Southgobi Resources Announces Third Quarter 2013 Financial and Operating Results
November 14, 2013
SOUTHGOBI RESOURCES ANNOUNCES THIRD QUARTER 2013 FINANCIAL AND OPERATING RESULTS
HONG KONG – SouthGobi Resources Ltd. (TSX: SGQ, HK: 1878), (the “Company” or “SouthGobi”) today announced its financial and operating results for the three and nine months ended September 30, 2013. All figures are in U.S. Dollars unless otherwise stated.
SIGNIFICANT EVENTS
The Company’s significant events for the quarter ended September 30, 2013 and subsequent weeks are as follows:
- On August 22, 2013, SouthGobi announced that it had withdrawn the Notice of Investment
Dispute on the Government of Mongolia in recognition of the fact that the dispute was resolved following the grant of three pre-mining agreements (“PMAs”) on August 14, 2013 relating to the Zag Suuj Deposit and certain areas associated with the Soumber Deposit, and the earlier grant of a PMA on January 18, 2013 pertaining to the Soumber Deposit;
- On September 3, 2013, the Company announced the appointment of Bold Baatar as a non-
executive director of the Company;
- On November 8, 2013, the Company announced a restatement to its financial statements for
2011 and 2012, and consequently its comparative consolidated interim financial statements for 2013 and the related MD&A. The restatement follows a review by the Company of its prior revenue recognition practices for its coal sales in the fourth quarter of 2010, full year 2011 and in the first half of 2012;
- Third quarter sales volumes and revenue improved to 0.94 million tonnes and $15.7 million,
respectively, in 2013 compared to 0.32 million tonnes and $3.8 million in 2012.
FINANCIAL STATEMENT RESTATEMENT
On November 8, 2013, the Company’s Board of Directors approved the decision to restate the Company’s financial statements for 2011 and 2012, and the related Management’s Discussion and Analysis (“MD&A”) (collectively, the “Restated Financials”). The restatement follows a review by the Company of its prior revenue recognition practices for its coal sales contracts entered into in the fourth quarter of 2010, full year 2011 and in the first half of 2012. The review was conducted in consultation with PricewaterhouseCoopers LLP (“PwC”), the Company’s current auditors, and Deloitte LLP (“Deloitte”), the Company’s auditors during the 2010 and 2011 fiscal years.
As a result of this review, the Company determined that certain revenue transactions were previously recognized in the Company's consolidated financial statements prior to meeting relevant revenue recognition criteria. The restatement is due to a change in the determination of when revenue should be recognized from its sales of coal previously recognized in the fourth quarter of 2010, full year 2011 and in the first half of 2012. These transactions relate to coal that had been delivered to the customer’s stockpile in a stockyard located within the SouthGobi Ovoot Tolgoi mining license area (“the Stockyard”), the location at which title transferred, but from which the coal had not been collected by the customers. The restatement of the Company’s consolidated financial statements reflects a correction in the point of revenue recognition from: (A) the delivery of coal to the customer stockpiles within the Stockyard to (B) the loading of coal onto the customer's trucks at the time of collection.
The Company adopted new terms in its sales contracts starting in the second half of 2012 such that title transfers when coal is loaded onto the customer’s trucks which results in a later point of revenue recognition for all its sales starting from the second half of 2012.
Summary of key impacts of restatement
(Unaudited)
(Expressed in thousands of U.S. Dollars unless otherwise stated)
Six months ended Year ended June 30, 2013 December 31, 2012
As previously As previously
| reported | Adjustment | Restated | reported | Adjustment | Restated | |
|---|---|---|---|---|---|---|
| Raw coal production(millions of tonnes) | 0.19 | - | 0.19 | 1.33 | - | 1.33 |
| Coal sales(millions of tonnes) | 0.12 | 0.48 | 0.60 | 1.33 | 0.65 | 1.98 |
| 24.70 | $47.76 | $(0.27) $47.49 | ||||||
| Revenue | $3,633 | $6,894 | $10,527 | $53,116 | $24,945 | $78,061 | ||
| Cost of sales | (34,327) | (4,457) | (38,784) | (97,118) | (30,289) | (127,407) | ||
| Other operating expenses | (15,260) | (95) | (15,355) | (54,345) | 12,700 | (41,645) | ||
| Net income/(loss) | (58,564) | 1,756 | (56,808) | (103,019) | 5,517 | (97,502) |
Average realized selling price (per tonne) $ 34.62 $ (9.92) $
Basic income/(loss) per share $ (0.32) $ 0.01 $ (0.31) $ (0.57) $ 0.03 $ (0.54)
June 30, 2013 December 31, 2012
As previously As previously reported Adjustment Restated reported Adjustment Restated
Trade and other receivables $ 7,947 $ (3,764) $ 4,183 $ 17,430 $ (14,138) $ 3,292 Inventories 45,872 1,617 47,489 53,661 6,074 59,735 Deferred revenue - 7,932 7,932 - 8,181 8,181
Year ended Year ended December 31, 2011 December 31, 2010
As previously As previously
| reported | Adjustment | Restated | reported | Adjustment | Restated | |
|---|---|---|---|---|---|---|
| Raw coal production(millions of tonnes) | 4.57 | - | 4.57 | 2.79 | - | 2.79 |
| Coal sales(millions of tonnes) | 4.02 | (0.93) | 3.09 | 2.54 | (0.81) | 1.73 |
Average realized selling price (per tonne) $ 54.03 $ (3.39) $ 50.64 $ 34.61 $ 3.63 $ 38.24 Revenue $ 179,049 $ (48,293) $ 130,756 $ 79,777 $ (19,365) $ 60,412
| Cost of sales | (127,343) | 35,165 | (92,178) | (69,904) | 17,253 | (52,651) |
| Other operating expenses | (29,189) | 872 | (28,317) | (12,643) | 218 | (12,425) |
| Net income/(loss) | 57,745 | (9,192) | 48,553 | (116,195) | (1,421) | (117,616) |
Basic income/(loss) per share $ 0.32 $ (0.08) $ 0.24 $ (0.66) $ (0.01) $ (0.67)
December 31, 2011 December 31, 2010
As previously As previously reported Adjustment Restated reported Adjustment Restated
Trade and other receivables $ 80,285 $ (64,051) $ 16,234 $ 30,246 $ (10,911) $ 19,335 Inventories 52,443 52,418 104,861 26,160 17,253 43,413 Deferred revenue - 17,653 17,653 - 10,827 10,827
Following the correction in the point of revenue recognition, revenues from affected coal sales contracts are recognized in later periods than previously reported and some revenue remains to be reported in periods after September 30, 2013 as not all contracted coal has been collected by customers. This change results in lower revenues and cost of sales in 2010 and 2011 followed by higher revenues and cost of sales in 2012 and year to date September 30, 2013.
The adjustments to other operating expenses in each applicable period primarily result from the reversal of provisions for doubtful trade and other receivables in those periods.
The impact on the net income/(loss) for the restated periods follows from the restated revenues, net of cost of sales and adjustments to other operating expenses. The net loss for the year 2010 increases, the net income for the year 2011 decreases and the net loss for the year 2012 decreases. The net loss for the six month period ending June 30, 2013 is also lower than previously reported.
During the periods from 2010 to September 30, 2013, trade and other receivables have been adjusted lower and deferred revenue recognized to reflect revenue being recorded in later periods than previously reported. The inventory balance increased over the same period to reflect higher coal inventory stockpile balances. Prepaid expenses also increased, with a corresponding decrease in trade and other payables, as coal sales royalty expenses were recognized in later periods than previously reported.
Effects of the restatements on previously filed statements of cash flows
The restatements do not result in a change in cash at the end of any period. The statement of cash flows as reported does not change except for the reclassification of various items within operating activities. Financing activities, investing activities, change in cash, cash at beginning of period and cash at the end of period remain unchanged from previously filed financial statements.
Timeline going forward
The Company is working expeditiously with PwC and Deloitte in order to file the full set of audited restated consolidated financial statements and MD&A as at and for the years ended December 31, 2012 and 2011 comprising the Restated Financials. The Restated Financials are expected to be available on or before December 13, 2013.
Notwithstanding the foregoing, if required as a result of a delay in filing the Restated Financials, the Company will be applying to the British Columbia Securities Commission (the “Principal Regulator”) pursuant to Part 4 of National Policy 12-203 (“NP 12-203”) for a Management Cease Trade Order (“MCTO”) in connection with the Restated Financials. If issued, the MCTO will prohibit trading in securities of the Company, whether direct or indirect, by the Company’s CEO, CFO and board of directors or other persons or companies who had, or may have had, access directly or indirectly to any material fact or material change with respect to the Company that has not been generally disclosed. There can be no assurance that an MCTO will be issued.
If an MCTO is not issued, the Principal Regulator can impose a general cease trade order ceasing all trading in securities of the Company for such period of time as the Principal Regulator may deem appropriate.
While the Company intends to file the Restated Financials as soon as possible, any delay in filing the Restated Financials could ultimately result in an event of default of the Company’s convertible debenture held by China Investment Corporation (“CIC”), which if not cured within applicable cure periods in accordance with the terms of such debenture, may result in the principal amount owing and all accrued and unpaid interest becoming immediately due and payable upon notice to the Company by CIC.
REVIEW OF QUARTERLY OPERATING RESULTS
The Company’s operating results for the previous eight quarters are summarized in the table below:
| 2013 | 2012 (i) | 2011 (i) | ||||||
| QUARTER ENDED | 30-Sep | 30-Jun (i) | 31-Mar (i) | 31-Dec | 30-Sep | 30-Jun | 31-Mar | 31-Dec |
| Raw coal production (millions of tonnes) Sales volumes and prices (ii) SouthGobi premium semi-soft coking coal Coal sales (millions of tonnes) Average realized selling price (per tonne) (iii) SouthGobi standard semi-soft coking coal Coal sales (millions of tonnes) Average realized selling price (per tonne) (iii) SouthGobi thermal coal Coal sales (millions of tonnes) Average realized selling price (per tonne) (iii) Total Coal sales (millions of tonnes) Average realized selling price (per tonne) (iii) Costs Direct cash costs of product sold excluding idled mine asset costs (per tonne) (iv) Total cash costs of product sold excluding idled mine asset costs (per tonne) (iv) Waste movement and stripping ratio Production waste material moved (millions of bank cubic meters) Strip ratio (bank cubic meters of waste material per tonne of coal produced) Other operating capacity statistics Capacity of key mining fleet Number of mining shovels/excavators available at period end Total combined stated mining shovel/excavator capacity at period end (cubic meters) Number of haul trucks available at period end Total combined stated haul truck capacity at period end (tonnes) Employees and safety Employees at period end Lost time injury frequency rate (v) | 1.13 0.04 $ 3 7.50 0.87 $ 2 1.67 0.03 $ 1 3.07 0.94 $ 2 2.05 $ 9.41 $ 1 1.61 1.57 1.39 5 113 24 4,978 463 - | 0.17 0.21 $ 32.46 - $ - 0.11 $ 13.98 0.32 $ 26.26 $ 11.49 $ 18.63 2.71 15.55 5 113 24 4,978 449 - | 0.02 0.08 $ 4 5.81 - $ - 0.20 $ 1 3.67 0.28 $ 2 2.75 $ 1 0.22 $ 1 1.68 0.40 26.21 5 113 31 5,615 444 - | - 0.03 $ 47.86 - $ - - $ - 0.03 $ 47.86 $ 11.67 $ 16.75 - - 5 113 27 4,743 465 0.1 | - - $ - 0.01 $ 49.91 0.31 $ 15.87 0.32 $ 16.98 $ 9.56 $ 13.31 - - 4 98 27 4,743 644 0.2 | 0.27 0.42 $ 67.46 0.36 $ 49.74 0.28 $ 34.10 1.06 $ 52.86 $ 16.52 $ 17.85 1.16 4.31 4 98 27 4,743 693 0.2 | 1.07 0.33 $ 67.58 0.10 $ 49.43 0.15 $ 30.29 0.58 $ 54.60 $ 22.09 $ 28.25 2.20 2.07 3 64 27 4,743 720 0.3 | 1.34 0.26 $ 6 6.91 0.26 $ 4 8.48 0.37 $ 2 9.92 0.89 $ 4 6.18 $ 2 4.70 $ 2 5.92 4.58 3.42 3 64 25 4,561 720 0.2 |
(i) Restated, see Restated Financial Statements section
(ii) The sales volumes previously disclosed as raw semi-soft coking coal, raw medium-ash coal and raw higher-ash coal have now been reclassified as SouthGobi premium semi-soft coking coal, SouthGobi standard semi-soft coking coal and SouthGobi thermal coal, respectively, to reflect the Company’s new product strategy.
(iii) Average realized selling price excludes royalties and selling fees
(iv) A non-International Financial Reporting Standards (“IFRS”) financial measure, see Non-IFRS Financial Measures section
(v) Per 200,000 man hours
On March 22, 2013, SouthGobi announced the resumption of operations at its Ovoot Tolgoi Mine. In the second quarter of 2013, the Company primarily moved waste material (overburden) and exposed coal in the pit. Sales volumes increased in the third quarter of 2013 and, as planned, raw coal production increased to meet contracted sales volumes.
The Company recognized revenue of $15.7 million in the third quarter of 2013 compared to $6.1 million in the second quarter of 2013 and $3.8 million in the third quarter of 2012. China’s economic growth has recently shown signs of gradual improvement with increasing steel production and higher levels of manufacturing activity. Coal prices for both coking and thermal coal stabilized at near four year lows within the third quarter and have moved slightly higher in recent weeks.
For the three months ended September 30, 2013
For the three months ended September 30, 2013, the Company produced 1.13 million tonnes of raw coal with a strip ratio of 1.39. The lower strip ratio in the third quarter of 2013 is primarily the result of the waste material (overburden) activities undertaken in the second quarter of 2013.
For the three months ended September 30, 2013, SouthGobi recorded revenue of $15.7 million compared to $3.8 million for the three months ended September 30, 2012. Revenue increased primarily due to increased sales volumes and a higher average realized selling price. The Company sold 0.94 million tonnes of coal at an average realized selling price of $22.05 per tonne in the third quarter of 2013 compared to sales of 0.32 million tonnes of coal at an average realized selling price of $16.98 per tonne in the third quarter of 2012. Sales in the third quarter of 2013 primarily consisted of Standard semi-soft coking coal mined in 2013, whereas sales in the third quarter of 2012 primarily consisted of thermal coal from the Company’s stockpiles to satisfy existing sales contracts.
Direct cash costs of product sold excluding idled mine asset costs (a non-IFRS financial measure, see Non- IFRS Measures section) were $9.42 per tonne for the three months ended September 30, 2013 compared to $9.56per tonne for the three months ended September 30, 2012.
Mine administration cash costs of product sold excluding idled mine asset costs (a non-IFRS financial measure, see Non-IFRS Measures section) decreased to $2.20 per tonne for the three months ended September 30, 2013 from $3.75 per tonne for the three months ended September 30, 2012 primarily due to mine administration costs being allocated over higher sales volumes.
For the nine months ended September 30, 2013
For the nine months ended September 30, 2013, the Company produced 1.32 million tonnes of raw coal with a strip ratio of 3.53 compared to production of 1.33 million tonnes of raw coal with a strip ratio of 2.52 for the nine months ended September 30, 2012.
For the nine months ended September 30, 2013, SouthGobi recorded revenue of $26.2 million compared to $76.9 million for the nine months ended September 30, 2012. The Company sold 1.54 million tonnes of coal at an average realized selling price of $23.08 per tonne for the nine months ended September 30, 2013 compared to sales of 1.96 million tonnes of coal at an average realized selling price of $47.48 per tonne for the nine months ended September 30, 2012. Revenue decreased primarily due to decreased sales volumes and a lower average realized selling price.
Direct cash costs of product sold excluding idled mine asset costs (a non-IFRS financial measure, see Non- IFRS Measures section) were $9.96 per tonne for the nine months ended September 30, 2013 compared to $17.01 per tonne for the nine months ended September 30, 2012.
Mine administration cash costs of product sold excluding idled mine asset costs (a non-IFRS financial measure, see Non-IFRS Measures section) increased to $3.19 per tonne for the nine months ended September 30, 2013 from $3.15 per tonne for the nine months ended September 30, 2012.
REVIEW OF QUARTERLY FINANCIAL RESULTS
The Company’s financial results for the previous eight quarters are summarized in the table below:
($ in thousands, except for per share information, unless otherwise indicated)
| 2013 | 2012 (i) | 2011 (i) | ||||||
| QUARTER ENDED | 30-Sep | 30-Jun (i) | 31-Mar (i) | 31-Dec | 30-Sep | 30-Jun | 31-Mar | 31-Dec |
| Revenue Gross profit/(loss) excluding idled mine asset costs Gross profit/(loss) margin excluding idled mine asset costs Gross profit/(loss) including idled mine asset costs Other operating expenses Administration expenses Evaluation and exploration expenses Loss from operations Net income/(loss) Basic income/(loss) per share Diluted income/(loss) per share | $ 15,652 (13,323) -85% (17,834) (1,003) (4,204) (186) (23,227) (41,928) (0.23) (0.23) | $ 6,129 (5,593) -91% (11,348) (14,925) (4,024) (221) (30,518) (33,140) (0.18) (0.18) | $ 4,398 (494) -11% (16,908) (431) (3,733) (273) (21,344) (23,666) (0.13) (0.13) | $ 1,186 (12,601) -1063% (31,043) (19,282) (6,080) (508) (56,913) (56,564) (0.31) (0.31) | $ 3,804 (8,719) -229% (27,650) (18,315) (5,178) (958) (52,101) (46,413) (0.26) (0.26) | $ 4 6,575 20,277 44% 4,690 (1,344) (7,497) (2,099) (6,250) 15,955 0.09 (0.04) | $ 2 6,497 4,657 18% 4,657 (2,702) (5,882) (5,033) (8,961) (10,480) (0.06) (0.06) | $ 3 3,626 4,639 14% 4,639 (24,426) (8,612) (14,513) (42,912) (27,732) (0.16) (0.18) |
| 2013 | 2012 (i) | 2011 (i) | ||||||
| QUARTER ENDED | 30-Sep | 30-Jun (i) | 31-Mar (i) | 31-Dec | 30-Sep | 30-Jun | 31-Mar | 31-Dec |
| Net income/(loss) Income/(loss) adjustments, net of tax Idled mine asset costs Share-based compensation expense/(recovery) Net impairment loss on assets Unrealized foreign exchange losses/(gains) Unrealized loss/(gain) on embedded derivatives in CIC debenture Realized loss/(gain) on disposal of FVTPL investments (ii) Unrealized loss/(gain) on FVTPL investments Adjusted net income/(loss) (iii) | $ (41,928) 3,383 5 10,531 564 (113) 39 128 (27,391) | $ (33,140) 4,316 (21) 18,146 60 (3,343) 43 473 (13,467) | $ (23,666) 12,312 154 581 10 (748) - (5) (11,363) | $ (56,564) 14,474 (1,144) 25,375 906 (662) 15 664 (16,935) | $ (46,413) 13,572 1,490 23,258 335 (12,856) - 1,197 (19,418) | $ 1 5,955 10,966 4,383 - (355) (26,770) 46 2,282 6,507 | $ (10,480) - 3,799 - (794) 776 (85) 339 (6,446) | $ (27,732) - 4,050 23,818 (184) (10,790) - 155 (10,683) |
(i) Restated, see Restated Financial Statements section
(ii) FVTPL is defined as “fair value through profit or loss”
(iii) A non-IFRS financial measure, see Non-IFRS Financial Measures section
For the three months ended September 30, 2013
The Company recorded a net loss of $41.9 million in the third quarter of 2013 compared to a net loss of $33.1 million in the second quarter of 2013 and a net loss of $46.4 million in the third quarter of 2012.
Gross Profit/(Loss):
The Company recorded a gross loss of $17.8 million in the third quarter of 2013, $11.3 million in the second quarter of 2013 and $27.6 million in the third quarter of 2012. SouthGobi’s gross loss in these periods was negatively impacted by idled mine asset costs. The Company recorded a gross loss excluding idled mine asset costs of $13.3 million in the third quarter of 2013, $5.6 million in the second quarter of 2013 and $8.7 million in the third quarter of 2012. Gross profit will vary by quarter depending on sales volumes, sales prices and unit costs.
The Company recognized revenue of $15.7 million in the third quarter of 2013 compared to $6.1 million in the second quarter of 2013 and $3.8 million in the third quarter of 2012.
SouthGobi’s effective royalty rate in the third quarter of 2013 was 23%. Effective October 1, 2012 (for a six month trial period) the royalty was determined using the contracted sales price per tonne, not the reference price per tonne published by the Government of Mongolia. Despite SouthGobi, together with other Mongolian mining companies, engaging the appropriate Government of Mongolia authorities, the six month trial period was not extended and effective April 1, 2013, the royalty on all coal sales exported out of Mongolia was once again based on a set reference price per tonne published monthly by the Government of Mongolia. Although discussions have not been successful to date, SouthGobi, together with other Mongolian mining companies, continue the dialog with the appropriate Government of Mongolia authorities with the goal of moving to a more equitable process for setting reference prices.
Cost of sales was $33.5 million in the third quarter of 2013 compared to $17.5 million in the second quarter of 2013 and $31.5 million in the third quarter of 2012. Cost of sales comprise the direct cash costs of product sold, mine administration cash costs of product sold, idled mine asset costs, inventory impairments, equipment depreciation, depletion of mineral properties and share-based compensation expense. Of the $33.5 million, $17.5 million and $31.5 million recorded as cost of sales in the third quarter of 2013, the second quarter of 2013 and the third quarter of 2012, $29.0 million, $11.7 million and $12.5 million related to mine operations and $4.5 million, $5.8 million and $18.9 million related to idled mine asset costs, respectively. Cost of sales from mine operations in the third quarter of 2013, the second quarter of 2013 and the third quarter of 2012 included coal stockpile impairments of $10.8 million, $3.9 million and $7.2 million, respectively, to reduce the carrying value of the coal stockpiles to their estimated net realizable values. Cost of sales from mine operations, exclusive of impairments, increased in the third quarter of 2013 compared to the third quarter of 2012 primarily due to higher sales volumes.
Cost of sales from idled mine asset costs decreased in the third quarter of 2013 compared to the third quarter of 2012 due to the recommencement of mining operations at the Ovoot Tolgoi Mine on March 22, 2013. However, the 2013 production plan does not fully utilize the Company’s existing mining fleet, therefore, idled mine asset costs will continue to be incurred moving forward.
Other Operating Expenses:
Other operating expenses in the third quarter of 2013 were $1.0 million compared to $14.9 million in the second quarter of 2013 and $18.3 million in the third quarter of 2012. In the third quarter of 2013, other operating expenses primarily related to a $0.6 million foreign exchange loss. In the second quarter of 2013, other operating expenses primarily related to an impairment loss of $3.1 million related to the Company’s investment in Aspire, an impairment loss of $6.9 million related to surplus materials and supplies and $4.3 million of impairment charges to reduce various items of property, plant and equipment to their recoverable amounts. In the third quarter of 2012, other operating expenses primarily related to a $16.1 million an impairment loss related to the Company’s investment in Aspire.
Administration Expenses:
Administration expenses in the third quarter of 2013 were $4.2 million compared to $4.0 million in the second quarter of 2013 and $5.2 million in the third quarter of 2012. The increase in administration expenses in the third quarter of 2013 compared to the second quarter of 2013 primarily related to increased legal and professional fees due to the ongoing governmental, regulatory and internal investigations and slightly higher salaries and benefits expenses. The decrease in administration expenses in the third quarter of 2013 compared to the third quarter of 2012 primarily related to decreased salaries and benefits and share-based compensation expenses.
Evaluation and Exploration Expenses:
Exploration expenses in the third quarter of 2013 were $0.2 million compared to $0.2 million in the second quarter of 2013 and $1.0 million in the third quarter of 2012. Exploration expenses will vary from quarter to quarter depending on the number of projects and the related seasonality of the exploration programs. The Company continues to minimize exploration expenditures to preserve the Company’s financial resources.
Finance costs in the third quarter of 2013 were $5.4 million compared to $5.2 million in the third quarter of 2012. Finance costs in the third quarter of 2013 primarily consisted of $5.2 million of interest expense on the CIC convertible debenture; whereas, finance costs in the third quarter of 2012 consisted of $3.9 million of interest expense on the CIC convertible debenture and a $1.2 million unrealized loss on FVTPL investments.
Finance income in the third quarter of 2013 was $0.1 million compared to $12.9 million in the third quarter of 2012. In the third quarter of 2013 and 2012, finance income primarily consisted of a $0.1 million and $12.9 million unrealized gain on the fair value change of the embedded derivatives in the CIC convertible debenture, respectively. The fair value of the embedded derivatives in the CIC convertible debenture is driven by many factors including: the Company’s share price, foreign exchange rates and share price volatility.
In the third quarter of 2013, the Company recorded $nil current income tax expense related to its Mongolian operations compared to a current income tax recovery of $0.9 million in the third quarter of 2012. The Company has recorded a deferred income tax expense related to deductible temporary differences and loss carry-forwards of $13.4 million in the third quarter of 2013 compared to a deferred income tax expense related to deductible temporary differences of $3.2 million in the third quarter of 2012.
For the nine months ended September 30, 2013
The Company recorded a net loss of $98.7 million for the nine months ended September 30, 2013 compared to net loss of $40.9 million for the nine months ended September 30, 2012.
Gross Profit/(Loss):
The Company recorded a gross loss of $46.1 million for the nine months ended September 30, 2013 compared to a gross loss of $18.3 million for the nine months ended September 30, 2012. SouthGobi’s gross loss in these periods was negatively impacted by idled mine asset costs. The Company recorded a gross loss excluding idled mine asset costs of $19.4 million for the nine months ended September 30, 2013 compared to a gross profit excluding idled mine asset costs of $16.2 million for the nine months ended September 30, 2012. Gross profit will vary by quarter depending on sales volumes, sales prices and unit costs.
For the nine months ended September 30, 2013, SouthGobi recorded revenue of $26.2 million compared to $76.9 million for the nine months ended September 30, 2012. The Company sold 1.54 million tonnes of coal at an average realized selling price of $23.08 per tonne for the nine months ended September 30, 2013 compared to sales of 1.96 million tonnes of coal at an average realized selling price of $47.48 per tonne for the nine months ended September 30, 2012. Revenue decreased primarily due to decreased sales volumes and a lower average realized selling price.
Revenues are presented net of royalties and selling fees. Based on the reference prices for the nine months ended September 30, 2013, the Company was subject to an average 7% royalty based on a weighted average reference price of $69.16 per tonne. The Company’s effective royalty rate for the nine months ended September 30, 2013, based on the Company’s average realized selling price of $23.08 per tonne, was 24% or $5.62 per tonne compared to $7.21 per tonne for the nine months ended September 30, 2012.
Cost of sales was $72.3 million for the nine months ended September 30, 2013 compared to $95.2 million for the nine months ended September 30, 2012. Cost of sales comprise the direct cash costs of product sold, mine administration cash costs of product sold, idled mine asset costs, inventory impairments, equipment depreciation, depletion of mineral properties and share-based compensation expense. Of the $72.3 million (2012: $95.2 million) recorded as cost of sales for the nine months ended September 30, 2013, $45.6 million (2012: $60.7 million) related to mine operations and $26.7 million (2012: $34.5 million) related to idled mine asset costs. In the nine months ended September 30, 2013, cost of sales included coal stockpile impairments of $15.8 million (2012: $7.2 million) to reduce the carrying value of the Company’s coal stockpile to its net realizable value. Cost of sales related to mine operations, exclusive of impairments, decreased for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 primarily due to lower sales volumes. Cost of sales related to idled mine asset costs primarily consist of period costs, which are expensed as incurred and primarily include depreciation expense. The depreciation expense relates to the Company’s idled plant and equipment.
Other Operating Expenses:
Other operating expenses for the nine months ended September 30, 2013 were $16.4 million compared to $22.4 million for the nine months ended September 30, 2012. For the nine months ended September 30, 2013, other operating expenses primarily related to the following:
- Available-for-sale financial asset – the Company recognized an impairment loss of $3.1 million related to its investment in Aspire.
- Materials and supplies inventory – the Company recognized an impairment loss of $6.9 million related to surplus materials and supplies inventories not expected to be utilized with the Company’s existing mining fleet.
- Property, plant and equipment – the Company recorded $4.3 million of impairment charges to reduce various items of property, plant and equipment to their recoverable amounts. The impairments relate to surplus capital spares not expected to be utilized with the Company’s existing mining fleet.
For the nine months ended September 30, 2012, other operating expenses primarily related to a $16.1 million an impairment loss related to its investment in Aspire.
Administration Expenses:
Administration expenses for the nine months ended September 30, 2013 were $12.0 million compared to $18.6 million for the nine months ended September 30, 2012. The decrease in administration expenses primarily relates to decreased corporate administration, salaries and benefits and share-based compensation expenses, partially offset by increased legal and professional fees due to the ongoing governmental, regulatory and internal investigations.
Evaluation and Exploration Expenses:
Exploration expenses for the nine months ended September 30, 2013 were $0.7 million compared to $8.1 million for the nine months ended September 30, 2012. Exploration expenses will vary from period to period depending on the number of projects and the related seasonality of the exploration programs. The Company continues to minimize exploration expenditures to preserve the Company’s financial resources.
Finance costs for the nine months ended September 30, 2013 were $16.0 million compared to $9.8 million for the nine months ended September 30, 2012. Finance costs for the nine months ended September 30, 2013 primarily consisted of $15.2 million of interest expense on the CIC convertible debenture; whereas, finance costs for the nine months ended September 30, 2012 consisted of $5.7 million interest expense on the CIC convertible debenture and $3.8 million unrealized loss on FVTPL investments.
Finance income for the nine months ended September 30, 2013 was $4.3 million compared to $39.2 million for the nine months ended September 30, 2012. For the nine months ended September 30, 2013 and September 30, 2012, finance income primarily consisted of a $4.2 million and $38.9 million unrealized gain on the fair value change of the embedded derivatives in the CIC convertible debenture, respectively. The fair value of the embedded derivatives in the CIC convertible debenture is driven by many factors including: the Company’s share price, foreign exchange rates and share price volatility.
For the nine months ended September 30, 2013, the Company recorded a $1 thousand current income tax expense related to its Mongolian operations compared to a current income tax expense of $0.3 million for the nine months ended September 30, 2012. The Company has recorded a deferred income tax expense related to deductible temporary differences and loss carry-forwards of $11.9 million for the nine months ended September 30, 2013 compared to a deferred income tax expense related to deductible temporary differences of $3.2 million for the nine months ended September 30, 2012.
FINANCIAL POSITION AND LIQUIDITY
Cash Position and Liquidity
As at September 30, 2013, the Company had cash of $16.1 million compared to cash of $19.7 million and short term money market investments of $15.0 million for a total of $34.7 million in cash and money market investments as at December 31, 2012. Working capital (excess current assets over current liabilities) was $67.8 million as at September 30, 2013 compared to $120.4 million as at December 31, 2012.
The Company expects to have sufficient liquidity and capital resources to meet its ongoing obligations and future contractual commitments, including interest payments due on the CIC convertible debenture, for at least twelve months from the end of the September 30, 2013 reporting period. The Company expects its liquidity to remain sufficient based on existing capital resources and estimated cash flows from mining operations. Estimated cash flows from mining operations are subject to a number of external market factors including supply and demand and pricing in the coal industry. The Company continues to minimize uncommitted capital expenditures and exploration expenditures in order to preserve the Company’s financial resources.
CIC Convertible Debenture
During the second quarter of 2013, the Company and the CIC mutually agreed upon a three month deferral of the convertible debenture semi-annual $7.9 million cash interest payment due on May 19, 2013. The Company and the CIC subsequently agreed to an additional deferral of one month, and the cash interest payment became due on September 19, 2013.
On September 19, 2013, the Company settled the $7.9 million amount, plus additional accrued interest of $0.2 million, as follows:
- The Company issued 1.8 million shares to the CIC for the November 19, 2012 1.6% share interest payment, where the number of common shares was based on the 50-day volumeweighted average share price on November 19, 2012 of $2.16Cdn;
- In consideration of the common share issue, the CIC applied the $4.0 million in cash already paid by the Company in the first quarter of 2013 for the November 19, 2012 share interest payment against the amount due on September 19, 2013; and
- The Company paid the remaining $4.1 million balance in cash.
The mutually agreed upon deferral of the cash interest payment, and subsequent settlement in cash and common shares of the Company, did not trigger an event of default and all other terms of the convertible debenture remain unchanged.
Mongolian IAAC Investigation
In the first quarter of 2013, the Company was subject to orders imposed by the IAAC which placed restrictions on certain of the Company’s Mongolian assets. The orders were imposed on the Company in connection with the IAAC’s investigation of the Company. The SIA also continues to enforce the orders on the Company.
The orders placing restrictions on certain of the Company’s Mongolian assets could ultimately result in an event of default of the Company’s CIC convertible debenture. This matter remains under review by the Company and its advisers but to date, it is the Company's view that this would not result in an event of default as defined under the CIC convertible debenture terms. However, in the event that the orders result in an event of default of the Company’s CIC convertible debenture that remains uncured for ten business days, the principal amount owing and all accrued and unpaid interest will become immediately due and payable upon notice to the Company by CIC.
The orders relate to certain items of operating equipment and infrastructure and the Company’s Mongolian bank accounts. The orders related to the operating equipment and infrastructure restricts the sale of these items; however, the orders do not restrict the use of these items in the Company’s mining activities. The orders related to the Company’s Mongolian bank accounts restrict the use of in-country funds. While the orders restrict the use of in-country funds pending outcome of the investigation, they are not expected to have any material impact on the Company’s activities.
Impairment Analysis
Unchanged from the assessment made as at June 30, 2013, the Company determined that an indicator of impairment existed for its Ovoot Tolgoi Mine cash generating unit as at September 30, 2013. The impairment indicator was the continued weakness in the Company’s share price during the third quarter of 2013 and the fact that the market capitalization of the Company, as at September 30, 2013, was less than the carrying value of its net assets.
Therefore, the Company conducted an impairment test whereby the carrying value of the Company’s Ovoot Tolgoi Mine cash generating unit was compared to its “value-in-use” using a discounted future cash flow valuation model. The Company’s Ovoot Tolgoi Mine cash generating unit carrying value was $517.5 million as at September 30, 2013.