SouthGobi Resources announces second quarter 2018 financial and operating results
R E S O U R C E S August 14, 2018
SouthGobi Resources announces second quarter 2018 financial and operating results
HONG KONG – SouthGobi Resources Ltd. (TSX: SGQ, HK: 1878) (the “Company” or “SouthGobi”) today announces its financial and operating results for the three and six months ended June 30, 2018. All figures are in U.S. dollars (“USD”) unless otherwise stated.
SIGNIFICANT EVENTS AND HIGHLIGHTS
The Company’s significant events and highlights for the three months ended June 30, 2018 and the subsequent period up to August 14, 2018 are as follows:
- Operating Results – As a result of improved market conditions and prices for coal in China as well as a higher portion of sales were made through our Inner Mongolia subsidiary, the Company experienced an increase in the average selling price of coal from $25.2 per tonne in the second quarter of 2017 to $32.8 per tonne in the second quarter of 2018. However, the volume of coal sales has decreased from 1.5 million tonnes in the second quarter of 2017 to 0.6 million tonnes in the second quarter of 2018 as a result of the delay in the customs clearance process at the Ceke border which the Company has been experiencing since July 2017 and a certain portion of the Company’s coal products failing to meet the quality standards established under Chinese import regulations.
- Financial Results – The Company recorded a gross profit of $2.3 million in the second quarter of 2018 compared to $7.3 million in the second quarter of 2017 while a $19.8 million loss from operations was recorded in the second quarter of 2018 compared to a $0.9 million profit from operations in the second quarter of 2017. The overall financial results have worsened when compared to the second quarter of 2017, which was principally attributable to the diseconomies of scale driven by decreased sales volume, the recognition of a provision for doubtful notes receivables of $7.7 million and the recognition of a provision for doubtful trade and other receivables of $8.2 million during the quarter. The recognition of a provision for doubtful notes receivables and trade and other receivables follows after a credit reassessment exercise carried out during the second quarter of 2018 which concluded with the Company only continuing coal deliveries to customers with above-standard credit ratings in order to preserve the capital of the Company and discontinuing coal deliveries to certain other customers. The provision recognized relates to receivables from those customers that the Company has ceased coal shipments to. The Company is investigating the matter and exploring different options to retrieve the balance of these doubtful trade and notes receivables.
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- China Investment Corporation (“CIC”) Convertible Debenture (“CIC Convertible Debenture”) – Pursuant to the terms of the deferral agreement dated June 12, 2017 (the “June 2017 Deferral Agreement”) with CIC in relation to a revised payment schedule on the $22.3 million of cash interest and associated costs originally due under the CIC Convertible Debenture on May 19, 2017 (the “May 2017 Interest Payable”), the Company was required to pay $9.7 million of cash interest and associated costs to CIC on November 19, 2017 (the “June 2017 Deferral Agreement Payment”). In addition, pursuant to the terms of the CIC Convertible Debenture, the Company was required to pay $8.1 million and $7.9 million of anniversary cash interest to CIC on November 19, 2017 and May 19, 2018, respectively (the “Anniversary Interest Payment” and together with the June 2017 Deferral Agreement Payment, the “November 19th and May 19th Payments”). Pursuant to the CIC Convertible Debenture, the Company was also obliged to issue $4.0 million worth of PIK interest shares (the “November 2017 PIK Interest”) to CIC on November 19, 2017.
As of the date of this press release, the Company: (i) has neither paid the November 19th and May 19th Payments nor issued the November 2017 PIK Interest shares to CIC within the cure period provided for under the CIC Convertible Debenture; and (ii) has not agreed upon a repayment plan for such amounts with CIC. Consequently, the Company is in default under the CIC Convertible Debenture and the June 2017 Deferral Agreement. Pursuant to the terms of the CIC Convertible Debenture and the June 2017 Deferral Agreement, CIC may, at its discretion, provide notice to the Company and declare all principal, interest and other amounts owing under the CIC Convertible Debenture and the June 2017 Deferral Agreement immediately due and payable, and take steps to enforce payment thereof, which would have a material adverse effect on the business and operations of the Company and may negatively affect the price and volatility of the Common Shares and any investment in such shares could suffer a significant decline or total loss in value. As of the date of this press release, the Company has received no indication from CIC of any intention to deliver a notice of default under the CIC Convertible Debenture and the June 2017 Deferral Agreement or to accelerate the amounts outstanding under the CIC Convertible Debenture and the June 2017 Deferral Agreement.
The Company is in discussion with CIC for a deferral of the November 19th and May 19th Payments and the November 2017 PIK Interest; however, there can be no assurance that a favorable outcome will be reached.
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As a consequence of the Company not entering into a deferral agreement with CIC as at June 30, 2018, International Accounting Standard (“IAS”) 1 requires the Company to classify the entire balance of the CIC Convertible Debenture as a current liability as at June 30, 2018, notwithstanding the fact that CIC has not indicated any intention to deliver notice of default or accelerate the maturity of the CIC Convertible Debenture. The Company anticipates that both the debt host and the fair value of the embedded derivative will be classified as a non-current liability upon the execution of a deferral agreement, unless a future event of default occurs under the terms of the CIC Convertible Debenture.
- Changes in Management and Directors
Mr. Zhiwei Chen: Mr. Chen was appointed as a non-executive director on April 13, 2018.
Mr. Xiaoxiao Li: Mr. Li was appointed as a non-executive director on April 13, 2018.
Mr. Shougao Wang: Mr. Wang was appointed as Chief Executive Officer on June 1, 2018 and was subsequently appointed as an executive director on July 3, 2018.
Mr. Weiguo Zhang: Mr. Zhang was appointed as Chief Financial Officer on June 1, 2018.
Mr. Aiming Guo: Mr. Guo was appointed as Chief Operating Officer on June 1, 2018.
Mr. Bing Wang: Mr. Wang stepped down as interim Chief Executive Officer and returned to his prior position as General Manger, Sales and Marketing of the Company on June 1, 2018.
Mr. Yulan Guo: Mr. Guo stepped down as Chief Financial Officer of the Company on June 1, 2018. On June 28, 2018, Mr. Guo did not stand for re-election at the Company’s annual general meeting of shareholders (the “AGM”) and ceased to be a non-executive director.
Mr. Aminbuhe: On June 28, 2018, Mr. Aminbuhe did not stand for re-election at the AGM and ceased to be a non-executive director.
Mr. Zhu Liu: On June 28, 2018, Mr. Liu did not stand for re-election at the AGM and ceased to be an Independent non-executive director.
Ms. Lan Cheng: On June 28, 2018, Ms. Cheng was elected as a non-executive director of the Company at the AGM.
Mr. Tao Zhang: Mr. Zhang was appointed as a vice president of the Company on July 3, 2018.
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- Going Concern – In the fourth quarter of 2016, the Company initiated a plan to change the existing product mix to higher value and higher margin outputs by washing certain grades of coal in order to produce more premium semi-soft coking coal and to initiate more processing of the lower grades of coal in order to reduce the ash content and improve the selling price and margins on its thermal coal product. The construction of the wash plant was substantially completed in 2017, however commencement of washing has been delayed to the fourth quarter of 2018. The current mine plan incorporates the coal washing and processing systems and contemplates significantly higher volumes of production in order to complement the Company’s new product mix and sales volume targets. Such plans will require a significant level of stripping activities over the next two years and certain capital expenditures to achieve the designed production outputs. Such expenditures and other working capital requirements will require the Company to seek additional financing in the form of finance leases, debt or equity.
There is no guarantee that the Company will be able to successfully execute the measures mentioned above and 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 June 30, 2019, then the Company is unlikely to have sufficient capital resources or cash flows from mining operations in order to satisfy its current ongoing obligations and future contractual commitments. This could result in adjustments to the amounts and classifications of assets and liabilities in the Company’s condensed consolidated interim financial statements and such adjustments could be material.
Unless the Company acquires additional sources of financing and/or funding in the short term, the ability of the Company to continue as a going concern is threatened. If the Company is unable to continue as a going concern, it may be forced to seek relief under applicable bankruptcy and insolvency legislation. See section “Liquidity and Capital Resources” for details. As at August 14, 2018, the Company had $3.4 million of cash.
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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, 2018 2017 2018 2017
Sales Volumes, Prices and Costs
Premium semi-soft coking coal Coal sales (millions of tonnes) 0.07 0.18 0.10 0.37 Average realized selling price $ 59.98 $ 45.67 $ 62.54 $ (per tonne) (i) 45.64 Standard semi-soft coking coal/premium thermal coal Coal sales (millions of tonnes) 0.19 0.79 0.60 1.43 Average realized selling price $ 33.80 $ 26.69 $ 42.32 $ (per tonne) (i) 25.20 Standard thermal coal
0.32 0.44
Coal sales (millions of tonnes) 0.51 0.79 Average realized selling price (per tonne) (i) $ 26.32 $ 15.79 $ 26.07 $ 14.85 Total Coal sales (millions of tonnes) 0.58 1.48 1.14 2.59 Average realized selling price (per tonne) (i) $ 32.81 $ 25.24 $ 37.83 $ 24.93
0.98 1.36
Raw coal production (millions of tonnes) 1.89 3.40
Cost of sales of product sold (per tonne) $ 26.00 $ 18.50 $ 27.71 $ 19.75 Direct cash costs of product sold (per tonne) (ii) $ 10.12 $ 7.84 $ 13.43 $ 8.52 Mine administration cash costs of product sold (per tonne) (ii) $ 1.00 $ 2.22 $ 1.12 $ 1.70 Total cash costs of product sold (per tonne) (ii) $ 11.12 $ 10.06 $ 14.55 $ 10.22
Other Operational Data
Production waste material moved
5.18 8.06
(millions of bank cubic meters) 6.36 9.66 Strip ratio (bank cubic meters of waste material per tonne of coal produced) 5.26 3.37 5.90 2.84
0.06 0.10
Lost time injury frequency rate (iii) 0.18 0.15
(i) Average realized selling price is presented before deduction of royalties.
(ii) A Non-International Financial Reporting Standards (“IFRS”) financial measure, which does not have a standardized meaning according to IFRS. See “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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Overview of Operational Data
For the second quarter of 2018, the Company had a lost time injury frequency rate of 0.06 per 200,000 man hours based on a rolling 12 month average.
For the three months ended June 30, 2018
As a result of improved market conditions and prices for coal in China as well as a higher portion of sales were made through our Inner Mongolia subsidiary, the Company experienced an increase in the average selling price of coal from $25.2 per tonne in the second quarter of 2017 to $32.8 per tonne in the second quarter of 2018. The product mix for the second quarter of 2018 consisted of approximately 12% of premium semi-soft coking coal, 33% of standard semi-soft coking coal/premium thermal coal and 55% of standard thermal coal compared to approximately 12% of premium semi-soft coking coal, 53% of standard semi-soft coking coal/ premium thermal coal and 35% of standard thermal coal in the second quarter of 2017.
The Company sold 0.6 million tonnes for the second quarter of 2018 as compared to 1.5 million tonnes for the second quarter of 2017, as a result of the delay in the customs clearance process at the Ceke border which the Company has been experiencing since July 2017 and a certain portion of the Company’s coal products failing to meet the quality standards established under Chinese import regulations. The Company’s production in the second quarter of 2018 was lower than the second quarter of 2017 as a result of pacing the production to meet the expected sales, yielding 1.0 million tonnes for the second quarter of 2018 as compared to 1.9 million tonnes for the second quarter of 2017.
The Company’s unit cost of sales of product sold increased to $26.0 per tonne in the second quarter of 2018 from $18.5 per tonne in the second quarter of 2017. The increase was mainly driven by decreased sales volume and the related diseconomies of scale.
For the six months ended June 30, 2018
Due to the delays experienced in the custom clearance process at the Ceke border and a certain portion of the Company’s coal products failing to meet the quality standards established under Chinese import regulations, the Company sold 1.1 million tonnes for the first six months of 2018 as compared to 2.6 million tonnes for the first six months of 2017.
The average selling price increased from $24.9 per tonne for the first six months of 2017 to $37.8 per tonne for the first six months of 2018, which was mainly due to the improved market conditions and prices for coal in China as well as a higher portion of sales were made through our Inner Mongolia subsidiary.
The Company’s production in the first six months of 2018 was lower than the first six months of 2017 as a result of pacing the production to meet the expected sales, yielding 1.4 million tonnes for the six months of 2018 as compared to 3.4 million tonnes for the first six months of 2017.
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The Company’s unit cost of sales of product sold increased to $27.7 per tonne in the first six months of 2018 from $19.8 per tonne in the first six months of 2017. The increase was principally attributable to the diseconomies of scale driven by decreased sales volume.
Summary of Financial Results
| $ in thousands, except per share | Three months ended | Six months ended | |||
|---|---|---|---|---|---|
| information | June 30, | June 30, | |||
| 2018 | 2017 | 2018 | 2017 | ||
| Revenue(i),(ii) | $ | 17,377 $ | 34,665 $ | 40,600 $ | 59,919 |
| Cost of sales(ii) | (15,078) | (27,385) | (31,585) | (51,144) |
Gross profit excluding idled mine asset costs 6,079 9,445 16,329 14,159 Gross profit including idled mine asset costs 2,299 7,280 9,015 8,775
(18,091) (19,429)
Other operating expenses (4,045) (7,253) Administration expenses (3,856) (2,234) (6,233) (4,619)
(156) (280)
Evaluation and exploration expenses (144) (173) Profit/(loss) from operations (19,804) 857 (16,927) (3,270)
(5,958) (11,932)
Finance costs (5,494) (11,169) Finance income 140 50 366 14
628 968
Share of earnings of a joint venture 388 654 Income tax expense (1,609) (2,714) (2,538) (2,759)
(26,603) (30,063)
Net loss (6,913) (16,530) Basic and diluted loss per share $ (0.10)$ (0.03)$ (0.11)$ (0.06)
(i) Revenue is presented after the deduction of royalties.
(ii) Revenue and cost of sales relate to the Company’s Ovoot Tolgoi Mine within the Coal Division operating segment. Refer to note 3 of the condensed consolidated financial statements for further analysis regarding the Company’s reportable operating segments.
Overview of Financial Results
For the three months ended June 30, 2018
The Company recorded a $19.8 million loss from operations in the second quarter of 2018 compared to a $0.9 million profit from operations in the second quarter of 2017. The overall financial results have worsened when compared to the second quarter of 2017, which was principally attributable to the diseconomies of scale driven by decreased sales, the recognition of a provision for doubtful notes receivables of $7.7 million and the recognition of a provision for doubtful trade and other receivables of $8.2 million during the quarter. The recognition of a
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provision for doubtful notes receivables and trade and other receivables follows after a credit reassessment exercise carried out during the second quarter of 2018 which concluded with the Company only continuing coal deliveries to customers with above-standard credit ratings in order to preserve the capital of the Company and discontinuing coal deliveries to certain other customers. The provision recognized relates to receivables from those customers that the Company has ceased coal shipments to. The Company is investigating the matter and exploring different options to retrieve the balance of these doubtful trade and notes receivables.
Revenue was $17.4 million in the second quarter of 2018 compared to $34.7 million in the second quarter of 2017. The Company’s revenue is presented after deduction of royalties. The Company’s effective royalty rate for the second quarter of 2018, based on the Company’s average realized selling price of $32.8 per tonne, was 9.9% or $3.2 per tonne compared to 5.5% or $1.4 per tonne based on the average realized selling price of $25.2 per tonne in the second quarter of 2017.
Royalty regime in Mongolia
The royalty regime in Mongolia is evolving and has been subject to change since 2012.
On February 1, 2016, the Government of Mongolia issued a resolution in connection with the royalty regime. From February 1, 2016 onwards, royalties are to be calculated based on the actual contract price in which transportation cost to the Mongolia border should have been included. If such transportation cost was not included in the contract, the relevant transportation costs, customs documentation fees, insurance and loading costs should be estimated for the calculation of royalties. In the event that the calculated sales price as described above differs from the contract sales price of other entities in Mongolia (same quality of coal and same border crossing) by more than 10%, the calculated sales price will be deemed to be “non-market” under Mongolian tax law and the royalty will then be calculated based on a reference price as determined by the Government of Mongolia. See the section entitled “Risk Factors – Company’s Projects in Mongolia” in the Company’s most recently filed Annual Information Form for the year ended December 31, 2017, a copy of which is available under the Company’s profile on SEDAR at www.sedar.com.
Cost of sales was $15.1 million in the second quarter of 2018 compared to $27.4 million in the second quarter of 2017. The decrease in cost of sales was mainly due to the decreased sales during the quarter. 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 section “Non-IFRS financial measure” for further analysis) during the quarter.
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Three months ended June 30,
| $ in thousands | 2018 | 2017 |
| Operating expenses | $ 6,445 $ | 14,891 |
| Share-based compensation expense | – | 5 |
4,853
Depreciation and depletion 7,454
| Impairment of coal stockpile inventories | – | 2,870 |
| Cost of sales from mine operations | 11,298 | 25,220 |
| Cost of sales related to idled mine assets | 3,780 | 2,165 |
| Cost of sales | $ 15,078 $ | 27,385 |
Operating expenses in cost of sales were $6.4 million in the second quarter of 2018 compared to $14.9 million in the second quarter of 2017. The overall decrease in operating expenses was primarily due to the net effect of: (i) decreased sales volume from 1.5 million tonnes in the second quarter of 2017 to 0.6 million tonnes in the second quarter of 2018 and (ii) less coal stockpile inventories were impaired during the quarter.
There was no impairment of coal stockpiles for the second quarter of 2018 (second quarter of 2017: $2.9 million). The coal stockpile impairments recorded in the second quarter of 2017 primarily related to the Company’s higher-ash content products.
Cost of sales related to idled mine asset costs primarily consisted of periodic costs, which were expensed as incurred and included mainly depreciation expense. Cost of sales related to idled mine assets in the second quarter of 2018 included $3.8 million related to depreciation expenses for idled equipment (second quarter of 2017: $2.2 million).
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Other operating expenses was $18.1 million in the second quarter of 2018 (second quarter of 2017: $4.0 million).
Three months ended
2018
$ in thousands 2017
$ (7,705)$ Provision for doubtful notes receivables –
(8,176)
Provision for doubtful trade and other receivables (1,335)
(742)
Foreign exchange loss (1,607)
(532)
Provision for prepaid expenses and deposits –
(395)
CIC management fee –
(323)
Penalty on late settlement of trade payables –
(230)
Provision for commercial arbitration – Gain on disposal of property, plant and equipment –
–
Impairment of properties for resale (1,075)
(27)
Other (28)
Other operating expenses $ (18,091)$ (4,045)
The Company made a provision for doubtful notes receivables of $7.7 million in the second quarter of 2018 (second quarter of 2017: nil) for certain long aged notes receivables. Further, a provision for doubtful trade and other receivables of $8.2 million were made by the Company in the second quarter of 2018 (second quarter of 2017: $1.3 million) for certain long aged receivables based on expected credit loss model.
Administration expenses were $3.9 million in the second quarter of 2018 (second quarter of 2017: $2.2 million).
Three months ended June 30,
| $ in thousands | 2018 | 2017 | |
| Corporate administration | $ | 704 $ | 566 |
| Professional fees | 1,748 | 533 | |
| Salaries and benefits | 1,344 | 1,040 | |
| Share-based compensation expense | 21 | 24 | |
| Depreciation | 39 | 71 | |
| Administration expenses | $ | 3,856 $ | 2,234 |
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The increase in salaries and benefits was mainly due to the increase of headcount, which is to support the expansion of the sales channel in China.
Evaluation and exploration expenses were $0.2 million in the second quarter of 2018 (second quarter of 2017: $0.1 million). The Company continued to minimize evaluation and exploration expenditures in 2018 in order to preserve the Company’s financial resources. Evaluation and exploration activities and expenditures in the second quarter of 2018 were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining licenses.
Finance costs were $6.0 million and $5.5 million in the second quarter of 2018 and 2017 respectively, which primarily consisted of interest expense on the $250.0 million CIC Convertible Debenture.
Finance income was $0.1 million for the second quarter of 2018 (second quarter of 2017: $0.1 million), which primarily related to fair value gain on notes receivable upon redemption.
For the six months ended June 30, 2018
The Company recorded a $16.9 million loss from operations in the first six months of 2018 compared to a $3.3 million loss from operations in the first six months of 2017. The operations for the six months ended June 30, 2018 were impacted by the following factors: (i) improved coal prices in China; (ii) diseconomies of scale driven by decreased sales; (iii) provision for doubtful notes receivables of $7.7 million; and (iv) provision for doubtful trade and other receivables of $9.3 million. The recognition of a provision for doubtful notes receivables and trade and other receivables follows after a credit reassessment exercise carried out during the second quarter of 2018 which concluded with the Company only continuing coal deliveries to customers with above-standard credit ratings in order to preserve the capital of the Company and discontinuing coal deliveries to certain other customers. The provision recognized relates to receivables from those customers that the Company has ceased coal shipments to. The Company is investigating the matter and exploring different options to retrieve the balance of these doubtful trade and notes receivables.
Revenue was $40.6 million in the first six months of 2018 compared to $59.9 million in the first six months of 2017. The Company sold 1.1 million tonnes of coal at an average realized selling price of $37.8 per tonne in the first six months of 2018 compared to sales of 2.6 million tonnes at an average realized selling price of $24.9 per tonne in the first six months of 2017.
The Company’s revenue is presented net of royalties. The Company’s effective royalty rate for the first six months of 2018, based on the Company’s average realized selling price of $37.8 per tonne, was 7.1% or $2.7 per tonne compared to 5.6% or $1.4 per tonne based on the average realized selling price of $24.9 per tonne in the first six months of 2017.
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Cost of sales was $31.6 million in the first six months of 2018 compared to $51.1 million in the first six months of 2017 as follows:
Six months ended
$ in thousands 2018 2017
$ 16,577 $ Operating expenses 25,591 Share-based compensation expense – 28
7,694
Depreciation and depletion 14,940
| Impairment of coal stockpile inventories | – | 5,201 |
| Cost of sales from mine operations | 24,271 | 45,760 |
| Cost of sales related to idled mine assets | 7,314 | 5,384 |
| Cost of sales | $ 31,585 $ | 51,144 |
Operating expenses in cost of sales were $16.6 million in the first six months of 2018 compared to $25.6 million in the first six months of 2017. The decrease in operating expenses was primarily related to the decrease in sales volume from 2.6 million tonnes in the first six months of 2017 to 1.1 million tonnes in the first six months of 2018.
Cost of sales in the first six months of 2017 included coal stockpile impairments of $5.2 million, to reduce the carrying value of the Company’s coal stockpiles to their net realizable value. The coal stockpile impairments recorded in 2017 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 2018 included $7.3 million related to depreciation expenses for idled equipment (2017: $5.4 million).
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