SouthGobi Resources announces second quarter 2015 financial and operating results
August 13, 2015
SouthGobi Resources announces second quarter 2015 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 six months ended June 30, 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 June 30, 2015 and subsequent period to August 13, 2015 are as follows:
- Operating results - The Company continues to operate under difficult market conditions as prices for coal remained weak in China through the second quarter of 2015. The impact of these conditions on the Company's operations continues to be exacerbated given the Company’s liquidity constraints. The Company sold 0.19 million tonnes of its coal products during the quarter. After the resumption of mining operations on March 30, 2015, production for the second quarter of 2015 was 0.62 million tonnes, allowing the Company to position itself to meet its commitments under existing and expected new coal offtake contracts.
- Tax investigation case in Mongolia - On January 30, 2015, the panel of appointed judges from the Second District Criminal Court of Justice found three of the Company’s 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”), the Company’s wholly-owned subsidiary, was not a party to the criminal proceedings, the court declared it to be financially liable as a “civil defendant” for a penalty (the “Tax Penalty”) of MNT 35.3 billion (approximately $18.0 million at June 30, 2015), the corresponding balance has been provided for in the second quarter of 2015.
Subsequent to an unsuccessful appeal to the Second District Criminal Court of Justice, on April 22, 2015, SGS filed an appeal with the Supreme Court against the decision of the 10th Appeal Court for Criminal Case of Mongolia upholding the tax verdict against SGS (the “Tax Verdict”). SGS has been informed that the Supreme Court has refused to hear the tax case on appeal and as such the Tax Verdict has entered into force.
The Tax Verdict is however not immediately payable and enforceable against SGS absent further actions prescribed by the laws of Mongolia. In particular, SGS has not received a copy of the bailiff’s resolution on execution of the Tax Verdict, as required under the Law of Mongolia on Execution of Court Decisions in order for any judgment execution process to happen.
The Company continues to believe that there is a lack of evidence to support the Tax Verdict and that the Tax Verdict and the subsequent decisions of the higher courts on appeal were substantively and procedurally in error under the laws of Mongolia.
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The Company has assessed other available judicial avenues to continue defending itself. However, it believes it can and is currently seeking to resolve amicably with the Mongolian authorities the dispute giving rise to the Tax Verdict in a manner that is both appropriate having regard to the Company's limited financial resources and supportive of a positive environment for foreign investment in Mongolia. There can be no assurance, however, that any such resolution can be successfully negotiated by the Company either at all or on favourable terms, or that the terms of any resolution to which the Government of Mongolia would be prepared to agree would not be materially adverse to the Company. In such case, this may result in an event of default under the China Investment Corporation (“CIC”) convertible debenture (the “CIC Convertible Debenture”) Convertible Debenture and CIC would have the right to declare the full principal and accrued interest owing thereunder immediately due and payable. Such an event of default under the CIC Convertible Debenture or the Company’s inability to pay the penalty could result in voluntary or involuntary proceedings involving the Company (including bankruptcy) as discussed under the heading Risk Factors in the MD&A issued on March 30, 2015 and available on SEDAR at www.sedar.com.
- Novel Sunrise Private Placement - On February 24, 2015, the Company announced it had entered into a private placement for proceeds of up to $7.5 million with Novel Sunrise Investments Limited (“Novel Sunrise”) as a proposed new significant investor and strategic partner.
On March 3, 2015, following the successful closing of the first tranche of the Novel Sunrise private placement, including the receipt of $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 July 26, 2015, Mr. Ted Chan ceased to be the Executive Director of the Company. Refer to “Changes in Management and Directors” section below for more details.
On April 23, 2015, the Company successfully closed the second and final tranche of the Novel Sunrise 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 Mandatory Convertible Units on a one for one basis into Common Shares.
CITIC Merchant and Swiss Life GP private placements - On June 22, 2015, the Company announced it had negotiated private placement agreements with sophisticated investors to provide additional capital resources into the Company. The terms of the subscription agreements for the private placements allowed for the issue of approximately 55 million Common Shares.
On July 14, 2015, the Company announced it had obtained all the necessary regulatory approvals for the private placements and subsequently successfully closed the Swiss Life GP Private Placement, raising $2.9 million for the issuance of 5 million Common Shares.
On July 14, 2015, the Company agreed to an extension of the closing date of the private placement agreement between the Company and CITIC Merchant until July 20, 2015. However, the conditions precedent to the agreement were not fulfilled and CITIC Merchant informed the Company that it would not be subscribing for Common Shares pursuant to the signed private placement agreement.
- TSX remedial delisting review - As a result of relying on the financial hardship exemption to complete the Novel Sunrise private placement, the Company was placed on remedial delisting review as of February 25, 2015.
The Company has received confirmation from the Continued Listing Committee of the TSX (the “TSX Committee”) that it will further defer its scheduled meeting to consider whether the Company has met the listing requirements of the TSX until August 25, 2015. The TSX Committee has determined to defer its delisting decision until no later than August 28, 2015.
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- CIC Convertible Debenture - On May 20, 2015 under the terms of the CIC Convertible Debenture, CIC confirmed to the Company that subject to certain conditions and limitations, it would grant a deferral of payment of approximately $7.9 million in cash interest due by the Company to CIC on May 19, 2015 (“May 2015 cash interest installment”) until July 22, 2015, subject to a three day cure period which expires on July 27, 2015.
On July 27, 2015, CIC confirmed to the Company that, subject to certain conditions and limitations, it agreed to grant a further deferral of payment of the May 2015 cash interest installment until November 19, 2015 to allow the Company to execute its Proposed Funding Plan (as defined below in the section entitled "Going Concern”).
- Novel SPA - On February 24, 2015, the Company was advised by Turquoise Hill Resources Ltd. (“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 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.
- NUR SPA - 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 held by Turquoise Hill.
- Shareholder loan extension - 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.
- Notice of arbitration - On June 29, 2015, the Company announced First Concept Logistics Limited (“First Concept”), a subsidiary of NUR, served a notice of arbitration (the “Notice”) on SGS in respect of a coal supply agreement dated May 19, 2014 as amended on June 27, 2014 (the “Coal Supply Agreement”).
According to the Notice, First Concept alleges that SGS has breached the Coal Supply Agreement and seeks, among other items, the repayment of $11.5 million, representing the prepayment amount advanced by First Concept under such agreement. The Company firmly rejects the allegations of the First Concept in the Notice as lacking any merit and categorically denies First Concept’s claim for repayment of the sum of $11.5 million as wholly misconceived and will vigorously defend itself throughout the arbitration proceedings. In addition, SouthGobi reserves the right to pursue legal action against NUR and its subsidiary for compensation for any damages that result from their actions.
- Notice of claim - On July 2, 2015, the Company announced it had been served with a notice of claim by former President and Chief Executive Officer Alexander Molyneux. The claim relates to alleged breaches of Mr. Molyneux’s employment agreement by the Company and is seeking damages of $1 million. The Company considers the claim has no merit and will vigorously defend the action.
- Changes in Management and Directors
Mr. Ted Chan: Mr. Chan was initially appointed as Executive Director of the Company on March 3, 2015. On July 26, 2015, following the appointment of Mr. Yulan Guo as Interim Chief Executive Officer, Mr. Chan is no longer Executive Director but remained as a Non-Executive Director of the Company until August 6, 2015, the date of the Company's Annual Meeting of Shareholders (the "AGM"), where Mr. Chan did not stand for election.
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Mr. Yulan Guo: Mr. Guo was initially appointed to the Board of Directors as a Non-Executive Director on May 15, 2015. On July 26, 2015 Mr. Guo was appointed as Interim Chief Executive Officer and Executive Director of the Company and was elected as a director of the Company at the AGM.
Mr. Ningqiao Li: Mr. Li was appointed to the Board of Directors as a Non-Executive Director on May 15, 2015 and was elected as a director of the Company at the AGM.
Mr. Aminbuhe, Mr. Zhu Liu and Ms. Jin Lan Quan: On August 6, 2015, Mr. Aminbuhe, Mr. Liu and Ms. Quan were elected to the Board of Directors as Non-Executive Directors following the conclusion of the AGM.
Mr. Kelly Sanders: On August 6, 2015, Mr. Sanders did not stand for the election at the AGM and ceased to be a Non-Executive Director.
Mr. Bertrand Troiano: Mr. Troiano has stepped down as Chief Financial Officer of the Company following a two-year secondment from Rio Tinto which ended on July 31, 2015.
- Going Concern - 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 due under the CIC Convertible Debenture, meet the Company’s obligations as they fall due and 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. As at August 13, 2015, the Company had cash of $2.0 million.
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OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS
Summary of Operational Data
Three months ended Six months ended June 30, June 30, 2015 2014 2015 2014 Sales Volumes, Prices and Costs
Premium semi-soft coking coal Coal sales (millions of tonnes) 0.02 - 0.02 - Average realized selling price (per tonne) (i) $ 23.37 $
- $ 23.37 $ -
Standard semi-soft coking coal Coal sales (millions of tonnes) 0.11 0.12 0.16 0.41 Average realized selling price (per tonne) (i) $ 19.97 $ 20.33 $ 19.31 $ 21.52 Thermal coal Coal sales (millions of tonnes) 0.06 0.51 0.19 0.61 Average realized selling price (per tonne) (i) $ 10.47 $ 10.72 $ 10.46 $ 10.94 Total
| Coal sales(millions of tonnes) | 0.19 | 0.63 | 0.37 | 1.02 | ||||
| Average realized selling price(per tonne) (i) | $17.42 | $12.52 | $15.15 | $15.22 | ||||
| Raw coal production (millions of tonnes) | 0.62 | 0.55 | 0.62 | 1.19 | ||||
| Direct cash costs of product sold(per tonne) (ii) | $15.57 | $ | ||||||
| 8.23 | $12.27 | $ |
9.08 Mine administration cash costs of product sold (per tonne) (ii) $ 7.90 $ 2.49 $ 5.13 $ 3.00 Total cash costs of product sold (per tonne) (ii) $ 23.47 $ 10.72 $ 17.40 $ 12.08
Other Operational Data
Production waste material moved (millions of bank 3.62 2.17 3.62 4.72 cubic meters)
Strip ratio (bank cubic meters of waste material per tonne of 5.87 3.97 5.87 4.00 coal produced)
Lost time injury frequency rate (iii) 0.00 0.15 0.00 0.15
(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
For the three months ended June 30, 2015
Market conditions and prices for coal remained weak in China through the second quarter of 2015. The Company sold 0.19 million tonnes of its coal products during the quarter. After the resumption of mining operations on March 30, 2015, production increased to 0.62 million tonnes for the quarter, allowing the Company to position itself to meet its commitments under existing and expected new coal offtake contracts.
The cash cost of product sold for the second quarter of 2015 $23.47 has significantly increased compared to the second quarter of 2014 $10.72. The reason for the increase is primarily related to the decrease in sales volumes over which the relatively fixed administration costs are allocated. The Mine administration cash costs per tonne of product sold in the second quarter of 2015 was $7.90 an increase of $5.41 compared to comparative period in 2014 of $2.49.
The Company ended the second quarter of 2015 without a lost time injury. As at June 30, 2015, the Company has a lost injury time frequency rate of nil per 200,000 man hours based on a rolling 12 month average.
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For the six months ended June 30, 2015
During the first six months of 2015 market conditions and prices for coal remained weak in China.
The production in the first six months of 2015 was lower than the first six months of 2014 due to the curtailment of the Company’s mining operations through to March 30, 2015. 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 allowing the Company to position itself to meet its commitments under existing and expected new coal offtake contracts.
Total cash costs of product sold were $17.40 per tonne in the first six months of 2015 compared to $12.08 per tonne in the first six months of 2014. The reason for the increase is primarily related to the decrease in sales volumes over which the fixed and variable costs are allocated. At a gross level, the Mine administration cash costs of product sold in the first six months of 2015 is $1.9 million compared to $3.1 million a decrease of $1.2 million.
Summary of Financial Results
Three months ended Six months ended June 30, June 30,
$ in thousands, except per share information 2015 2014 2015 2014 Revenue (i),(ii) $ 2,951 $ 6,691 $ 4,536 $ 11,828
| Cost of sales(ii) | (11,835) | (20,086) | (29,511) | (38,452) |
| Gross loss excluding idled mine asset costs | (5,017) | (8,497) | (6,246) | (18,699) |
| Gross loss including idled mine asset costs | (8,884) | (13,395) | (24,975) | (26,624) |
| Other operating expense | (19,450) | (1,776) | (18,479) | (2,849) |
| Administration expenses | (1,961) | (2,253) | (3,388) | (4,490) |
| Evaluation and exploration expenses | 22 | (107) | (56) | (279) |
| Loss from operations | (30,273) | (17,531) | (46,898) | (34,242) |
| Finance costs | (5,222) | (5,215) | (11,605) | (10,240) |
| Finance income | 273 | 127 | 16 | 1,134 |
| Share of losses of joint venture | 151 | (3) | 133 | (29) |
| Income tax expense | (1) | (546) | (1) | (546) |
| Net loss | (35,072) | (23,168) | (58,355) | (43,923) |
Basic loss per share $ (0.15) $ (0.12) $ (0.25) $ (0.23) Diluted loss per share $ (0.15) $ (0.12) $ (0.25) $ (0.23)
(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
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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 initially calculated and paid monthly based on the Government reference price. On a quarterly basis the royalty amount is 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 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.
On March 16, 2015, the Government of Mongolia issued an amendment resolution to the “flexible tariff” regime changing the coal classification methodology from which to base the royalty calculation. The resolution is effective from May 1, 2015 and the Government of Mongolia has published reference price classifications subdivided into additional classifications since that date. According to the resolution, Company’s coal is mainly divided into 2 classifications depending on coal quality under raw coal type.
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” in the MD&A issued on March 30, 2015 and available on SEDAR at www.sedar.com.
Overview of Financial Results
For the three months ended June 30, 2015
The Company recorded a $30.3 million loss from operations in the second quarter of 2015 compared to a $17.5 million loss from operations in the second quarter of 2014. The operations for the three months ended June 30, 2015 were impacted by continuing difficult market conditions and weak coal prices in China. Whilst the Company resumed production on March 30, 2015 in anticipation of increased sales volumes, the results for the second quarter of 2015 were primarily impacted as a consequence of the tax investigation case in Mongolia as a provision of $18.0 million was recorded in respect of the Tax Penalty during the three months ended June 30, 2015.
Revenue was $3.0 million in the second quarter of 2015 compared to $6.7 million in the second quarter of 2014. The Company sold 0.19 million tonnes of coal at an average realized selling price of $17.42 per tonne in the second quarter of 2015 compared to sales of 0.63 million tonnes at an average realized selling price of $12.52 per tonne in the second quarter of 2014. Despite the continued difficult market conditions there was an increase in the average realized selling price which is attributed to a change in sales mix. The product mix for the second quarter of 2015 consisted of approximately 69% of Premium and Standard semisoft coking coal and 31% of Thermal coal compared to approximately 19% of Premium and Standard semisoft coking coal and 81% of Thermal coal in the second quarter of 2014.
The Company’s revenue is presented after deduction of royalties and selling fees. The Company’s effective royalty rate for the second quarter of 2015, based on the Company’s average realized selling price of $17.42 per tonne, was 10.7% or $1.86 per tonne compared to 8.1% or $1.00 per tonne based on the average realized selling price of $12.52 per tonne in the second quarter of 2014.
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Cost of sales was $11.8 million in the second quarter of 2015 compared to $20.1 million in the second 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 June 30,
$ in thousands 2015 2014
| Operating expenses Share-based compensation expense Depreciation and depletion Impairment of coal stockpile inventories | $ 4,571 4 832 2,561 | $ 6,754 127 2,061 6,246 |
|---|---|---|
| Cost of sales from mine operations Cost of sales related to idled mine assets | 7,968 3,867 | 15,188 4,898 |
| Cost of sales | $ 11,835 | $ 20,086 |
Operating expenses in cost of sales were $4.6 million in the second quarter of 2015 compared to $6.8 million in the second quarter of 2014. The overall decrease in operating expenses is primarily the result of the impact of increasing the coal stockpile levels during the second quarter of 2015 to allow the Company to meet its existing and anticipated coal sales commitments compared to a reduction in the coal stockpile in the second quarter of 2014.
Cost of sales in the second quarter of 2015 and 2014 included coal stockpile impairments of $2.6 million and $6.2 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 second 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 second quarter of 2015 included $3.9 million related to depreciation expenses for idled equipment compared to $4.9 million in the second quarter of 2014.
Other operating expense was $19.5 million in the second quarter of 2015 compared to $1.8 million in the second quarter of 2014 as follows:
Three months ended June 30,
$ in thousands 2015 2014
| Foreign exchange loss/ (gain) Impairment loss on prepaid expenses and deposits Impairment loss on property, plant and equipment Proceeds on disposal of mining license Provision for doubtful trade and other receivable Provision for court case penalty Other | $ 1,196 - - - 157 18,049 48 | $ ( 146) 3,405 277 (1,818) - - 58 |
|---|---|---|
| Other operating expense | $ 19,450 | $ 1,776 |
The Company recognized an expense for the provision of the Tax Penalty in respect of the tax investigation case in Mongolia. The Tax Penalty amounts to MNT35.3 billion (approximately $18.0 million on June 30, 2015).
The Company recognized an impairment loss of $3.4 million in the second quarter of 2014 related to prepaid toll washing fees under the contract with Ejinaqi Jinda Coal Industry Co. Ltd. (“Ejin Jinda”). The impairment
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charge was the result of the continued delay in starting the commercial operations at the wet washing facility and the continued soft coal market in China. No corresponding impairment charge was required in the second quarter of 2015.
In the second quarter of 2014, the Company completed the sale of the Tsagaan Tolgoi mining license. The gross proceeds of the sale were $2.0 million, indirect taxes and costs totaled $0.2 million and a withholding tax totaling $0.5 million was incurred. The net proceeds generated for the Company after taxes and costs were $1.3 million.
Administration expenses were $2.0 million in the second quarter of 2015 compared to $2.3 million in the second quarter of 2014 as follows:
Three months ended June 30,
$ in thousands 2015 2014
| Corporate administration Legal and professional fees Salaries and benefits Share-based compensation expense Depreciation | $ 5 12 890 472 47 40 | $ 5 23 779 825 94 32 |
|---|---|---|
| Administration expenses | $ 1,961 | $ 2,253 |
Administration expenses were lower for the second quarter of 2015 compared to the second quarter of 2014 primarily as a result of cost reduction measures.
Evaluation and exploration expenses were negligible in the second quarter of 2015 compared to $0.1 million in the second quarter of 2014. The Company continued to minimize evaluation and exploration expenditures in the second quarter of 2015 in order to preserve the Company’s financial resources. Evaluation and exploration activities and expenditures in the second 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 $5.2 million and $5.2 million respectively in the second quarter of 2015 and the second quarter of 2014. Finance costs primarily consisted of interest expense in respect of the $250.0 million CIC Convertible Debenture ($5.1 million for the second quarter of 2015 and $5.0 million for the second quarter of 2014).
Finance income was $0.3 million in the second quarter of 2015 compared to $0.1 million in the second quarter of 2014 which, primarily consists of an unrealized gain in respect of the embedded derivative in the CIC Convertible Debenture.
For the six months ended June 30, 2015
The Company recorded a $46.9 million loss from operations in the first six months of 2015 compared to a $34.2 million loss from operations in the first six months of 2014. The operations for the six months ended June 30, 2015 were impacted by continuing difficult market conditions and weak coal prices in China. Whilst the Company resumed production on March 30, 2015 in anticipation of increased sales volumes, the results for the first six months of 2015 were primarily impacted as a consequence of the Tax investigation case in Mongolia as a provision of $18.0 million was recorded in respect of the Tax Penalty during the three months ended June 30, 2015.
Revenue was $4.5 million in the first six months of 2015 compared to $11.8 million in the first six months of 2014. The Company sold 0.37 million tonnes of coal at an average realized selling price of $15.15 per tonne in the first six months of 2015 compared to sales of 1.02 million tonnes at an average realized selling price of $15.22 per tonne in the first six months of 2014. The benefit of the improved product mix has been
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more than offset by continued declining prices for the first six months of 2015 when compared to the first six months of 2014.
The Company’s revenue is presented net of royalties and selling fees. With the changes affecting the royalty regime in Mongolia, the Company’s effective royalty rate for the first six months of 2015, based on the Company’s average realized selling price of $15.15 per tonne, was 18.0% or $2.73 per tonne compared to 16.2% or $2.46 per tonne based on the average realized selling price of $15.22 per tonne in the first six months of 2014.
Cost of sales was $29.5 million in the first six months of 2015 compared to $38.5 million in the first six months 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.
Six months ended June 30,
$ in thousands 2015 2014
| Operating expenses Share-based compensation expense Depreciation and depletion Impairment of coal stockpile inventories | $ 6,498 32 1,141 3,111 | $ 12,317 143 4,540 13,527 |
|---|---|---|
| Cost of sales from mine operations Cost of sales related to idled mine assets | 10,782 18,729 | 30,527 7,925 |
| Cost of sales | $ 29,511 | $ 38,452 |
Operating expenses in cost of sales were $6.5 million in the first six months of 2015 compared to $12.3 million in the first six months of 2014. The overall decrease in operating expenses is the result of both (i) different production profiles, in the first six months of 2015 there was a period of curtailment until March 30, 2015 whilst in the first six months of 2014 production was impacted by a decision by the Company in June 2014 in response to market conditions to reduce production and place approximately half of its workforce on furlough; and (ii) a greater increase in coal stockpiles during the first six months of 2015 when compared to the first six months of 2014.
Cost of sales in the first six months of 2015 and the first six months of 2014 included coal stockpile impairments of $3.1 million and $13.5 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 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 primarily included depreciation expense. Cost of sales related to idled mine assets in the first six months of 2015 included $15.8 million related to depreciation expenses for idled equipment (2014: $7.9 million). Idled mine asset costs increased in the first six months of 2015 compared to the first six months of 2014 as a result of the period of curtailment until March 30, 2014 when mining operations recommenced. However, neither the production plan for the first six months of 2014 nor for the period from March 30, 2015 until June 30, 2015 fully utilized the Company’s existing mining fleet, therefore, idled mine asset costs continued to be incurred.
Other operating expenses were $18.5 million in the first six months of 2015 compared to $2.8 million in the first six months of 2014.
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Six months ended June 30,
$ in thousands 2015 2014
| Foreign exchange loss/(gain) Impairment loss on available-for-sale financial asset Impairment loss on prepaid expenses and deposits Impairment loss on property, plant and equipment Proceeds on disposal of mining license Provision for doubtful trade and other receivable Provision for court case penalty Other | $ 1 38 - - - - 157 18,049 135 | $ ( 910) 1,766 3,405 277 (1,818) - - 129 |
|---|---|---|
| Other operating expense | $ 18,479 | $ 2,849 |
The Company recognized an expense for the provision of the Tax Penalty in respect of the tax investigation case in Mongolia. The Tax Penalty amounts to MNT35.3 billion (approximately $18.0 million at June 30, 2015).
The Company recognized an impairment loss of $3.4 million in the first six months of 2014 related to prepaid toll washing fees under the contract with Ejinaqi Jinda Coal Industry Co. Ltd. (“Ejin Jinda”). The impairment charge was the result of the continued delay in starting the commercial operations at the wet washing facility and the continued soft coal market in China. No corresponding impairment charge was required in the second quarter of 2015.
In the first six months of 2014, the Company completed the sale of the Tsagaan Tolgoi mining license. The gross proceeds of the sale were $2.0 million, indirect taxes and costs totaled $0.2 million and a withholding tax totaling $0.5 million was incurred. The net proceeds generated for the Company after taxes and costs were $1.3 million.
The Company’s previous investment in Aspire Mining Limited (“Aspire”) was accounted for as an availablefor-sale financial asset and carried at its fair value. In the first six months of 2014, Aspire’s market capitalization fluctuated, in the first quarter of 2014 the market capitalization decreased and an impairment charge of $1.8 million was initially recorded. In the second quarter of 2014 the gain of $0.4 million was recorded in other comprehensive income. The Company disposed all its investment in Aspire during 2014 and did not hold any Aspire shares as at December 31, 2014 or June 30, 2015.
Administration expenses were $3.4 million in the first six months of 2015 compared to $4.5 million in the first six months of 2014.
Six months ended June 30,
$ in thousands 2015 2014
| Corporate administration Legal and professional fees Salaries and benefits Share-based compensation expense Depreciation | $ 9 58 1,365 852 147 66 | $ 1,183 1,465 1,553 225 64 |
|---|---|---|
| Administration expenses | $ 3,388 | $ 4,490 |
Administration expenses were lower in the first six months of 2015 compared to the first six months of 2014 reflecting the continued cost-cutting initiatives.
Evaluation and exploration expenses were $0.1 million in the first six months of 2015 compared to $0.3 million in the first six months of 2014. The Company continued to minimize evaluation and exploration expenditures in the first six months of 2015 in order to preserve the Company’s financial resources.
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Evaluation and exploration activities and expenditures in the first six months 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 $11.6 million and $10.2 million in the first six months of 2015 and 2014 respectively. This primarily consisted of interest expense on the CIC Convertible Debenture ($10.1 million for the first six months of 2015 and $10.0 million for the first six months of 2014).
Finance costs for the first six months of 2015, also includes $1.3 million in respect of the unrealized fair value loss of the embedded derivative in the CIC Convertible Debenture. In comparison, in the first six months of 2014, the Company recorded within Finance income an unrealized fair value gain of the embedded derivative in the CIC Convertible Debenture ($1.1 million). The fair value of the embedded derivatives in the CIC Convertible Debenture is driven by many factors including: the Common Share price, U.S. Dollar and Canadian Dollar exchange rates and share price volatility.
Finance income was negligible in the first six months of 2015 compared to $1.1 million in the first six months of 2014. Finance income primarily consists of unrealized gains on the fair value change of the embedded derivatives in the CIC Convertible Debenture (nil and $1.1 million respectively for the first six months of 2015 and the first six months of 2014).
Income tax expense was negligible in the first six months of 2015 compared to an expense of $0.5 million in the first six months of 2014. The $0.5 million recognized in the first six months of 2014 relates to taxes paid in respect of the sale of the Tsagaan Tolgoi mining license.
Summary of Quarterly Operational Data
| 2015 | 2014 | 2013 | ||||||
| Quarter Ended | 30-Jun | 31-Mar | 31-Dec | 30-Sep | 30-Jun | 31-Mar | 31-Dec | 30-Sep |
| 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) | 0.02 $ 2 3.37 0.11 $ 1 9.97 0.06 $ 1 0.47 0.19 $ 1 7.42 0.62 $ 1 5.57 $ 7.90 $ 2 3.47 3.62 5.87 | - $ - 0.05 $ 1 7.95 0.13 $ 1 0.46 0.18 $ 1 2.66 - $ 8.68 $ 2.11 $ 1 0.79 - - 0.25 | 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 |
| 0.00 | 0.21 | 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.
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