SGQ.V · 2019-03-31

Southgobi Resources Announces Fourth Quarter and Full Year 2018 Financial and Operating Results

Production Results Financials

R E S O U R C E S March 31, 2019

SOUTHGOBI RESOURCES ANNOUNCES FOURTH QUARTER AND FULL YEAR 2018 FINANCIAL AND OPERATING RESULTS

HONG KONG – SouthGobi Resources Ltd. (TSX: SGQ, HK: 1878) (the “Company” or “SouthGobi”) today announces its financial and operating results for the quarter and the year ended December 31, 2018. All figures are in U.S. dollars (“USD”) unless otherwise stated.

SIGNIFICANT EVENTS AND HIGHLIGHTS

The Company’s significant events and highlights for the year ended December 31, 2018 and the subsequent period to March 31, 2019 are as follows:

Operating Results – With a higher proportion of sales made through Inner Mongolia SouthGobi Energy Co., Ltd. (“IMSGE”), a subsidiary of the Company, in 2018, the Company experienced an increase in the average selling price of coal from $28.3 per tonne in 2017 to $37.1 per tonne in 2018. The Company sold 2.8 million tonnes in 2018 as compared to 4.7 million tonnes in 2017, which was mainly as a result of the delays in the custom clearance process at the Ceke border which the Company has been experiencing since July 2017, as well as the decreased production level for 2018.
Financial Results – The Company recorded a gross profit of $24.0 million in 2018 compared to $15.1 million in 2017, while a $10.5 million loss from operations was recorded in 2018 compared to a $14.6 million loss from operations in 2017 (Restated). The improvement of overall financial results when compared to 2017 is as a result of the Company experiencing a higher average selling price for coal in China during the year.
Wash plant – The construction of the wash plant at the Ovoot Tolgoi mine was completed, and commissioning at the wash plant commenced, in October 2018. The Company sold 0.2 million tonnes of washed coal in the fourth quarter of 2018. The Company is in the process of making improvements to the wash plant in order to enhance the operational efficiency, as well as the output throughput. The Company is currently in discussions with the wash plant operator concerning an agreement regarding the operation of the wash plant; however, there can be no assurance that a favorable outcome will be reached.
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China Investment Corporation (“CIC”) convertible debenture (“CIC Convertible Debenture”) – Pursuant to the terms of the deferral agreement dated June 12, 2017 (the “June 2017 Deferral Agreement”) with CIC in relation to a revised payment schedule on the $22.3 million of cash interest and associated costs originally due under the CIC Convertible Debenture on May 19, 2017 (the “May 2017 Interest Payable”), the Company was required to pay $9.7 million of cash interest and associated costs to CIC on November 19, 2017 (the “June 2017 Deferral Agreement Payment”). Pursuant to the terms of the CIC Convertible Debenture, the Company was required to pay $8.1 million, $7.9 million and $8.1 million of anniversary cash interest to CIC on November 19, 2017, May 19, 2018 and November 19, 2018, respectively (the “Anniversary Interest Payments” and together with the June 2017 Deferral Agreement Payment, the “Outstanding Cash Interest Payable”). Pursuant to the CIC Convertible Debenture, the Company was also obligated to issue to CIC $4.0 million worth of payment in kind (“PIK”) interest shares on November 19, 2017 and $4.0 million worth of PIK interest shares on November 19, 2018 (collectively, the “PIK Interest Shares”).

As of the date of this press release, the Company: (i) has neither paid the Outstanding Cash Interest Payable nor issued the PIK Interest shares to CIC within the cure period provided for under the CIC Convertible Debenture; and (ii) has not agreed upon a repayment plan for such amounts with CIC. Consequently, the Company is in default under the CIC Convertible Debenture and the June 2017 Deferral Agreement. Furthermore, the Common Shares have now been suspended from trading on The Stock Exchange of Hong Kong Limited (“HKEX”) and the Toronto Stock Exchange (“TSX”), for a period of more than 5 trading days since December 17, 2018 (“Trading Suspension”) , which represents another event of default under the CIC Convertible Debenture. Pursuant to the terms of the CIC Convertible Debenture and the June 2017 Deferral Agreement, CIC may, at its discretion, provide notice to the Company and declare all principal, interest and other amounts owing under the CIC Convertible Debenture and the June 2017 Deferral Agreement immediately due and payable, and take steps to enforce payment thereof, which would have a material adverse effect on the business and operations of the Company and may negatively affect the price and volatility of the Common Shares and any investment in such shares could suffer a significant decline or total loss in value. As of the date of this press release, the Company has received no indication from CIC of any intention to deliver a notice of default under the CIC Convertible Debenture and the June 2017 Deferral Agreement or to accelerate the payment of amounts outstanding under the CIC Convertible Debenture and the June 2017 Deferral Agreement.

The Company has been in discussions with CIC for a deferral of the Outstanding Cash Interest Payable and the PIK Interest Shares; however, there can be no assurance that a favorable outcome will be reached.

As a consequence of the Company not entering into a deferral agreement with CIC as at December 31, 2018, International Accounting Standard (“IAS”) 1 requires the Company to classify the entire balance of the CIC Convertible Debenture as a current liability as at December 31, 2018, notwithstanding the fact that CIC has not indicated any intention to deliver notice of default or accelerate the maturity of the CIC Convertible Debenture. The Company anticipates that both the debt host and the fair value of the embedded derivative will be classified as a non-current liability upon the execution of a deferral agreement, unless a future event of default occurs under the terms of the CIC Convertible Debenture.

Notice of Legal Proceedings from a Former Customer – On September 20, 2018, the Company announced that IMSGE had received a court summons (the “Summons”) from the Ejinaqi People’s Court of Inner Mongolia Autonomous Region of China (the “Ejinaqi Court”) in relation to a dispute over certain coal sales contracts with Jiayuguan Xiyuan Trading Co., Ltd (“Xiyuan”), a former customer of IMSGE.

According to the Summons, Xiyuan applied to the Ejinaqi Court claiming that IMSGE should repay a sum of RMB19.4 million (approximately $2.8 million) to Xiyuan, comprised of RMB19.1 million of coal prepayments and RMB0.3 million of interest. Xiyuan also claimed against Ejinaqi Fulemeng Energy Industry Co., Ltd. (“FLM”) for joint liability of the above sums, as it alleged that FLM acted as an agent for IMSGE to receive coal prepayment and deliver coal on behalf of IMSGE.

On January 24, 2019, the Company received noticed that the Ejinaqi Court rendered a judgement allowing an application by Xiyuan to voluntarily withdraw its lawsuit against IMSGE and FLM. Xiyuan’s application cited a lack of evidence.

Notice of Arbitration – On January 10, 2018, the Company received a confidential partial ruling (final except as to costs) (the “Arbitration Award”) with respect to an arbitration proceeding in Hong Kong related to a dispute concerning a coal supply agreement (as amended) between SouthGobi Sands LLC (“SGS”), a subsidiary of the Company, and First Concept Industrial Group Limited (“First Concept”) (together the “Coal Supply Agreement”) (the “Arbitration”).

Pursuant to the Arbitration Award, SGS was ordered to repay the sum of $11.5 million (which SGS had received as a prepayment for the purchase of coal) to First Concept, together with accrued interest at a simple interest rate of 6% per annum from the date which the prepayment was made until the date of the Arbitration Award, and then at a simple interest rate of 8% per annum until full payment. The Arbitration Award was final, except as to costs which were reserved for a future award.

On November 14, 2018, the Company executed a deed of settlement (“Settlement Deed”) with First Concept in respect of the Arbitration Award. Pursuant to the Settlement Deed, which provides for the full and final satisfaction of the Arbitration Award as well as the settlement of the issue of costs relating to the Arbitration and any other disputes arising out of the Coal Supply Agreement, SGS agreed to pay to First Concept the sum of $13.9 million (“Settlement Sum”), together with simple interest thereon at the rate of 6% per annum from November 1, 2018 until full payment, in 12 monthly installments commencing in November 2018. Provided that SGS complies with the terms of the Settlement Deed, First Concept agreed to waive its costs in connection with the Arbitration and interest for the period from January 4, 2018 to October 31, 2018.

As of the date hereof, the Company has not paid the November 2018 and January 2019 monthly payments due under the Settlement Deed. On March 5, 2019, SGS received a notice from First Concept claiming that the Company is in default under the Settlement Deed and demanding payment of the full amount of the outstanding monthly payments due under the Settlement Deed, 2019, otherwise First Concept intends to commence legal action against SGS pursuant to the Settlement Deed. The Company is consulting with its independent litigation counsel regarding this matter; however, as a default is only triggered under the Settlement Deed where there has been a failure to pay two or more consecutive monthly instalment payments, the Company is of the view that SGS is not in default under the Settlement Deed. In the event that First Concept commences legal action against SGS regarding this matter, the Company intends to take appropriate steps to respond to such legal proceedings in the best interests of the Company through independent litigation counsel which has been retained by the Company for this purpose.

As at December 31, 2018, the outstanding amount payable to First Concept amounted to $12.5 million (December 31, 2017: $13.9 million).

Special Committee – On November 17, 2017, the Board formed a special committee of independent non-executive directors (the “Special Committee”) to initiate a formal internal investigation into certain legal charges against Mr. Aminbuhe (the Company’s former Chairman and Chief Executive Officer) and the connection, if any, between those charges and the Company and his conduct as Chairman and Chief Executive Officer of the Company.
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On May 7, 2018, the Company provided an update on the status of its ongoing internal investigation into the charges against Mr. Aminbuhe, and reported that, to the best of its knowledge, the Chinese authorities had not laid charges against Mr. Aminbuhe, made any public statement of the basis for Mr. Aminbuhe’s arrest or sought information from the Company in respect of this matter. The Company further reported that it was not aware of any definitive information which would suggest that Mr. Aminbuhe’s arrest is related to any misconduct directly related to his position as Chairman and Chief Executive Officer of the Company.

With the assistance of its external legal counsel, the Special Committee has conducted an extensive review of the records involving or relating to Mr. Aminbuhe which are in the Company’s possession (including communications to and from Mr. Aminbuhe’s email account with the Company, relevant public disclosure and other internal documents), and interviewed several directors and senior officers of the Company who had direct contact with Mr. Aminbuhe during his tenure as Chairman and Chief Executive Officer of the Company.

On December 17, 2018, the Company announced that it had learned of certain information relating to past conduct engaged in by former senior executive officers and employees of the Company (“Former Management and Employees”) which raised suspicions of serious fraud, misappropriation of Company assets and other criminal acts by the Former Management and Employees relating to prior transactions (“Suspicious Transactions”) between 2016 and the first half of 2018 involving the Company, IMSGE and certain coal trading and transportation companies, some of which are allegedly related to or controlled by the Former Management and Employees or their related persons. The Company filed a report with local police authorities in China in respect of certain of the Suspicious Transactions and, on December 17, 2018, the Board expanded the mandate of the Special Committee to include a formal investigation (the “Formal Investigation”) of the Suspicious Transactions, the implicated Former Management and Employees, and their impact, if any, on the business and affairs of the Company. The Special Committee engaged Blake, Cassels & Graydon LLP as independent Canadian legal counsel, Zhong Lun Law Firm, as independent Chinese legal counsel and Ernst & Young (China) Advisory Limited (the “Forensic Accountant”), as forensic accountants, to assist in the formal investigation.

On March 15, 2019, the Company provided a quarterly update on the status of the Formal Investigation pursuant to Rules 13.09(2)(a) and 13.24A of the Rules Governing the Listing of Securities on the HKEX (“HKEX’s Listing Rules”), and reported that: (i) the Forensic Accountant had submitted a draft investigation report to the Special Committee; and (ii) the Special Committee would review the findings of the investigation report and work with the Company’s independent auditors and legal counsel to assess the financial and legal implications and to plan for any further actions.

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Key Findings of Formal Investigation – On March 30, 2019, the Company announced that the Special Committee concluded the Formal Investigation and delivered a final report summarizing its key findings to the Board, which was adopted and approved at a meeting held on March 30, 2019.

The Formal Investigation concentrated on the following areas of focus (the “Areas of Focus”): (i) the arrangements of the Suspicious Transactions; (ii) the relationships between the Former Management and Employees and certain coal trading and transportation companies; (iii) any unidentified questionable transactions relating to the Former Management and Employees; and (iv) the potential impact of (i), (ii) and (iii) on the financial statements of the Company and its subsidiaries. During the course of the Formal Investigation, certain incomplete accounting/operational records of one of the Companies Under Investigation (as defined below) (“Company A”) were identified in the Company’s employee computers. As a result, the Special Committee expanded the scope of the Area of Focus of the Formal Investigation to include: (i) a fund flow analysis of Company A; and (ii) a price analysis of the difference between Company A’s purchase prices from the Company’s subsidiaries and selling prices to downstream customers.

Based on the Areas of Focus, the Special Committee examined and made findings in respect of a number of matters in connection with the Formal Investigation, including the following: (i) allegations that Mr. Aminbuhe, the Company’s former Chairman and Chief Executive Officer, controlled certain companies the Company had business dealings (the “Companies Under Investigation”); (ii) uncollectable receivables from certain former customers and suppliers of the Company; (iii) the impact of the lawsuit filed by Xiyuan; and (iv) allegations of misconduct by the Former Management and Employees, including: (I) the grant of a RMB5 million loan; (II) embezzlement of bank acceptance bills of RMB12 million; (III) endorsement of commercial acceptance bills of RMB71 million which were not supported by genuine commercial transactions; (IV) prepayments of RMB8.5 million for coal transportation services which were never received by the Company; and (V) prepayment of RMB16.4 million for coal transportation services which were never received by the Company.

Based on the information obtained from the Formal Investigation, the Special Committee has concluded that four matters examined in connection with the Formal Investigation, having an aggregate value of approximately RMB41 million, involved improper conduct, fraud or misappropriation of assets (the “Fraudulent Transactions”) and that one matter examined in connection with the Formal Investigation, having an aggregate value of approximately RMB71 million, involved an accounting reclassification error. From an accounting perspective, the Company does not anticipate that the Fraudulent Transactions will have any impact on its financial statements in the future as the Company has already recorded the appropriate provisions in the financial statements as at December 31, 2018, 2017 and 2016 and for the years then ended.

Based on the key findings of and information obtained from the Formal Investigation, the Company has considered the resulting financial impact on the financial statements and determined that a restatement of prior period financial information is required. For more information, please see section “Significant Events and Highlights” of this press release entitled “Restatement of Prior Year Financial Information” below.

As of the date of this press release, the Special Committee, with the assistance of its professional advisors, is in the process of assessing the potential remedial actions and preventative measures available to the Company to address the issues which caused the Trading Suspension, which will include amendments to the Company’s existing system of internal controls and risk management policies and procedures to improve and strengthen the Company’s commitment to a culture of honesty, integrity and accountability and compliance with the highest standards of professional and ethical conduct, and such other actions as the Special Committee may consider necessary or appropriate to protect the Company’s interests.

Trading Suspension on HKEX and TSX – Subsequent to the announcement made by the Company on December 17, 2018 in relation to the Suspicious Transactions, the Common Shares have been suspended from trading on the HKEX and the TSX since December 17, 2018.

On January 3, 2019, the HKEX provided the Company with certain resumption guidance, setting out the conditions which the Company must satisfy in order for trading of the Common Shares to resume on the HKEX. Pursuant to the resumption guidance, the Company is required to: (i) conduct a forensic investigation (the “Forensic Investigation”) of the Suspicious Transactions involving the Former Management and Employees;

(ii) disclose the findings of the Forensic Investigation and take appropriate remedial actions; and (iii) inform the market of all material information in order for the Company’s shareholders and investors to appraise the Company’s position. The HKEX has advised that it may modify or supplement the trading resumption guidance if the Company’s situation changes. Pursuant to Rule 6.01A(1) of the HKEX’s Listing Rules, the HKEX may cancel the listing of any securities that have been suspended from trading for a continuous period of 18 months. In the case of the Company, this 18-month period expires on June 16, 2020. The HKEX has also advised that if the Company fails to remedy the issues causing the Trading Suspension, fully comply with the HKEX’s Listing Rules to the HKEX’s satisfaction and resume trading of the Common Shares on the HKEX by June 16, 2020, the Listing Department of the HKEX will recommend that the HKEX’s Listing Committee proceed with cancelling the Company’s listing on the HKEX. Pursuant to Rules 6.01 and 6.10 of the HKEX’s Listing Rules, the HKEX also has the right to impose a shorter specific remedial period, where appropriate. Pursuant to Rule 13.24A of the HKEX’s Listing Rules, the Company is required to announce quarterly updates on developments relating to its Trading Resumption Plan (as defined below), including details of the actions taken, or to be taken, in order to remedy the issues causing the Trading Suspension and fully comply with the HKEX’s Listing Rules, the progress of

implementing the Trading Resumption Plan, details of any material change to the Trading Resumption Plan (including any delays thereof) and impact on the Company’s business operations. The Company was required to make its first quarterly update on or before March 16, 2019 and is required to announce additional updates every three months thereafter until resumption of trading on the HKEX or cancellation of the Company’s listing on the HKEX (whichever is earlier).

On March 30, 2019, the Company announced that, based on the key findings of, and information obtained from, the Formal Investigation, and with the advice of its professional advisors, the Board approved the principal actions, together with the related dates of completion or anticipated completion, set forth in the table below (collectively, the “Trading Resumption Plan”) in order to address the issues which caused the Trading Suspension, re-comply with the HKEX’s Listing Rules and allow trading of the Common Shares to resume trading on the HKEX:

Action Item Date of Completion or Anticipated Completion

The Company completes a forensic The Forensic Accountant completed the investigation into the Suspicious Transactions forensic investigation and submitted its final investigation report to the Special Committee on March 26, 2019

The Special Committee concludes its formal The Special Committee delivered its final investigation and, with the assistance of its report to the Board on March 27, 2019 professional advisors, completes its final report summarizing the key findings of the formal investigation and submits the same to the Board for consideration

The Board meets to consider and, if deemed The Board adopted and approved the appropriate, approve the Special Committee’s Special Committee’s final report and the final report and the Trading Resumption Plan key findings set out therein on March 30, 2019

The Company announces the material The Company announced the material findings of the Special Committee in findings of the Special Committee in respect of the Suspicious Transactions that respect of the Suspicious Transactions were investigation pursuant to the Formal that were investigation pursuant to the Investigation and the Trading Resumption Formal Investigation and the Trading Plan Resumption Plan on March 30, 2019

The Company announces its financial results The Company announced its 2018 fiscal for the fiscal year ended December 31, 2018 year results on March 31, 2019

Action Item Date of Completion or Anticipated Completion

The Special Committee, with the assistance The Special Committee expects to of its professional advisors, completes its deliver its report and recommendations assessment of the potential remedial actions to the Board, and the Board anticipates and preventative measures available to the that it will be in a position to approve Company to address the issues which caused specific remedial actions and preventative the Trading Suspension and prepares a report measures, on or before April 30, 2019 on its conclusions and recommendations for the Board. The Board considers the recommendations of the Special Committee and formalizes and approves a set of remedial actions and preventative measures

The Company applies to the HKEX and the The Company anticipates submitting an TSX for trading in the Common Shares to application to the HKEX and the TSX resume as soon as practicable after the Board has formally approved a set of remedial actions and preventative measures

The Company announces the remedial As soon as practicable after the HKEX actions and preventative measures approved and the TSX accepts the Company’s by the Board and the resumption of trading application for trading resumption on the HKEX and the TSX

The Trading Resumption Plan set forth above was approved by the Board based on the information and advice received as of March 30, 2019 and may be subject to change. In accordance with Rule 13.24A of the HKEX’s Listing Rules, the Company will announce details of any material changes to the Trading Resumption Plan (including any delays thereof) as and when necessary.

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Restatement of Prior Year Financial Information – Based on the key findings of and information obtained from the Formal Investigation, the Company has considered the resulting financial impact on the Financial Statements and determined that a restatement of prior period financial information is required. The restatements reflect the impact of the misappropriation of assets as well as the reclassification of certain balances of assets in the prior years. In particular, certain prepaid contracts recognized in 2016 were fictitious as the services were never to be received by the Company and accordingly no assets should have been recognized. Further, in 2016 there was embezzlement of bank acceptances. Consequently, in these financial statements there is no impairment related to these assets to be recorded in 2017. The net effect was an increase in the net comprehensive loss of 2016 of $4.8 million and decrease of the net comprehensive loss of $2.1 million in 2017. A summary of the requisite adjustments on the Financial Statements for the years ended 2016 and 2017 is set forth in the table below:

$ in thousands December 31, Increase/ December 31, December 31, Increase/ January 1,

Statement of financial

position extract 2017 (decrease) 2017 2016 (decrease) 2017

(Restated) (Restated)

Trade and other receivables $ 16,486 $ 4,648 $ 21,134 $ 19,434 $ – $ 19,434 Notes receivables 12,520 (10,622) 1,898 – – – Prepaid expenses

and deposits	6,286	(1,157)	5,129	8,194	(4,797)		3,397
Deferred revenue	(27,644)	4,419	(23,225)	(29,849)		–	(29,849)
Net assets	$ 10,540	$(2,712) $	7,828 $	46,013 $	(4,797) $		41,216
Exchange reserve	(4,737)			(5,158)
		(342) $	(5,079)			– $	(5,158)
Accumulated deficit	(1,135,809)	(2,370)		(1,095,788)	(4,797)

(1,138,179) (1,100,585)

Total equity $ 10,540 $	(2,712) $ 7,828 $ 46,013 $	(4,797) $ 41,216
$ in thousands	December 31, Loss decrease/	December 31,
Statement of comprehensive income extract	2017 (increase)	2017

(Restated)

Other operating expenses $(11,264) $2,137 $(9,127) Finance costs (22,958) 290 (22,668)

Net loss attributable to equity holders of the Company $(37,594) $(40,021) $2,427 Other comprehensive income for the year 421 (342) 79

Net comprehensive loss attributable to equity holders of the Company $(39,600) $2,085 $(37,515)

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Basic and diluted loss per share for the year ended December 31, 2017 has also been restated. The correction for both basic and diluted loss per share was from a loss of $0.15 to a loss of $0.14.

The amounts disclosed above for the 2017 reporting period, and for the statements of financial position as at January 1, 2017 and December 31, 2017 are before restatements for the change in accounting policy due to IFRS 9.

Suspension of the Ceke Logistic Park Development – As part of its focus on capital preservation, the Company intends to suspend indefinitely all further development activities relating to the previously announced Ceke Logistics Park Project until further notice.
Restrictions on Importing F-Grade Coal into China – As a result of import restrictions established by Chinese authorities at the Ceke border, the Company has been barred from transporting its F-grade coal products into China for sale since December 15, 2018. The Company, together with other Mongolian coal companies, have been in discussions with Chinese authorities regarding a potential amendment or withdrawal of these import restrictions to allow for the importation of F-grade coal into China; however, there can be no assurance that a favorable outcome will be reached.
Changes in Management and Director

Mr. Zhiwei Chen: Mr. Chen was appointed as a non-executive director on April 13, 2018.

Mr. Xiaoxiao Li: Mr. Li was appointed as a non-executive director on April 13, 2018.

Mr. Shougao Wang: Mr. Wang was appointed as Chief Executive Officer on June 1, 2018 and was subsequently appointed as an executive director on July 3, 2018.

Mr. Weiguo Zhang: Mr. Zhang was appointed as Chief Financial Officer on June 1, 2018.

Mr. Aiming Guo: Mr. Guo was appointed as Chief Operating Officer on June 1, 2018.

Mr. Bing Wang: Mr. Wang stepped down as interim Chief Executive Officer and returned to his prior position as General Manager, Sales and Marketing of the Company on June 1, 2018. Subsequently on August 26, 2018, Mr. Wang ceased to be the General Manager, Sales and Marketing of the Company.

Mr. Yulan Guo: Mr. Guo ceased to be the Chief Financial Officer of the Company and an executive director on June 1, 2018. Mr. Guo did not stand for re-election at the Company’s annual general meeting of shareholders (the “AGM”) held on June 28, 2018 (“2018 AGM”) and ceased to be a non-executive director.

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Mr. Aminbuhe: On June 28, 2018, Mr. Aminbuhe did not stand for re-election at the 2018 AGM and ceased to be a non-executive director.

Mr. Zhu Liu: On June 28, 2018, Mr. Liu did not stand for re-election at the 2018 AGM and ceased to be an Independent non-executive director.

Ms. Lan Cheng: On June 28, 2018, Ms. Cheng was elected as a non-executive director of the Company at the 2018 AGM.

Mr. Tao Zhang: Mr. Zhang was appointed as a vice president of the Company on July 3, 2018.

Going Concern – Since 2016, the Company has been developing plans to change its existing product mix to higher value and higher margin outputs by washing certain grades of coal in order to produce more premium semi-soft coking coal and to initiate more processing of the lower grades of coal in order to reduce the ash content and improve the selling price and margins on its thermal coal product. The construction of the wash plant at the Ovoot Tolgoi mine was completed, and operations at the wash plant commenced, in October 2018. The Company sold 0.2 million tonnes of washed coal in the fourth quarter of 2018. The Company is in the process of making improvements to the wash plant in order to enhance the operational efficiency, as well as the output throughput. The Company is currently in discussions with the wash plant operator concerning an agreement regarding the operation of the wash plant; however, there can be no assurance that a favorable outcome will be reached.

The current mine plan incorporates the coal washing and processing systems and contemplates significantly higher volumes of production in order to complement the Company’s new product mix and sales volume targets. Such plans will require a significant level of stripping activities to be undertaken in 2019 and 2020 and the Company to make certain capital expenditures to achieve the designed production outputs. Such expenditures and other working capital requirements will require the Company to seek additional financing in the form of finance leases, debt or equity.

There is no guarantee that the Company will be able to successfully execute the measures mentioned above and secure other sources of financing. If it fails to do so, or is unable to secure additional capital or otherwise restructure or refinance its business in order to address its cash requirements through December 31, 2019, then the Company is unlikely to have sufficient capital resources or cash flows from mining operations in order to satisfy its current ongoing obligations and future contractual commitments. This could result in adjustments to the amounts and classifications of assets and liabilities in the Company’s 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 March 31, 2019, the Company had $8.7 million of cash.

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