SouthGobi Resources announces third quarter 2017 financial and operating results
November 13, 2017
SouthGobi Resources announces third quarter 2017 financial and operating results
VANCOUVER – SouthGobi Resources Ltd. (TSX: SGQ, HK: 1878) (the “Company” or “SouthGobi”) today announces its financial and operating results for the three and nine months ended September 30, 2017. All figures are in U.S. dollars (“USD”) unless otherwise stated.
SIGNIFICANT EVENTS AND HIGHLIGHTS
The Company’s significant events and highlights for the three months ended September 30, 2017 and subsequent period up to November 13, 2017 are as follows:
- Operating Results – As a result of improved market conditions and prices for coal in the People’s Republic of China (“China”), the Company experienced an increase in the average selling price of coal from $15.79 per tonne for the third quarter of 2016 to $26.47 per tonne for the third quarter of 2017. However, as a result of delays in the custom clearance process at the Ceke border which the Company has been experiencing since July 2017, the volume of coal sales has dropped from 1.13 million tonnes for the third quarter of 2016 to 0.80 million tonnes for the third quarter of 2017. As of the date of this announcement, the situation has improved slightly and the Company continues to closely monitor the situation at the Ceke border.
- Financial Results – The Company recorded a gross loss of $5.7 million during the quarter compared to a gross loss of $5.6 million in the third quarter of 2016. Revenue was $19.4 million in the third quarter of 2017 as compared to $16.4 million in the third quarter of 2016. The financial results of the third quarter of 2017 are comparable to the comparative 2016 quarter as a result of increased coal price due to improved market conditions in China offset by decreased sales volume caused by delays in the custom clearance process at the Ceke border experienced during the quarter.
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- CIC 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 Company is 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 is required pay $8.1 million of anniversary cash interest to CIC on November 19, 2017 (the “November Interest Payment” and together with the June 2017 Deferral Agreement Payment, the “November 19th Payments”). As of the date hereof, the Company expects that it will be unable to pay the November 19th Payments to CIC on the due date. The Company is currently in discussions with CIC for a further deferral of the November 19th Payments; however, there can be no assurance that a favorable outcome will be reached. If a further deferral of the November 19th Payments cannot be agreed to with CIC by November 19, 2017, then the principal amount outstanding and all accrued and unpaid interest and other amounts owing under the CIC Convertible Debenture and the June 2017 Deferral Agreement would immediately become due and payable in the event that CIC provides notice to the Company.
- Equipment Loan – Inner Mongolia SouthGobi Energy Ltd., a subsidiary of the Company executed a $10 million loan agreement on August 31, 2017 with Beijing Jin Rui Tian Chen Asset Management Co Ltd. (the “Equipment Loan”) for the purpose of financing the purchase of mining equipment to increase the production capacity of the Company.
- Class Action Lawsuit – On September 18, 2017, the Ontario Court of Appeal dismissed the Company’s appeal of the original Ontario lower court decision to permit the plaintiff to commence and proceed with a class action (the “Class Action”) against the Company claiming damages under the Ontario Securities Act in connection with the Company’s restatement of certain financial statements previously disclosed in the Company’s public fillings (the “Restatement”). Concurrently, the Ontario Court of Appeal allowed the plaintiff’s appeal of the original Ontario lower court decision to dismiss the plaintiff’s leave motion against certain of the Company’s former officers and directors and made an order granting leave for the plaintiff to proceed against such former officers and directors of the Company in relation to the Restatement. As a result, the plaintiff is now permitted to proceed with the Class Action against both the Company and the former officers and directors of the Company. The Company intends to seek leave to appeal to the Supreme Court of Canada.
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- Ceke Logistics Park Project – On October 10, 2017, the Company entered into an investment agreement (“Investment Agreement”) with Beijing De Rong Tai Investment Co., Ltd. (“BDRT”) in connection with the Company’s development of the Ceke Port Eco-friendly Bonded Logistics Park project (the “Ceke Logistics Park”). Pursuant to the Investment Agreement, BDRT has agreed, subject to fulfilment of certain conditions, to invest RMB231 million in instalments by July 30, 2018 in return for a 30% interest in Inner Mongolia SouthGobi Enterprise Co. Ltd. (“IMSE”), while the Company will hold the remaining 70% interest in IMSE. Proceeds from BDRT’s equity investment will be used by IMSE for the construction of the Ceke Logistics Park. IMSE is the project company which holds a 100% interest in the Ceke Logistics Park.
- Changes in Management and Director
Mr. Huiyi Wang: Mr. Wang resigned as a non-executive director on July 24, 2017.
Mr. Aminbuhe: Mr. Aminbuhe commenced a leave from his role as Chief Executive Officer of the Company, effective as of November 13, 2017.
Mr. Bing Wang: Mr. Wang was appointed as interim Chief Executive Officer of the Company, effective as of November 13, 2017.
- Going Concern – As at the date hereof, the Company has initiated a plan to change the existing product mix to higher value and higher margin outputs by washing certain grades of coal commencing in the fourth quarter of 2017 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 Company has also completed a new mine plan, which 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 involve the need for a significant level of stripping activities over the next two years and require certain capital expenditures to achieve the designed production outputs. Such expenditures will require the Company to seek additional financing in the form of finance leases, debt or equity. The Company has entered into an agreement for a finance lease on the new wash plant facility but will need additional financing to complete the thermal coal processing facilities.
There is no guarantee that the Company will be able to successfully secure additional sources of financing. This could result in adjustments to the amounts and classifications of assets and liabilities in the Company’s condensed consolidated 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 November 13, 2017, the Company had $1.9 million of cash.
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OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS
Summary of Operational Data
Three months ended Nine months ended September 30, September 30, 2017 2017
2016 2016
Sales Volumes, Prices and Costs
Premium semi-soft coking coal Coal sales (millions of tonnes) 0.12 0.07 0.49 0.13 $ 46.81 $ 21.04 $ 45.93 $ Average realized selling price (per tonne) (i) 21.19 Standard semi-soft coking coal
0.41 1.84
Coal sales (millions of tonnes) 0.77 1.87 Average realized selling price (per tonne) (i) $ 28.32 $ 15.66 $ 25.89 $ 16.69 Thermal coal
0.27 1.06
Coal sales (millions of tonnes) 0.29 0.83 Average realized selling price (per tonne) (i) $ 14.54 $ 14.79 $ 14.77 $ 11.11 Total
| Coal sales(millions of tonnes) | 0.80 | 1.13 | 3.39 | 2.83 | |
| Average realized selling price(per tonne)(i) | $ | 26.47 $ | 15.79 $ | 25.29 $ | 15.27 |
| Raw coal production(millions of tonnes) | 2.47 | 1.13 | 5.87 | 2.17 | |
| Cost of sales of product sold(per tonne) | $ | 31.31 $ | 19.53 $ | 22.48 $ | 22.65 |
| Direct cash costs of product sold(per tonne)(ii) | $ | 10.98 $ | 7.13 $ | 9.10 $ | 8.92 |
Mine administration cash costs of product sold (per tonne) (ii) $ 2.98 $ 2.26 $ 2.00 $ 1.96 $ 13.96 $ 9.39 $ 11.10 $ Total cash costs of product sold (per tonne) (ii) 10.88
Other Operational Data
Production waste material moved (millions of bank cubic meters) 6.77 2.22 16.43 4.76 Strip ratio (bank cubic meters of waste material per tonne of coal produced) 2.74 1.96 2.80 2.19 Lost time injury frequency rate (iii) 0.04 0.00 0.03 0.00
(i) Average realized selling price is presented before deduction of royalties and selling fees.
(ii) A Non-International Financial Reporting Standards (“IFRS”) financial measure, 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 third quarter of 2017, the Company had a lost time injury frequency rate of 0.04 per 200,000 man hours based on a rolling 12 month average.
For the three months ended September 30, 2017
As a result of improved market conditions and prices for coal in China, the Company experienced an increase in the average selling price of coal as compared to the third quarter of 2016. However the Company has been experiencing delays in the custom clearance process at the Ceke border since July 2017, and these delays have caused the typical turnaround time for the coal exporting trucks which transport coal from the Company’s mine site to the Ceke border to take at least twice as long as normal. As a result, the volume of coal sales has dropped as compared to the third quarter of 2016. The Company continues to closely monitor the situation at the Ceke border.
The Company sold 0.8 million tonnes of coal product during the third quarter of 2017 as compared to 1.13 million tonnes for the third quarter of 2016. The average realized selling price increased from $15.79 per tonne for the third quarter of 2016 to $26.47 per tonne for the third quarter of 2017, which was mainly a result of improved market conditions as well as improved product mix. The product mix for the third quarter of 2017 consisted of approximately 15% of premium semi-soft coking coal, 51% of standard semi-soft coking coal and 34% of thermal coal compared to approximately 7% of premium semi-soft coking coal, 68% of standard semi-soft coking coal and 25% of thermal coal for the third quarter of 2016.
The Company also improved the pacing of production to meet the anticipated demand, such that production was 2.47 million tonnes for the third quarter of 2017 as compared to 1.13 million tonnes for the third quarter of 2016.
The Company’s unit cost of sales of product sold increased to $31.31 per tonne in the third quarter of 2017 from $19.53 per tonne in the third quarter of 2016. The increase was mainly driven by the coal stockpile impairments of $7.9 million during the quarter as compared to $1.5 million for the third quarter of 2016.
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For the nine months ended September 30, 2017
Despite the delay in the custom clearance process at the Ceke border as mentioned above, the overall market conditions and prices for coal generally have improved in China in 2017. The Company experienced an increase in the tonnage of coal product sold from 2.83 million tonnes during the first nine months of 2016 to 3.39 million tonnes for the first nine months of 2017. The average selling price also increased from $15.27 per tonne for the first nine months of 2016 to $25.29 per tonne for the first nine months of 2017, which was mainly due to the improved market conditions.
Production in the first nine months of 2017 was higher than the first nine months of 2016, increasing from 2.17 million tonnes to 5.87 million tonnes, as a result of pacing production with the current and expected demand.
The Company’s unit cost of sales of product sold maintained at similar level for the first nine months of 2017 of $22.48 as compared to $22.65 for the first nine months of 2016.
Summary of Financial Results
Three months ended Nine months ended September 30, September 30, 2017 2017
$ in thousands, except per share information 2016 2016
| $ 19,356 $ | 16,379 $ | 79,275 $ | ||
|---|---|---|---|---|
| Cost of sales(ii) | (25,049) | (22,018) | (76,193) | (64,203) |
| Gross profit/(loss) excluding idled mine asset costs | (3,528) | (3,162) | 10,631 | (14,137) |
| Gross profit/(loss) including idled mine asset costs | (5,639) | (24,736) |
Revenue (i),(ii) 39,467
(5,693) 3,082
3,477 (3,776)
Other operating income/(expenses) 4,631 3,732
| Administration expenses | (2,451) (2,042) | (7,070) | (5,510) |
| Evaluation and exploration expenses | (48) (101) | (221) | (200) |
| Loss from operations | (3,151) | (26,714) |
(4,715) (7,985)
(5,674) (16,708)
Finance costs (6,358) (16,910)
| Finance income | 142 | 5 | 21 | 8 |
| Share of earnings of a joint venture | 265 | 89 | 919 | 428 |
| Income tax credit/(expense) | 82 | (176) |
238 (2,521)
Net loss (9,744) (9,333) (26,274) (43,364) Basic and diluted loss per share $ (0.04) $ (0.04) $ (0.10) $ (0.17)
(i) Revenue is presented after the deduction of royalties and selling fees.
(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 interim financial statements for further analysis regarding the Company’s reportable operating segments.
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Overview of Financial Results
For the three months ended September 30, 2017
The Company recorded a gross loss of $5.7 million during the quarter compared to a gross loss of $5.6 million in the third quarter of 2016. The Company recorded a $4.7 million loss from operations during the quarter compared to a $3.2 million loss from operations in the third quarter of 2016. The operations for the three months ended September 30, 2017 were impacted by delays experienced by the Company in the custom clearance process at the Ceke border as mentioned above.
The Company earned revenue of $19.4 million in the third quarter of 2017 compared to $16.4 million in the third quarter of 2016.
The Company’s revenue is presented after deduction of royalties and selling fees. The Company’s effective royalty rate for the third quarter of 2017, based on the Company’s average realized selling price of $26.47 per tonne, was 6.1% or $1.63 per tonne compared to 6.9% or $1.08 per tonne based on the average realized selling price of $15.79 per tonne in the third quarter of 2016.
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, custom 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 “nonmarket” under Mongolian tax law and the royalty will then be calculated based on a reference price as determined by the Government of Mongolia.
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Cost of sales was $25.0 million in the third quarter of 2017 compared to $22.0 million in the third quarter of 2016, the increase was mainly due to the impairment of coal stockpile inventories of $7.9 million that was recorded this quarter (2016: $1.5 million). 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 Measures” for further analysis) during the period.
Three months ended September 30, 2017
$ in thousands 2016
| Operating expenses | $ 11,165 $ | 10,823 |
| Share-based compensation expense | 2 | 2 |
| Depreciation and depletion | 2,350 | 7,183 |
7,933
Impairment of coal stockpile inventories 1,533
21,450
Cost of sales from mine operations 19,541 Cost of sales related to idled mine assets 3,599 2,477
Cost of sales $ 25,049 $ 22,018
Cost of sales in the third quarter of 2017 and 2016 included coal stockpile impairments of $7.9 million and $1.5 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 the third quarter of 2017 and 2016 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 third quarter of 2017 included $3.6 million of depreciation expenses for idled equipment compared to $2.5 million in the third quarter of 2016.
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Other operating income was $3.5 million in the third quarter of 2017 compared to $4.6 million in the third quarter of 2016 as follows:
Three months ended
Foreign exchange gain $ 2,128 $ 4,655
1,389
Reversal of provision for doubtful trade and other receivables – Other (40) (24)
Other operating income $ 3,477 $ 4,631
A foreign exchange gain of $2.1 million (2016: $4.7 million) was recorded as a result of the significant appreciation of RMB against the U.S. dollar during the quarter. The key underlying driver of the foreign exchange gain is that some trade receivables which are denominated in RMB.
The Company reversed a provision for doubtful trade and other receivables of $1.4 million as a result of collecting certain long aged receivables during the third quarter of 2017.
Administration expenses were $2.5 million in the third quarter of 2017 compared to $2.0 million in the third quarter of 2016 as follows:
Three months ended September 30,
| $ in thousands | 2017 | 2016 |
| Corporate administration | $ 919 $ | 877 |
| Professional fees | 508 | 400 |
| Salaries and benefits | 952 | 713 |
| Share-based compensation expense | 32 | 28 |
Depreciation 24
$ 2,451
Administration expenses $ 2,042
The increase in salaries and benefits was mainly due to the operations of the new subsidiaries in China, which was incorporated to expand the sales channels of coal in China.
Evaluation and exploration expenses were $0.1 million in the third quarter of 2017 (2016: $0.1 million). The Company continued to minimize evaluation and exploration expenditures in the third quarter of 2017 in order to preserve the Company’s financial resources.
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Finance costs were $5.7 million and $6.4 million respectively in the third quarter of 2017 and the third quarter of 2016. Finance costs primarily consisted of interest expense in respect of the $250.0 million CIC Convertible Debenture ($5.4 million for both the third quarter of 2017 and the third quarter of 2016).
For the nine months ended September 30, 2017
The Company recorded an $8.0 million loss from operations in the first nine months of 2017 compared to a $26.7 million loss from operations in the first nine months of 2016. The operations for the nine months ended September 30, 2017 were positively impacted by improved market conditions resulting in higher sales volumes as well as the improved coal prices in China.
Revenue was $79.3 million in the first nine months of 2017 compared to $39.5 million in the first nine months of 2016. The Company sold 3.39 million tonnes of coal at an average realized selling price of $25.29 per tonne in the first nine months of 2017 compared to sales of 2.83 million tonnes at an average realized selling price of $15.27 per tonne in the first nine months of 2016, which was mainly a result of improved market conditions.
The Company’s revenue is presented net of royalties and selling fees. The Company’s effective royalty rate for the first nine months of 2017, based on the Company’s average realized selling price of $25.29 per tonne, was 5.8% or $1.46 per tonne compared to 7.0% or $1.06 per tonne based on the average realized selling price of $15.27 per tonne in the first nine months of 2016.
Cost of sales was $76.2 million in the first nine months of 2017 compared to $64.2 million in the first nine months of 2016 as follows:
Nine months ended September 30,
| $ in thousands | 2017 | 2016 |
| Operating expenses | $ 36,756 $ | 29,356 |
| Share-based compensation expense/(recovery) | 30 | (6) |
| Depreciation and depletion | 17,290 | 17,015 |
| Impairment of coal stockpile inventories | 13,134 | 7,239 |
| Cost of sales from mine operations | 67,210 | 53,604 |
8,983
Cost of sales related to idled mine assets 10,599
$ 76,193
Cost of sales $ 64,203
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Operating expenses in cost of sales were $36.8 million in the first nine months of 2017 compared to $29.4 million in the first nine months of 2016. The increase in operating expenses was primarily related to the increase in sales volume from 2.83 million tonnes in the first nine months of 2016 to 3.39 million tonnes in the first nine months of 2017.
Cost of sales in the first nine months of 2017 and the first nine months of 2016 included coal stockpile impairments of $13.1 million and $7.2 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 2017 and 2016 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 nine months of 2017 included $9.0 million related to depreciation expenses for idled equipment (2016: $10.6 million).
Other operating expenses were $3.8 million in the first nine months of 2017 compared to other operating income of $3.7 million in the first nine months of 2016 as follows:
Nine months ended September 30, 2017
$ in thousands 2016
| Foreign exchange gain | $ 23 $ | 3,141 |
| Impairment of properties held for sale | (1,075) | – |
| Mining services, net | (2,395) | – |
Reversal of provision/(provision) for doubtful trade
| and other receivables | 54 | (2) | |
| Penalty on late settlement of trade payables | (280) | – | |
| Discount on settlement of trade payables | – | 1,009 | |
| Other | (103) | (416) | |
| Other operating income/(expenses) | $ (3,776) $ | 3,732 |
Mining services at the Tavan Tolgoi deposit were provided by the Company to Erdenes Tavan Tolgoi JSC (“Erdenes”) in connection with settlement of the Tax Penalty (as defined below) at a net cost of $2.4 million in the first nine months of 2017 (direct mining costs and depreciation totaling $8.0 million, net of service revenue of $5.6 million) (see “Regulatory Issues and Contingencies – Governmental and Regulatory Investigations” for more details).
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Administration expenses were $7.1 million in the first nine months of 2017 compared to $5.5 million in the first nine months of 2016 as follows:
Nine months ended
Corporate administration $ 1,955 $ 2,035
1,959
Professional fees 1,295 Salaries and benefits 2,835 2,033 Share-based compensation expense 67 33 Depreciation 114
$ 7,070
Administration expenses $ 5,510
The increase in salaries and benefits was mainly due to the operations of the new subsidiaries in China, which was incorporated to expand the sales channels of coal in China.
Evaluation and exploration expenses were $0.2 million in the first nine months of 2017 (2016: $0.2 million). The Company continued to minimize evaluation and exploration expenditures in the first nine months of 2017 in order to preserve the Company’s financial resources. Evaluation and exploration activities and expenditures in the first nine months of 2017 were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining and exploration licenses.
Finance costs were $16.7 million and $16.9 million in the first nine months of 2017 and 2016 respectively. This primarily consisted of interest expense on the CIC Convertible Debenture ($16.0 million for the first nine months of 2017 and $15.9 million for the first nine months of 2016).
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