Southgobi Announces Third Quarter 2023 Unaudited Financial and Operating Results
R E S O U R C E S
November 14, 2023
SOUTHGOBI ANNOUNCES THIRD QUARTER 2023 UNAUDITED FINANCIAL AND OPERATING RESULTS
HONG KONG – SouthGobi Resources Ltd. (Hong Kong Stock Exchange (“HKEX”): 1878, TSX Venture Exchange (“TSX-V”): SGQ) (the “Company” or “SouthGobi”) today announces its financial and operating results for the three and nine months ended September 30, 2023. 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, 2023 and the subsequent period to November 14, 2023 are as follows:
- – In late 2022, the Company resumed its major mining operations, including coal mining, and the volume of coal production has gradually increased since then. The Company also resumed coal washing operations in April 2023. In response to the market demand, the Company has been mixing some higher ash content product with its semi-soft coking coal product and selling this mixed product to the market as processed coal.
The Company experienced an increase in the average selling price of coal from $65.4 per tonne in the third quarter of 2022 to $85.6 per tonne in the third quarter of 2023 as a result of improved market conditions in China, expansion of its sales network and diversification of its customer base.
- – The Company recorded a $46.3 million profit from operations in the third quarter of 2023 compared to a $3.5 million profit from operations in the third quarter of 2022. The Company experienced increased sales volume and improvement in its average realised selling price during the first nine months of 2023.
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- – On October 13, 2023, the Company and JD Zhixing Fund L.P. (“JDZF”) entered into the 2023 November Deferral Agreement pursuant to which JDZF agreed to grant the Company a deferral of (i) payment-in-kind interest (“PIK Interest”) of approximately $4.0 million (the “2023 November PIK Interest”) which will be due and payable on November 19, 2023 under the Convertible Debenture; and (ii) the management fees payable to JDZF on November 15, 2023, February 15, 2024, May 16, 2024 and August 15, 2024, respectively, under the amended and restated mutual cooperation agreement signed on April 23, 2019 (the “Amended and Restated Cooperation Agreement”) (together with the 2023 November PIK Interest, the “2023 November Deferred Amounts”).
The principal terms of the 2023 November Deferral Agreement are as follows:
- Payment of the 2023 November Deferred Amounts will be deferred until August 31, 2024 (the “Deferral Date”).
- As consideration for the deferral of the 2023 November Deferred Amounts which relate to the payment obligations arising from the Convertible Debenture, the Company agreed to pay JDZF a deferral fee equal to 6.4% per annum on the outstanding balance of such 2023 November Deferred Amounts, commencing on the date on which each such 2023 November Deferred Amounts would otherwise have been due and payable under the Convertible Debenture.
- As consideration for the deferral of the 2023 November Deferred Amounts which relate to payment obligations arising from Amended and Restated Cooperation Agreement, the Company agreed to pay JDZF a deferral fee equal to 1.5% per annum on the outstanding balance of such 2023 November Deferred Amounts, commencing on the date on which each such 2023 November Deferred Amounts would otherwise have been due and payable under the Amended and Restated Cooperation Agreement.
- The 2023 November Deferral Agreement does not contemplate a fixed repayment schedule for the 2023 November Deferred Amounts or related deferral fees. Instead, the 2023 November Deferral Agreement requires the Company to use its best efforts to pay the 2023 November Deferred Amounts and related deferral fees due and payable under the 2023 November Deferral Agreement to JDZF. During the period beginning as of the effective date of the 2023 November Deferral Agreement and ending as of the Deferral Date, the Company will provide JDZF with monthly updates of its financial status and business operations, and the Company and JDZF will on a monthly basis discuss and assess in good faith the amount (if any) of the 2023 November Deferred Amounts and related deferral fees that the Company may be able to repay to JDZF, having regard to the working capital requirements of the Company’s operations and business at such time and with the view of ensuring that the Company’s operations and business would not be materially prejudiced as a result of any repayment.
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- If at any time before the 2023 November Deferred Amounts and related deferral fees are fully repaid, the Company proposes to appoint, replace or terminate one or more of its chief executive officer, its chief financial officer or any other senior executive(s) in charge of its principal business function or its principal subsidiary, the Company will first consult with, and obtain written consent (such consent shall not be unreasonably withheld) from JDZF prior to effecting such appointment, replacement or termination.
- – On August 29, 2023, the Company convened a special meeting of shareholders during which the Company obtained the requisite approvals from shareholders for the 2023 March Deferral Agreement.
- – On July 18, 2023, SouthGobi Sands LLC (“SGS”), a wholly owned subsidiary of the Company received an official notice (the “Notice”) issued by MTA stating that MTA has recently completed a periodic tax audit (the “Audit”) on the financial information of SGS between 2017 and 2020, including transfer pricing, royalty, air-pollution fee and unpaid tax payables. As a result of the Audit, the MTA has notified SGS that they are imposing a tax penalty against SGS in the amount of approximately $75.0 million. Under Mongolian law, the Company has a period of 30-days from the date of receipt of the Notice to file an appeal in relation to the Audit. Subsequently the Company engaged an independent tax consultant in Mongolia to provide tax advice and support to the Company and filed an appeal letter in relation to the Audit with the MTA in accordance with Mongolian laws on August 17, 2023.
As at September 30, 2023, the Company recorded a provision for a tax penalty in the amount of $75.0 million. If any subsequent event occurs that may impact the amount of the provision for the tax penalty, an adjustment would be recognised in profit or loss and the carrying amount of the provision shall be adjusted.
- – 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.
Refer to 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
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Overview of Operational Data
The Company experienced an increase in the average selling price of coal from $65.4 per tonne in the third quarter of 2022 to $85.6 per tonne in the third quarter of 2023, as a result of improved market conditions in China, expansion of its sales network and diversification of its customer base. The product mix for the third quarter of 2023 consisted of approximately 56% premium semi-soft coking coal, 15% standard semi-soft coking coal/premium thermal coal and 29% of processed coal compared to approximately 31% premium semi-soft coking coal, 5% standard semi-soft coking coal/ premium thermal coal and 64% processed coal in the third quarter of 2022.
The Company’s unit cost of sales of product sold decreased from $58.3 per tonne in the third quarter of 2022 to $42.2 per tonne in the third quarter of 2023. The decrease was mainly driven by the economies of scale due to increased sales.
The Company sold 2.6 million tonnes for the first nine months of 2023 as compared to 0.6 million tonnes for the first nine months of 2022. The average selling price increased from $65.5 per tonne for the first nine months of 2022 to $93.1 per tonne for the first nine months of 2023, due to improved market conditions in China, expansion of its sales network and diversification of its customer base.
The Company’s production in the first nine months of 2023 was higher than the first nine months of 2022 due to the Company resuming its major mining operations, including coal mining in late 2022, and the volume of coal production has gradually increased since then. The Company also resumed coal washing operations in April 2023.
The Company’s unit cost of sales of product sold decreased from $59.6 per tonne for the first nine months of 2022 to $46.2 per tonne in the first nine months of 2023. The decrease was mainly driven by the economies of scale due to increased sales.
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Summary of Financial Results
Three months ended Nine months ended September 30, September 30, 2023 2022 2023 2022
Revenue $ 97,979 $ 36,807 $ 243,002 $ 42,597 Cost of sales (48,569) (32,036) (121,550) (38,110) Gross profit excluding idled mine
| asset costs | 49,491 | 4,982 | 121,579 | 5,361 |
| Gross profit | 49,410 | 4,771 | 121,452 | 4,487 |
| Other operating income/(expenses), net | (413) | 546 | (5,178) | 6,382 |
| Administration expenses | (1,846) | (1,830) | (6,558) | (4,808) |
| Evaluation and exploration expenses | (808) | (31) | (900) | (121) |
| Provision of tax penalty | – | – | (74,990) | – |
| Profit from operations | 46,343 | 3,456 | 33,826 | 5,940 |
| Finance costs | (13,266) | (10,800) | (36,732) | (31,029) |
| Finance income | 4,915 | 69 | 5,038 | 1,188 |
| Share of earnings/(loss) of joint ventures | 809 | 237 | 1,739 | (24) |
| Current income tax expenses | (9,452) | (979) | (27,299) | (1,917) |
Net profit/(loss) attributable to equity holders of the Company 29,349 (8,017) (23,428) (25,842) Basic and diluted earnings/(loss) per share $ 0.10 $ (0.03) $ (0.08) $ (0.09)
Overview of Financial Results
The Company recorded a $46.3 million profit from operations in the third quarter of 2023 compared to a $3.5 million profit from operations in the third quarter of 2022. The financial results for the third quarter of 2023 were impacted by increased sales volume and improvement in the Company’s average realised selling price.
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Revenue was $98.0 million in the third quarter of 2023 compared to $36.8 million in the third quarter of 2022. The increase was due to (i) coal export volumes through the Ceke Port of Entry gradually increased since the second quarter of 2023; and (ii) the Company experienced an increase in the average selling price of coal from $65.4 per tonne in the third quarter of 2022 to $85.6 per tonne in the third quarter of 2023 as a result of improved market conditions in China, expansion of its sales network and diversification of its customer base.
Cost of sales was $48.6 million in the third quarter of 2023 compared to $32.0 million in the third quarter of 2022. The increase in cost of sales was mainly due to the increased 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, refer to “Non-IFRS Financial Measures” section) during the quarter.
Three months ended September 30, 2023 2022
| Operating expenses | $ 38,044 $ | 23,599 |
| Share-based compensation expense | 1 | 8 |
| Depreciation and depletion | 1,361 | 1,419 |
| Royalties | 9,082 | 6,799 |
Cost of sales from mine operations 31,825 48,488 Cost of sales related to idled mine assets 81 211
Cost of sales $ 48,569 $ 32,036
Operating expenses in cost of sales were $38.0 million in the third quarter of 2023 compared to $23.6 million in the third quarter of 2022. Cost of sales related to idled mine assets in the third quarter of 2023 included less than $0.1 million related to depreciation expenses for idled equipment (third quarter of 2022: $0.2 million).
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Other operating expenses was $0.4 million in the third quarter of 2023 (third quarter of 2022: $0.5 million of other operating income). Management fee of $1.8 million were recorded and offset by foreign exchange gain of $1.2 million in the third quarter of 2023.
Three months ended September 30, 2023 2022
Management fee $ 1,754 $ 666 Reversal of provision for doubtful trade and
| other receivables | (2) | (64) |
| Foreign exchange gain, net | (1,246) | (2,198) |
| Gain on disposal of items of property, plant and equipment, net | – | (162) |
| Reversal of impairment on materials and supplies inventories | (81) | – |
| Rental income from short term leases | (12) | (39) |
| Discount on settlement of trade payables | – | (127) |
| Written off of other payables | – | (482) |
| Penalty on late settlement of trade payables | – | 1,860 |
| Other operating expenses/(income), net | $ 413 $ | (546) |
Administration expenses were $1.8 million in the third quarter of 2023 which was similar to the third quarter of 2022.
Three months ended September 30, 2023 2022
Corporate administration $ 593 $ 369 Legal and professional fees 556
| Salaries and benefits | 671 | 776 |
| Share-based compensation expense | 1 | 25 |
| Depreciation | 103 | 104 |
| Administration expenses | $ 1,846 $ | 1,830 |
The Company continued to minimise evaluation and exploration expenditures in the third quarter of 2023 in order to preserve the Company’s financial resources. Evaluation and exploration activities and expenditures in the third quarter of 2023 were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining licenses.
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Finance costs were $13.2 million and $10.8 million in the third quarter of 2023 and 2022
The Company recorded a $33.8 million profit from operations in the first nine months of 2023 compared to a $5.9 million profit from operations in the first nine months of 2022. The financial results for the first nine months of 2023 was impacted by increased sales volume and improvement in the Company’s average realised selling price.
Revenue was $243.0 million in the first nine months of 2023 compared to $42.6 million in the first nine months of 2022. The increase was due to (i) coal export volumes through the Ceke Port of Entry gradually increased since the second quarter of 2023; and (ii) the Company experienced an increase in the average selling price of coal from $65.5 per tonne in the first nine months of 2022 to $93.1 per tonne in the first nine months of 2023 as a result of improved market conditions in China, expansion of its sales network and diversification of its customer base.
Cost of sales were $121.6 million in the first nine months of 2023 compared to $38.1 million in the first nine months of 2022, as follows:
Nine months ended September 30, 2023 2022
| Operating expenses | $ | 87,440 $ | 27,185 |
| Share-based compensation expense | 4 | 29 | |
| Depreciation and depletion | 3,729 | 1,692 | |
| Royalties | 30,250 | 8,330 | |
| Cost of sales from mine operations | 121,423 | 37,236 | |
| Cost of sales related to idled mine assets | 127 | 874 | |
| Cost of sales | $ | 121,550 $ | 38,110 |
Operating expenses in cost of sales were $87.4 million in the first nine months of 2023 compared to $27.2 million in the first nine months of 2022. The overall increase in cost of sales was primarily due to the increased sales.
Cost of sales related to idled mine assets in the first nine months of 2023 included $0.1 million related to depreciation expenses for idled equipment (first nine months of 2022: $0.9 million).
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Other operating expenses was $5.2 million in the first nine months of 2023 (first nine months of 2022: $6.4 million of other operating income). Foreign exchange loss of $1.2 million and management fee of $3.7 million were recorded in the first nine months of 2023. (first nine months of 2022: foreign exchange gain of $4.1 million and written off of other payables of $3.3 million were recorded).
Nine months ended September 30, 2023 2022
Management fee $ 3,650 $ 821 Provision/(reversal of provision) for doubtful trade and other
| receivables | 178 | (618) |
| Foreign exchange loss/(gain), net | 1,211 | (4,094) |
| Gain on disposal of items of property, plant and equipment, net | – | (195) |
| Reversal of impairment on materials and supplies inventories | (262) | (10) |
| Rental income from short term leases | (53) | (65) |
| Discount on settlement of trade payables | – | (127) |
| Written off of other payables | – | (3,287) |
| Penalty on late settlement of trade payables | 454 | 1,860 |
| Gain on contract offsetting arrangement | – | (667) |
| Other operating expenses/(income), net | $ 5,178 $ | (6,382) |
Administration expenses were $6.6 million in the first nine months of 2023 compared to $4.8 million in the first nine months of 2022, the increase was mainly due to the increase in corporate administration expenses and salaries and benefits as a result of expansion of operation since the second quarter of 2023.
Nine months ended September 30, 2023 2022
| Corporate administration | $ | 1,870 $ | 779 |
| Legal and professional fees | 1,489 | 1,535 | |
| Salaries and benefits | 2,823 | 2,076 | |
| Share-based compensation expense | 9 | 96 | |
| Depreciation | 367 | 322 | |
| Administration expenses | $ | 6,558 $ | 4,808 |
The Company continued to minimise evaluation and exploration expenditures in the first nine months of 2023 in order to preserve the Company’s financial resources. Evaluation and exploration activities and expenditures in the first nine months of 2023 were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining licenses.
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Finance costs were $36.7 million and $31.0 million in the first nine months of 2023 and 2022
Summary of Quarterly Operational Data
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Summary of Quarterly Financial Results
The Company’s condensed consolidated interim financial statements are reported under International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“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:
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