Southgobi Announces Second Quarter 2024 Unaudited Financial and Operating Results
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R ESOURCE S
August 14, 2024
SOUTHGOBI ANNOUNCES SECOND QUARTER 2024
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 financial
and operating results for the three and six months ended June 30, 2024. 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, 2024 and the
subsequent period to August 14, 2024 are as follows:
• Operating Results – The Company has been increasing the scale of its mining operations
since 2023, as well as implementing various coal processing methods, including screening,
wet washing and dry coal processing, which have resulted in improved coal quality and
enhanced production volume and growth of coal export volume into China during the quarter.
In response to the market demand for different coal products, the Company focused on
expanding the categories of coal products in its portfolio, including mixed coal, wet washed
coal and dry processed coal. In addition, the Company has experienced success with
processing its inventory of F-grade coal products through cost-effective screening procedures.
As a result of the improvement in the quality of the processed F-grade coal, the Company
was able to meet the import coal quality standards established by Chinese authorities and has
been exporting this product to China for sale since the first quarter of 2024, further enhancing
the Company ’s coal export volume.
The Company recorded sales volume of 1.2 million tonnes for the second quarter of 2024
compared to 0.9 million tonnes for the second quarter of 2023, while the Company recorded
an average realised selling price of $77.6 per tonne for the second quarter of 2024 compared
to $95.3 per tonne for the second quarter of 2023. The decrease in the average realised
selling price was mainly due to changes in the Company ’s product mix and decreased pricing
for premium semi-soft coking coal and processed coal.
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• Build-Operate-Transfer Agreement – On July 15, 2024, the Company ’s wholly-owned
Mongolian subsidiary, Southgobi Sands LLC ( “SGS”), entered into a Build-Operate-Transfer
agreement (the “BOT Agreement ”) with Tangshan Shenzhou Manufacturing Group Co.,
Ltd ( “Tangshan ”), pursuant to which Tangshan will be responsible for the construction,
operation, and quality management of a new dry coal separation system, including key
machinery (collectively, the “Dry Coal Separation System ”) at the Company ’s Ovoot Tolgoi
Mine in Mongolia, which will be a stand-alone plant separate from the Company ’s existing
dry processing plant. Tangshan will also be responsible for the construction of all related
facilities for the Dry Coal Separation System. Under the BOT Agreement, SGS has the right
to supervise and manage the overall work of coal quality assurance and operation, including,
but not limited to, the supervision and management of operational safety, production planning,
and operations management.
The total consideration payable by the Company over the term of the BOT Agreement is
approximately $10.9 million, together with certain additional processing volume-based fees.
Subject to the terms as set out therein, the BOT Agreement is effective from July 15, 2024
until October 1, 2029.
• Financial Results – The Company recorded a $15.0 million profit from operations for the
second quarter of 2024 compared to $40.5 million loss from operations for the second quarter
of 2023. The turnaround result was mainly due to an additional tax and tax penalty of $75.0
million imposed by the Mongolian Tax Authority ( “MTA”), which was recorded in the second
quarter of 2023.
• Deferral Agreements – On March 19, 2024, the Company and JD Zhixing Fund L.P.
(“JDZF”) entered into an agreement (the “2024 March Deferral Agreement ”) pursuant to which
JDZF agreed to grant the Company a deferral of (i) the cash and payment-in-kind interest
(“PIK Interest ”), management fees, and related deferral fees in the aggregate amount of
approximately $96.5 million which will be due and payable to JDZF on or before August 31,
2024 pursuant to certain prior deferral agreements dated March 24, 2023 and October 13,
2023; (ii) semi-annual cash interest payment of approximately $7.9 million payable to JDZF
on May 19, 2024 under the Company ’s convertible debenture (the “Convertible Debenture ”);
(iii) semi-annual cash interest payments of approximately $8.1 million payable to JDZF on
November 19, 2024 and the $4.0 million in PIK Interest payable to JDZF on November 19,
2024 under the Convertible Debenture; and (iv) management fees in the aggregate amount
of $2.2 million payable to JDZF on November 15, 2024 and February 15, 2025, respectively,
under the amended and restated mutual cooperation agreement (the “Amended and Restated
Cooperation Agreement ”) (collectively, the “2024 March Deferred Amounts ”).
The effectiveness of the 2024 March Deferral Agreement and the respective covenants,
agreements and obligations of each party under the 2024 March Deferral Agreement
are subject to the Company obtaining the requisite approval of the 2024 March Deferral
Agreement from shareholders in accordance with the requirements of applicable Canadian
securities laws and Rule 14.33 and Rule 14A.36 of the Rules Governing the Listing
of Securities on the Stock Exchange of Hong Kong Limited (the “Listing Rules ”). The
Company will be seeking approval of the 2024 March Deferral Agreement from disinterested
shareholders through a special meeting of shareholders, which is scheduled to be convened
on August 28, 2024.
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The principal terms of the 2024 March Deferral Agreement are as follows:
• Payment of the 2024 March Deferred Amounts will be deferred until August 31, 2025
(the “2024 March Deferral Agreement Deferral Date ”).
• As consideration for the deferral of the 2024 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 2024
March Deferred Amounts, commencing on the date on which each such 2024 March
Deferred Amounts would otherwise have been due and payable under the Convertible
Debenture.
• As consideration for the deferral of the 2024 March Deferred Amounts which relate to
payment obligations arising from 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 2024 March Deferred Amounts commencing on the date on
which each such 2024 March Deferred Amounts would otherwise have been due and
payable under the Amended and Restated Cooperation Agreement.
• The 2024 March Deferral Agreement does not contemplate a fixed repayment schedule
for the 2024 March Deferred Amounts or related deferral fees. Instead, the 2024 March
Deferral Agreement requires the Company to use its best efforts to pay the 2024
March Deferred Amounts and related deferral fees due and payable under the 2024
March Deferral Agreement to JDZF. During the period beginning as of the effective
date of the 2024 March Deferral Agreement and ending as of the 2024 March Deferral
Agreement 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 2024 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 2024 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.
On April 30, 2024, the Company and JDZF entered into an agreement (the “2024 April
Deferral Agreement ”) pursuant to which JDZF agreed to grant the Company a deferral of
the remaining $1.1 million of PIK interest which was payable on November 19, 2022 under
the Convertible Debenture, the payment of which was deferred pursuant to a certain prior
deferral agreement dated November 11, 2022 (the “November 2022 Deferral Agreement ”)
until November 19, 2023, as well as related deferral fees under the November 2022 Deferral
Agreement (collectively, the “2024 April Deferred Amounts ”).
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The effectiveness of the 2024 April Deferral Agreement and the respective covenants,
agreements and obligations of each party under the 2024 April Deferral Agreement are subject
to the Company obtaining the requisite approval of the 2024 April Deferral Agreement from
shareholders in accordance with the requirements of applicable Canadian securities laws and
Rule 14.33 and Rule 14A.36 of the Listing Rules. The Company will be seeking approval of
the 2024 April Deferral Agreement from disinterested shareholders through a special meeting
of shareholders, which is scheduled to be convened on August 28, 2024.
The principal terms of the 2024 April Deferral Agreement are as follows:
• Payment of the 2024 April Deferred Amounts will be deferred until August 31, 2025 (the
“2024 April Deferral Agreement Deferral Date ”).
• As consideration for the deferral of the 2024 April Deferred Amounts, the Company
agreed to pay JDZF a deferral fee equal to 6.4% per annum on the outstanding balance
of such 2024 April Deferred Amounts, commencing on the date on which each such
2024 April Deferred Amounts would otherwise have been due and payable under the
Convertible Debenture.
• The 2024 April Deferral Agreement does not contemplate a fixed repayment schedule for
the 2024 April Deferred Amounts or related deferral fees. Instead, the 2024 April Deferral
Agreement requires the Company to use its best efforts to pay the 2024 April Deferred
Amounts and related deferral fees due and payable under the 2024 April Deferral
Agreement to JDZF. During the period beginning as of the effective date of the 2024
April Deferral Agreement and ending as of the 2024 April Deferral Agreement 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 2024 April 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 2024 April 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.
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• Amendment of Convertible Debenture – On May 13, 2024, the Company and JDZF entered
into an amendment agreement (the “Convertible Debenture Amendment ”) to amend certain
terms of the Convertible Debenture.
Pursuant to the Convertible Debenture Amendment, the Company may, by resolution of
the Board of Directors (the “Board”) of the Company, at any time and from time to time
prepay, without penalty, the whole or any part of the principal amount outstanding under the
Convertible Debenture, together with accrued cash interest and PIK interest thereon to the
date of prepayment, provided that:
(i) the Company has, not later than three (3) business days prior to the proposed
prepayment date, delivered to JDZF an irrevocable written notice, signed by an
independent director of the Company and setting out the terms of the prepayment;
(ii) the amount of such prepayment reduces the then outstanding principal amount under
the Convertible Debenture by an amount that is (a) not less than $500,000 and (b) if in
excess of $500,000, an integral multiple of $500,000; and
(iii) the proposed prepayment date falls on a business day.
The Company is not providing any additional form of consideration to JDZF in connection
with the Convertible Debenture Amendment. Aside from the aforementioned amendments, the
existing terms of the Convertible Debenture continue in full force and effect and unchanged.
The effectiveness of the Convertible Debenture Amendment is subject to the Company
providing notice to, and obtaining acceptance (if required) from the TSX-V and requisite
approval from disinterested shareholders of the Company in accordance with the
requirements of applicable Canadian securities laws and Listing Rules. The Company must
obtain the requisite approval from disinterested shareholders of the Company by August 30,
2024, or otherwise the Convertible Debenture Amendment shall automatically terminate and
cease to be of any force and effect. The Company will be seeking approval of the Convertible
Debenture Amendment from disinterested shareholders through a special meeting of
shareholders, which is scheduled to be convened on August 28, 2024.
• Additional Tax and Tax Penalty Imposed by the MTA – On July 18, 2023, SGS received
an official notice (the “Notice”) issued by the MTA stating that the MTA had completed a
periodic tax audit (the “Audit”) on the financial information of SGS for the tax assessment
years between 2017 and 2020, including transfer pricing, royalty, air-pollution fee and unpaid
tax payables. As a result of the Audit, the MTA notified SGS that it is imposing a tax penalty
against SGS in the amount of approximately $75.0 million. The penalty mainly relates to the
different view on the interpretation of tax law between the Company and the MTA. Under
Mongolian law, the Company had a period of 30 days from the date of receipt of the Notice to
file an appeal in relation to the Audit. Subsequently the Company engaged an independent tax
consultant in Mongolia to provide tax advice and support to the Company and filed an appeal
letter in relation to the Audit with the MTA in accordance with Mongolian laws on August 17,
2023.
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On February 8, 2024, SGS received notice from the Tax Dispute Resolution Council ( “TDRC”)
which stated that, after the TDRC ’s review, the TDRC issued a decision in relation to SGS ’
appeal of the Audit, and ordered that the audit assessments set forth in the Notice of July 18,
2023 be sent back to the MTA for review and re-assessment.
On February 22, 2024, SGS received another notice from the MTA stating that the MTA
anticipates commencing the re-assessment process on or about March 7, 2024 and the
duration of such process will be approximately 45 working days. Up to the date of this press
release, the MTA is still reviewing the supplementary documents and information submitted by
the Company and yet to have the re-assessment decision. Any decision of the MTA following
the re-assessment process may not be conclusive as the Company retains the right to appeal
such decision under Mongolian laws.
On May 15, 2024, SGS received a notice (the “Revised Notice ”) from the MTA regarding
the re-assessment result on the Audit. The re-assessed amount of the tax penalty is
approximately $80.0 million (the “Re-assessment Result ”). In accordance with applicable
Mongolian laws, SGS is entitled to file an appeal to the TDRC regarding the Re-assessment
Result within a 30-day period from the date of receiving the Revised Notice.
On June 12, 2024, following consultation with its independent tax consultant in Mongolia, SGS
has submitted an appeal letter to the TDRC regarding the Re-assessment Result on the Audit,
in accordance with applicable Mongolian laws.
As at June 30, 2024, the Company recorded an additional tax and tax penalty in the amount
of $85.1 million, which consists of a tax penalty payable of $75.0 million and a provision
of additional late tax penalty of $10.1 million. To date, the Company has paid the MTA an
aggregate of $1.7 million in relation to the aforementioned tax penalty. According to Mongolian
tax law, the MTA has the legal authority to demand payment from the Company irrespective of
any potential appeal process that may change the aforesaid tax penalty. Based on the advice
from tax professionals and the best estimate from the management, in the event that the
Company ’s appeal is to be successful in future, it is probable that the Company may recover
approximately $46.0 million which represents a portion of the tax penalty payable to the MTA.
However, there are inherent uncertainties surrounding the development and outcome of the
appeal. The Company cannot determine with any virtual certainty the recoverability or exact
recoverable amount of the tax penalty paid in future. If any subsequent event occurs that may
impact the amount of the additional tax and tax penalty, an adjustment would be recognised in
profit or loss and the carrying amount of the tax liabilities shall be adjusted.
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• Changes in Directors
Mr. Fan Keung Vic Choi: Mr. Choi was elected as an independent non-executive director at
the Company ’s annual general meeting held on June 27, 2024.
Mr. Mao Sun: Mr. Sun did not stand for the re-election at the annual general meeting and
ceased to be an independent non-executive Director on June 27, 2024.
• 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.
See section “Liquidity and Capital Resources ” of this press release for details.
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OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS
Summary of Operational Data
Three months ended Six months ended
June 30, June 30,
2024 2023 2024 2023
Sales Volumes, Prices and Costs
Premium semi-soft coking coal
Coal sales (millions of tonnes) 0.29 0.57 0.65 0.90
Average realised selling price (per tonne) $ 102.61 $ 103.33 $ 107.22 $ 111.19
Standard semi-soft coking coal/premium thermal coal
Coal sales (millions of tonnes) 0.28 0.05 0.56 0.06
Average realised selling price (per tonne) $ 77.04 $ 67.09 $ 76.56 $ 67.77
Standard thermal coal
Coal sales (millions of tonnes) 0.12 – 0.24 –
Average realised selling price (per tonne) $ 36.10 $ – $ 41.93 $ –
Processed coal
Coal sales (millions of tonnes) 0.51 0.26 0.80 0.52
Average realised selling price (per tonne) $ 73.04 $ 82.99 $ 67.09 $ 90.28
Total
Coal sales (millions of tonnes) 1.20 0.88 2.25 1.48
Average realised selling price (per tonne) $ 77.55 $ 95.34 $ 78.47 $ 98.88
Raw coal production (millions of tonnes) 2.01 0.97 3.26 1.53
Cost of sales of product sold (per tonne) $ 61.32 $ 47.76 $ 52.94 $ 49.31
Direct cash costs of product sold (per tonne) (i) $ 47.15 $ 33.79 $ 39.48 $ 31.83
Mine administration cash costs of product sold
(per tonne) (i) $ 2.42 $ 1.60 $ 1.79 $ 1.55
Total cash costs of product sold (per tonne) (i) $ 49.57 $ 35.39 $ 41.27 $ 33.38
Other Operational Data
Production waste material moved (millions of
bank cubic meters) 14.59 7.73 26.95 10.56
Strip ratio (bank cubic meters of waste material
per tonne of coal produced) 7.27 7.93 8.27 6.89
Lost time injury frequency rate (ii) 0.00 0.23 0.11 0.12
(i) A Non-International Financial Reporting Standards ( “non-IFRS ”) financial measure. Refer to “Non-IFRS
Financial Measures ” section. 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.