SouthGobi Resources announces fourth quarter and full year 2013 financial and operating results
March 24, 2014
SouthGobi Resources announces fourth quarter and full year 2013 financial and operating results
HONG KONG - SouthGobi Resources Ltd. (TSX: SGQ, HK: 1878) (the "Company"). The Company today announced its financial and operating results for the quarter and the year ended December 31, 2013. All figures are in U.S. Dollars unless otherwise stated.
Significant Events and Highlights
The Company’s significant events and highlights for the year ended December 31, 2013 and subsequent period to March 24, 2014 are as follows:
- Resumed operations at the Ovoot Tolgoi Mine on March 22, 2013 after having been fully curtailed since the end of the second quarter of 2012. The Company completed the fourth quarter of 2013 in line with the coal sales and production guidance provided in November 2013.
- Production increased to 3.06 million tonnes of raw coal in 2013 compared to production of 1.33 million tonnes of raw coal in 2012. The increase in production from 2012 to 2013 primarily related to the operations at the Ovoot Tolgoi Mine being fully curtailed in the second half of 2012.
- Sales volumes increased to 3.26 million tonnes in 2013 compared to 1.98 million tonnes in 2012, whereas revenue decreased to $58.6 million in 2013 compared to $78.1 million in 2012 primarily due to lower average selling prices for the Company’s coal products.
- On August 22, 2013, announced the withdrawal of the Notice of Investment Dispute on the Government of Mongolia in recognition of the fact that the dispute was resolved following the grant of three pre-mining agreements (“PMAs”) on August 14, 2013 relating to the Zag Suuj Deposit and certain areas associated with the Soumber Deposit, and the earlier grant of a PMA on January 18, 2013 pertaining to the Soumber Deposit.
- Announced the appointment of Bertrand Troiano as its Chief Financial Officer, Brett Salt as its Chief Commercial Officer and Enkh-Amgalan Sengee as President and Executive Director of SouthGobi Sands LLC, the Company’s wholly-owned Mongolian operating subsidiary. Brett Salt resigned as a Non-Executive Director of the Company following his appointment as Chief Commercial Officer. Bold Baatar was appointed as a Non-Executive Director of the Company in 2013.
- Following an extensive review of the dry coal handling facility (“DCHF”) at the Ovoot Tolgoi Mine and its contribution to the Company’s product strategy, recorded a $66.9 million non-cash impairment charge in the fourth quarter of 2013 related to the DCHF.
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- Recorded a $30.2 million impairment loss in the fourth quarter of 2013 related to the $33.6 million of prepaid toll washing fees to Ejinaqi Jinda Coal Industry Co. Ltd (“Ejin Jinda”). The impairment followed the results of a trial sample from the wet washing facility and the delay in starting the commercial operations at the facility. The Company is cooperating with Ejin Jinda in reviewing the utilization of the facility.
OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS
Summary of Annual Operational Data
2013 2012 Sales Volumes, Prices and Costs
Premium semi-soft coking coal Coal sales (millions of tonnes) 0.54 0.78 Average realized selling price (per tonne) (i) $ 36.61 $ 66.87 Standard semi-soft coking coal Coal sales (millions of tonnes) 2.27 0.47 Average realized selling price (per tonne) (i) $ 23.41 $ 49.68 Thermal coal Coal sales (millions of tonnes) 0.45 0.73 Average realized selling price (per tonne) (i) $ 13.43 $ 25.65 Total Coal sales (millions of tonnes) 1.98
3.26
Average realized selling price (per tonne) (i) $ 24.25 $ 47.49
Raw coal production (millions of tonnes) 3.06 1.33
Direct cash costs of product sold (per tonne) (ii) $ 10.58 $ 16.86 Mine administration cash costs of product sold (per tonne) (ii) $ 2.23 $ 3.15 Total cash costs of product sold (per tonne) (ii) $ 12.81 $ 20.01
Other Operational Data
Production waste material moved (millions of bank 8.45 3.36 cubic meters)
Strip ratio (bank cubic meters of waste material per tonne of 2.76 2.52 coal produced)
Lost time injury frequency rate (iii) - -
(i) Average realized selling price excludes royalties and selling fees.
(ii) A non-International Financial Reporting Standards (“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.
Overview of Annual Operational Data
The Company resumed operations at the Ovoot Tolgoi Mine on March 22, 2013 after having been fully curtailed since the end of the second quarter of 2012. The 2013 mining activities reflected a safe and cost effective resumption of operations, designed to preserve liquidity and allow operations to continue on a sustainable basis. The Company ended 2013 without a lost time injury.
Raw coal production was 3.06 million tonnes in 2013 with a strip ratio of 2.76 compared to 1.33 million tonnes in 2012 with a strip ratio of 2.52. The rate of production in 2013 was paced to meet contracted sales volumes and adjust to market conditions. The strip ratios in both 2012 and 2013 were below the average life-of-mine trend.
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Summary of Annual Financial Results
Year ended December 31, $ in thousands, except per share information 2013 2012 Revenue (i),(ii) $ 58,636 $ 78,061
| Cost of sales(ii) | (112,627) | (127,407) |
| Gross profit/(loss) excluding idled mine asset costs | (23,552) | 3,612 |
| Gross loss including idled mine asset costs | (53,991) | (49,346) |
| Other operating expenses | (126,040) | (41,645) |
| Administration expenses | (15,629) | (24,637) |
| Evaluation and exploration expenses | (1,169) | (8,598) |
Loss from operations (124,226)
(196,829)
| Finance costs | (21,162) | (15,385) |
| Finance income | 5,566 | 39,942 |
| Income tax recovery/(expense) | (24,986) | 1,532 |
| Net loss | (237,464) | (97,502) |
Basic loss per share $ (1.30) $ (0.54) Diluted loss per share $ (1.30) $ (0.60)
(i) Revenue is presented net 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 2 of the “Selected Information from the Notes to the Consolidated Financial Statements” section for further analysis regarding the Company’s reportable operating segments.
Overview of Annual Financial Results
The Company recorded a $196.8 million loss from operations in 2013 compared to a $124.2 million loss from operations in 2012 and a $237.5 million net loss in 2013 compared to a $97.5 million net loss in 2012. The 2013 loss from operations was negatively impacted by $20.7 million of coal stockpile impairments (2012: $20.5 million), $30.4 million of idled mine asset costs (2012: $53.0 million) and $121.1 million of impairment losses recorded in other operating expenses (2012: $35.5 million). The Company’s loss from operations was $24.6 million in 2013 excluding the impact of the above noted items (2012: $15.2 million).
Revenue was $58.6 million in 2013 compared to $78.1 million in 2012. The Company sold 3.26 million tonnes of coal in 2013 at an average realized selling price of $24.25 per tonne compared to sales of 1.98 million tonnes in 2012 at an average realized selling price of $47.49 per tonne. Revenue decreased due to lower average realized selling prices for the Company’s coal products. Following the softening of coal markets in mid-2012, the coal markets in China continued to be challenging in 2013 with certain coal price indices in China reaching four year lows during the year. The decrease in average realized selling prices for the Company’s coal products was partially offset by higher sales volumes in 2013 compared to 2012.
The Company’s revenue is presented net of royalties and selling fees. The Company is subject to a base royalty in Mongolia of 5% on all export coal sales. In addition, effective January 1, 2011, the Company is subject to an additional sliding scale royalty of up to 5%. The royalty is calculated using a set reference price per tonne published monthly by the Government of Mongolia.
Based on the reference prices for 2013, the Company was subject to an average 7% royalty based on a weighted average reference price of $65.81 per tonne. The Company’s effective royalty rate for 2013, based on the Company’s average realized selling price of $24.25 per tonne, was 19% or $4.53 per tonne compared to 15% or $7.12 per tonne in 2012.
During a trial period from October 1, 2012 to March 31, 2013, the royalty was determined using the actual contracted sales price per tonne, not the reference price. However, effective April 1, 2013, the royalty regime returned to the set reference price per tonne published monthly by the Government of Mongolia.
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The Company, together with other Mongolian mining companies, continues the dialogue with the appropriate Government of Mongolia authorities with the goal of moving to a more equitable process for setting reference prices.
Cost of sales was $112.6 million in 2013 compared to $127.4 million in 2012. 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 Measures section) during the period.
$ in thousands 2013 2012
| Operating expenses Share-based compensation expense Depreciation and depletion Impairment of coal stockpile inventories | $ 41,746 (293) 20,000 20,735 | $ 39,671 1,205 13,042 20,531 |
|---|---|---|
| Cost of sales from mine operations Cost of sales related to idled mine assets | 82,188 30,439 | 74,449 52,958 |
| Cost of sales | $ 112,627 | $ 127,407 |
Operating expenses in cost of sales were $41.7 million in 2013 compared to $39.7 million in 2012. Operating expenses were largely consistent from 2012 to 2013 as the impact from higher sales volumes was partially offset by lower total cash costs of product sold in 2013 compared to 2012.
Cost of sales in 2013 and 2012 included coal stockpile impairments of $20.7 million and $20.5 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 2013 and 2012 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 2013 included $25.1 million related to depreciation expenses for idled equipment (2012: $33.2 million). Idled mine asset costs decreased in 2013 compared to 2012 as a result of the recommencement of mining operations at the Ovoot Tolgoi Mine on March 22, 2013. However, the 2013 production plan did not fully utilize the Company’s existing mining fleet, therefore, idled mine asset costs continued to be incurred throughout 2013.
Other operating expenses were $126.0 million in 2013 compared to $41.6 million in 2012.
Year ended December 31, $ in thousands 2013 2012
| Public infrastructure Sustainability and community relations Foreign exchange loss Provision for doubtful trade and other receivables Impairment loss on available-for-sale financial asset Loss on disposal of property, plant and equipment Impairment of property, plant and equipment Impairment of prepaid expenses and deposits Impairment of materials and supplies inventories Other | $ 7 235 1,659 200 3,067 895 72,669 30,152 14,962 2,194 | $ 1,273 894 3,226 1,032 19,184 720 15,245 - - 71 |
|---|---|---|
| Other operating expenses | $ 126,040 | $ 41,645 |
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The Company recognized an impairment loss of $3.1 million in 2013 related to its investment in Aspire compared to an impairment loss of $19.2 million in 2012. The Company’s investment in Aspire is accounted for as an available-for-sale financial asset. In 2012, the Company determined that objective evidence of impairment in the Company’s investment in Aspire existed. Therefore, the Company recorded impairment losses in 2013 and 2012 as a result of declines in the fair value of the Company’s investment in Aspire.
The Company recorded $72.7 million of impairment charges in 2013 to reduce various items of property, plant and equipment (“PP&E”) to their recoverable amounts compared to $15.2 million in 2012. The impairment charges in 2013 included $66.4 million related to the DCHF at the Ovoot Tolgoi Mine. The impairment charge followed an extensive review of the DCHF and its contribution to the Company’s product strategy. Refer to “Processing Infrastructure – Dry Coal Handling Facility” section for further analysis of the impairment charge related to the DCHF. The impairment charges also included $6.3 million related to surplus capital spares not expected to be utilized with the Company’s existing mining fleet.
An impairment of prepaid expenses and deposit of $30.2 million was included in other operating expenses in 2013 related to prepaid toll washing fees under the Ejin Jinda contract. The impairment charge followed a trial sample from the wet washing facility and also related to the delay in starting the commercial operations at the wet washing facility. Refer to “Processing Infrastructure – Wet Washing Facility” section for further analysis of the impairment charge.
Other operating expenses in 2013 included a $15.0 million impairment of materials and supplies inventories compared to $nil in 2012. Following an extensive review of the Company’s mining fleet in 2013, $14.5 million of surplus materials and supplies inventories were identified. These items are not expected to be utilized with the Company’s existing mining fleet and, therefore, were adjusted to their net realizable value in 2013. In addition, the Company has implemented further controls related to procurement and inventory warehousing to prevent future overstocking. The impairment of materials and supplies inventories in 2013 also included $0.5 million of materials and supplies related to the DCHF.
Administration expenses were $15.6 million in 2013 compared to $24.6 million in 2012.
Year ended December 31, $ in thousands 2013 2012
| Corporate administration Legal and professional fees Salaries and benefits Share-based compensation expense Depreciation | $ 3,269 8,252 3,748 167 193 | $ 5,525 7,293 5,556 6,048 215 |
|---|---|---|
| Administration expenses | $ 15,629 | $ 24,637 |
Legal and professional fees remained high in 2013 as a result of ongoing regulatory issues. In particular, the internal and tripartite committees referred to in section “Regulatory Issues and Contingencies” resulted in $4.3 million of legal and professional fees in 2013 compared to $1.9 million of legal and professional fees in 2012. Corporate administration and salaries and benefits were lower in 2013 as the Company focused on cost-cutting initiatives and reduced headcount. Share-based compensation expense decreased in 2013 as certain employee stock options were terminated in late 2012 and early 2013 with the change in senior management.
Evaluation and exploration expenses were $1.2 million in 2013 compared to $8.6 million in 2012. The Company continued to minimize evaluation and exploration expenditures in 2013 in order to preserve the Company’s financial resources. The 2013 exploration program focused on further defining the Soumber Deposit. Other exploration activities and expenditures were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining and exploration licenses.
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Finance costs were $21.2 million in 2013 compared to $15.4 million in 2012. Finance costs in 2013 primarily consisted of $20.3 million of interest expense on the $250.0 million China Investment Corporation (“CIC”) convertible debenture compared to $10.5 million in 2012. The increase in the interest expense is the result of $nil interest capitalized to PP&E in 2013, compared to $9.6 million capitalized in 2012, as the Company minimized uncommitted capital expenditures, including expenditures on construction projects. In addition, finance costs in 2012 included a $4.5 million unrealized loss on the Company’s investment in Kangaroo Resources Limited (“Kangaroo”). The Company’s investment in Kangaroo is classified as fair value through profit or loss (“FVTPL”).
Finance income was $5.6 million in 2013 compared to $39.9 million in 2012. Finance income for 2013 and 2012 primarily consisted of a $5.5 million and $39.5 million unrealized gain on the fair value change of the embedded derivatives in the CIC convertible debenture, respectively. The fair value of the embedded derivatives in the CIC convertible debenture is driven by many factors including: the Company’s common share price, U.S. Dollar and Canadian Dollar exchange rates and share price volatility.
Income tax expense was $25.0 million in 2013 (primarily deferred income taxes) compared to a recovery of $1.5 million in 2012. As at December 31, 2013, the Company’s deferred income tax asset was reduced to $nil (2012: $25.0 million). Deferred income tax expense in 2013 included $17.5 million related to the derecognition of deferred tax assets related to the Company’s Mongolian tax loss carry forwards and deductible temporary differences.
Summary of Quarterly Operational Data
| 2013 | 2012 | |||||||
| Quarter Ended | 31-Dec | 30-Sep | 30-Jun | 31-Mar | 31-Dec | 30-Sep | 30-Jun | 31-Mar |
| 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 (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) | 0.21 $ 37.54 1.40 $ 24.49 0.11 $ 12.60 1.72 $ 25.30 1.73 $ 11.13 $ 1.39 $ 12.52 3.77 2.18 - | 0.04 $ 37.50 0.87 $ 21.67 0.03 $ 13.07 0.94 $ 22.05 1.13 $ 9.41 $ 2.20 $ 11.61 1.57 1.39 - | 0.21 $ 32.46 - $ - 0.11 $ 13.98 0.32 $ 26.26 0.17 $ 11.49 $ 7 .14 $ 18.63 2.71 15.55 - | 0.08 $ 45.81 - $ - 0.20 $ 13.67 0.28 $ 22.75 0.02 $ 10.22 $ 1 .46 $ 11.68 0.40 26.21 - | 0.03 $ 47.86 - $ - - $ - 0.03 $ 47.86 - $ 11.67 $ 5.08 $ 16.75 - - 0.1 | - $ - 0.01 $ 49.91 0.31 $ 15.87 0.32 $ 16.98 - $ 9.56 $ 3 .75 $ 13.31 - - 0.2 | 0.42 $ 67.46 0.36 $ 49.74 0.28 $ 34.10 1.06 $ 52.86 0.27 $ 16.52 $ 1 .33 $ 17.85 1.16 4.31 0.2 | 0.33 $ 67.58 0.10 $ 49.43 0.15 $ 30.29 0.58 $ 54.60 1.07 $ 22.09 $ 6 .16 $ 28.25 2.20 2.07 0.3 |
(i) Average realized selling price excludes 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.
Overview of Quarterly Operational Data
Raw coal production was 1.73 million tonnes in the fourth quarter of 2013 with a strip ratio of 2.18. The Ovoot Tolgoi Mine had been fully curtailed since the end of the second quarter of 2012, and therefore there was no production in the fourth quarter of 2012. Raw coal production in the fourth quarter of 2013 was paced to meet contracted sales tonnages.
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Summary of Quarterly Financial Results
| $ in thousands, except per share information | 2013 | 2012 | ||||||
| Quarter Ended | 31-Dec | 30-Sep | 30-Jun | 31-Mar | 31-Dec | 30-Sep | 30-Jun | 31-Mar |
| Financial Results Revenue (i), (ii) Cost of sales (ii) Gross profit/(loss) excluding idled mine asset costs Gross profit/(loss) including idled mine asset costs Other operating expenses Administration expenses Evaluation and exploration expenses Loss from operations Finance costs Finance income Income tax recovery/(expense) Net income/(loss) Basic income/(loss) per share Diluted loss per share | $ 32,457 (40,359) (4,141) (7,900) (109,682) (3,668) (489) (121,740) (5,167) 1,301 (13,109) (138,730) $ (0.75) $ (0.75) | $ 15,652 (33,486) (13,323) (17,834) (1,003) (4,204) (186) (23,227) (5,382) 124 (13,377) (41,928) $ ( 0.23) $ ( 0.23) | $ 6,129 (17,477) (5,593) (11,348) (14,925) (4,024) (221) (30,518) (5,617) 3,366 (415) (33,140) $ ( 0.18) $ ( 0.18) | $ 4,398 (21,305) (494) (16,908) (431) (3,733) (273) (21,344) (4,996) 775 1,915 (23,666) $ ( 0.13) $ ( 0.13) | $ 1,186 (32,229) (12,601) (31,043) (19,282) (6,080) (508) (56,913) (4,718) (116) 5,040 (56,564) $ (0.31) $ (0.31) | $ 3,804 (31,454) (8,719) (27,650) (18,315) (5,178) (958) (52,101) (5,164) 12,947 (2,383) (46,413) $ ( 0.26) $ ( 0.26) | $ 46,575 (41,884) 20,277 4,690 (1,344) (7,497) (2,099) (6,250) (4,006) 26,875 (867) 15,955 $ 0 .09 $ ( 0.04) | $ 26,497 (21,839) 4,657 4,657 (2,702) (5,882) (5,033) (8,961) (1,497) 236 (258) (10,480) $ ( 0.06) $ ( 0.06) |
(i) Revenue is presented net 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 2 of the “Selected Information from the Notes to the Consolidated Financial Statements” section for further analysis regarding the Company’s reportable operating segments.
Overview of Quarterly Financial Results
The Company recorded a $121.7 million loss from operations in the fourth quarter of 2013 compared to a $56.9 million loss from operations in the fourth quarter of 2012 and a $138.7 million net loss in the fourth quarter of 2013 compared to a $56.6 million net loss in the fourth quarter of 2012. The fourth quarter 2013 loss from operations was negatively impacted by $4.9 million of coal stockpile impairments (2012: $13.3 million), $3.8 million of idled mine asset costs (2012: $18.4 million) and $106.8 million of impairment losses recorded in other operating expenses (2012: $17.1 million). The Company’s loss from operations was $6.2 million in the fourth quarter of 2013 excluding the impact of the above noted items (2012: $8.1 million).
Revenue was $32.5 million in the fourth quarter of 2013 compared to $1.2 million in the fourth quarter of 2012. The Company sold 1.72 million tonnes of coal in the fourth quarter of 2013 at an average realized selling price of $25.30 per tonne compared to sales of 0.03 million tonnes from stockpile in the fourth quarter of 2012 at an average realized selling price of $47.86. The average realized selling price decreased as a result of the product mix in the fourth quarter of 2013. The fourth quarter of 2013 product mix primarily included Standard semi-soft coking coal compared to entirely Premium semi-soft coking coal in the fourth quarter of 2012. While certain coal price indices in China reached four year lows during 2013, Chinese coal price indices recovered slightly in the fourth quarter of 2013 compared to the third quarter of 2013. This resulted in an increase in the average realized selling price from $22.05 in the third quarter of 2013 to $25.30 in the fourth quarter of 2013.
Based on the royalty reference prices for the fourth quarter of 2013, the Company was subject to an average 7% royalty based on a weighted average reference price of $69.17 per tonne. The Company’s effective royalty rate for the fourth quarter of 2013, based on the Company’s average realized selling price of $25.30 per tonne, was 19% or $4.84 per tonne compared to 6% or $2.87 per tonne in the fourth quarter of 2012. The fourth quarter 2012 royalty per tonne benefitted from the trial royalty period from October 1, 2012 to March 31, 2013 whereby the royalty was determined using the actual contracted sales price per tonne, not the reference price.
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Cost of sales was $40.4 million in the fourth quarter of 2013 compared to $32.2 million in the fourth quarter of 2012.
| Operating expenses Share-based compensation expense Depreciation and depletion Impairment of coal stockpile inventories | $ 21,537 28 10,096 4,938 | $ 199 - 279 13,310 |
|---|---|---|
| Cost of sales from mine operations Cost of sales related to idled mine assets | 36,599 3,760 | 13,788 18,441 |
| Cost of sales | $ 40,359 | $ 32,229 |
Operating expenses in cost of sales were $21.5 million in 2013 compared to $0.2 million in the fourth quarter of 2012. The increase in operating expenses was due to the increase in coal sales in the fourth quarter of 2013 compared to the fourth quarter of 2012.
The coal stockpile impairments recorded in both the fourth quarter of 2013 and fourth quarter of 2012 of $4.9 million and $13.3 million, respectively, related to the Company’s higher-ash products. Cost of sales related to idled mine assets in the fourth quarter of 2013 included $3.7 million related to depreciation expenses for idled equipment compared to $12.1 million in the fourth quarter of 2012.
Other operating expenses were $109.7 million in the fourth quarter of 2013 compared to $19.3 million in the fourth quarter of 2012.
Three months ended December 31,
$ in thousands 2013 2012
| Public infrastructure Sustainability and community relations Foreign exchange loss Provision for doubtful trade and other receivables Impairment loss on available-for-sale financial asset Impairment of property, plant and equipment Impairment of prepaid expenses and deposits Impairment of materials and supplies inventories Other | $ 1 117 631 200 - 68,370 30,152 8,032 2,179 | $ 50 213 1,128 1,032 3,075 12,957 - - 827 |
|---|---|---|
| Other operating expenses | $ 109,682 | $ 19,282 |
The Company recorded $68.4 million of impairment charges in the fourth quarter of 2013 to reduce various items of PP&E to their recoverable amounts (2012: $13.0 million). The impairment charges included $66.4 million related to the DCHF (refer to section “Processing Infrastructure – Dry Coal Handling Facility” for further analysis).
An impairment of prepaid expenses and deposit of $30.2 million was included in other operating expenses in the fourth quarter of 2013 related to prepaid toll washing fees under the Ejin Jinda contract (refer to section “Processing Infrastructure – Wet Washing Facility” for further analysis).
Other operating expenses included an $8.0 million impairment of materials and supplies inventories. Following a review of the Company’s mining fleet that continued in the fourth quarter of 2013, $7.5 million of additional surplus materials and supplies inventories were identified. These items are not expected to be utilized with the Company’s existing mining fleet and, therefore, were adjusted to their net realizable value in the fourth quarter of 2013. The impairment of materials and supplies inventories in the fourth quarter of 2013 also included $0.5 million of materials and supplies related to the DCHF.
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Administration expenses were $3.7 million in the fourth quarter of 2013 compared to $6.1 million in the fourth quarter of 2012.
| Corporate administration Legal and professional fees Salaries and benefits Share-based compensation recovery Depreciation | $ 1,052 2,075 780 (275) 36 | $ 1,504 3,082 1,626 (184) 52 |
|---|---|---|
| Administration expenses | $ 3,668 | $ 6,080 |
Legal and professional fees remained high in the fourth quarter of 2013. In particular, the internal and tripartite committees referred to in section “Regulatory Issues and Contingencies” resulted in $1.8 million of legal and professional fees in the fourth quarter of 2013 compared to $1.9 million in the fourth quarter of 2012. Meanwhile, corporate administration and salaries and benefits were lower in the fourth quarter of 2013 as a result of the Company’s cost-cutting initiatives throughout 2013.
Evaluation and exploration expenses were $0.5 million in the fourth quarters of 2013 and 2012 as the Company continued to minimize evaluation and exploration expenditures in these periods.
Finance costs were $5.2 million in the fourth quarter of 2013 compared to $4.7 million in the fourth quarter of 2012. Finance costs in the fourth quarters of 2013 and 2012 primarily consisted of interest expense on the CIC convertible debenture. Finance income was $1.3 million in the fourth quarter of 2013 compared to $0.1 million in the fourth quarter of 2012. Finance income in both the fourth quarters of 2013 and 2012 primarily consisted of unrealized gains on the fair value change of the embedded derivatives in the CIC convertible debenture.
The Company recorded an income tax expense of $13.1 million in the fourth quarter of 2013 (primarily deferred income taxes) compared to an income tax recovery of $5.0 million in the fourth quarter of 2012 (primarily related to deferred income taxes). Deferred income tax expense in the fourth quarter of 2013 included $17.5 million related to the derecognition of deferred tax assets related to the Company’s Mongolian tax loss carry forwards and deductible temporary differences.
FINANCIAL POSITION AND LIQUIDITY
Liquidity and Capital Management
The Company has in place a planning, budgeting and forecasting process to help determine the funds required to support the Company’s normal operations on an ongoing basis and its expansionary plans.
The Company anticipates that coal prices in China will remain under pressure in 2014, which will continue to impact the Company’s margins and liquidity. Based on the Company’s forecasts for the year ended December 31, 2014, the Company is unlikely to have sufficient capital resources and does not expect to generate sufficient cash flows from mining operations in order to satisfy its ongoing obligations and future contractual commitments, including cash interest payments due on the CIC convertible debenture. Therefore, the Company is actively seeking additional sources of financing to continue operating and meet its objectives.
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The Company’s consolidated financial statements have been prepared on a going concern basis which assumes that the Company will continue operating until at least December 31, 2014 and will be able to realize its assets and discharge its liabilities in the normal course of operations as they come due. While the Company is actively seeking additional sources of financing to continue operating and meet its objectives, there can be no assurance that such financing will be available on terms acceptable to the Company. If for any reason, the Company is unable to secure the additional sources of financing and continue as a going concern, then this could result in adjustments to the amounts and classifications of assets and liabilities in the Company’s consolidated financial statements and such adjustments could be material.
While the Company intends to secure additional sources of financing as soon as possible, a continued delay in securing additional financing could ultimately result in an event of default of the $250.0 million CIC convertible debenture, which if not cured within applicable cure periods in accordance with the terms of such debenture, may result in the principal amount owing and all accrued and unpaid interest becoming immediately due and payable upon notice to the Company by CIC.
Cash Position and Liquidity
As at December 31, 2013, the Company had cash of $21.8 million compared to cash of $19.7 million and short term money market investments of $15.0 million for a total of $34.7 million in cash and money market investments as at December 31, 2012. Working capital (excess current assets over current liabilities) was $41.7 million as at December 31, 2013 compared to $120.4 million as at December 31, 2012. As at March 24, 2014, the Company had cash of $10.0 million.
As at December 31, 2013, the Company’s gearing ratio was 0.19 (December 31, 2012: 0.14), which was calculated based on the Company’s long term liabilities to total assets. As at December 31, 2013, the Company is not subject to any externally imposed capital requirements.
2013 Interest Payment Deferral
During the second quarter of 2013, the Company and the CIC mutually agreed upon a three month deferral of the convertible debenture semi-annual $7.9 million cash interest payment due on May 19, 2013. The Company and the CIC subsequently agreed to an additional deferral of one month, and the cash interest payment became due on September 19, 2013.
On September 19, 2013, the Company settled the $7.9 million amount, plus additional accrued interest of $0.2 million, as follows:
- The Company issued 1.8 million shares to the CIC for the November 19, 2012 1.6% share interest payment, where the number of common shares was based on the 50-day volume-weighted average share price on November 19, 2012 of Cdn$2.16;
- In consideration of the common share issue, the CIC applied the $4.0 million in cash already paid by the Company in the first quarter of 2013 for the November 19, 2012 share interest payment against the amount due on September 19, 2013; and
- The Company paid the remaining $4.1 million balance in cash.
The mutually agreed upon deferral of the cash interest payment, and subsequent settlement in cash and common shares of the Company, did not trigger an event of default and all other terms of the convertible debenture remain unchanged.
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Mongolian IAAC Investigation
In the first quarter of 2013, the Company was subject to orders imposed by Mongolia’s Independent Authority against Corruption (the “IAAC”) which placed restrictions on certain of the Company’s Mongolian assets. The orders were imposed on the Company in connection with the IAAC’s investigation of the Company. The Mongolian State Investigation Office (the “SIA”) also continues to enforce the orders on the Company.
The orders placing restrictions on certain of the Company’s Mongolian assets could ultimately result in an event of default of the Company’s CIC convertible debenture. Following a review by the Company and its advisers, it is the Company's view that this does not result in an event of default as defined under the CIC convertible debenture terms. However, if an event of default of the CIC convertible debenture occurs that remains uncured for ten business days, the principal amount owing and all accrued and unpaid interest will become immediately due and payable upon notice to the Company by CIC.
The orders relate to certain items of operating equipment and infrastructure and the Company’s Mongolian bank accounts. The orders related to the operating equipment and infrastructure restricts the sale of these items; however, the orders do not restrict the use of these items in the Company’s mining activities. The orders related to the Company’s Mongolian bank accounts restrict the use of in-country funds. While the orders restrict the use of in-country funds pending outcome of the investigation, they are not expected to have any material impact on the Company’s activities.
Ovoot Tolgoi Mine Impairment Analysis
Unchanged from the assessment made as at September 30, 2013, the Company determined that an indicator of impairment existed for its Ovoot Tolgoi Mine cash generating unit as at December 31, 2013. The impairment indicator was the continued weakness in the Company’s share price during the fourth quarter of 2013 and the fact that the market capitalization of the Company, as at December 31, 2013, was less than the carrying value of its net assets.
Therefore, the Company conducted an impairment test whereby the carrying value of the Company’s Ovoot Tolgoi Mine cash generating unit was compared to its “value in use” using a discounted future cash flow valuation model. The Company’s Ovoot Tolgoi Mine cash generating unit carrying value was $416.6 million as at December 31, 2013.
Key estimates and assumptions incorporated in the valuation model included the following:
- Long term real selling price of $110 per tonne for semi-soft coking coal FOB Australia;
- Life-of-mine coal production and operating costs; and
- A discount rate of 12.5% based on an analysis of market, country and company specific factors.
Key sensitivities in the valuation model are as follows:
- For each 1% increase/(decrease) in the long term real selling price of semi-soft coking coal FOB Australia, the calculated fair value of the cash generating unit increases/(decreases) by approximately $34.0/($34.0) million; and
- For each 1% increase/(decrease) in the discount rate, the calculated fair value of the cash generating unit (decreases)/increases by approximately ($44.0)/$50.0 million.
The impairment analysis did not result in the identification of an impairment loss and no charge was required as at December 31, 2013. The Company believes that the estimates and assumptions incorporated in the impairment analysis are reasonable; however, the estimates and assumptions are subject to significant uncertainties and judgments.
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REGULATORY ISSUES AND CONTINGENCIES
Regulatory Issues
Governmental and Regulatory Investigations
The Company is subject to investigations by the IAAC and the SIA regarding allegations against the Company and some of its former employees. The IAAC investigation concerns possible breaches of Mongolia’s anti-corruption laws, while the SIA investigation concerns possible breaches of Mongolia’s money laundering and taxation laws.
While the IAAC investigation into allegations of possible breaches of Mongolian anti-corruption laws has been suspended, the Company has not received formal notice that the IAAC investigation is completed. The IAAC has not formally accused any current or former Company employees of breach of Mongolia’s anti-corruption laws.
A report issued by the experts appointed by the SIA on June 30, 2013 and again in January 2014 has recommended that the accusations of money laundering as alleged against the Company’s three former employees be withdrawn. However, to date, the Company has not received notice or legal document confirming such withdrawal as recommended by the experts appointed by the SIA.
A third investigation ordered by the SIA and conducted by the National Forensic Center (“NFC”) into alleged violations of Mongolian taxation law was concluded at the end of January 2014. The Company has received notice that the report with conclusions of the investigations by the NFC have been provided to the Prosecutor General of Mongolia. The Prosecutor General may undertake criminal actions against the three former employees for alleged violations of taxation laws and the Company may be held liable as “civil defendant” as a result of these alleged criminal actions. These actions could result in the investigation case being imminently transferred to a Court of Justice under the relevant Mongolian law. The likelihood or consequences of such an outcome or any civil action taken against the Company are uncertain and unclear at this time but could include financial or other penalties, which could be material, and which could have a material adverse effect on the Company.
The Company disputes and will vigorously defend itself against any civil or criminal actions. At this point, the three former employees remain designated as “accused” in connection with the allegations of tax evasion, and continue to be subject to a travel ban. The Company remains designated as a “civil defendant” in connection with the tax evasion allegations, and may potentially be held financially liable for the alleged criminal misconduct of its former employees under Mongolian Law.
The SIA also continues to enforce administrative restrictions, which were initially imposed by the IAAC investigation, on certain of the Company’s Mongolian assets, including local bank accounts, in connection with its continuing investigation of these allegations. While the orders restrict the use of in-country funds pending the outcome of the investigation, they are not expected to have a material impact on the Company’s activities in the short term, although they could create potential difficulties for the Company in the medium to long term. The Company will continue to take all appropriate steps to protect its ability to conduct its business activities in the ordinary course.
Internal Investigations
Through its Audit Committee (comprised solely of independent directors), the Company has conducted an internal investigation into possible breaches of law, internal corporate policies and codes of conduct arising from the allegations which have been raised. The Audit Committee has had the assistance of independent legal counsel in connection with its investigation.
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