Condensed Consolidated Interim Financial Statements
SouthGobi Resources Ltd.
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS March 31, 2013
(Unaudited)
(Expressed in U.S. Dollars)
TABLE OF CONTENTS
CONDENSED FINANCIAL STATEMENTS
Page Condensed Consolidated Interim Statements of Comprehensive Income............................................................................................... 3 Condensed Consolidated Interim Statements of Financial Position.......................................................................................................... 4 Condensed Consolidated Interim Statements of Changes in Equity........................................................................................................... 5 Condensed Consolidated Interim Statements of Cash Flows........................................................................................................................ 6
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
1. Corporate information and liquidity............................................................................................................................................................. 7
2. Basis of preparation.............................................................................................................................................................................................. 8
3. Segmented information....................................................................................................................................................................................... 12
4. Cost of sales.............................................................................................................................................................................................................. 13
5. Other operating expenses................................................................................................................................................................................... 13
6. Administration expenses.................................................................................................................................................................................... 14
7. Evaluation and exploration expenses........................................................................................................................................................... 14
8. Finance costs and income.................................................................................................................................................................................. 15
9. Earnings/(loss) per share.................................................................................................................................................................................. 16
10. Trade and other receivables............................................................................................................................................................................. 16
11. Investments.............................................................................................................................................................................................................. 17
12. Inventories............................................................................................................................................................................................................... 19
13. Property, plant and equipment........................................................................................................................................................................ 20
14. Trade and other payables................................................................................................................................................................................... 20
15. Convertible debenture......................................................................................................................................................................................... 21
16. Equity......................................................................................................................................................................................................................... 24
17. Share-based payments......................................................................................................................................................................................... 24
18. Fair value measurements................................................................................................................................................................................... 27
19. Related party transactions................................................................................................................................................................................. 28
20. Supplemental cash flow information............................................................................................................................................................ 31
21. Commitments for expenditure......................................................................................................................................................................... 31
22. Contingencies.......................................................................................................................................................................................................... 32
Condensed Consolidated Interim Statements of Comprehensive Income
(Expressed in thousands of U.S. Dollars, except for share and per share amounts)
March 31,
| Revenue $ 3 ,259 $ 40,153 Cost of sales 4 (21,860) (17,479) | ||
|---|---|---|
| $ 3 ,259 (21,860) | ||
| Gross profit/(loss) Other operating expenses 5 Administration expenses 6 Evaluation and exploration expenses 7 | (18,601) (383) (3,733) (273) | 22,674 (2,578) (5,882) (5,033) |
| Income/(loss) from operations Finance costs 8 Finance income 8 Share of loss of joint venture 11 | (22,990) (4,996) 775 (17) | 9,181 (1,497) 236 - |
| Income/(loss) before tax Current income tax expense Deferred income tax recovery | (27,228) (1) 2,328 | 7,920 (4,874) 80 |
| Net income/(loss) attributable to equity holders of the Company | (24,901) | 3,126 |
| OTHER COMPREHENSIVE INCOME/(LOSS) Item that may be reclassified to profit or loss: Gain/(loss) on available-for-sale financial asset, net of tax 11 | 930 | (5,422) |
| Net comprehensive loss attributable to equity holders of the Company | $ ( 23,971) | $ ( 2,296) |
BASIC INCOME/(LOSS) PER SHARE 9 $ (0.14) $ 0.02 DILUTED INCOME/(LOSS) PER SHARE 9 $ (0.14) $ 0.02
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
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Condensed Consolidated Interim Statements of Financial Position
As at March 31, December 31,
ASSETS Current assets
| Cash Trade and other receivables 10 Short term investments 11 Inventories 12 Prepaid expenses and deposits | $ 24,813 15,331 - 51,506 43,894 | $ 19,674 17,430 15,000 53,661 37,982 |
|---|---|---|
| Total current assets Non-current assets Prepaid expenses and deposits Property, plant and equipment 13 Long term investments 11 Deferred income tax assets | 135,544 8,389 512,144 26,417 25,612 | 143,747 16,778 521,473 24,084 23,285 |
| Total non-current assets | 572,562 | 585,620 |
| Total assets | $ 708,106 | $ 7 29,367 |
| EQUITY AND LIABILITIES Current liabilities Trade and other payables 14 Current portion of convertible debenture 15 | $ 12,468 7,233 | $ 10,216 6,301 |
| Total current liabilities Non-current liabilities Convertible debenture 15 Decommissioning liability | 19,701 98,945 4,157 | 16,517 99,667 4,104 |
| Total non-current liabilities | 103,102 | 103,771 |
| Total liabilities Equity Common shares Share option reserve Investment revaluation reserve Accumulated deficit 16 | 122,803 1,059,751 51,457 930 (526,835) | 120,288 1,059,710 51,303 - (501,934) |
| Total equity | 585,303 | 609,079 |
| Total equity and liabilities | $ 708,106 | $ 7 29,367 |
Net current assets $
115,843 $ 127,230
Total assets less current liabilities $
688,405 $ 712,850
Commitments for expenditure (Note 21) and contingencies (Note 22)
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
APPROVED BY THE BOARD:
"Andre Deepwell" "Pierre Lebel"
Director Director
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Condensed Consolidated Interim Statements of Changes in Equity
(Expressed in thousands of U.S. Dollars and shares in thousands)
Share Investment Number of Common option revaluation Accumulated shares shares reserve reserve deficit Total
Balances, January 1, 2012 181,320 $ 1,054,298 $ 44,143 $ 16,559 $ (398,820) $ 716,180 Shares issued for:
| Interest settlement on convertible debenture | 522 | 4,000 | - | - | - | 4,000 |
| Employee share purchase plan | 15 | 104 | - | - | - | 104 |
| Share-based compensation charged to operations | - | - | 3,799 | - | - | 3,799 |
| Common shares repurchased and cancelled | (148) | (860) | - | - | (95) | (955) |
| Common share repurchase costs | - | (5) | - | - | - | (5) |
| Net income for the period | - | - | - | - | 3,126 | 3,126 |
| Other comprehensive loss for the period | - | - | - | (5,422) | - | (5,422) |
| Balances, March 31, 2012 | 181,709 $1,057,537 | $ |
47,942 $ 11,137 $ (395,789) $ 720,827
Balances, January 1, 2013 181,928 $ 1,059,710 $ 51,303 $
- $ (501,934) $ 609,079
Shares issued for:
| Employee share purchase plan | 19 | 41 | - | - | - | 41 |
| Share-based compensation charged to operations | - | - | 154 | - | - | 154 |
| Net loss for the period | - | - | - | - | (24,901) | (24,901) |
| Other comprehensive income for the period | - | - | - | 930 | - | 930 |
| Balances, March 31, 2013 | 181,947 $ |
1,059,751 $ 51,457 $ 930 $ (526,835) $ 585,303
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
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Condensed Consolidated Interim Statements of Cash Flows
March 31,
OPERATING ACTIVITIES
| Income/(loss) before tax Adjustments for: Depreciation and depletion Share-based compensation 17 Finance costs 8 Finance income 8 Share of loss of joint venture 11 Interest paid Unrealized foreign exchange gain Loss on disposal of property, plant and equipment Impairment of inventories 12 Other adjustments | $ (27,228) 11,301 154 4,996 (775) 17 (4,011) (38) 57 2,161 16 | $ 7,920 3,966 3,799 1,497 (236) - (88) (950) 105 - - |
|---|---|---|
| Operating cash flows before changes in non-cash working capital items Net change in non-cash working capital items 20 | (13,350) 5,084 | 16,013 (4,810) |
| Cash generated from/(used in) operating activities | (8,266) | 11,203 |
| INVESTING ACTIVITIES Purchase of property, plant and equipment Proceeds from disposal of property, plant and equipment Interest received Proceeds from maturity or disposal of short and long term investments Investment in joint venture | (436) 9 25 15,000 (1,415) | (24,774) - 155 16,141 (213) |
| Cash generated from/(used in) investing activities | 13,183 | (8,691) |
| FINANCING ACTIVITIES Proceeds from issuance of common shares and exercise of stock options, net of issue costs Repurchase of common shares, including transaction costs Drawings under line of credit facility Repayments of line of credit facility | 41 - - - | 104 (960) 7,608 (7,893) |
| Cash generated from/(used in) financing activities | 41 | (1,141) |
| Effect of foreign exchange rate changes on cash | 181 | 184 |
| Increase in cash Cash, beginning of period | 5,139 19,674 | 1,555 123,567 |
| Cash, end of period | $ 24,813 | $ 1 25,122 |
Supplemental cash flow information (Note 20)
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
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1. CORPORATE INFORMATION AND LIQUIDITY
SouthGobi Resources Ltd. is a publicly listed company incorporated in Canada with limited liability under the legislation of the Province of British Columbia and its shares are listed on the Toronto Stock Exchange (Symbol: SGQ) and Hong Kong Stock Exchange (Symbol: 1878). The company, together with its subsidiaries (collectively referred to as the “Company”), is an integrated coal mining, development and exploration company. The Company owns the following significant coal projects in Mongolia: the Ovoot Tolgoi open pit producing coal mine (“Ovoot Tolgoi Mine”) and three development projects, the Soumber Deposit, the Zag Suuj Deposit and the Ovoot Tolgoi Underground Deposit.
The Company’s immediate parent company is Turquoise Hill Resources Ltd. (formerly Ivanhoe Mines Ltd.) (“Turquoise Hill”) and at March 31, 2013, Turquoise Hill owned approximately 58% of the outstanding common shares of the Company (Note 19). Turquoise Hill is controlled by Rio Tinto plc (“Rio Tinto”).
The head office, principal address and registered and records office of the Company is located at 999 Canada Place, Suite 615, Vancouver, British Columbia, Canada, V6C 3E1.
The Company curtailed its mining activities at the Ovoot Tolgoi Mine during the three months ended June 30, 2012 to varying degrees to manage coal inventories and to maintain efficient working capital levels. As at June 30, 2012, mining activities had been fully curtailed. The Company’s mining activities remained fully curtailed during the remainder of the year ended December 31, 2012. On March 22, 2013, the Company recommenced mining activities at the Ovoot Tolgoi Mine.
The Company had cash of $24,813 and working capital of $115,843 at March 31, 2013. These condensed consolidated interim financial statements have been prepared on a going concern basis which assumes that the Company will continue operating for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations as they come due. 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 expects to have sufficient liquidity and capital resources to meet its ongoing obligations and future contractual commitments for at least twelve months from the end of the March 31, 2013 reporting period. The Company expects its liquidity to remain sufficient based on existing capital resources and estimated income from mining operations. Liquidity beyond the twelve month period is dependent on the success of the recommencement of operations and ongoing demand and prices in the coal market. The Company continues to minimize uncommitted capital expenditures and exploration expenditures in order to preserve the Company’s financial resources.
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2. BASIS OF PREPARATION
2.1 Statement of compliance
These condensed consolidated interim financial statements, including comparatives, have been prepared in accordance with International Accounting Standard 34 “Interim Financial Reporting” (“IAS 34”) using accounting policies in full compliance with the International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”) and Interpretations of the IFRS Interpretations Committee (“IFRIC”).
The condensed consolidated interim financial statements of the Company for the three months ended March 31, 2013 were approved and authorized for issue by the Board of Directors of the Company on May 13, 2013.
2.2 Basis of presentation
These condensed consolidated interim financial statements have been prepared using accounting policies and methods of computation consistent with those applied in the Company’s December 31, 2012 consolidated annual financial statements, except for those accounting policies which have changed as a result of the adoption of new and revised standards and interpretations as described below.
2.3 Adoption of new and revised standards and interpretations
The Company has adopted the new and revised standards and interpretations issued by the IASB listed below effective January 1, 2013. These changes were made in accordance with the transitional provisions outlined in the respective standards and interpretations.
IFRS 10 Consolidated Financial Statements
IFRS 10 replaces IAS 27 “Consolidated and Separate Financial Statements” and SIC 12 “Consolidation – Special Purpose Entities”. IFRS 10 establishes principles for the presentation and preparation of consolidated financial statements when an entity controls multiple entities. The new consolidation standard changes the definition of control so that the same criteria apply to all entities, both operating and special purpose entities, to determine control. The revised definition focuses on the need to have both power over the investee and exposure to variable returns before control is present. The adoption of IFRS 10 did not result in any change in the consolidation status of any of the Company’s subsidiaries and investees.
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IFRS 11 Joint Arrangements
IFRS 11 replaces IAS 31 “Interests in Joint Ventures”. IFRS 11 classifies joint arrangements as either joint operations or joint ventures, depending on the rights and obligations of the parties involved in the joint arrangement. Joint arrangements that are classified as joint operations require the venturers to recognize the individual assets, liabilities, revenues and expenses to which they have legal rights or are responsible. Joint arrangements that are classified as a joint venture are accounted for using the equity method of accounting.
As a result of the adoption of IFRS 11, the Company’s 40% interest in RDCC LLC is now classified as a joint venture (previously classified as a jointly-controlled entity under IAS 31). Prior to the adoption of IFRS 11, the Company accounted for its investment in RDCC LLC under the equity method of accounting. Therefore, the adoption of IFRS 11 did not have an impact on the consolidated financial statements for the current or prior periods presented.
IFRS 12 Disclosure of Interests in Other Entities
IFRS 12 outlines the disclosure requirements for interests in subsidiaries and other entities. The adoption of IFRS 12 will result in incremental disclosures in the Company’s consolidated annual financial statements.
IFRS 13 Fair Value Measurement
IFRS 13 provides a definition of fair value, sets out a single IFRS framework for measuring fair value and outlines disclosure requirements for fair value measurements. The adoption of IFRS 13 has resulted in additional fair value measurement disclosures in these condensed consolidated interim financial statements (refer to Note 18) and will result in incremental disclosures in the Company’s annual consolidated financial statements.
IAS 1 Presentation of Financial Statements (Amendment)
The amendments to IAS 1 requires companies preparing financial statements under IFRS to group items within other comprehensive income that may be reclassified to profit or loss and those that will not be reclassified. The consolidated statement of comprehensive income in these condensed consolidated interim financial statements has been amended to reflect the presentation requirements under the amended IAS 1.
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IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine
IFRIC 20 provides guidance on the accounting for the costs of stripping activities during the production phase of a surface mine. Under IFRIC 20, stripping activity assets are recognized when the following three criteria are met:
- it is probable that the future economic benefit (improved access to the ore body) associated with the stripping activity will flow to the entity;
- the entity can identify the component of the ore body for which access has been improved; and
- the costs relating to the stripping activity associated with that component can be measured reliably
If not all of the criteria are met, the stripping activity costs are included in the costs of inventory produced during the period incurred.
The Company assessed its open-pit mining operations at the Ovoot Tolgoi Mine and concluded that as at January 1, 2012 there are identifiable coal seams with which the predecessor stripping activity related to. Therefore, no adjustment to the consolidated financial statements was required upon initial transition to IFRIC 20.
The adoption of IFRIC 20 has not resulted in a change in the Company’s capitalization of stripping activity costs, and therefore no adjustment was required to the Company’s consolidated financial statements in the current or prior periods presented. The Company classifies stripping activity assets capitalized under IFRS 20 as mineral property costs within property, plant and equipment and these costs are amortized on a units-ofproduction basis based on proven and probable reserves.
Other
The IASB also amended IAS 19 “Post-Employment Benefits” and IAS 28 “Investments in Associates” (2003) effective January 1, 2013. The amendments to these standards did not impact the Company’s consolidated financial statements.
IFRS 9 “Financial Instruments” is effective for years beginning on or after January 1, 2015. The IASB issued IFRS 9 as the first step in its project to replace IAS 39 “Financial Instruments: Recognition and Measurement”. The Company will assess the impact of this new standard closer to its implementation date.
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2.4 Significant accounting judgments and estimates
Information about judgments and estimates in applying accounting policies that have the most significant effect on the amounts recognized in the Company’s consolidated financial statements are included in Note 3.23 to the Company’s December 31, 2012 consolidated annual financial statements. Except for the significant accounting judgments and estimates disclosed below, the significant accounting judgments and estimates remain unchanged from December 31, 2012.
Review of carrying value of assets and impairment charges
In the determination of carrying values and impairment charges, management of the Company reviews the higher of the recoverable amount and the fair value less costs to sell or the value in use in the case of non-financial assets and at objective evidence indicating impairment in the case of financial assets. These determinations and their individual assumptions require that management make a decision based on the best available information at each reporting period. Changes in these assumptions may alter the results of non-financial asset and financial asset impairment testing, impairment charges recognized in profit or loss and the resulting carrying amounts of assets.
During the three months ended March 31, 2013, the Company determined that an indicator of impairment existed for its property, plant and equipment related to the Ovoot Tolgoi Mine. The impairment indicator was the continued weakness in the Company’s share price.
Therefore, the Company conducted an impairment test whereby the carrying values of the Company’s property, plant and equipment, including mineral properties, related to the Ovoot Tolgoi Mine were compared to their “value-in-use” using a discounted future cash flow valuation model as at March 31, 2013. The Company’s property, plant and equipment, including mineral properties, totaled $512,114 as at March 31, 2013.
Key estimates and assumptions incorporated in the valuation model included the following:
- Inland Chinese coking coal market coal prices;
- Life-of-mine coal production and operating costs; and
- A discount rate based on an analysis of market, country and company specific factors
The impairment analysis did not result in the identification of an impairment loss and no charge was required as at March 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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3. SEGMENTED INFORMATION
The Company’s one reportable operating segment is its Mongolian Coal Division. The Company’s Chief Executive Officer (chief operating decision maker) reviews the Mongolian Coal Division’s discrete financial information in order to make decisions about resources to be allocated to the segment and to assess its performance. The division is principally engaged in coal mining, development and exploration in Mongolia. The Company’s Corporate Division does not earn revenues and therefore does not meet the definition of an operating segment.
During the three months ended March 31, 2013, the Mongolian Coal Division had 2 active customers with the largest customer accounting for 99% of revenues and the other customer accounting for the remaining 1% of revenue.
The carrying amounts of the Company’s assets, liabilities, reported income or loss and revenues analyzed by operating segment are as follows:
Mongolian Consolidated Coal Division Unallocated (i) Total Segment assets
As at March 31, 2013 $ 661,056 $ 47,050 $
708,106 As at December 31, 2012 673,896 55,471 729,367
Segment liabilities
As at March 31, 2013 $
11,938 $ 110,865 $ 122,803 As at December 31, 2012 11,315 108,973 120,288
Segment income/(loss)
For the three months ended March 31, 2013 $ (17,845) $ (7,056) $
(24,901) For the three months ended March 31, 2012 11,764 (8,638) 3,126
Segment revenues
For the three months ended March 31, 2013 $
- $
For the three months ended March 31, 2012 40,153 - 40,153
Impairment charge on assets (ii)
For the three months ended March 31, 2013 $
- $
For the three months ended March 31, 2012 - - -
(i) The unallocated amount contains all amounts associated with the Corporate Division.
(ii) The impairment charge on assets for the three months ended March 31, 2013 relates to inventories (Note 12).
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