Southgobi Resources Announces Third Quarter 2021 Financial and Operating Results
R E S O U R C E S November 12, 2021
SOUTHGOBI RESOURCES ANNOUNCES THIRD QUARTER 2021 FINANCIAL AND OPERATING RESULTS
HONG KONG – SouthGobi Resources Ltd. (Toronto Stock Exchange (“TSX”): SGQ, Hong Kong Stock Exchange (“HKEX”): 1878) (the “Company” or “SouthGobi”) today announces its financial and operating results for the three and nine months ended September 30, 2021. All figures are in U.S. dollars (“USD”) unless otherwise stated.
SIGNIFICANT EVENTS AND HIGHLIGHTS
The Company’s significant events and highlights for the three months ended September 30, 2021 and the subsequent period to November 12, 2021 are as follows:
- Operating Results – In response to the increase in Coronavirus Disease 2019 (“COVID-19”) case numbers in Mongolia, the Chinese authorities has been restricting the number of trucks permitted to cross the Ceke port of entry, and such restriction has severely impacted the sales volume of the Company in the third quarter of 2021. As a result, the Company’s sales volume decreased from 1.0 million tonnes in the third quarter of 2020 to 0.2 million tonnes in the third quarter of 2021.
In response to the restrictions on the number of trucks crossing the Mongolian border into China, the Company temporarily suspended its major mining operations (including coal mining) in the second quarter of 2021 in order to control the inventory level and preserve the Company’s working capital. Mining operations (including coal mining) resumed in the third quarter of 2021 and 0.3 million tonnes were produced during the quarter. However, mining operations were temporarily suspended again by the Company beginning in November 2021 in response to the temporary closure of the Ceke Port of Entry. See “Impact of the COVID-19 Pandemic” below.
The Company experienced an increase in the average selling price of coal from $31.6 per tonne in the third quarter of 2020 to $53.5 per tonne in the third quarter of 2021, as a result of improved market conditions in China and an improvement of the overall product mix.
- Financial Results – The Company recorded a $1.0 million profit from operations in the third quarter of 2021 compared to a $8.5 million profit from operations in the third quarter of 2020. The financial results for the third quarter of 2021 were impacted by the decreased sales resulting from the export volume limitations experienced by the Company during the quarter.
- Impact of the COVID-19 Pandemic – Since the second quarter of 2021, additional precautionary measures were imposed by the Chinese authorities at the Ceke port of entry in response to the increase of COVID-19 cases in Mongolia, which included restricting the number of trucks crossing the Mongolian border into China. The restrictions on trucking volume have had an adverse impact on the Company’s ability to import its coal products into China in the third quarter of 2021.
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In response to the increase in the number of COVID-19 cases in Ejinaqi, a region in China’s Inner Mongolia Autonomous Region, reported in late October 2021, the local government authorities have imposed stringent preventive measures throughout the region, including the temporary closure of the Ceke port of entry located at the border of Mongolia and China. Accordingly, the Company’s coal exports into China have been suspended and such suspension remains in effect as of the date hereof. The Company anticipates the temporary closure of the Ceke port of entry will have a material adverse impact on the Company’s sales and cash flow until such time as coal exports into China are allowed to resume. In order to control the inventory level and preserve the Company’s working capital, the Company decided to temporarily suspend mining operations (including coal mining) beginning as of early November 2021.
The Company will continue to closely monitor the development of the COVID-19 pandemic and the impact it has on coal exports to China and will continue to react promptly to preserve the working capital of the Company and mitigate any negative impacts on the business and operations of the Company.
In the event that the Company’s ability to export coal into the Chinese market continues to be restricted or limited, this is expected to have a material adverse effect on the business and operations of the Company and may negatively affect the price and volatility of the Common Shares and any investment in such shares could suffer a significant decline or total loss in value.
- China Investment Corporation (“CIC”) Convertible Debenture (“CIC Convertible Debenture”) – On July 30, 2021, the Company and CIC entered into an agreement (the “2021 July Deferral Agreement”) pursuant to which CIC agreed to grant the Company a deferral of:
(i) semi-annual cash interest payments of $8.1 million payable to CIC on November 19, 2021; and (ii) $4.0 million worth of payment in kind interest (“PIK Interest”) shares (collectively, the “2021 Deferral Amounts”) issuable to CIC on November 19, 2021 under the CIC Convertible Debenture.
The principal terms of the 2021 July Deferral Agreement are as follows:
- Payment of the 2021 Deferral Amounts will be deferred until August 31, 2023.
- As consideration for the deferral of the 2021 Deferral Amounts, the Company agreed to pay CIC a deferral fee equal to 6.4% per annum on the 2021 Deferral Amounts payable under the CIC Convertible Debenture, commencing on November 19, 2021.
- Going Concern – Several adverse conditions and material uncertainties relating to the Company cast significant doubt upon the going concern assumption which includes the deficiencies in assets and working capital.
See section “Liquidity and Capital Resources” of this press release for details.
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OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS
Summary of Operational Data
Three months ended Nine months ended September 30, September 30, 2021 2021
2020 2020
Sales Volumes, Prices and Costs
Premium semi-soft coking coal
0.11 0.59
Coal sales (millions of tonnes) 0.35 0.63
$ 64.25 $ 51.53
Average realized selling price (per tonne) $ 30.17 $ 29.48 Standard semi-soft coking coal/premium thermal coal
0.06 0.32
Coal sales (millions of tonnes) 0.54 0.93
$ 33.56 $ 35.01
Average realized selling price (per tonne) $ 30.80 $ 31.71 Washed coal
- 0.01
Coal sales (millions of tonnes) 0.10 0.12
$ – $ 48.53
Average realized selling price (per tonne) $ 41.30 $ 41.64 Total
0.17 0.92
Coal sales (millions of tonnes) 0.99 1.68
| Average realized selling price (per tonne) | $ 31.63 | $ 31.58 |
| $ 53.52 $ 45.87 | ||
| Raw coal production (millions of tonnes) | 0.52 | 0.53 |
0.26 1.30
| Cost of sales of product sold (per tonne) | $ | 20.23 | $ | 21.70 | ||||
| $ | 40.39 | $ | 32.35 | |||||
| Direct cash costs of product sold (per tonne)(i) | $ | 12.38 | $ | 11.57 | ||||
| $ | 17.50 | $ | 17.82 |
Mine administration cash costs of product sold
| (per tonne)(i) | $ | 1.15 | $ | 1.47 | ||||
| $ | 1.62 | $ | 1.53 | |||||
| Total cash costs of product sold (per tonne)(i) | $ | 13.53 | $ | 13.04 | ||||
| $ | 19.12 | $ | 19.35 |
Other Operational Data
Production waste material moved (millions of
0.59 5.63
bank cubic meters) 1.67 2.24 Strip ratio (bank cubic meters of waste material
2.23 4.31
per tonne of coal produced) 3.20 4.24
0.00 0.00
Lost time injury frequency rate (ii) 0.00 0.04
(i) A Non-International Financial Reporting Standards (“non-IFRS”) financial measure. Refer to “Non-IFRS Financial Measures” section. Cash costs of product sold exclude idled mine asset cash costs.
(ii) Per 200,000 man hours and calculated based on a rolling 12-month average.
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Overview of Operational Data
For the three months ended September 30, 2021
The Company experienced an increase in the average selling price of coal from $31.6 per tonne in the third quarter of 2020 to $53.5 per tonne in the third quarter of 2021, as a result of improved market conditions in China and an improvement of the overall product mix. The product mix for the third quarter of 2021 consisted of approximately 65% premium semi-soft coking coal and 35% standard semi-soft coking coal/premium thermal coal compared to approximately 35% premium semi-soft coking coal, 55% standard semi-soft coking coal/premium thermal coal and 10% washed coal in the third quarter of 2020.
In response to the increase in COVID-19 case numbers in Mongolia in the third quarter of 2021, the Chinese authorities has been restricting the number of trucks permitted to cross the Ceke port of entry, and such restriction has severely impacted the sales volume of the Company in the third quarter of 2021. As a result, the Company’s sales volume decreased from 1.0 million tonnes in the third quarter of 2020 to 0.2 million tonnes in the third quarter of 2021.
In response to the restrictions on the number of trucks crossing the Mongolian border into China, the Company temporarily suspended its major mining operations (including coal mining) in the second quarter of 2021 in order to control the inventory level and preserve the Company’s working capital. Mining operations (including coal mining) resumed in the third quarter of 2021 and 0.3 million tonnes were produced during the quarter. However, mining operations were temporarily suspended again by the Company beginning in November 2021 in response to the temporary closure of the Ceke Port of Entry. See “Significant Events and Highlights - Impact of the COVID-19 Pandemic” above.
The Company’s unit cost of sales of product sold increased from $20.2 per tonne in the third quarter of 2020 to $40.4 per tonne in the third quarter of 2021. The increase was mainly driven by the diseconomies of scale due to decreased sales as well as the increase in the effective royalty rate.
For the nine months ended September 30, 2021
The Company sold 0.9 million tonnes for the first nine months of 2021 as compared to 1.7 million tonnes for the first nine months of 2020. The average selling price increased from $31.6 per tonne for the first nine months of 2020 to $45.9 per tonne for the first nine months of 2021, as a result of improved market conditions in China and an improvement of the overall product mix.
The Company’s production in the first nine months of 2021 was higher than the first nine months of 2020 as a result of the Company’s major mining operations (including coal mining) being temporarily suspended for a relatively longer period in 2020 in order to mitigate the financial impact of the border closures and to preserve the Company’s working capital.
The Company’s unit cost of sales of product sold increased from $21.7 per tonne for the first nine months of 2020 to $32.4 per tonne in the first nine months of 2021. The increase was mainly driven by the increase in the effective royalty rate.
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Summary of Financial Results
Three months ended Nine months ended September 30, September 30, 2021 2021
2020 2020
$ in thousands, except per share information
| Revenue(i) | $ 30,960 | $ 52,072 |
| $ 9,295 $ | 42,550 | |
| Cost of sales(i) | (20,027) | (36,464) |
(6,866) (29,765)
Gross profit excluding idled mine
3,269 15,062
asset costs 11,789 19,537
2,429 12,785
Gross profit 10,933 15,608
100 (348)
Other operating income/(expenses), net (575) (5,255)
(1,467) (4,733)
Administration expenses (1,789) (4,851)
(36) (148)
Evaluation and exploration expenses (63) (171)
1,026 7,556
Profit from operations 8,506 5,331
(11,457) (32,484)
Finance costs (9,885) (24,250)
2,040 23,055
Finance income 2,583 2,600
(261) (22)
Share of earnings/(loss) of a joint venture 660 882
(78) (1,059)
Current income tax expenses (793) (2,425)
Net profit/(loss) attributable to
(8,730) (2,954)
equity holders of the Company 1,071 (17,862)
$ (0.03) $ (0.01)
Basic and diluted earnings/(loss) per share $ – $ (0.07)
(i) Revenue and cost of sales relate to the Company’s Ovoot Tolgoi Mine within the Coal Division operating segment. Refer to note 3 of the condensed consolidated interim financial statements for further analysis regarding the Company’s reportable operating segments.
Overview of Financial Results
For the three months ended September 30, 2021
The Company recorded a $1.0 million profit from operations in the third quarter of 2021 compared to an $8.5 million profit from operations in the third quarter of 2020. The financial results for the third quarter of 2021 were impacted by the decreased sales resulting from the export volume limitations experienced by the Company during the quarter.
Revenue was $9.3 million in the third quarter of 2021 compared to $31.0 million in the third quarter of 2020. The Company’s effective royalty rate for the third quarter of 2021, based on the Company’s average realized selling price of $53.5 per tonne, was 25.5% or $13.7 per tonne, compared to 11.1% or $3.5 per tonne in the third quarter of 2020 (based on the average realized selling price of $31.6 per tonne).
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Royalty regime in Mongolia
The royalty regime in Mongolia is evolving and has been subject to change since 2012.
On September 4, 2019, the Government of Mongolia issued a resolution in connection with the royalty regime. From September 1, 2019 onwards, in the event that the contract sales price is less than the reference price as determined by the Government of Mongolia by more than 30%, then the royalty payable will be calculated based on the Mongolian government’s reference price instead of the contract sales price.
On June 23, 2021, the Government of Mongolia issued a new resolution in connection with the royalty regime. From July 1, 2021 onwards, the royalty payable is to be calculated based on the reference price as determined by the Government of Mongolia, and the reference to the contract sales price will be removed.
Cost of sales was $6.9 million in the third quarter of 2021 compared to $20.0 million in the third quarter of 2020. The decrease in cost of sales was mainly due to the decreased sales during the quarter. Cost of sales consists of operating expenses, share-based compensation expense, equipment depreciation, depletion of mineral properties, royalties 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 section “Non-IFRS financial measure” for further analysis) during the quarter.
Three months ended September 30, 2021
$ in thousands 2020
$ 3,251 $ Operating expenses 13,390 Share-based compensation expense 4 Depreciation and depletion 2,297
2,371
Royalties 3,480
| Cost of sales from mine operations | 6,026 | 19,171 |
| Cost of sales related to idled mine assets | 840 | 856 |
| Cost of sales | $ 6,866 $ | 20,027 |
Operating expenses in cost of sales were $3.3 million in the third quarter of 2021 compared to $13.4 million in the third quarter of 2020. The overall decrease in operating expenses was primarily due to the decreased sales volume from 1.0 million tonnes in the third quarter of 2020 to 0.2 million tonnes in the third quarter of 2021.
Cost of sales related to idled mine assets in the third quarter of 2021 included $0.8 million related to depreciation expenses for idled equipment (third quarter of 2020: $0.9 million).
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Other operating income were $0.1 million in the third quarter of 2021 (third quarter of 2020: other operating expenses of $0.6 million).
Three months ended September 30, 2021
$ in thousands 2020
$ 199 $ CIC management fee 864
(16)
Reversal of provision for doubtful trade and other receivables (482) Foreign exchange loss, net 113
(127)
Discount on settlement of trade payables –
–
Loss on disposal of items of property, plant and equipment, net 80
(169)
Written off of other payables –
Other operating expenses/(income), net $ (100) $ 575
Administration expenses were $1.5 million in the third quarter of 2021 compared to $1.8 million in the third quarter of 2020 as follows:
Three months ended September 30,
| $ in thousands | 2021 | 2020 | |
| Corporate administration | $ | 186 $ | 394 |
| Legal and professional fees | 294 | 395 | |
| Salaries and benefits | 685 | 781 | |
| Share-based compensation expense | 137 | 15 | |
| Depreciation | 165 | 204 | |
| Administration expenses | $ | 1,467 $ | 1,789 |
The Company continued to minimize evaluation and exploration expenditures in the third quarter of 2021 in order to preserve the Company’s financial resources. Evaluation and exploration activities and expenditures in the third quarter of 2021 were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining licenses.
Finance costs were $11.5 million and $9.9 million in the third quarter of 2021 and 2020 respectively, which primarily consisted of interest expense on the $250.0 million CIC Convertible Debenture.
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For the nine months ended September 30, 2021
The Company recorded a $7.6 million profit from operations in the first nine months of 2021 compared to a $5.3 million profit from operations in the first nine months of 2020. The financial results were impacted by (i) the higher selling price achieved by the Company; (ii) the decreased sales resulting from the export volume limitations and (iii) a provision for commercial arbitration of $4.6 million recorded for the first nine months of 2020 in connection with the settlement agreement entered into with First Concept Industrial Group Limited (“First Concept”).
Revenue was $42.6 million in the first nine months of 2021 compared to $52.1 million in the first nine months of 2020. The Company’s effective royalty rate for the first nine months of 2021, based on the Company’s average realized selling price of $45.9 per tonne, was 18.1% or $8.3 per tonne, compared to 12.2% or $3.9 per tonne in the first nine months of 2020 (based on the average realized selling price of $31.6 per tonne).
Cost of sales were $29.8 million in the first nine months of 2021 compared to $36.5 million in the first nine months of 2020, as follows:
Nine months ended September 30, 2021
$ in thousands 2020
$ 17,802 $ Operating expenses 21,912 Share-based compensation expense 23
1,943
Depreciation and depletion 4,163
7,706
Royalties 6,437
| Cost of sales from mine operations | 27,488 | 32,535 |
| Cost of sales related to idled mine assets | 2,277 | 3,929 |
| Cost of sales | $ 29,765 $ | 36,464 |
Operating expenses in cost of sales were $17.8 million in the first nine months of 2021 compared to $21.9 million in the first nine months of 2020. The overall decrease in operating expenses was primarily due to the decreased sales volume.
Cost of sales related to idled mine assets in the first nine months of 2021 included $2.3 million related to depreciation expenses for idled equipment (first nine months of 2020: $3.9 million).
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Other operating expenses were $0.3 million in the first nine months of 2021 (first nine months of 2020: $5.3 million). A provision for commercial arbitration of $4.6 million recorded for the first nine months of 2020 in connection with the settlement agreement entered into with First Concept.
Nine months ended September 30, 2021
$ in thousands 2020
$ 932 $ CIC management fee 1,399 Provision/(reversal of provision) for doubtful trade and other receivables (200) Foreign exchange loss/(gain), net (639) Loss/(gain) on disposal of items of property,
(270)
plant and equipment, net 61
(169)
Written off of other payables – Reversal of impairment on materials and
(25)
supplies inventories –
(508)
Discount on settlement of trade payables –
–
Provision for commercial arbitration 4,634
Other operating expenses $ 348 $ 5,255
Administration expenses were $4.7 million in the first nine months of 2021 compared to $4.9 million in the first nine months of 2020, as follows:
Nine months ended September 30,
| $ in thousands | 2021 | 2020 | |
| Corporate administration | $ | 1,135 $ | 842 |
| Legal and professional fees | 853 | 944 | |
| Salaries and benefits | 2,083 | 2,448 | |
| Share-based compensation expense | 133 | 84 | |
| Depreciation | 529 | 533 | |
| Administration expenses | $ | 4,733 $ | 4,851 |
The Company continued to minimize evaluation and exploration expenditures in the first nine months of 2021 in order to preserve the Company’s financial resources. Evaluation and exploration activities and expenditures in the first nine months of 2021 were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining licenses.
Finance costs were $32.5 million and $24.3 million in the first nine months of 2021 and 2020 respectively, which primarily consisted of interest expense on the $250.0 million CIC Convertible Debenture. The increase was mainly due to the associated increase in interest expenses following the recording of a gain on extinguishment of the CIC Convertible Debenture.
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Summary of Quarterly Operational Data
2021
2020 2019 Quarter Ended 30-Sep 30-Jun 31-Mar 31-Dec 30-Sep 30-Jun 31-Mar 31-Dec
Sales Volumes, Prices and Costs
Premium semi-soft coking coal Coal sales (millions of tonnes) 0.11 0.08 0.40 0.38 0.35 0.21 0.07 0.39 Average realized selling price (per tonne) $ 64.25 $ 52.11 $ 47.88 $ 39.34 $ 30.17 $ 28.69 $ 28.46 $ 29.18 Standard semi-soft coking coal/premium thermal coal
0.06
Coal sales (millions of tonnes) 0.03 0.23 0.50 0.54 0.26 0.13 0.40 Average realized selling price (per tonne) $ 33.56 $ 36.71 $ 35.17 $ 31.66 $ 30.80 $ 33.12 $ 32.71 $ 31.88 Washed coal Coal sales (millions of tonnes) – – 0.01 0.07 0.10 0.02 – 0.20 Average realized selling price (per tonne) $ – $ – $ 49.62 $ 42.51 $ 41.30 $ 43.26 $ – $ 42.95 Total
| Coal sales (millions of tonnes) | 0.17 | 0.11 | 0.64 | 0.95 | 0.99 | 0.49 | 0.20 | 0.99 | ||||||||
| Average realized selling price (per tonne) | $ | 53.52 | $ | 47.93 | $ | 43.46 | $ | 35.53 | $ | 31.63 | $ | 31.66 | $ | 31.18 | $ | 33.04 |
| Raw coal production (millions of tonnes) | 0.26 | – | 1.04 | 0.96 | 0.52 | – | 0.01 | 1.48 | ||||||||
| Cost of sales of product sold (per tonne) | $ | 40.39 | $ | 41.38 | $ | 28.67 | $ | 23.36 | $ | 20.23 | $ | 21.16 | $ | 30.36 | $ | 23.68 |
| Direct cash costs of product sold (per tonne)(i) | $ | 17.50 | $ | 16.39 | $ | 18.15 | $ | 14.78 | $ | 12.38 | $ | 9.90 | $ | 11.69 | $ | 13.61 |
Mine administration cash costs of product sold (per tonne) (i) $ 1.62 $ 4.26 $ 1.04 $ 1.07 $ 1.15 $ 1.70 $ 2.50 $ 1.29
$ 19.12
Total cash costs of product sold (per tonne) (i) $ 20.65 $ 19.19 $ 15.85 $ 13.53 $ 11.60 $ 14.19 $ 14.90
Other Operational Data
Production waste material moved
0.59
(millions of bank cubic meters) – 5.04 3.10 1.67 – 0.57 3.61 Strip ratio (bank cubic meters of waste material per tonne of coal produced) 2.23 – 4.83 3.24 3.20 – 85.08 2.44 Lost time injury frequency rate (ii) 0.00 0.00 0.00 0.00 0.00 0.04 0.09 0.08
(i) A Non-IFRS financial measure. Refer to “Non-IFRS Financial Measures” section. Cash costs of product sold exclude idled mine asset cash costs.
(ii) Per 200,000 man hours and calculated based on a rolling 12-month average.
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Summary of Quarterly Financial Results
The Company’s consolidated financial statements are reported under IFRS issued by the International Accounting Standards Board (the “IASB”). The following table provides highlights, extracted from the Company’s annual and interim consolidated financial statements, of quarterly results for the past eight quarters:
2021
$ in thousands, except per share information 2020 2019 Quarter Ended 30-Sep 30-Jun 31-Mar 31-Dec 30-Sep 30-Jun 31-Mar 31-Dec
Financial Results
$ 9,295
Revenue (i) $ 5,191 $ 28,064 $ 33,879 $ 30,960 $ 14,975 $ 6,137 $ 32,113
| Cost of sales(i) | (6,866) | (4,552) | (18,347) | (22,193) | (20,027) | (10,366) | (6,071) | (23,446) |
| Gross profit excluding idled mine asset costs | 3,269 | 1,565 | 10,228 | 12,610 | 11,789 | 6,286 | 1,462 | 9,971 |
| Gross profit including idled mine asset costs | 2,429 | 639 | 9,717 | 11,686 | 10,933 | 4,609 | 66 | 8,667 |
| Other operating income/(expenses), net | (113) | (335) | 434 | (575) | (5,150) | 470 | (1,589) |
| Administration expenses | (1,467) | (1,484) | (1,781) | (2,120) | (1,789) | (1,291) | (1,771) | (1,386) |
| Evaluation and exploration expenses | (36) | (47) | (65) | (55) | (63) | (52) | (56) | (382) |
| Profit/(loss) from operations | 1,026 | (1,005) | 7,536 | 9,945 | 8,506 | (1,884) | (1,291) | 5,310 |
| Finance costs | (8,870) | (14,637) | (7,442) | (9,885) | (7,258) | (7,135) | (7,095) |
(11,457)
| Finance income | 2,040 | 2,494 | 21,001 | 13 | 2,583 | 2 | 43 | 36 |
| Share of earnings/(loss) of a joint venture | (261) | (35) | 274 | 431 | 660 | 268 | (46) | 225 |
| Current income tax credit/(expenses) | (78) | 139 | (1,120) | (5,174) | (793) | (900) | (732) | (659) |
| Net profit/(loss) | (7,277) | 13,054 | (2,227) | 1,071 | (9,772) | (9,161) | (2,183) |
(8,730)
Basic earnings/(loss) per share $ (0.03) $ (0.03) $ 0.05 $ (0.01) $ – $ (0.04) $ (0.03) $ (0.01) Diluted earnings/(loss) per share $ (0.03) $ (0.03) $ 0.02 $ (0.01) $ – $ (0.04) $ (0.03) $ (0.01)
(i) Revenue and cost of sales relate to the Company’s Ovoot Tolgoi Mine within the Coal Division operating segment. Refer to note 3 of the condensed consolidated interim financial statements for further analysis regarding the Company’s reportable operating segments.
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LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Management
The Company has in place a planning, budgeting and forecasting process to help determine the funds required to support the Company’s normal operations on an ongoing basis and its expansionary plans.
Costs reimbursable to Turquoise Hill Resources Limited (“Turquoise Hill”)
Prior to the completion of a private placement with Novel Sunrise Investments Limited (“Novel Sunrise”) on April 23, 2015, Rio Tinto plc (“Rio Tinto”) was the Company’s ultimate parent company. In the past, Rio Tinto sought reimbursement from the Company for the salaries and benefits of certain Rio Tinto employees who were assigned by Rio Tinto to work for the Company, as well as certain legal and professional fees incurred by Rio Tinto in relation to the Company’s prior internal investigation and Rio Tinto’s participation in the tripartite committee. Subsequently Rio Tinto transferred and assigned to Turquoise Hill its right to seek reimbursement for these costs and fees from the Company.
As at December 31, 2020, the amount of reimbursable costs and fees claimed by Turquoise Hill (the “TRQ Reimbursable Amount”) amounted to $8.1 million (such amount is included in the trade and other payables).
On January 20, 2021, the Company and Turquoise Hill entered into a settlement agreement, whereby Turquoise Hill agreed to a repayment schedule in settlement of certain secondment costs in the amount of $2.8 million (representing a portion of the TRQ Reimbursable Amount) pursuant to which the Company agreed to make monthly payments to Turquoise Hill in the amount of $0.1 million per month from January 2021 to June 2022. The Company is contesting the validity of the remaining balance of the TRQ Reimbursable Amount claimed by Turquoise Hill.
Going concern considerations
The Company’s condensed consolidated interim financial statements have been prepared on a going concern basis which assumes that the Company will continue operating until at least September 30, 2022 and will be able to realize its assets and discharge its liabilities in the normal course of operations as they come due. However, in order to continue as a going concern, the Company must generate sufficient operating cash flow, secure additional capital or otherwise pursue a strategic restructuring, refinancing or other transactions to provide it with additional liquidity.
Several adverse conditions and material uncertainties cast significant doubt upon the Company’s ability to continue as a going concern and the going concern assumption used in the preparation of the Company’s consolidated financial statements. The Company had a deficiency in assets of $79.1 million as at September 30, 2021 as compared to a deficiency in assets of $76.2 million as at December 31, 2020 while the working capital deficiency (excess current liabilities over current assets) was $36.5 million as at September 30, 2021 compared to a working capital deficiency of $217.6 million as at December 31, 2020.
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