SouthGobi Resources announces third quarter 2016 financial and operating results
November 14, 2016
SouthGobi Resources announces third quarter 2016 financial and operating results
HONG KONG - SouthGobi Resources Ltd. (TSX: SGQ, HK: 1878) (the "Company" or “SouthGobi) today announced its financial and operating results for the three and nine months ended September 30, 2016. 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, 2016 and subsequent period to November 14, 2016 are as follows:
- Operating results – Although the market conditions and prices for coal has improved in China through the third quarter of 2016, the impact of these conditions was partially offset by the depreciation of Renminbi against USD. The Company sold 1.13 million tonnes of its coal products during the quarter compared to 0.49 million tonnes in the third quarter of 2015. The production for the third quarter of 2016 was 1.13 million tonnes compared to 0.71 million tonnes for the third quarter of 2015. The Company maintained a strong safety record and completed the third quarter of 2016 without a lost time injury.
Financial results – The Company recorded a $3.2 million loss from operations during the quarter compared to a $14.9 million loss from operations in the third quarter of 2015. Revenue was $16.4 million in the third quarter of 2016 compared to $8.6 million in the third quarter of 2015. The operations for the three months ended September 30, 2016 has improved given the improved market conditions in China.
- China Investment Corporation (“CIC”) convertible debenture(the “CIC Convertible Debenture”)
- On July 13, 2016, the Company executed deferral agreement with CIC which covers outstanding
deferred cash interest obligations and associated costs of $18.8 million as of July 13, 2016 and the next Issue Date Anniversary Cash Interest payment of $8.1 million due on November 19, 2016. Pursuant to the deferral agreement, the Company has agreed to repay $1.3 to $1.4 million monthly from July to November 2016 and repay $20.7 million on December 19, 2016. In consideration for the deferred payments of $18.8 million, the Company will pay a deferral fee at a rate of 6.4% per annum to CIC. The interest payments due from July to October 2016 has been paid as at November 14, 2016.
- Short-term bridge loan – The Company has repaid the first tranche of the short-term bridge loan with interest of $5.0 million up to August 11, 2016. During June and July 2016, the Company drew the second tranche of $5.0 million. $1.5 million and $3.5 million will mature in March and April 2017, respectively.
- Appointment of a Director – Mr. Joseph Belan was appointed as Independent Non-Executive Director of the Company on August 16, 2016.
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- Strategic Advisory Board – On September 16, 2016, the Company established a Strategic Advisory Board and appointed Mr. Abraham (Braam) Jonker as its initial member. The purpose of the Strategic Advisory Board is to provide non-binding strategic guidance and advice to the Board of Directors of the Company in connection with the Company's ongoing business activities and initiatives.
- Going Concern - As at the date hereof, the Company is focused on securing additional financing (which includes working capital financing from vendors) and longer term coal offtake agreements by building direct sales relationships with end customers so as to improve sales volumes. The Company has been negotiating with key vendors to lengthen the credit terms and extend the payable turnover cycle. Further, the Company has been exploring the utilization of trade financing in order to speed up the receivable collection cycle. The measures mentioned above are intended to allow the Company to ramp up production to capacity, meet existing as well as upcoming trade and other payables obligations and the interest due under the CIC Convertible Debenture, the short-term bridge loan, the Turquoise Hill (“TRQ”) shareholder loan (“TRQ Loan”) and the bank loan, to meet its obligations as they fall due and achieve its business objectives in 2016.
However, there is no guarantee that the Company will be able to successfully secure additional sources of financing. 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 14, 2016, the Company had $7.0 million of cash and $1.9 million of bank’s acceptance notes, which are financial instruments in Chinese banking industry and are readily convertible into 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, 2016 2015 2016 2015 Sales Volumes, Prices and Costs
Premium semi-soft coking coal Coal sales (millions of tonnes) 0.07 0.16 0.13 0.18 Average realized selling price (per tonne) (i) $ 21.04 $ 22.32 $ 21.19 $ 22.46 Standard semi-soft coking coal Coal sales (millions of tonnes) 0.77 0.31 1.87 0.48 Average realized selling price (per tonne) (i) $ 15.66 $ 19.10 $ 16.69 $ 19.17 Thermal coal Coal sales (millions of tonnes) 0.29 0.02 0.83 0.21 Average realized selling price (per tonne) (i) $ 14.79 $ 10.48 $ 11.11 $ 10.47 Total
| Coal sales(millions of tonnes) | 1.13 | 0.49 | 2.83 | 0.87 |
| Average realized selling price(per tonne) (i) | $15.79 | $19.76 | $15.27 | $17.77 |
| Raw coal production (millions of tonnes) | 1.13 | 0.71 | 2.17 | 1.33 |
Direct cash costs of product sold (per tonne) (ii) $ 7.13 $ 17.46 $ 8.92 $ 15.22 Mine administration cash costs of product sold (per tonne) (ii) $ 2.26 $ 2.81 $ 1.96 $ 3.81 Total cash costs of product sold (per tonne) (ii) $ 9.39 $ 20.27 $ 10.88 $ 19.03
Other Operational Data
Production waste material moved (millions of bank cubic 2.22 2.33 4.76 5.94 meters)
Strip ratio (bank cubic meters of waste material per tonne of 1.96 3.25 2.19 4.46 coal produced)
Lost time injury frequency rate (iii) 0.00 0.00 0.00 0.00
(i) Average realized selling price is presented before deduction of royalties and selling fees.
(ii) A non-IFRS financial measure, see “Non-IFRS Financial Measure” section. Cash costs of product sold exclude idled mine asset cash costs.
(iii) Per 200,000 man hours and calculated based on a rolling 12 month average.
Overview of Operational Data
The Company ended the third quarter of 2016 without a lost time injury. As at September 30, 2016, the Company has a lost time injury frequency rate of nil per 200,000 man hours based on a rolling 12 month average.
For the three months ended September 30, 2016
Although the market conditions and prices for coal has improved in China through the third quarter of 2016, the impact of these conditions was partially offset by the depreciation of Renminbi against USD. The Company sold 1.13 million tonnes of its coal products during the third quarter of 2016 compared to 0.49 million tonnes for the third quarter of 2015. The Company is pacing production with current and expected demand, production was 1.13 million tonnes for the quarter as compared to 0.71 million tonnes for the third quarter of 2015.
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For the nine months ended September 30, 2016
The Company sold 2.83 million tonnes of its coal products during the first nine months of 2016 compared to 0.87 million tonnes for the first nine months of 2015.
The production in the first nine months of 2016 was higher than the first nine months of 2015 as a result of pacing production with the current and expected demand.
Summary of Financial Results
Three months ended Nine months ended September 30, September 30, $ in thousands, except per share information 2016 2015 2016 2015 Revenue (i),(ii) $ 16,379 $ 8,620 $ 39,467 $ 13,157
| Cost of sales(ii) | (22,018) | (22,108) | (64,203) | (51,619) |
| Gross loss excluding idled mine asset costs | (3,162) | (10,642) | (14,137) | (16,889) |
| Gross loss including idled mine asset costs | (5,639) | (13,488) | (24,736) | (38,462) |
| Other operating income/(expenses) | 4,631 | 621 | 3,732 | (17,858) |
| Administration expenses | (2,042) | (1,967) | (5,510) | (5,355) |
| Evaluation and exploration expenses | (101) | (40) | (200) | (99) |
| Loss from operations | (3,151) | (14,874) | (26,714) | (61,774) |
| Finance costs | (6,358) | (5,351) | (16,910) | (15,677) |
| Finance income | 5 | 1,984 | 8 | 722 |
| Share of earnings of a joint venture | 89 | 99 | 428 | 232 |
| Income tax credit/(expense) | 82 | (1) | (176) | (2) |
| Net loss | (9,333) | (18,143) | (43,364) | (76,499) |
Basic and diluted loss per share $ (0.04) $ (0.07) $ (0.17) $ (0.32)
(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.
Overview of Financial Results
For the three months ended September 30, 2016
The Company recorded a $3.2 million loss from operations in the third quarter of 2016 compared to a $14.9 million loss from operations in the third quarter of 2015. The operations for the three months ended September 30, 2016 has improved given the improved market conditions in China.
Revenue was $16.4 million in the third quarter of 2016 compared to $8.6 million in the third quarter of 2015. The Company sold 1.13 million tonnes of coal at an average realized selling price of $15.79 per tonne in the third quarter of 2016 compared to sales of 0.49 million tonnes at an average realized selling price of $19.76 per tonne in the third quarter of 2015. The decrease in the average realized selling price mainly resulted from the product mix as well as the depreciation of Renminbi against USD. The product mix for the third quarter of 2016 consisted of approximately 75% of Premium and Standard semi-soft coking coal and 25% of thermal coal compared to approximately 96% of Premium and Standard semi-soft coking coal and 4% of thermal coal in the third quarter of 2015.
The Company’s revenue is presented after the deduction of royalties and selling fees. The Company’s effective royalty rate for the third quarter of 2016, based on the Company’s average realized selling price of $15.79 per tonne, was 6.9% or $1.08 per tonne compared to 9.3% or $1.83 per tonne based on the average realized selling price of $19.76 per tonne in the third quarter of 2015.
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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 to the royalty regime. From February 1, 2016 onwards, royalties are 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 cost 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.
Cost of sales was $22.0 million in the third quarter of 2016 compared to $22.1 million in the third quarter of 2015. 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, $ in thousands 2016 2015
Operating expenses $ 10,823 $ 9,988
| Share-based compensation expense | 2 | 1 |
| Depreciation and depletion | 7,183 | 3,273 |
| Impairment of coal stockpile inventories | 1,533 | 6,000 |
| Cost of sales from mine operations | 19,541 | 19,262 |
| Cost of sales related to idled mine assets | 2,477 | 2,846 |
Cost of sales $ 22,018 $ 22,108
Operating expenses in cost of sales were $10.8 million in the third quarter of 2016 compared to $10.0 million in the third quarter of 2015. The operating expenses for the quarter is comparable to the third quarter of 2015 in which the impact of the increase in sales volume was partially offset against the saving from operation efficiency.
Cost of sales in the third quarter of 2016 and 2015 included coal stockpile impairments of $1.5 million and $6.0 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 2016 and 2015 reflected the challenging coal market conditions and primarily related to the Company’s higher-ash products.
Cost of sales related to idled mine asset costs primarily consisted of period costs, which were expensed as incurred and included mainly depreciation expense. Cost of sales related to idled mine assets in the third quarter of 2016 included $2.5 million of depreciation expenses for idled equipment compared to $2.8 million in the third quarter of 2015.
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Other operating income was $4.6 million in the third quarter of 2016 compared to $0.6 million in the third quarter of 2015 as follows:
Three months ended September 30, $ in thousands 2016 2015
Foreign exchange gain $ 4,655 $ Other (24) (58) Other operating income $ 4,631 $
For the three months ended September 30, 2016, the Company recorded foreign exchange gain of $4.7 million (2015: $0.7 million) as a result of the depreciation of Mongolia Tugrik against USD. The key underlying drivers are the trade and other payables and provision for court case penalty, which are mostly denominated in Mongolia Tugrik.
Administration expenses were $2.0 million in the third quarter of 2016, which is comparable with the third quarter of 2015 as follows:
Three months ended September 30, $ in thousands 2016 2015
| Corporate administration Legal and professional fees Salaries and benefits Share-based compensation expense Depreciation | $ 8 77 400 713 28 24 | $ 5 08 771 620 39 29 |
|---|---|---|
| Administration expenses | $ 2,042 | $ 1,967 |
Evaluation and exploration expenses were $0.1 million in the third quarter of 2016. The Company continued to minimize evaluation and exploration expenditures in the third quarter of 2016 in order to preserve the Company’s financial resources.
Finance costs were $6.4 million and $5.4 million respectively in the third quarter of 2016 and the third quarter of 2015. Finance costs primarily consisted of interest expense in respect of the $250.0 million CIC Convertible Debenture ($5.4 million for the third quarter of 2016 and $5.2 million for the third quarter of 2015).
For the nine months ended September 30, 2016
The Company recorded a $26.7 million loss from operations in the first nine months of 2016 compared to a $61.8 million loss from operations in the first nine months of 2015. The operations for the nine months ended September 30, 2016 were impacted by continuing difficult market conditions although prices for coal has improved in China over prior quarters. Whilst the Company resumed production on March 30, 2015, the results for the first nine months of 2015 were primarily impacted as a consequence of the tax investigation case in Mongolia as a provision of $18.0 million was recorded in respect of the Tax Penalty during the nine months ended September 30, 2015.
Revenue was $39.5 million in the first nine months of 2016 compared to $13.2 million in the first nine months of 2015. The Company sold 2.83 million tonnes of coal at an average realized selling price of $15.27 per tonne in the first nine months of 2016 compared to sales of 0.87 million tonnes at an average realized selling price of $17.77 per tonne in the first nine months of 2015. The worsening of product mix and the depreciation of Renminbi against USD were being main reasons for the decline of average realized selling price.
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The Company’s revenue is presented net of royalties and selling fees. The Company’s effective royalty rate for the first nine months of 2016, based on the Company’s average realized selling price of $15.27 per tonne, was 7.0% or $1.06 per tonne compared to 12.5% or $2.22 per tonne based on the average realized selling price of $17.77 per tonne in the first nine months of 2015.
Cost of sales was $64.2 million in the first nine months of 2016 compared to $51.6 million in the first nine months of 2015.
Nine months ended September 30, $ in thousands 2016 2015
Operating expenses $ 29,356 $ 16,486
| Share-based compensation expense/(recovery) | (6) | 34 |
| Depreciation and depletion | 17,015 | 4,415 |
| Impairment of coal stockpile inventories | 7,239 | 9,111 |
| Cost of sales from mine operations | 53,604 | 30,046 |
| Cost of sales related to idled mine assets | 10,599 | 21,573 |
Cost of sales $ 64,203 $ 51,619
Operating expenses in cost of sales were $29.4 million in the first nine months of 2016 compared to $16.5 million in the first nine months of 2015. The increase in operating expenses is primarily related to the increase in sales volume from 0.87 million tonnes in the first nine months of 2015 to 2.83 million tonnes in the first nine months of 2016.
Cost of sales in the first nine months of 2016 and the first nine months of 2015 included coal stockpile impairments of $7.2 million and $9.1 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 2016 and 2015 reflect the challenging coal market conditions and primarily related to the Company’s higher-ash products.
Cost of sales related to idled mine asset costs primarily consisted of period costs, which were expensed as incurred and primarily included depreciation expense. Cost of sales related to idled mine assets in the first nine months of 2016 included $10.6 million related to depreciation expenses for idled equipment (2015: $21.6 million). Idled mine asset costs decreased in the first nine months of 2016 compared to the first nine months of 2015 as a result of the period of curtailment until March 30, 2015 when mining operations recommenced. However, neither the production plan for the first nine months of 2016 nor for the period from March 30, 2015 until September 30, 2015 fully utilized the Company’s existing mining fleet, therefore, idled mine asset costs continued to be incurred.
Other operating income were $3.7 million in the first nine months of 2016 compared to other operating expenses of $17.9 million in the first nine months of 2015.
Nine months ended September 30, $ in thousands 2016 2015
| Foreign exchange gain Provision for doubtful trade and other receivable Provision for court case penalty Discount on settlement of trade payables Other | $ 3,141 (2) - 1,009 (416) | $ 5 41 (157) (18,049) - (193) |
|---|---|---|
| Other operating income/(expenses) | $ 3,732 | $ (17,858) |
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The Company recognized an expense for the provision of the Tax Penalty in respect of the tax investigation case in Mongolia. The Tax Penalty amounts to MNT35.3 billion (approximately $17.7 million at September 30, 2015). Foreign exchange gain of $3.1 million (2015: $0.5 million) was recorded as a result of the depreciation of Mongolia Tugrik against USD. The key underlying drivers are the trade and other payables and provision for court case penalty, which are mostly denominated in Mongolia Tugrik.
Administration expenses were $5.5 million in the first nine months of 2016 compared to $5.4 million in the first nine months of 2015. The increase in corporate administration and salaries and benefit was mainly due to the operations of the new subsidiary in China which was incorporated in June 2016.
Nine months ended September 30, $ in thousands 2016 2015
Corporate administration $ 2,035 $ 1,465
| Legal and professional fees | 1,295 | 2,135 |
| Salaries and benefits | 2,033 | 1,473 |
| Share-based compensation expense | 33 | 187 |
| Depreciation | 114 | 95 |
Administration expenses $ 5,510 $ 5,355
Evaluation and exploration expenses were $0.2 million in the first nine months of 2016 (2015: $0.1 million). The Company continued to minimize evaluation and exploration expenditures in order to preserve the Company’s financial resources. Evaluation and exploration activities and expenditures in the first nine months of 2016 were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining and exploration licenses.
Finance costs were $16.9 million and $15.7 million in the first nine months of 2016 and 2015 respectively. This primarily consisted of interest expense on the CIC Convertible Debenture ($15.9 million for the first nine months of 2016 and $15.3 million for the first nine months of 2015).
Finance costs for the first nine months of 2016 also included $0.2 million in respect of the unrealized fair value loss of the embedded derivative in the CIC Convertible Debenture. In comparison, in the first nine months of 2015, the Company recorded within finance income an unrealized fair value gain of the embedded derivative in the CIC Convertible Debenture ($0.7 million). The fair value of the embedded derivatives in the CIC Convertible Debenture is driven by many factors including: the Common Share price, USD and Canadian Dollar exchange rates and share price volatility.
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Summary of Quarterly Operational Data
| Quarter Ended Sales Volumes, Prices and Costs Premium semi-soft coking coal Coal sales (millions of tonnes) Average realized selling price (per tonne) (i) Standard semi-soft coking coal Coal sales (millions of tonnes) Average realized selling price (per tonne) (i) Thermal coal Coal sales (millions of tonnes) Average realized selling price (per tonne) (i) Total Coal sales (millions of tonnes) Average realized selling price (per tonne) (i) Raw coal production (millions of tonnes) Direct cash costs of product sold (per tonne) (ii) Mine administration cash costs of product sold (per tonne) (ii) Total cash costs of product sold (per tonne) (ii) Other Operational Data Production waste material moved (millions of bank cubic meters) Strip ratio (bank cubic meters of waste material per tonne of coal produced) Lost time injury frequency rate (iii) | 2016 30-Sep 30-Jun 31-Mar 0.07 - 0.06 $ 21.04 $ - $ 21.38 0.77 0.52 0.58 $ 15.66 $ 16.27 $ 18.42 0.29 0.30 0.24 $ 14.79 $ 9 .17 $ 9 .19 1.13 0.82 0.88 $ 15.79 $ 13.65 $ 16.11 1.13 0.67 0.37 $ 7 .13 $ 12.47 $ 7 .88 $ 2 .26 $ 2 .32 $ 1 .24 $ 9 .39 $ 14.79 $ 9 .12 2.22 1.82 0.72 1.96 2.71 1.94 0 .00 0.00 0.00 | 2015 31-Dec 30-Sep 30-Jun 31-Mar 0.04 0.16 0.02 - $ 21.72 $ 22.32 $ 23.37 $ - 0.12 0.31 0.11 0.05 $ 18.91 $ 19.10 $ 19.97 $ 17.95 0.05 0.02 0.06 0.13 $ 9 .26 $ 10.48 $ 10.47 $ 10.46 0.21 0.49 0.19 0.18 $ 17.19 $ 19.76 $ 17.42 $ 12.66 0.62 0.71 0.62 - $ 6 .55 $ 17.46 $ 15.57 $ 8 .68 $ 1 .78 $ 2 .81 $ 7 .90 $ 2 .11 $ 8 .33 $ 20.27 $ 23.47 $ 10.79 1.08 2.33 3.62 - 1.75 3.25 5.87 - 0.00 0.00 0.00 0.25 | 2014 31-Dec 0.02 $ 26.77 0.14 $ 18.32 0.21 $ 11.69 0.37 $ 15.04 0.21 $ 8 .09 $ 2 .44 $ 10.53 0.55 2.61 | ||
|---|---|---|---|---|---|
| 0 .00 | 0.00 | 0.00 | 0.00 | 0.21 |
(i) Average realized selling price is presented before deduction of royalties and selling fees.
(ii) A non-IFRS financial measure, refer to “Non-IFRS Financial Measures” section. Cash costs of product sold exclude idled mine asset cash costs.
(iii) Per 200,000 man hours and calculated based on a rolling 12 month average.
Summary of Quarterly Financial Results
The Company’s financial statements are reported under IFRS issued by the IASB. The following tables provide highlights, extracted from the Company’s annual and interim financial statements, of quarterly results for the past eight quarters:
| $ in thousands, except per share information | 2016 | 2015 | 2014 | |||||
| Quarter Ended Financial Results Revenue (i), (ii) Cost of sales (ii) Gross loss excluding idled mine asset costs Gross loss including idled mine asset costs Other operating income/(expenses) Administration expenses Evaluation and exploration expenses Impairment of property, plant and equipment Loss from operations Finance costs Finance income Share of earnings/(losses) of a joint venture Income tax credit/(expense) Net loss Basic and dilute loss per share | 30-Sep $ 16,379 (22,018) (3,162) (5,639) 4,631 (2,042) (101) - (3,151) (6,358) 5 89 82 (9,333) $ (0.04) | 30-Jun $ 10,361 (23,105) (9,926) (12,744) 812 (1,826) (52) - (13,810) (5,377) 324 256 (23) (18,630) $ (0.07) | 31-Mar $ 12,727 (19,080) (1,049) (6,353) (1,711) (1,642) (47) - (9,753) (5,497) 1 83 (235) (15,401) $ (0.06) | 31-Dec | 30-Sep | 30-Jun | 31-Mar | 31-Dec |
| $ 2 ,873 (12,072) (5,338) (9,199) (1,093) (2,154) (46) (92,651) (105,143) (5,694) 580 (7) (2) (110,266) $ (0.44) | $ 8 ,620 (22,108) (10,642) (13,488) 621 (1,967) (40) - (14,873) (5,351) 1,984 99 (1) (18,142) $ (0.07) | $ 2 ,949 (11,833) (5,017) (8,884) (19,450) (1,963) 22 - (30,275) (5,222) 274 151 (1) (35,073) $ (0.15) | $ 1 ,587 (17,678) (1,230) (16,091) 971 (1,425) (81) - (16,626) (6,648) 8 (18) - (23,284) $ (0.11) | $ 5 ,054 (19,757) (821) (14,703) (3,386) (1,924) (911) (8,603) (29,527) (6,351) 317 (40) (40) (35,641) $ (0.19) |
(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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LIQUIDITY AND CAPITAL RESOURCES
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.
Turquoise Hill Loan Facility
On May 25, 2014, the Company announced it had obtained the TRQ Loan in the form of a $10 million revolving credit facility to meet its short term working capital requirements. The terms and conditions of this facility were filed on SEDAR at www.sedar.com on June 2, 2014. The key commercial terms of the facility were: an original maturity date of August 30, 2014 (subsequently extended); an interest rate of one month US dollar LIBOR Rate in effect plus 11% per annum; a commitment fee of 35% of interest rate payable quarterly in arrears on undrawn principal amount of facility and a front end fee of $0.1 million.
During 2014 and 2015, the due date of the TRQ Loan, was extended several times and the credit limit has been reduced to $3.8 million.
On May 16, 2016, the Company and Turquoise Hill entered into the May 2016 Deferral Agreement, whereby Turquoise Hill agreed to a limited and circumscribed deferral of repayment of all remaining amounts and obligations now and hereafter owing under the TRQ Loan to December 29, 2017 in accordance with the schedule of repayment set out below:
- The Company has agreed to effect monthly repayments on the last business day of each month in an amount of (i) $0.15 million per month starting on May 31, 2016 and ending on April 28, 2017, (ii) $0.2 million per month starting on May 31, 2017 and ending on December 29, 2017, and (iii) the remaining balance on December 29, 2017 (collectively (i) to (iii), the Repayments, and each, a Repayment). Upon receipt of each Repayment by Turquoise Hill, the aggregate amount of obligations owing under the TRQ Loan will be reduced by such equal amount;
- In the event that the Company fails to make any one of the Repayments in its entirety on or before the dates set out above, then the Company shall be in automatic and irremediable default of the obligations thereunder and under the TRQ Loan, shall immediately and irremediably lose all benefits of the May 2016 Deferral Agreement, and all then outstanding obligations shall become immediately due and payable to Turquoise Hill; and
- Interest shall continue to accrue on all outstanding obligations at 12-month US dollar LIBOR rate.
Unless otherwise agreed by TRQ, under certain conditions, including the non-payment of interest amounts as the same become due, amounts outstanding under the TRQ Loan may be accelerated. Bankruptcy and insolvency events with respect to the Company or its material subsidiaries will result in an automatic acceleration of the indebtedness under the TRQ Loan. Subject to notice and cure periods, certain events of default under the TRQ Loan will result in acceleration of the indebtedness under such loan at the option of Turquoise Hill.
At September 30, 2016, the outstanding principal and accrued interest under this facility amounted to $3.5 million (at December 31, 2015, the outstanding principal and accrued interest amounted to $4.0 million).
The amount due in July to October 2016 has been paid as at November 14, 2016.
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Short-term bridge loan
On October 27, 2015, the Company executed a $10 million bridge loan agreement with an independent Asian based private equity fund. The interest rate is 8% per annum and payable upon the repayment of loan principal.
The Company has repaid the first tranche of the short-term bridge loan with interest of $5.0 million up to August 11, 2016. During June and July 2016, the Company drew the second tranche of $5.0 million, $1.5 million and $3.5 million will mature in March and April 2017, respectively.
As at September 30, 2016, the outstanding principal and accrued interest for the short-term bridge loan was $5.0 million (December 31, 2015: $5.0 million).
Under certain conditions, including the non-payment of interest amounts as the same become due, amounts outstanding under the short-term bridge loan may be accelerated. Bankruptcy and insolvency events with respect to the Company or its material subsidiaries will result in an automatic acceleration of the indebtedness under the short-term bridge loan. Subject to notice and cure periods, certain events of default under the short-term bridge loan will result in acceleration of the indebtedness under the short-term bridge loan at the option of the lender.
Bank loan
On May 6, 2016, the Company entered into a $2.0 million loan agreement with a Mongolian bank. The key commercial terms of the loan are as follows:
- Maturity on May 6, 2017;
Interest rate of 15.8% per annum and payable monthly; and
- Certain items of property, plant and equipment of $4.1 million were pledged.
As at September 30, 2016, the outstanding balance and accrued interest for the bank loan was $2.1 million (December 31, 2015: nil).
Going concern considerations
The Company’s condensed consolidated financial statements have been prepared on a going concern basis which assumes that the Company will continue operating until at least September 30, 2017 and will be able to realize its assets and discharge its liabilities in the normal course of operations as they come due. However, in order to continue as a going concern, the Company must generate sufficient operating cash flows, secure additional capital or otherwise pursue a strategic restructuring, refinancing or other transactions to provide it with additional liquidity.
Several adverse conditions and material uncertainties cast significant doubt upon the going concern assumption. The Company had cash of $1.1 million at September 30, 2016 and agreed to repay $1.4 million and $20.7 million to CIC in November and December 2016, respectively, pursuant to the deferral agreement. Although the Company has been in discussion with CIC for further deferral, there can be no assurance that a favorable outcome can be reached. Further, the trade payables of the Company have started accumulating due to liquidity constraints and the Company has a working capital deficiency of $53.7 million (December 31, 2015: $42.3 million). The aging profile has risen as compared to that as at December 31, 2015, as follows:
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As at September 30, December 31, 2016 2015
Less than 1 month $ 8,308 $ 9,465
| 1 to 3 months | 4,595 | 3,282 |
| 3 to 6 months | 5,565 | 6,075 |
| Over 6 months | 23,472 | 12,095 |
Total trade and other payables $
41,940 $ 30,917
The Company may not be able to settle all trade and other payables on a timely basis while continuing postponement in settling the trade payables may impact the mining operations of the Company and may result in potential lawsuits and/or bankruptcy proceedings being filed against the Company. No such lawsuits or proceedings are pending as at November 14, 2016.
Although the prices for coal has improved in China through the third quarter of 2016, the Company anticipates the market situation will remain unfavorable in 2016 and 2017 which will continue to impact the Company’s margins and liquidity. The Company has enhanced the previous funding plan, in which, in addition to minimizing uncommitted capital expenditures, securing additional financing (which includes working capital financing from vendors) and longer term coal offtake agreements by building direct sales relationships with end customers so as to improve sales volumes, the Company has been negotiating with key vendors to lengthen the credit terms and extend the payable turnover cycle. Further, the Company has been exploring the utilization of trade financing in order to speed up the receivable collection cycle.
The measures mentioned above are intended to allow the Company to ramp up production to capacity, meet existing as well as upcoming trade and other payables obligations and the interest due under the CIC Convertible Debenture, the short-term bridge loan, the TRQ Loan and the bank loan, to meet its obligations as they fall due and achieve its business objectives in 2016.
These obligations include the tax penalty due to the Government of Mongolia (Refer to “Governmental and Regulatory Investigations” of section “Regulatory Issues and Contingencies” for details) and the potential refund to First Concept Logistics Limited (“First Concept”) (Refer to “Commercial arbitration in Hong Kong” of section “Regulatory Issues and Contingencies” for details). However, 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 September 30, 2017, then the Company is unlikely to have sufficient capital resources or cash flows from mining operations in order to satisfy its ongoing obligations and future contractual commitments, including the cash interest payments due under the CIC Convertible Debenture, the short-term bridge loan, the TRQ Loan and the bank loan. 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. 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.
Continuing delay in securing additional financing could ultimately result in an event of default of the CIC Convertible Debenture, the short-term bridge loan, TRQ Loan and the bank loan, which if not cured within applicable cure periods in accordance with the terms of respective instruments, may result in the principal amounts owing and all accrued and unpaid interest becoming immediately due and payable upon notice to the Company by CIC, the lender of the short-term bridge loan, Turquoise Hill and the lender of the bank loan, respectively.
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