s average realized selling price of $15.04 per tonne, was 8.1% or $1.22 per tonne. In the fourth quarter of 2013, the Company was subject to an average 7% royalty based on a weighted average reference price of $69.17 per tonne. As a result, the Company’s effective royalty rate was 19.1% or $4.84 per tonne based on the average realized selling price of $25.30 per tonne in the fourth quarter of 2013.
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Cost of sales was $19.8 million in the fourth quarter of 2014 compared to $40.4 million in the fourth quarter of 2013. Cost of sales comprises operating expenses, share-based compensation expense, equipment depreciation, depletion of mineral properties, coal stockpile inventory impairments and idled mine asset costs. Operating expenses in cost of sales reflect the total cash costs of product sold (a non- IFRS financial measure, see Non-IFRS Financial Measures section for further analysis) during the period.
Three months ended December 31,
| Operating expenses Share-based compensation expense Depreciation and depletion Impairment of coal stockpile inventories | $ 3,895 (3) 953 1,030 | $ 21,537 28 10,096 4,938 |
|---|---|---|
| Cost of sales from mine operations Cost of sales related to idled mine assets | 5,875 13,882 | 36,599 3,760 |
| Cost of sales | $ 19,757 | $ 40,359 |
Operating expenses included in cost of sales were $3.9 million in the fourth quarter of 2014 compared to $21.5 million in the fourth quarter of 2013. The overall decrease in operating expenses is the result of the lower variable costs which are linked to production levels which are down to 0.21 million tonnes in the fourth quarter of 2014 compared to 1.73 million tonnes in the fourth quarter of 2013 and the continued focus on cost saving initiatives, including the furlough which commenced in mid-June 2014. The total cash cost of product sold decreased from $12.52 per tonne in the fourth quarter of 2013 to $10.53 per tonne in the fourth quarter of 2014.
Cost of sales in the fourth quarter of 2014 and the fourth quarter of 2013 included coal stockpile impairments of $1.0 million and $4.9 million, respectively, to reduce the carrying value of the Company’s coal stockpiles to their net realizable value. The coal stockpile impairments recorded in both 2014 and 2013 reflect the challenging coal market conditions and primarily related to the Company’s higher-ash products.
Idled mine asset costs included in cost of sales increased in the fourth quarter of 2014 compared to the fourth quarter of 2013 as a result of the mining operations’ slowdown which commenced in June 2014. Idled mine asset costs in the fourth quarter of 2014 included $11.6 million related to depreciation expense for idled mine equipment (2013: $3.7 million).
Other operating expenses were $12.0 million in the fourth quarter of 2014 (2013: $109.7 million).
Three months ended December 31,
$ in thousands 2014 2013
| Public infrastructure Sustainability and community relations Foreign exchange loss/(gain) Provision for doubtful trade and other receivables Impairment of property, plant and equipment Impairment of prepaid expenses and deposits Impairment of materials and supplies inventories Gain on disposal of mining license Other | $ - 42 (163) 567 8,603 375 2,981 (416) - | $ 1 117 631 200 68,370 30,152 8,032 - 2,179 |
|---|---|---|
| Other operating expenses | $ 11,989 | $ 109,682 |
The Company’s other operating expenses were significantly lower in the fourth quarter of 2014 compared to the fourth quarter of 2013 primarily due to reduced impairment charges totaling $12.0 million in the fourth quarter of 2014 compared to $106.6 million in the fourth quarter of 2013.
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Given the difficult market condition and delay in commissioning of the equipment, the Company recorded $8.6 million of impairment charges to reduce various items of property, plant and equipment to their recoverable amounts in the fourth quarter of 2014.
The Company recorded $68.4 million of impairment charges in the fourth quarter of 2013 to reduce various items of PP&E to their recoverable amounts. The impairment charges in 2013 included $66.4 million related to the dry coal handling facility (“DCHF”) (refer to “Processing Infrastructure – Dry Coal Processing” for further analysis).
An impairment of prepaid expenses and deposit of $30.2 million was included in other operating expenses in the fourth quarter of 2013 related to prepaid toll washing fees under the Ejin Jinda contract (refer to “Processing Infrastructure – Wet Washing Facility” for further analysis of the impairment charge).
Furthermore, following the results of a review of the Company’s mining fleet in the fourth quarter of 2013, $7.5 million of additional surplus materials and supplies inventories were identified. A corresponding review performed in the fourth quarter of 2014 with an impairment charge of $3.0 million identified as the Company continued to operate below capacity. The impairment charge in the fourth quarter of 2013 also included $0.5 million of materials and supplies related to the DCHF for which there was no corresponding impairment in the fourth quarter of 2014.
Administration expenses were $1.9 million in the fourth quarter of 2014 compared to $3.7 million in the fourth quarter of 2013.
Three months ended December 31,
$ in thousands 2014 2013
| Corporate administration Legal and professional fees Salaries and benefits Share-based compensation expense Depreciation | $ 8 65 243 774 10 32 | $ 1,052 2,075 780 (275) 36 |
|---|---|---|
| Administration expenses | $ 1,924 | $ 3,668 |
Administration expenses decreased in the fourth quarter of 2014 compared to the fourth quarter of 2013 due to lower professional fees and overhead cost reduction initiatives. Legal and professional fees in the fourth quarter of 2013 included $1.8 million of fees related to the internal investigations led by a tripartite committee referred to in section “Regulatory Issues and Contingencies”. The tripartite committee substantially completed the investigative phase of its activities during 2013. Therefore, additional professional fees were not incurred in the fourth quarter of 2014.
Evaluation and exploration expenses were $0.9 million in the fourth quarter of 2014 compared to $0.5 million in the fourth quarter of 2013. The Company continued to minimize evaluation and exploration expenditures in the fourth quarter of 2014 in order to preserve the Company’s financial resources. Evaluation and exploration activities and expenditures in the fourth quarter of 2014 were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining and exploration licenses.
Finance costs were $6.4 million and $5.2 million in the fourth quarters of 2014 and 2013 which primarily consisted of interest expense on the $250.0 million CIC Convertible Debenture. Further, $1.1 million of realized loss was recorded in relations to the disposal of Aspire shares in the fourth quarter of 2014.
Finance income was $0.3 million in the fourth quarter of 2014 compared to $1.3 million in the fourth quarter of 2013 and primarily consisting of unrealized gains on the fair value change of the embedded derivatives in the CIC Convertible Debenture ($0.3 million in the fourth quarter of 2014 and $1.6 million in the fourth quarter of 2013). The fair value of the embedded derivatives in the CIC Convertible Debenture
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