Tuesday, October 20, 2026
MineTerminalPro TheDeepDive SEDITracker
MiningNewsTerminal
Tuesday, October 20, 2026 Admin

SGQ.V ·

SouthGobi Resources announces first quarter 2019 financial and operating results

Production Results Financials

R E S O U R C E S  May 14, 2019

SouthGobi Resources announces first quarter 2019 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 months ended March 31, 2019. 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 March 31, 2019 and the subsequent period to May 14, 2019 are as follows:

  • Operating Results – The Company increased sales volume to 1.1 million tonnes for the first quarter of 2019 from 0.6 million tonnes for the first quarter of 2018. Despite an improvement of the product mix, the average realized selling price decreased from $43.0 per tonne in the first quarter of 2018 to $34.9 per tonne in the first quarter of 2019 as a result of a higher portion of sales made at the mine gate instead of transporting the coal to the Company’s Inner Mongolia subsidiary and selling to third party customers within China.
  • Financial Results – The Company recorded a gross profit of $13.4 million in the first quarter of 2019 compared to $6.7 million in the first quarter of 2018, while a $9.9 million profit from operations was recorded in the first quarter of 2019 compared to a $3.5 million profit from operations in the first quarter of 2018 (restated). The improvement of overall financial results were principally attributable to lower unit cost of sales of products sold during the quarter.
  • China Investment Corporation (“CIC”) convertible debenture (“CIC Convertible Debenture”) – On April 23, 2019, the Company executed a deferral agreement (the “2019 Deferral Agreement”) with CIC in relation to a deferral and revised repayment schedule in respect of (i) $41.8 million of outstanding cash and payment in kind interest (“PIK Interest”) and associated costs due and payable to CIC on November 19, 2018 (the “Outstanding Interest Payable”) under the CIC Convertible Debenture and the deferral agreement dated June 12, 2017 (the “June 2017 Deferral Agreement”); and (ii) the cash and PIK Interest payments payable to CIC under the CIC Convertible Debenture from April 23, 2019 to and including May 19, 2020 (the “Deferral”). Pursuant to Section
    • 1 -

501(c) of the TSX Company Manual, the Company will be seeking approval of the 2019 Deferral Agreement from disinterested shareholders at the Company’s upcoming annual and special meeting of shareholders (the “Meeting”) to be held on May 30, 2019. The effectiveness of the 2019 Deferral Agreement and the respective covenants, agreements and obligations of each party under the 2019 Deferral Agreement are subject to the Company obtaining the requisite approval from shareholders at the Meeting.

The key repayment terms of the 2019 Deferral Agreement are: (i) the Company agreed to pay $14.3 million by eight instalments during November 2019 to June 2020; (ii) the Company agreed to pay the PIK Interest covered by the Deferral by way of cash payments, rather than the issuance of Common Shares; and (iii) the Company agreed to pay $62.6 million on June 20, 2020. The Company agreed to pay a deferral fee at a rate of 6.4% per annum in consideration of the deferred amounts.

As a condition to agreeing to the Deferral, CIC required that the mutual co-operation agreement (the “Cooperation Agreement”) dated November 19, 2009 between SouthGobi Sands LLC (“SGS”), a subsidiary of the Company, and Fullbloom Investment Corporation (“Fullbloom”), an affiliate of CIC, be amended and restated (the “Amended and Restated Cooperation Agreement”) to clarify the manner in which the service fee payable to Fullbloom under the Cooperation Agreement is calculated, with effect as of January 1, 2017. Specifically, the service fee under the Amended and Restated Cooperation Agreement will be determined based on the net revenues realized by the Company and all of its subsidiaries derived from sales into China (rather than the net revenues realized by the Company and its Mongolian subsidiaries as currently contemplated under the Cooperation Agreement). As consideration for deferring payment of the additional service fees payable to Fullbloom as a result of the Amended and Restated Cooperation Agreement (the “Deferred Compensation”), the Company agreed to pay to Fullbloom a deferral fee at the rate of 2.5% on the outstanding amount of the Deferred Compensation. Pursuant to the Amended and Restated Cooperation Agreement, the Company agreed to pay Fullbloom the Deferred Compensation and related accrued deferral fee of $4.2 million in six instalments between June 2019 and November 2019. The effectiveness of the Amended and Restated Cooperation Agreement is subject to the Company obtaining the requisite approval of the 2019 Deferral Agreement from shareholders at the Meeting.

The Company also announced that it intends to discuss a potential debt restructuring plan with respect to amounts owing to Land Breeze II S.a.r.l., a wholly-owned subsidiary of CIC, which is mutually beneficial to the Company and CIC within the next 6 months, and to form a special committee comprised of independent directors to ensure that the interests of its minority shareholders are fairly considered in the negotiation and review of any such restructuring; however, there can be no assurance that a favorable outcome will be reached.

  • 2 -

As of the date of this press release, the Company has neither: (i) paid the Outstanding Interest Payable within the cure period provided for under the CIC Convertible Debenture; nor (ii) obtained shareholders approval of the 2019 Deferral Agreement. Consequently, the Company is in default under the CIC Convertible Debenture and the June 2017 Deferral Agreement. Furthermore, the Common Shares have now been suspended from trading on the HKEX and TSX for a period of more than five trading days since December 17, 2018 (the “Trading Suspension”), which represents another event of default under the CIC Convertible Debenture. Pursuant to the terms of the CIC Convertible Debenture and the June 2017 Deferral Agreement, CIC may, at its discretion, provide notice to the Company and declare all principal, interest and other amounts owing under the CIC Convertible Debenture and the June 2017 Deferral Agreement immediately due and payable, and take steps to enforce payment thereof, which would 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.

Because a deferral of the Outstanding Interest Payable was not in effect as at March 31, 2019, International Accounting Standard (“IAS”) 1 requires the Company to classify the entire balance of the CIC Convertible Debenture as a current liability as at March 31, 2019, notwithstanding the fact that CIC has not indicated any intention to deliver notice of default or accelerate the maturity of the CIC Convertible Debenture.

  • Notice of Arbitration – As of the date hereof, the Company has not paid the November 2018 and January 2019 monthly payments due under a deed of settlement (the “Settlement Deed”). On March 5, 2019, SGS received a notice from First Concept Industrial Group Limited (“First Concept”) claiming that the Company is in default under the Settlement Deed and demanding payment of the full amount of the outstanding monthly payments due under the Settlement Deed, otherwise First Concept intends to commence legal action against SGS pursuant to the Settlement Deed. The Company is consulting with its independent litigation counsel regarding this matter; however, as a default is only triggered under the Settlement Deed where there has been a failure to pay two or more consecutive monthly instalment payments, the Company is of the view that SGS is not in default under the Settlement Deed. In the event that First Concept commences legal action against SGS regarding this matter, the Company intends to take appropriate steps to respond to such legal proceedings in the best interests of the Company through independent litigation counsel which has been retained by the Company for this purpose.

As at March 31, 2019, the outstanding amount payable to First Concept amounted to $10.6 million (December 31, 2018: $12.5 million).

  • Key Findings of Formal Investigation – On December 17, 2018, the Company announced that it had learned of certain information relating to past conduct engaged in by former senior executive officers and employees of the Company (“Former Management and Employees”) which raised suspicions of serious fraud, misappropriation of Company
    • 3 -

assets and other criminal acts by the Former Management and Employees relating to prior transactions (“Suspicious Transactions”) between 2016 and the first half of 2018 involving the Company, Inner Mongolia SouthGobi Energy Co. Ltd. (“IMSGE”), a subsidiary of the Company, and certain coal trading and transportation companies, some of which are allegedly related to or controlled by the Former Management and Employees or their related persons. The Company filed a report with local police authorities in China in respect of certain of the Suspicious Transactions and, on December 17, 2018, the Board expanded the mandate of its special committee of independent non-executive directors (the “Special Committee”), which was previously established to initiate a formal internal investigation into certain legal charges against Mr. Aminbuhe (the Company’s former Chairman and Chief Executive Officer), to include a formal investigation (the “Formal Investigation”) of the Suspicious Transactions, the implicated Former Management and Employees, and their impact, if any, on the business and affairs of the Company. The Special Committee engaged Blake, Cassels & Graydon LLP as independent Canadian legal counsel, Zhong Lun Law Firm, as independent Chinese legal counsel, and Ernst & Young (China) Advisory Limited (the “Forensic Accountant”), as forensic accountants, to assist in the formal investigation.

On March 30, 2019, the Company announced that the Special Committee concluded the Formal Investigation and delivered a final report summarizing its key findings to the Board, which was adopted and approved at a meeting held on March 30, 2019.

The Formal Investigation concentrated on the following areas of focus (the “Areas of Focus”): (i) the arrangements of the Suspicious Transactions; (ii) the relationships between the Former Management and Employees and certain coal trading and transportation companies; (iii) any unidentified questionable transactions relating to the Former Management and Employees; and (iv) the potential impact of (i), (ii) and (iii) on the financial statements of the Company and its subsidiaries. During the course of the Formal Investigation, certain incomplete accounting/operational records of one of the Companies Under Investigation (as defined below) (“Company A”) were identified in Company’s employee computers. As a result, the Special Committee expanded the scope of the Area of Focus of the Formal Investigation to include: (i) a fund flow analysis of Company A; and (ii) a price analysis of the difference between Company A’s purchase prices from the Company and selling prices to downstream customers.

Based on the Areas of Focus, the Special Committee examined and made findings in respect of a number of matters in connection with the Formal Investigation, including the following: (i) allegations that Mr. Aminbuhe, the Company’s former Chairman and Chief Executive Officer, controlled certain companies the Company had business dealings (the “Companies Under Investigation”); (ii) uncollectable receivables from certain former customers and suppliers of the Company; (iii) the impact of the lawsuit filed by Jiayuguan Xiyuan Trading Co., Ltd., a former customer of IMSGE; and (iv) allegations of misconduct by the Former Management and Employees, including: (I) the grant of a Renminbi (“RMB”) 5 million loan; (II) embezzlement of bank acceptance bills of RMB12 million;

  • 4 -

(III) endorsement of commercial acceptance bills of RMB71 million which were not supported by genuine commercial transactions; (IV) prepayments of RMB8.5 million for coal transportation services which were never received by the Company; and (V) prepayment of RMB16.4 million for coal transportation services which were never received by the Company.

Based on the information obtained from the Formal Investigation, the Special Committee concluded that four matters examined in connection with the Formal Investigation, having an aggregate value of approximately RMB41 million, involved improper conduct, fraud or misappropriation of assets (the “Fraudulent Transactions”) and that one matter examined in connection with the Formal Investigation, having an aggregate value of approximately RMB71 million, involved an accounting reclassification error. From an accounting perspective, the Company does not anticipate that the Fraudulent Transactions will have any impact on its financial statements in the future as the Company has already recorded the appropriate provisions in the financial statements as at December 31, 2018, 2017 and 2016 and for the years then ended.

Based on the key findings of and information obtained from the Formal Investigation, the Company considered the resulting financial impact on its prior financial statements and restated certain items in the Company’s financial statements for the years ended 2016 and 2017 (the “Prior Restatement”), as disclosed in the Company’s audited annual consolidated financial statements and related management’s discussion and analysis for the year ended December 31, 2018, copies of which are available under the Company’s profile on SEDAR at www.sedar.com. The Prior Restatement reflects the impact of the misappropriation of assets as well as the reclassification of certain balances of assets in the prior years. With respect to the three month period ended March 31, 2018, the net effect of the Prior Restatement was a decrease in the net comprehensive loss of $0.4 million for the period. A summary of the requisite adjustments on the financial statements for the three month period ended March 31, 2018 is set forth in the table below:

March 31, Loss March 31, $ in thousands 2018 decrease/ 2018

(increase) (Restated) Statement of comprehensive income extract

Other operating expenses $ (1,338) $ 581 $ (757) Finance income 258 (158) 100

Net loss attributable to equity

holders of the Company $ (3,460) $ 423 $ (3,037) Other comprehensive income for the period (3,328) – (3,328)

Net comprehensive loss attributable to

equity holders of the Company $ (6,788) $ 423 $ (6,365)

  • 5 -
  • Trading Suspension on HKEX and TSX – Subsequent to the announcement made by the Company on December 17, 2018 in relation to the Suspicious Transactions, the Common Shares have been suspended from trading on the HKEX and TSX since December 17, 2018.

On January 3, 2019, the HKEX provided the Company with certain resumption guidance, setting out the conditions which the Company must satisfy in order for trading of the Common Shares to resume on the HKEX. Pursuant to the resumption guidance, the Company is required to: (i) conduct a forensic investigation (the “Forensic Investigation”) of the Suspicious Transactions involving the Former Management and Employees;

(ii) disclose the findings of the Forensic Investigation and take appropriate remedial actions; and (iii) inform the market of all material information in order for the Company’s shareholders and investors to appraise the Company’s position. The HKEX has advised that it may modify or supplement the trading resumption guidance if the Company’s situation changes. Pursuant to Rule 6.01A(1) of the HKEX’s Listing Rules, the HKEX may cancel the listing of any securities that have been suspended from trading for a continuous period of 18 months. In the case of the Company, this 18-month period expires on June 16, 2020. The HKEX has also advised that if the Company fails to remedy the issues causing the Trading Suspension, fully comply with the HKEX’s Listing Rules to the HKEX’s satisfaction and resume trading of the Common Shares on the HKEX by June 16, 2020, the Listing Department of the HKEX will recommend that the HKEX’s Listing Committee proceed with cancelling the Company’s listing on the HKEX. Pursuant to Rules 6.01 and 6.10 of the HKEX’s Listing Rules, the HKEX also has the right to impose a shorter specific remedial period, where appropriate. Pursuant to Rule 13.24A of the HKEX’s Listing Rules, the Company is required to announce quarterly updates on developments relating to its Trading Resumption Plan (as defined below), including details of the actions taken, or to be taken, in order to remedy the issues causing the Trading Suspension and fully comply with the HKEX’s Listing Rules, the progress of implementing the Trading Resumption Plan, details of any material change to the Trading Resumption Plan (including any delays thereof) and impact on the Company’s business operations. The Company made its first quarterly update on March 15, 2019 and is required to announce additional updates every three months thereafter until resumption of trading on the HKEX or cancellation of the Company’s listing on the HKEX (whichever is earlier).

  • 6 -

The action items set out below (the “Trading Resumption Plan”) were approved by the Board on March 30, 2019 in order to address the issues which caused the Trading Suspension, re-comply with the HKEX’s Listing Rules and allow trading of the Common Shares to resume trading on the HKEX:

Action Item Date of Completion or Anticipated Completion

The Company completes a forensic The Forensic Accountant completed the investigation into the Suspicious forensic investigation and submitted its Transactions final investigation report to the Special Committee on March 26, 2019

The Special Committee concludes The Special Committee delivered its final its formal investigation and, with the report to the Board on March 27, 2019 assistance of its professional advisors, completes its final report summarizing the key findings of the formal investigation and submits the same to the Board for consideration

The Board meets to consider and, if The Board adopted and approved the deemed appropriate, approve the Special Special Committee’s final report and the Committee’s final report and the Trading key findings set out therein on March 30, Resumption Plan 2019

The Company announces the material The Company announced the material findings of the Special Committee in findings of the Special Committee in respect of the Suspicious Transactions respect of the Suspicious Transactions that were investigated pursuant to the that were investigated pursuant to the Formal Investigation and the Trading Formal Investigation and the Trading Resumption Plan Resumption Plan on March 30, 2019

The Company announces its financial The Company announced its 2018 fiscal results for the fiscal year ended December year results on March 31, 2019 31, 2018

  • 7 -

Action Item Date of Completion or Anticipated Completion

The Special Committee, with the The Special Committee delivered its report assistance of its professional advisors, setting out a set of recommended remedial completes its assessment of the potential actions and preventative measures to remedial actions and preventative Board which was approved at a meeting measures available to the Company to held on April 28, 2019 address the issues which caused the Trading Suspension and prepares a report on its conclusions and recommendations for the Board. The Board considers the recommendations of the Special Committee and formalizes and approves a set of remedial actions and preventative measures

The Company applies to the HKEX and The Company anticipates submitting an the TSX for trading in the Common application to the HKEX and the TSX as Shares to resume soon as practicable after the recommended remedial actions and preventative measures have been implemented

The Company announces the remedial As soon as practicable after the HKEX actions and preventative measures and the TSX accepts the Company’s approved by the Board and the resumption application for trading resumption of trading on the HKEX and the TSX

The Trading Resumption Plan set forth above was approved by the Board based on the information and advice received as of March 30, 2019 and may be subject to change. In accordance with Rule 13.24A of the HKEX’s Listing Rules, the Company will announce details of any material changes to the Trading Resumption Plan (including any delays thereof) as and when necessary.

  • 8 -
  • Remedial Actions and Preventative Measures – On April 30, 2019, the Company announced that the Special Committee, with the assistance of the Forensic Accountant, completed its assessment of the potential remedial actions and preventative measures to improve and strengthen the Company’s commitment to a culture of honesty, integrity and accountability and compliance with the highest standards of professional and ethical conduct. The Special Committee delivered its report setting out a set of recommended remedial actions and preventative measures (the “Remedial Actions and Preventative Measures”) to the Board which was approved at a meeting of the Board held on April 28, 2019.

The Remedial Actions and Preventative Measures, which are summarized below, are intended to remediate the incidents identified in the Formal Investigation and address deficiencies in the implementation of the Company’s existing practices and procedures. Issues identified of note for the purposes of such remediation include a lack of preventative measures to avoid conflicts of interests, the need for additional employee oversight and the need to enhance compliance with accounting protocols and documentation retention.

The Company has already taken proactive steps to address some of the issues raised by the Formal Investigation, including but not limited to: ceasing business activities with companies allegedly controlled by the Company’s former management, taking steps to defend claims by third parties attempting to link the Company to the aforementioned companies, and considering whether legal recourse, such as collection actions, can be taken in respect of certain matters.

  • 9 -

The following is a summary of the Remedial Actions and Preventative Measures which were adopted and approved by the Board:

Recommendation Key Remedial and Preventative Objective(s)

Enhance the Company’s anti-fraud Enhance employee oversight program, including establishing an internal audit function, conducting Limit likelihood of conflicts of interest routine internal audits and developing a communication and training program Proper document retention and accounting for employees to effectively establish a protocols culture of compliance within the Company, ensure existing policies (such as the whistleblower policy) work effectively and support the implementation of the Remedial Actions and Preventative Measures

Enhance “know your customer” Limit likelihood of conflicts of interest procedures relating to the intake of new customers and/or granting of credit to Proper document retention and accounting customers protocols

Enhance vendor due diligence and Limit likelihood of conflicts of interest monitoring processes to screen third parties Proper document retention and accounting protocols

Formalize a process to perform routine Limit likelihood of conflicts of interest reconciliation of balances with customers and/or suppliers on a regular basis Proper document retention and accounting protocols

Enhance the Company’s Financial Limit likelihood of conflicts of interest Delegation of Authority document relating to payment authorization and contract Proper document retention and accounting approval processes protocols

Enhance controls around the use of Limit likelihood of conflicts of interest commercial bills Proper document retention and accounting protocols

  • 10 -

Recommendation Key Remedial and Preventative Objective(s)

Introduce segregation of employment Limit likelihood of conflicts of interest duties

Enhance the standardization of human Limit likelihood of conflicts of interest resources process and controls across different locations Proper document retention and accounting protocols

Ensure IT back up and document Enhance employee oversight retention protocols, including employee return of Company-issued devices and Proper document retention subsequent archiving

Monitor the implementation of the Enhance employee oversight Remedial Actions and Preventative Measures by establishing a special task Limit the likelihood of conflicts of interest force, comprised of managers of the Company’s various business units and Proper document retention and accounting members of the internal audit function, protocols which will be tasked with this responsibility, and will consider the engagement of third party experts to conduct a review of the results of the implementation and advise on further enhancements if necessary

Management is committed to remediating the issues which caused the Trading Suspension in a timely manner and will begin implementing the Remedial Actions and Preventative Measures as soon as practicable. Once the Remedial Actions and Preventative Measures have been implemented, the Company will make a further announcement as to the results of the implementation of the Remedial Actions and Preventative Measures and the steps that the Company intends to take to apply for trading resumption on the HKEX and the TSX.

  • 11 -
  • Going Concern – In 2016, the Company started its program to build a coal washing plant to upgrade the low quality fractions of its run-of-mine coals to higher value and higher margin products. The construction of the wash plant at the Ovoot Tolgoi mine was completed, and commissioning was started in October 2018. As of the date hereof, the wash plant commissioning process remains in progress. The Company is currently in discussions with the wash plant operator concerning an agreement regarding the operation of the wash plant; however, there can be no assurance that a favorable outcome will be reached.

The current operation plan contemplates significantly higher volumes of production in order to achieve the Company’s revenue and cash flow targets. Such plans will require a significant level of capital expenditure in waste rock stripping in 2019 and 2020. Such expenditures and other working capital requirements may require the Company to seek additional financing. There is no guarantee that the Company will be able to successfully execute the programs mentioned above and to secure other sources of financing. In addition, the current import restrictions on F-grade coal by Chinese authorities will further affect the short term cash inflow and may in turn undermine the execution of the operation plan. If the import restrictions on F-grade coal continue for an indefinite period, or if the Company fails to execute the aforementioned programs, or is unable to secure additional capital financing, or otherwise restructure or refinance its business in order to address its cash requirements through March 31, 2020, then the Company is unlikely to have sufficient cash flows from mining operations in order to satisfy its current ongoing obligations and future contractual commitments. This could result in adjustments to the amounts and classifications of assets and liabilities in the Company’s consolidated financial statements and such adjustments could be material.

Unless the Company acquires additional sources of financing and/or funding in the short term, the ability of the Company to continue as a going concern is threatened. If the Company is unable to continue as a going concern, it may be forced to seek relief under applicable bankruptcy and insolvency legislation. See section “Liquidity and Capital Resources” of this press release for details. As at May 14, 2019, the Company had $3.6 million of cash.

  • 12 -

← Back to feed