Southgobi Announces Second Quarter 2023 Unaudited Financial and Operating Results
- 1 -
For Result Ann,
please insert logo in P.2
(see P2)
R ESOURCE S
August 14, 2023
SOUTHGOBI ANNOUNCES SECOND QUARTER 2023
UNAUDITED FINANCIAL AND OPERATING RESULTS
HONG KONG – SouthGobi Resources Ltd. (Hong Kong Stock Exchange ( “HKEX”): 1878, TSX
Venture Exchange ( “TSX-V”): SGQ) (the “Company ” or “SouthGobi ”) today announces its unaudited
financial and operating results for the three and six months ended June 30, 2023. 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 June 30, 2023 and the
subsequent period to August 14, 2023 are as follows:
• Operating Results – In late 2022, the Company resumed its major mining operations,
including coal mining, and the volume of coal production has gradually increased since then.
The Company also resumed coal washing operations in April 2023. In response to the market
demand, the Company has been mixing some higher ash content product with its semi-soft
coking coal product and selling this mixed product to the market as processed coal.
The Company experienced an increase in the average selling price of coal from $66.6
per tonne in the second quarter of 2022 to $95.3 per tonne in the second quarter of 2023
as a result of improved market conditions in China, expansion of its sales network and
diversification of its customer base.
• Financial Results – The Company recorded a $40.5 million loss from operations in the
second quarter of 2023 compared to a $2.7 million profit from operations in the second
quarter of 2022. While the Company experienced increased sales volume and improvement
in its average realised selling price during the first half of 2023, the Company ’s financial
results were negatively offset by the provision of a tax penalty of $75.0 million imposed by
the Mongolian Tax Authority ( “MTA”), which the Company received notice of in July 2023 (see
“Provision of tax penalty imposed by MTA ” below).
- 2 -
For Result Ann,
please insert logo in P.2
(see P2)
• Convertible Debenture – On March 24, 2023, the Company and JD Zhixing Fund L.P.
(“JDZF”) entered into an agreement (the “2023 March Deferral Agreement ”) pursuant to
which JDZF agreed to grant the Company a deferral of (i) the cash interest payment of
approximately $7.9 million (the “2023 May Cash Interest ”) which will be due and payable on
May 19, 2023 under the Convertible Debenture; (ii) the cash interest, management fees, and
related deferral fees of approximately $8.7 million (the “2022 May Deferred Amounts ”) which
are due and payable to JDZF on or before August 31, 2023 under the deferral agreement
dated May 13, 2022; (iii) the cash and payment-in-kind interest ( “PIK Interest ”), and related
deferral fees of approximately $13.5 million (the “2021 July Deferred Amounts ”) which are
due and payable to JDZF on or before August 31, 2023 under the deferral agreement dated
July 30, 2021; and (iv) the cash and PIK Interest, management fees, and related deferral fees
of approximately $110.4 million (the “2020 November Deferred Amounts ”, and together with
the 2023 May Cash Interest, the 2022 May Deferred Amounts and the 2021 July Deferred
Amounts, the “2023 March Deferred Amounts ”) which are due and payable to JDZF on or
before August 31, 2023 under the deferral agreement dated November 19, 2020.
The effectiveness of the 2023 March Deferral Agreement and the respective covenants,
agreements and obligations of each party under the 2023 March Deferral Agreement are
subject to the approvals from the Toronto Stock Exchange ( “TSX”) and the disinterested
shareholders of the Company in accordance with the requirements of Section 501(c) of the
TSX Company Manual and the Rule Governing the Listing of Securities on the HKEX (the
“Listing Rules ”).
The principal terms of the 2023 March Deferral Agreement are as follows:
• Payment of the 2023 March Deferred Amounts will be deferred until August 31, 2024
(the “Deferral Date ”).
• As consideration for the deferral of the 2023 March Deferred Amounts which relate to the
payment obligations arising from the Convertible Debenture, the Company agreed to pay
JDZF a deferral fee equal to 6.4% per annum on the outstanding balance of such 2023
March Deferred Amounts, commencing on the date on which each such 2023 March
Deferred Amounts would otherwise have been due and payable under the Convertible
Debenture.
• As consideration for the deferral of the 2023 March Deferred Amounts which relate
to payment obligations arising from the amended and restated mutual cooperation
agreement signed on April 23, 2019 (the “Amended and Restated Cooperation
Agreement ”), the Company agreed to pay JDZF a deferral fee equal to 1.5% per annum
on the outstanding balance of such 2023 March Deferred Amounts commencing on the
date on which each such 2023 March Deferred Amounts would otherwise have been due
and payable under the Amended and Restated Cooperation Agreement.
- 3 -
For Result Ann,
please insert logo in P.2
(see P2)
• The 2023 March Deferral Agreement does not contemplate a fixed repayment schedule
for the 2023 March Deferred Amounts or related deferral fees. Instead, the 2023 March
Deferral Agreement requires the Company to use its best efforts to pay the 2023 March
Deferred Amounts and related deferral fees due and payable under the 2023 March
Deferral Agreement to JDZF. During the period beginning as of the effective date of
the 2023 March Deferral Agreement and ending as of the Deferral Date, the Company
will provide JDZF with monthly updates of its financial status and business operations,
and the Company and JDZF will on a monthly basis discuss and assess in good faith
the amount (if any) of the 2023 March Deferred Amounts and related deferral fees
that the Company may be able to repay to JDZF, having regard to the working capital
requirements of the Company ’s operations and business at such time and with the
view of ensuring that the Company ’s operations and business would not be materially
prejudiced as a result of any repayment.
• If at any time before the 2023 March Deferred Amounts and related deferral fees are
fully repaid, the Company proposes to appoint, replace or terminate one or more of its
chief executive officer, its chief financial officer or any other senior executive(s) in charge
of its principal business function or its principal subsidiary, the Company will first consult
with, and obtain written consent (such consent shall not be unreasonably withheld) from
JDZF prior to effecting such appointment, replacement or termination.
• The Company will convene a special meeting of shareholders on August 23, 2023
Vancouver time (August 24, 2023, Hong Kong time), to seek disinterested shareholder
approval of the 2023 March Deferral Agreement.
• New Listing on the TSX-V and Primary Listing on the HKEX – On April 17, 2023, the
Company announced (i) the change of its secondary listing status to primary listing on the
Main Board of the HKEX became effective; and (ii) the listing of the Company ’s common
shares for trading on the TSX-V was effective as of the opening of trade on April 17, 2023 in
Canada. The Company ’s trading symbol on the HKEX and the TSX-V remain as “1878” and
“SGQ”, respectively.
• Revolving Credit Facility – On March 2, 2023, an indirect wholly-owned subsidiary of the
Company (the “Borrower ”) entered into an unsecured revolving credit facility (the “Credit
Facility ”) with a related party of JDZF (the “Lender”), which makes available to the Company
up to a maximum principal sum of RMB90 million with a maturity date of three months after
the agreement was signed. The Company has obtained the requisite acceptance from the
TSX for the Credit Facility in accordance with the requirements of the TSX Company Manual,
subject to certain standard conditions.
- 4 -
For Result Ann,
please insert logo in P.2
(see P2)
The principal terms of the Credit Facility are as follows:
• All obligations under the Credit Facility are due and payable on the maturity date.
• The Credit Facility is a revolving facility, pursuant to which the Borrower will be entitled,
but not obligated, to request advances ( “Advances ”) under the Credit Facility from time
to time, provided that the aggregate amount of the outstanding Advances under the
Credit Facility does not exceed the maximum loan amount at any time. The Borrower is
entitled to repay all or any portion of the outstanding Advances under the Credit Facility
from time to time without bonus or penalty.
• Advances under the Credit Facility will not accrue interest if the Borrower repays any
Advance in full within fifteen (15) days following the date of drawdown (the “Interest-
Free Period ”). If the Borrower fails to repay in full the amount of the Advance prior to
the end of the Interest-Free Period, then the Borrower will pay to the Lender interest on
the outstanding amount of such Advance, beginning on the day immediately following
the last day of the Interest-Free Period (the “Interest Trigger Date ”) and ending on but
excluding the day on which such Advance is repaid or satisfied in full. Interest on the
outstanding amount of each Advance from the Interest Trigger Date is calculated at a
rate per annum equal to 5%, determined daily and calculated and payable on the date
on which the relevant Advance is repaid in full.
• The Company intends to use the proceeds of the Credit Facility for general corporate
purposes.
During the period ended June 30, 2023, the Company did not draw down any principal under
the Credit Facility and the Credit Facility expired on June 1, 2023.
• Provision of tax penalty imposed by MTA
On July 18, 2023, SouthGobi Sands LLC ( “SGS”), a wholly-owned subsidiary of the Company,
received an official notice (the “Notice ”) issued by MTA stating that MTA has recently
completed a periodic tax audit (the “Audit”) on the financial information of SGS between 2017
and 2020, including transfer pricing, royalty, air-pollution fee and unpaid tax payables. As a
result of the Audit, the MTA has notified SGS that they are imposing a tax penalty against SGS
in the amount of approximately $75.0 million. Under Mongolian law, the Company has a period
of 30-days from the date of receipt of the Notice to file an appeal in relation to the Audit.
The Company ’s management is currently reviewing the Notice and actively exploring various
options to resolve the issue, including, but not limited to, negotiating with the MTA and filing
an appeal for the tax penalty amount. As at June 30, 2023, the Company recorded a provision
for a tax penalty in the amount of $75.0 million. If any subsequent event occurs that may
impact the amount of the provision for tax penalty, an adjustment would be recognised in profit
or loss and the carrying amount of the provision should be adjusted.
- 5 -
For Result Ann,
please insert logo in P.2
(see P2)
• Changes in Directors and Management
Mr. Gang Li: Mr. Li resigned as a non-executive director on May 8, 2023.
Mr. Dong Wang: Mr. Wang was removed as Chief Executive Officer and redesignated from
an executive Director to a non-executive Director on May 15, 2023. He ceased to be a non-
executive Director upon conclusion of the Company ’s annual general meeting held on June
20, 2023.
Mr. Ruibin Xu: Mr. Xu was appointed as Chief Executive Officer on May 15, 2023 and elected
as an executive director at the Company ’s annual general meeting held on June 20, 2023.
Mr. Zaixiang Wen: Mr. Wen was appointed as a non-executive Director on May 17, 2023.
• Going Concern – Several adverse conditions and material uncertainties relating to the
Company cast significant doubt upon the going concern assumption which includes the
deficiencies in assets and working capital.
Refer to section “Liquidity and Capital Resources ” of this press release for details.
- 6 -
For Result Ann,
please insert logo in P.2
(see P2)
OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS
Summary of Operational Data
Three months ended Six months ended
June 30, June 30,
2023 2022 2023 2022
Sales Volumes, Prices and Costs
Premium semi-soft coking coal
Coal sales (millions of tonnes) 0.57 0.04 0.90 0.04
Average realised selling price (per tonne) $ 103.33 $ 92.87 $ 111.19 $ 92.87
Standard semi-soft coking coal/premium thermal coal
Coal sales (millions of tonnes) 0.05 0.04 0.06 0.04
Average realised selling price (per tonne) $ 67.09 $ 30.41 $ 67.77 $ 30.41
Processed coal
Coal sales (millions of tonnes) 0.26 0.01 0.52 0.01
Average realised selling price (per tonne) $ 82.99 $ 79.02 $ 90.28 $ 79.02
Total
Coal sales (millions of tonnes) 0.88 0.09 1.48 0.09
Average realised selling price (per tonne) $ 95.34 $ 66.55 $ 98.88 $ 66.55
Raw coal production (millions of tonnes) 0.97 – 1.53 –
Cost of sales of product sold (per tonne) $ 47.76 $ 56.32 $ 49.31 $ 67.49
Direct cash costs of product sold (per tonne) (i) $ 33.79 $ 33.10 $ 31.83 $ 38.54
Mine administration cash costs of product sold
(per tonne) (i) $ 1.60 $ 1.20 $ 1.55 $ 1.30
Total cash costs of product sold (per tonne) (i) $ 35.39 $ 34.30 $ 33.38 $ 39.84
Other Operational Data
Production waste material moved (millions of bank cubic
meters) 7.73 – 10.56 –
Strip ratio (bank cubic meters of waste material per tonne
of coal produced) 7.93 – 6.89 –
Lost time injury frequency rate (ii) 0.23 0.00 0.12 0.00
(i) A non-IFRS financial measure, see section 3. Cash costs of product sold exclude idled mine asset cash
costs.
(ii) Per 200,000 man hours and calculated based on a rolling 12-month average.
- 7 -
For Result Ann,
please insert logo in P.2
(see P2)
Overview of Operational Data
For the three months ended June 30, 2023
The Company experienced an increase in the average selling price of coal from $66.6 per tonne
in the second quarter of 2022 to $95.3 per tonne in the second quarter of 2023, as a result of
improved market conditions in China, expansion of its sales network and diversification of its
customer base. The product mix for the second quarter of 2023 consisted of approximately 65%
premium semi-soft coking coal, 5% standard semi-soft coking coal/premium thermal coal and 30%
of processed coal compared to approximately 52% premium semi-soft coking coal, 40% standard
semi-soft coking coal/premium thermal coal and 8% processed coal in the second quarter of 2022.
The Company ’s unit cost of sales of product sold decreased from $56.3 per tonne in the second
quarter of 2022 to $47.8 per tonne in the second quarter of 2023. The decrease was mainly driven
by the economies of scale due to increased sales.
For the six months ended June 30, 2023
The Company sold 1.5 million tonnes for the first six months of 2023 as compared to 0.1 million
tonnes for the first six months of 2022. The average selling price increased from $66.6 per tonne
for the first six months of 2022 to $98.9 per tonne for the first six months of 2023, due to improved
market conditions in China, expansion of its sales network and diversification of its customer base.
The Company ’s production in the first six months of 2023 was higher than the first six months of
2022 due to the Company resuming its major mining operations, including coal mining in late 2022,
and the volume of coal production has gradually increased since then. The Company also resumed
coal washing operations in April 2023.
The Company ’s unit cost of sales of product sold decreased from $67.5 per tonne for the first six
months of 2022 to $49.3 per tonne in the first six months of 2023. The decrease was mainly driven
by the economies of scale due to increased sales.
- 8 -
For Result Ann,
please insert logo in P.2
(see P2)
Summary of Financial Results
Three months ended Six months ended
June 30, June 30,
2023 2022 2023 2022
$ in thousands, except per
share information
Revenue (i) $ 83,243 $ 5,790 $ 145,023 $ 5,790
Cost of sales (i) (42,027) (5,069) (72,981) (6,074)
Gross profit excluding idled mine
asset costs (ii) 41,227 940 72,088 379
Gross profit/(loss) 41,216 721 72,042 (284)
Other operating income/(expenses), net (4,001) 3,778 (4,765) 5,836
Administration expenses (2,656) (1,772) (4,712) (2,978)
Evaluation and exploration expenses (28) (66) (92) (90)
Provision of tax penalty (74,990) – (74,990) –
Profit/(loss) from operations (40,459) 2,661 (12,517) 2,484
Finance costs (11,558) (10,247) (23,466) (20,283)
Finance income 44 1,160 123 1,173
Share of earnings/(loss) of joint ventures 428 (109) 930 (261)
Current income tax expenses (9,087) (518) (17,847) (938)
Net loss attributable to equity holders
of the Company (60,632) (7,053) (52,777) (17,825)
Basic and diluted loss per share $ (0.21) $ (0.03) $ (0.18) $ (0.07)
(i) Revenue and cost of sales related 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.
(ii) A non-IFRS financial measure, idled mine asset costs represents the depreciation expense relates to
the Company ’s idled plant and equipment.