SouthGobi Resources announces first quarter 2015 financial and operating results
May 11, 2015
SouthGobi Resources announces first quarter 2015 financial and operating results
HONG KONG - SouthGobi Resources Ltd. (TSX: SGQ, HK: 1878) (the "Company") today announced its financial and operating results for the three months ended March 31, 2015. All figures are in U.S. Dollars unless otherwise stated.
Significant Events and Highlights
The Company’s significant events and highlights for the three months ended March 31, 2015 and subsequent period to May 11, 2015 are as follows:
- The Company continues to operate under difficult market conditions as prices weakened further in China. The impact of these conditions on the Company's operations has been exacerbated given the Company’s liquidity constraints.
- During the first quarter of 2015, the Company sold through its existing stockpiles to preserve the Company’s liquidity and therefore mining operations were curtailed. On March 30, 2015, the Company resumed mining operations following the receipt of new sales contracts at the end of March, 2015. The Company’s production of raw coal in the first quarter of 2015 was therefore negligible (two thousand tonnes compared to 210 thousand tonnes in the fourth quarter of 2014 and 635 thousand tonnes in the first quarter of 2014). Although it cancelled the furlough which affected the majority of its workforce through March 30, 2015, the Company will continue to pace production to meet demand in order to preserve its liquidity.
- In respect of the ongoing tax investigation case in Mongolia, on January 30, 2015, the panel of appointed judges from the Second District Criminal Court of Justice found the Company’s three former employees guilty of tax evasion and gave sentences ranging from 5 years and 6 months to 5 years and 10 months of imprisonment in the correctional facilities of strict regimen in Mongolia. Although SouthGobi Sands LLC (“SGS”) was not a party to the criminal proceedings, the court declared it to be financially liable as a “civil defendant” for a penalty of MNT 35.3 billion (approximately US$18.2 million on February 1, 2015). The Company firmly rejects this conclusion. Therefore, SGS filed an appeal of the Second District Criminal Court of Justice’s verdict on February 18, 2015. On February 26, 2015 the President of Mongolia issued a decree of pardon to the three former employees who, following the pardon, were released from imprisonment and subsequently departed Mongolia. On March 25, 2015, the hearing of the appeal of the Tax Verdict took place. The Tax Verdict was upheld and the appeal by SGS was dismissed. Following the decision by the Second District Criminal Court of Justice, the Company immediately reasserted its view that there is a complete lack of evidence to support both the Tax Verdict and the Appeal Verdict and, as a consequence, announced its intention to continue to defend itself. Therefore, on April 22, 2015, SGS lodged an appeal with the Supreme Court of Mongolia against the initial verdict and the dismissal of its first appeal. On April 29, 2015 the Second District Criminal Court refused to advance SGS’s appeal to the Supreme Court. Following an immediate protest
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by SGS, the Second District Criminal Court delivered SGS’s appeal to the Supreme Court of Mongolia and as at May 11, 2015 the Company awaits confirmation from the Supreme Court as to whether they will hear the case. The Tax Penalty is only payable after a final appeal.
For more information on the risks associated with the Tax Verdict, refer to the Risk Factor entitled “If the Company is unsuccessful in appealing the Tax Verdict it will likely not have sufficient cash resources to satisfy the penalty imposed thereunder.” in the December 31, 2014 MD&A available on www.sedar.com.
- On February 24, 2015, the Company announced it had entered into a private placement for proceeds of up to US$7.5 million with Novel Sunrise Investments Limited (“Novel Sunrise”) as a proposed new significant investor and strategic partner. The completion of the private placement and related transactions was subject to acceptance of notice of the placement by the TSX pursuant to the financial hardship exemption of the TSX Company Manual. As a result of relying on the financial hardship exemption, the Company was placed on remedial delisting review as of February 25, 2015. A meeting of the TSX Continued Listing Committee to consider this matter has been scheduled for May 19, 2015 although the Company is planning on seeking an approval from the TSX for a 30 day extension of the delisting review until June 18, 2015.
- On February 24, 2015, the Company was advised by Turquoise Hill that they had entered into a Sale and Purchase Agreement (“Novel SPA”) with Novel Sunrise for the purchase of 48,705,155 Common Shares currently held by Turquoise Hill.
- On March 3, 2015 following the successful closing of the first tranche of the Novel Sunrise private placement, including the receipt of US$3.5 million, the Company issued 10,131,113 Mandatory Convertible Units to Novel Sunrise and in accordance with the terms of the agreement Mr. Ted Chan was appointed as the Executive Director of the Company.
- On March 13, 2015, Mr. Enkh-Amgalan Sengee, tendered his resignation as President and Chief Executive Officer. Mr. Ted Chan, assumed the duties formerly handled by Mr. Sengee until further notice.
- On March 18, 2015, the Company announced that Mr. Jeffery Tygesen resigned as a non-executive director.
- On April 23, 2015, the Company was advised that the Novel SPA as initially announced by the Company on February 24, 2015 had received all the necessary approvals and closed. Pursuant to the Novel SPA, Novel Sunrise has purchased approximately 48.7 million Common Shares from Turquoise Hill.
- On April 23, 2015, the Company successfully closed the second and final tranche of the private placement generating approximately $4.0 million in gross proceeds through the issue of approximately 11.6 million Common Shares. In addition, Novel Sunrise converted their previously acquired 10.1 million Mandatory Convertible Units on a one for one basis into Common Shares.
On May 4, 2015 the Company announced it had been notified of the expiry of the Sale and Purchase agreement (“NUR SPA”), between Turquoise Hill and National United Resources Holdings Limited (“NUR”) which provided for the sale of 56.1 million common shares in the Company (“Common Shares”).
- On May 4, 2015 the Company received confirmation from Turquoise Hill of an extension to the limited deferral of amounts owing under the Turquoise Hill shareholder loan facility, subject to certain conditions and limitations.
- As at the date hereof, the Company, together with its new strategic partner and significant shareholder, Novel Sunrise, has developed a funding plan (the “Proposed Funding Plan”) in order to pay the interest
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due under the CIC Convertible Debenture, meet the Company’s obligations as they fall due, achieve its business objectives, in 2015 and beyond. However, there is no guarantee that the Company will be able to implement the Proposed Funding Plan or secure other sources of financing. See “Liquidity and Capital Resources” for details. As at May 11, 2015, the Company had cash of $4.9 million.
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OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS
Summary of Operational Data
Three months ended March 31, 2015 2014 Sales Volumes, Prices and Costs
Premium semi-soft coking coal Coal sales (millions of tonnes) - - Average realized selling price (per tonne) (i) $
- $ -
Standard semi-soft coking coal Coal sales (millions of tonnes) 0.05 0.29 Average realized selling price (per tonne) (i) $ 17.95 $ 22.00 Thermal coal Coal sales (millions of tonnes) 0.13 0.10 Average realized selling price (per tonne) (i) $ 10.46 $ 12.07 Total
| Coal sales(millions of tonnes) | 0.18 | 0.39 |
| Average realized selling price(per tonne) (i) | $12.66 | $19.54 |
| Raw coal production (millions of tonnes) | - | 0.64 |
Direct cash costs of product sold (per tonne) (ii) $ 8.68 $ 10.43 Mine administration cash costs of product sold (per tonne) (ii) $ 2.11 $ 3.80 Total cash costs of product sold (per tonne) (ii) $ 10.79 $ 14.23
Other Operational Data
Production waste material moved (millions of bank - 2.55 cubic meters)
Strip ratio (bank cubic meters of waste material per tonne of - 4.02 coal produced)
Lost time injury frequency rate (iii) 0.25 0.00
(i) Average realized selling price is presented before deduction of royalties and selling fees.
(ii) A non-IFRS financial measure, see “Non-IFRS Financial Measure” section. Cash costs of product sold exclude idled mine asset cash costs.
(iii) Per 200,000 man hours and calculated based on a rolling 12 month average.
Overview of Operational Data
In the first quarter of 2015, market conditions remained difficult and coal prices weakened further in China.
During the first quarter of 2015 the Company sold through its existing stockpiles to preserve the Company’s liquidity and therefore mining operations were curtailed. On March 30, 2015 the Company resumed mining operations following the receipt of new sales contracts at the end of March, 2015.
The Company continues to pace production to meet demand and following the receipt of new sales contracts at the end of March the Company has cancelled the furlough and recommenced mining operations on March 30, 2015.
The Company ended the first quarter of 2015 without a lost time injury. As at March 31, 2015, the Company has a lost injury time frequency rate of 0.25 per 200,000 man hours based on a rolling 12 month average.
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Summary of Financial Results
Three months ended March 31,
| $ in thousands, except per share information | 2015 | 2014 |
| Revenue(i),(ii) | $1,587 | $5,137 |
| Cost of sales(ii) | (17,678) | (18,366) |
| Gross loss excluding idled mine asset costs | (1,230) | (10,202) |
| Gross loss including idled mine asset costs | (16,091) | (13,229) |
| Other operating income/(expense) | 971 | (1,073) |
| Administration expenses | (1,425) | (2,237) |
| Evaluation and exploration expenses | (81) | (172) |
| Loss from operations | (16,626) | (16,711) |
| Finance costs | (6,648) | (5,025) |
| Finance income | 8 | 1,007 |
| Share of losses of joint venture | (18) | (26) |
| Income tax expense | - | - |
| Net loss | (23,284) | (20,755) |
Basic loss per share $ Diluted loss per share $
(i) Revenue is presented after deduction of royalties and selling fees.
(ii) Revenue and cost of sales relate to the Company’s Ovoot Tolgoi Mine within the Mongolian Coal Division operating segment. Refer to note 3 of the condensed consolidated interim financial statements for further analysis regarding the Company’s reportable operating segments.
Royalty regime in Mongolia
The royalty regime in Mongolia is evolving and has been subject to change since 2012. The Government of Mongolia implemented a trial period from October 1, 2012 to March 31, 2013, during which the royalty imposed on coal sales was determined using the actual contracted sales price per tonne. Subsequently, from April 1, 2013 to March 31, 2014, the royalty on all coal sales exported out of Mongolia was based on a set reference price per tonne published monthly by the Government of Mongolia.
The Government of Mongolia implemented a new royalty regime effective April 1, 2014, referred to as the “flexible tariff” royalty regime. From April 1, 2014, the royalty per tonne for export coal sales has been calculated based on the actual contracted sales price per tonne, whereby the contracted sales price includes the costs of transporting the coal to the Mongolia-China border. If transportation costs are not included in the contracted sales price between a buyer and seller, the following costs are required to be included in the contracted sales price for purposes of calculating the royalty per tonne: transportation costs and costs associated with transportation such as customs documentation fees, insurance, loading and unloading costs. In the event the actual contracted sales price calculated as described above differs by more than 10% from the contracted sales price of coal products with the same classification and quality being exported by other legal entities in Mongolia through the same border crossing, the calculated contracted sales price is deemed non-market under Mongolian tax law and the royalty per tonne is calculated based on a reference price that will be determined by the Government of Mongolia.
The Company currently sells coal from the Ovoot Tolgoi Mine ex mine gate and the coal is exported through the Shivee Khuren Border Crossing. The Company’s average realized selling price excludes transportation costs.
On July 4, 2014, the Government of Mongolia made further amendments to the royalty regime. From July 4, 2014 onwards, the royalty is to be initially calculated and paid monthly based on the Government reference price. On a quarterly basis the royalty amount is to be adjusted to reflect the contracted sales price and additional documentation needs to be submitted to the Mongolian Tax Authority. Once the quarterly statement has been approved by the Mongolian Tax Authority, any adjustments between the
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monthly payments for the quarter and the quarterly submission are adjusted in the next months’ royalty calculation.
On January 1 2015, this “flexible tariff” royalty regime ended and royalty payments reverted to the previous regime which is based on a set reference price per tonne published monthly by the Government of Mongolia. The Company and other Mongolian coal producers are actively engaging the Mongolian authorities to seek the continuation of the “flexible tariff” regime. See “Risk Factors - Company’s Projects in Mongolia”.
Overview of Financial Results
The Company recorded a $16.6 million loss from operations in the first quarter of 2015 compared to a $16.7 million loss from operations in the first quarter of 2014. The operations for the first quarter of 2015 were impacted by continuing difficult market conditions, including a further weakening of coal prices in China. These conditions led the Company to enter a brief period of production curtailment in order to preserve its liquidity. The deterioration in market conditions and the Company's measures to preserve its liquidity led to lower sales volumes and prices compared to the first quarter of 2014. The resulting reduction in gross revenue for the first quarter of 2015 was nearly all offset by lower royalty expenses, cost of sales and lower administration expenses compared to the first quarter of 2014.
Revenue was $1.6 million in the first quarter of 2015 compared to $5.1 million in the first quarter of 2014. The Company sold 0.18 million tonnes of coal at an average realized selling price of $12.66 per tonne in the first quarter of 2015 compared to sales of 0.39 million tonnes at an average realized selling price of $19.54 per tonne in the first quarter of 2014. The reduction in the average realized selling price resulted from continued difficult market conditions as well as differences in product mix in the first quarter of 2015 compared to the first quarter of 2014. The product mix for the first quarter of 2015 consisted of approximately 28% of Standard semi-soft coking coal and 72% of Thermal coal compared to approximately 74% of Standard semi-soft coking coal and 26% of Thermal coal in the first quarter of 2014.
The Company’s revenue is presented after deduction of royalties and selling fees. The Company’s effective royalty rate for the first quarter of 2015, based on the Company’s average realized selling price of $12.66 per tonne, was 29.0% or $3.67 per tonne compared to 24.6% or $4.81 per tonne based on the average realized selling price of $19.54 per tonne in the first quarter of 2014.
Cost of sales was $17.7 million in the first quarter of 2015 compared to $18.4 million in the first quarter of 2014. Cost of sales comprises operating expenses, share-based compensation expense, equipment depreciation, depletion of mineral properties, coal stockpile inventory impairments and idled mine asset costs. Operating expenses in cost of sales reflect the total cash costs of product sold (a non-IFRS financial measure, see “Non-IFRS Financial Measure” section for further analysis) during the period.
Three months ended March 31,
$ in thousands 2015 2014
| Operating expenses Share-based compensation expense Depreciation and depletion Impairment of coal stockpile inventories | $ 1,929 28 310 550 | $ 5,564 15 2,479 7,281 |
|---|---|---|
| Cost of sales from mine operations Cost of sales related to idled mine assets | 2,817 14,861 | 15,339 3,027 |
| Cost of sales | $ 17,678 | $ 18,366 |
Operating expenses in cost of sales were $1.9 million in the first quarter of 2015 compared to $5.6 million in the first quarter of 2014. The overall decrease in operating expenses is the result of both (i) the lower variable costs which are linked to production levels which are down to nil million tonnes for the first quarter of 2015 compared to 0.6 million tonnes for the first quarter of 2014; and (ii) the continued focus on cost
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saving initiatives. The total cash cost of product sold decreased from $14.23 per tonne for the first quarter of 2014 to $10.80 per tonne for the first quarter of 2015.
Cost of sales in the first quarter of 2015 and 2014 included coal stockpile impairments of $0.6 million and $7.3 million, respectively, to reduce the carrying value of the Company’s coal stockpiles to their net realizable value. The coal stockpile impairments recorded in both the first quarter of 2015 and 2014 reflect the challenging coal market conditions and primarily related to the Company’s higher-ash products.
Cost of sales related to idled mine asset costs primarily consisted of period costs, which were expensed as incurred and included mainly depreciation expense. Cost of sales related to idled mine assets in the first quarter of 2015 included $11.9 million related to depreciation expenses for idled equipment compared to $3.0 million in the first quarter of 2014.
Other operating income/expense was income of $1.0 million in the first quarter of 2015 compared to expense of $1.1 million in the first quarter of 2014 as follows:
Three months ended March 31,
$ in thousands 2015 2014
| Foreign exchange gain Impairment loss on available-for-sale financial asset Other | $ (1,058) - 87 | $ ( 764) 1,766 71 |
|---|---|---|
| Other operating expense/(income) | $ ( 971) | $ 1,073 |
The Company recognized an impairment loss of $1.8 million in the first quarter of 2014 related to its investment in Aspire Mining Limited (“Aspire”). The Company disposed all its investment in Aspire during 2014 and did not hold any Aspire shares as at December 31, 2014 or subsequent to that date.
Administration expenses were $1.4 million in the first quarter of 2015 compared to $2.2 million in the first quarter of 2014 as follows:
Three months ended March 31,
$ in thousands 2015 2014
| Corporate administration Legal and professional fees Salaries and benefits Share-based compensation expense Depreciation | $ 4 46 473 380 100 26 | $ 6 59 686 729 131 32 |
|---|---|---|
| Administration expenses | $ 1,425 | $ 2,237 |
Administration expenses were lower for the first quarter of 2015 compared to the first quarter of 2014 primarily as a result of cost reduction measures.
Evaluation and exploration expenses were $0.1 million in the first quarter of 2015 compared to $0.2 million in the first quarter of 2014. The Company continued to minimize evaluation and exploration expenditures in the first quarter of 2015 in order to preserve the Company’s financial resources. Evaluation and exploration activities and expenditures in the first quarter of 2015 were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining and exploration licenses.
Finance costs were $6.6 million and $5.0 million respectively in the first quarter of 2015 and the first quarter of 2014. Finance costs primarily consisted of interest expense in respect of the $250.0 million CIC Convertible Debenture ($5.0 million for the first quarter of 2015 and $5.0 million for the first quarter of 2014).
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Included within Finance costs for the first quarter of 2015, is $1.5 million in respect of the unrealized fair value loss of the embedded derivative in the CIC Convertible Debenture. In comparison, in the first quarter of 2014, the Company recorded within Finance income an unrealized fair value gain of the embedded derivative in the CIC Convertible Debenture ($1.0 million). The fair value of the embedded derivatives in the CIC Convertible Debenture is driven by many factors including: the Company’s Common Share price, U.S. Dollar and Canadian Dollar exchange rates and share price volatility.
Finance income was negligible in the first quarter of 2015 compared to $1.0 million in the first quarter of 2014 which, as described above, consisted of an unrealized gain in respect of the embedded derivative in the CIC Convertible Debenture.
Summary of Quarterly Operational Data
| 2015 | 2014 | 2013 | ||||||
| Quarter Ended | 31-Mar | 31-Dec | 30-Sep | 30-Jun | 31-Mar | 31-Dec | 30-Sep | 30-Jun |
| Sales Volumes, Prices and Costs Premium semi-soft coking coal Coal sales (millions of tonnes) Average realized selling price (per tonne) (i) Standard semi-soft coking coal Coal sales (millions of tonnes) Average realized selling price (per tonne) (i) Thermal coal Coal sales (millions of tonnes) Average realized selling price (per tonne) (i) Total Coal sales (millions of tonnes) Average realized selling price (per tonne) (i) Raw coal production (millions of tonnes) Direct cash costs of product sold (per tonne) (ii) Mine administration cash costs of product sold (per tonne) (ii) Total cash costs of product sold (per tonne) (ii) Other Operational Data Production waste material moved (millions of bank cubic meters) Strip ratio (bank cubic meters of waste material per tonne of coal produced) Lost time injury frequency rate (iii) | - $ - 0.05 $ 1 7.95 0.13 $ 1 0.46 0.18 $ 1 2.66 - $ 8.68 $ 2.11 $ 1 0.79 - - | 0.02 $ 2 6.77 0.14 $ 1 8.32 0.21 $ 1 1.69 0.37 $ 1 5.04 0.21 $ 8.09 $ 2.44 $ 1 0.53 0.55 2.61 | - $ - 0.31 $ 17.41 0.34 $ 10.66 0.65 $ 13.87 0.17 $ 7 .38 $ 2 .30 $ 9 .68 0.20 1.20 0.17 | - $ - 0.12 $ 20.33 0.51 $ 10.72 0.63 $ 12.52 0.55 $ 8 .23 $ 2 .49 $ 10.72 2.17 3.97 0.15 | - $ - 0.29 $ 22.00 0.10 $ 12.07 0.39 $ 19.54 0.64 $ 10.43 $ 3 .80 $ 14.23 2.55 4.02 | 0.21 $ 37.54 1.40 $ 24.49 0.11 $ 12.60 1.72 $ 25.30 1.73 $ 11.13 $ 1 .39 $ 12.52 3.77 2.18 | 0.04 $ 37.50 0.87 $ 21.67 0.03 $ 13.07 0.94 $ 22.05 1.13 $ 9 .41 $ 2 .20 $ 11.61 1.57 1.39 | 0.21 $ 32.46 - $ - 0.11 $ 13.98 0.32 $ 26.26 0.17 $ 11.49 $ 7 .14 $ 18.63 2.71 15.55 |
| 0.25 | 0.21 | 0.00 | 0.00 | 0.00 | 0.00 |
(i) Average realized selling price is presented before deduction of royalties and selling fees.
(ii) A non-IFRS financial measure, refer to “Non-IFRS Financial Measures” section. Cash costs of product sold exclude idled mine asset cash costs.
(iii) Per 200,000 man hours and calculated based on a rolling 12 month average.
Summary of Quarterly Financial Results
| $ in thousands, except per share information | 2015 | 2014 | 2013 | |||||
| Quarter Ended | 31-Mar | 31-Dec | 30-Sep | 30-Jun | 31-Mar | 31-Dec | 30-Sep | 30-Jun |
| Financial Results Revenue (i), (ii) Cost of sales (ii) Gross loss excluding idled mine asset costs Gross loss including idled mine asset costs Other operating income/(expenses) Administration expenses Evaluation and exploration expenses Loss from operations Finance costs Finance income Share of earnings/(losses) of joint venture Income tax expense Net loss Basic loss per share Diluted loss per share | $ 32,457 (40,359) (4,141) (7,900) (109,682) (3,668) (489) (121,740) (5,167) 1,301 (15) (13,109) (138,730) $ ( 0.75) $ ( 0.75) | $ 15,652 (33,486) (13,323) (17,834) (1,003) (4,204) (186) (23,227) (5,382) 124 (66) (13,377) (41,928) $ ( 0.23) $ ( 0.23) | $ 6,129 (17,477) (5,593) (11,348) (14,925) (4,024) (221) (30,518) (5,617) 3,366 44 (416) (33,141) $ ( 0.18) $ ( 0.18) | |||||
| $ 1 ,587 | $ 5 ,054 | $ 7,611 | $ 6,691 | $ 5,137 | ||||
| (17,678) (1,230) (16,091) 971 (1,425) (81) (16,626) (6,648) 8 (18) - (23,284) $ (0.11) $ (0.11) | (19,757) (821) (14,703) (11,989) (1,924) (911) (29,527) (6,351) 317 (40) (40) (35,641) $ (0.19) $ (0.19) | (23,922) (2,178) (16,311) (2) (2,530) (122) (18,965) (5,257) 135 (32) - (24,119) $ ( 0.13) $ ( 0.13) | (20,086) (8,497) (13,395) (1,776) (2,253) (107) (17,531) (5,215) 127 (3) (546) (23,168) $ ( 0.12) $ ( 0.12) | (18,366) (10,202) (13,229) (1,073) (2,237) (172) (16,711) (5,025) 1,007 (26) - (20,755) $ ( 0.11) $ ( 0.11) |
(i) Revenue is presented after deduction of royalties and selling fees.
(ii) Revenue and cost of sales relate to the Company’s Ovoot Tolgoi Mine within the Mongolian Coal Division operating segment. Refer to note 3 of the condensed consolidated interim financial statements for further analysis regarding the Company’s reportable operating segments.
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FINANCIAL POSITION AND LIQUIDITY
Liquidity and Capital Resources
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.
Turquoise Hill Loan Facility
On May 25, 2014, the Company announced it had obtained a $10 million revolving credit facility from Turquoise Hill to meet its short term working capital requirements. The terms and conditions of this facility were filed on SEDAR (www.sedar.com) on June 2, 2014. The key commercial terms of the facility were as follows:
Original maturity date of August 30, 2014 (subsequently extended);
- Interest rate of one month US dollar LIBOR Rate in effect plus 11% margin per annum;
- Commitment fee of 35% of interest rate payable quarterly in arrears on undrawn principal amount of facility;
- Front end fee of $0.1 million;
- Draws subject to customary closing conditions and the Company’s cash requirements in the ordinary course of business;
- Facility is subject to certain mandatory prepayment and termination provisions; and
- The Company to continue to seek other funding alternatives.
On August 30, 2014 and December 4, 2014, subject to certain conditions and limitations, Turquoise Hill agreed to grant deferrals of the payment of $3.8 million plus accrued interest thereon owing by the Company under the Turquoise Hill Loan Facility on the reduced revolving credit facility of $3.8 million. These deferrals of payment and repayment were granted to the Company without prejudice to Turquoise Hill’s right and ability to assert and re-assert at any point in time to demand payment and repayment of all amounts owing to Turquoise Hill under the Turquoise Hill Loan Facility.
On May 4, 2015 following the expiry of the NUR SPA on April 30, 2015, Turquoise Hill agreed to a further limited deferral of repayment, subject to certain conditions and limitations, on the $3.8 million principal and accrued interest owing on the Turquoise Hill Loan Facility as follows:
(i) $1.9 million in principal and all interest that has accrued on and under the Turquoise Hill Loan Facility up to and including August 31, 2015 shall become due and payable on August 31, 2015; and
(ii) $1.9 million in principal and all interest that has accrued on and under the Turquoise Hill Loan Facility from September 1, 2015 up to and including November 30, 2015 shall become due and payable on November 30, 2015.
At March 31, 2015 in addition to the principal of $3.8 million the Company owed accrued interest of $0.3 million under this facility (December 31, 2014 the Company had drawn $3.8 million and owed accrued interest of $0.1 million).
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Novel Sunrise private placement
On February 24, 2015, the Company announced it had entered into a private placement agreement with Novel Sunrise providing for the subscription of up to 21.75 million common shares in the Company (each, a “Common Share”) for gross proceeds of up to approximately $7.5 million.
The initial tranche of the private placement consisting of approximately $3.5 million of Mandatory Convertible Units closed on March 3, 2015 having been subject to regulatory approvals and other customary closing conditions. On completion of the Novel SPA each Mandatory Convertible Unit was converted on a one for one basis into Common Shares of the Company.
On April 23, 2015 the Company successfully closed the second tranche of the private placement for gross proceeds of approximately $4.0 million through the issue of approximately 11.6 million Common Shares in the Company.
The issue price for both tranches of the private placement was set at CAD$0.432 (“Placing Price”) and represented a discount of approximately 20% to the 5-day volume-weighted average price per Common Share of approximately CAD$0.54, as of the date the Company received price protection from the TSX for the private placement. The Placing Price was determined with reference to the prevailing market price of the Common Shares and was negotiated on an arm’s length basis between the Company's independent directors and Novel Sunrise.
The closing of the private placement and related transactions was subject to acceptance of notice of the placement by the TSX pursuant to the financial hardship exemption of the TSX Company Manual and the delisting review.
In accordance with the terms of the private placement:
- Following the closure of the initial tranche of the private placement, Mr. Chan was appointed as an Executive Director on March 3, 2015 and brings with him over 20 years of enterprise management experience. He has played a key role in the management of Novel Sunrise and its affiliated companies in China, particularly through establishing and managing client relationships. Mr. Chan holds a bachelor degree from Communication University of China.
- Following the closure of the second and final tranche of the private placement, Novel Sunrise holds the right to nominate two directors, (in addition to Mr. Chan), to the Company’s board of directors. Novel Sunrise has advised the Company that it plans to exercise this right at a later date.
Novel SPA
On April 23, 2015 the Company was advised that the Novel SPA as initially announced by the Company on February 24, 2015 had received all the necessary approvals and closed. Pursuant to the Novel SPA, Novel Sunrise has purchased 48.7 million Common Shares from Turquoise Hill.
Going concern considerations
Notwithstanding the provision of the private placement, the coal prepayments received from customers and the Turquoise Hill Loan Facility, the Company continues to experience negative impacts on its margins and liquidity and there can be no assurance that the Company will have sufficient funding to be able to continue as a going concern.
The Company anticipates that coal prices in China will remain under pressure in 2015, which will continue to impact the Company’s margins and liquidity. Therefore the Company is actively seeking prepaid coal offtake agreements and other additional sources of financing to continue operating and meet its business objectives, while continuing to be focused on minimizing uncommitted capital expenditures and preserving the Company’s growth options. The Company, together with its new strategic partner, Novel Sunrise, has
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developed the Proposed Funding Plan in order to pay the interest due under the CIC Convertible Debenture, meet its obligations as they fall due, achieve its business objectives in 2015 and beyond. These obligations may include potential penalties as a consequence of the tax case in Mongolia (refer to “Regulatory Issues and Contingencies” for details). However, there is no guarantee that the Company will be able to implement this funding plan or secure other sources of financing. If it fails to do so, or is unable to secure additional capital or otherwise restructure or refinance its business in order to address its cash requirements through March 31, 2016, then the Company is unlikely to have sufficient capital resources or cash flows from mining operations in order to satisfy its ongoing obligations and future contractual commitments, including cash interest payments due on the CIC Convertible Debenture (approximately $7.9 million on May 19, 2015 and approximately $8.0 million on November 19, 2015). Therefore, the Company is actively seeking additional sources of financing to continue operating and meet its objectives.
The Company’s consolidated financial statements have been prepared on a going concern basis which assumes that the Company will continue operating until at least March 31, 2016 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 flows, secure additional capital or otherwise pursue a strategic restructuring, refinancing or other transaction to provide it with additional liquidity. If it fails to do so, or is unable to secure additional capital or otherwise restructure or refinance its business in order to address its cash requirements through March 31, 2016, then the Company is unlikely to have sufficient capital resources or cash flows from mining operations in order to satisfy its ongoing obligations and future contractual commitments, including cash interest payments due on the CIC Convertible Debenture, it may not be able to continue as a going concern.
If for any reason, the Company is unable to secure the additional sources of financing and continue as a going concern, then 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.
While the Company intends to secure additional sources of financing as soon as possible, a continued delay in securing additional financing could ultimately result in an event of default of the $250 million CIC Convertible Debenture, 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.
The Company is also subject to a remedial delisting review by the TSX in connection with its reliance on the financial hardship exemption from approval by its shareholders of the private placement with Novel Sunrise as announced on February 24, 2015. Refer to the below section “TSX Financial Hardship Exemption Application and Status of Listing on TSX” for details. The failure by the Company to clear the TSX delisting review within 90 days from February 25, 2015 may result in the Company’s delisting which would result in an event of default under the CIC Convertible Debenture. An event of default 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.
Factors that impact the Company’s liquidity are being closely monitored and include, but are not limited to, Chinese economic growth, market prices of coal, production levels, operating cash costs, capital costs, exchange rates of currencies of countries where the Company operates and exploration and discretionary expenditures.
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Cash Position and Liquidity
At March 31, 2015, the Company had cash of $3.6 million compared to cash of $3.8 million at December 31, 2014. Working capital (excess current assets over current liabilities) was negative $3.6 million at March 31, 2015 compared to positive $3.4 million at December 31, 2014. At May 11, 2015, the Company had cash of $4.9 million.
At March 31, 2015, the Company’s gearing ratio was 0.24 (December 31, 2014: 0.23), which was calculated based on the Company’s long term liabilities to total assets. At March 31, 2015, the Company is not subject to any externally imposed capital requirements.
Proposed Funding Plan
The Company entered into the transaction with Novel Sunrise who as a new significant shareholder and strategic partner intend to bring its operational and marketing expertise to the Company. Novel Sunrise, together with its affiliated companies in China, is a leading private enterprise in the real estate, logistics and supply chain management industries. In this connection, Novel Sunrise has agreed to assist the Company in the implementation of a funding plan intended to improve cash flow for the Company and support its business strategy and operations in a difficult market, with the goal of positioning the Company with a strong future as a coal producer. The Proposed Funding Plan includes introducing potential customers in China to the Company to allow the Company to expand its customer base further inland in China, and helping the Company to secure longer-term coal offtake arrangements, thereby allowing the Company to ramp up production to capacity. Novel Sunrise has also advised the Company as part of the financing plan that it intends to help the Company to establish relationships with commercial banks in China and Hong Kong to help the Company to secure short term bridge loans, trading credit facilities and other types of financing.
While it is the Company's intention to proceed to implement the Proposed Funding Plan with Novel Sunrise's assistance as soon as possible, the Proposed Funding Plan is indicative only and the Company's ability to implement it successfully is dependent on a number of factors beyond its control, including but not limited to, China’s economic growth and coal demand growth, market prices of coal, the availability of credit and market interest rates, and exchange rates of currencies of countries where the Company operates, and there can be no assurance that the Company will be able to do so, or that it will be able to do so in sufficient time to continue as a going concern. In such event, the Company is likely to be unable to meet its obligations, which could result in voluntary or involuntary insolvency proceedings involving the Company as discussed under the heading "Risk Factors" in the December 31, 2014 MD&A issued on March 30, 2015 and available on SEDAR at www.sedar.com.
TSX Financial Hardship Exemption Application and Status of Listing on TSX
On February 25, 2015, the TSX confirmed that the Company had been placed on remedial delisting review in connection with its reliance on the financial hardship exemption from approval by its shareholders of the private placement with Novel Sunrise. A delisting review is customary practice under TSX policies when a listed company relies on the financial hardship exemption; refer to the Company’s MD&A for the year ended December 31, 2014 available on SEDAR at www.sedar.com for additional detail. The Company currently has until May 26, 2015 to comply with all requirements of the TSX for continued listing and a meeting of the TSX Continued Listing Committee to consider this matter has been scheduled for May 19, 2015.
The Company is planning on seeking an approval from TSX for a 30 day extension of the delisting review until June 18, 2015. The request for an extension is a consequence of the delays in the closing of the Novel SPA and the associated delays in the implementation of the Company's Proposed Funding Plan.
The Company believes the proceeds of the private placement and the implementation of the Company’s Proposed Funding Plan will allow it to meet its short term financing needs and that it will be compliant with the continued listing requirements of the TSX; however, no assurance can be provided that the TSX will grant the Company the requested extension nor can any assurance be provided as to the outcome of the
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