Southgobi Announces Third Quarter 2024 Unaudited Financial and Operating Results
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R ESOURCE S
November 14, 2024
SOUTHGOBI ANNOUNCES THIRD 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 nine months ended September 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 September 30, 2024
and the subsequent period to November 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 2.1 million tonnes for the third quarter of 2024
compared to 1.2 million tonnes for the third quarter of 2023, while the Company recorded an
average realised selling price of $67.8 per tonne for the third quarter of 2024 compared to
$85.6 per tonne for the third 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
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 $27.7 million profit from operations for the
third quarter of 2024 compared to $46.3 million profit from operations for the third quarter of
2023. The decrease was mainly due to changes in the Company ’s product mix and decreased
pricing for processed coal.
• Additional Tax and Tax Penalty Imposed by the Mongolian Tax Authority ( “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.
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
anticipated commencing the re-assessment process on or about March 7, 2024 and the
duration of such process will be approximately 45 working days.
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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
submitted an appeal letter to the TDRC regarding the Re-assessment Result on the Audit, in
accordance with applicable Mongolian laws.
As at September 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 of Company management, in
the event that the Company ’s appeal is 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.
• 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
September 30,
Nine months ended
September 30,
2024 2023 2024 2023
Sales Volumes, Prices and Costs
Premium semi-soft coking coal
Coal sales (millions of tonnes) 0.10 0.64 0.75 1.54
Average realised selling price (per tonne) $ 116.48 $ 100.33 $ 108.49 $ 106.67
Standard semi-soft coking coal/premium
thermal coal
Coal sales (millions of tonnes) 1.09 0.18 1.65 0.24
Average realised selling price (per tonne) $ 72.54 $ 68.43 $ 73.89 $ 68.28
Standard thermal coal
Coal sales (millions of tonnes) 0.24 – 0.48 –
Average realised selling price (per tonne) $ 37.20 $ – $ 39.52 $ –
Processed coal
Coal sales (millions of tonnes) 0.68 0.33 1.48 0.85
Average realised selling price (per tonne) $ 63.65 $ 66.03 $ 65.50 $ 74.94
Total
Coal sales (millions of tonnes) 2.11 1.15 4.36 2.63
Average realised selling price (per tonne) $ 67.77 $ 85.57 $ 73.25 $ 93.05
Raw coal production (millions of tonnes) 2.75 1.18 6.01 2.71
Cost of sales of product sold (per tonne) $ 52.77 $ 42.23 $ 52.86 $ 46.22
Direct cash costs of product sold (per tonne) (i) $ 41.74 $ 32.26 $ 40.57 $ 32.02
Mine administration cash costs of product sold
(per tonne) (i) $ 0.94 $ 0.82 $ 1.38 $ 1.23
Total cash costs of product sold (per tonne) (i) $ 42.68 $ 33.08 $ 41.95 $ 33.25
Other Operational Data
Production waste material moved
(millions of bank cubic meters) 15.04 7.34 41.99 17.90
Strip ratio (bank cubic meters of waste
material per tonne of coal produced) 5.48 6.24 6.99 6.61
Lost time injury frequency rate (ii) 0.00 0.21 0.07 0.15
(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.
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Overview of Operational Data
For the three months ended September 30, 2024
The Company recorded an average realised selling price of $67.8 per tonne in the third quarter of
2024 compared to $85.6 per tonne in the third quarter of 2023, the decrease was mainly due to
changes in the Company ’s product mix and decreased pricing for processed coal. The product mix
for the third quarter of 2024 consisted of approximately 5% of premium semi-soft coking coal, 51%
of standard semi-soft coking coal/premium thermal coal, 12% of standard thermal coal and 32% of
processed coal compared to approximately 56% of premium semi-soft coking coal, 15% of standard
semi-soft coking coal/premium thermal coal and 29% of processed coal in the third quarter of 2023.
The Company ’s unit cost of sales of product sold was $52.8 per tonne in the third quarter of 2024
compared to $42.2 per tonne in the third quarter of 2023. The increase was due to the Company
expanding into certain categories of processed coal with higher production costs.
For the nine months ended September 30, 2024
The Company sold 4.4 million tonnes for the first nine months of 2024 as compared to 2.6 million
tonnes for the first nine months of 2023. The Company recorded an average realised selling price
of $73.3 per tonne for the first nine months of 2024 compared to $93.1 per tonne for the first nine
months of 2023, the decrease was mainly due to changes in the Company ’s product mix and
decreased pricing for processed coal.
The Company ’s unit cost of sales of product sold was $52.9 per tonne for the first nine months of
2024 compared to $46.2 per tonne for the first nine months of 2023. The increase was due to the
Company expanding into certain categories of processed coal with higher production costs.
For the nine months ended September 30, 2024, the Company had a lost time injury frequency rate
of 0.07.
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Summary of Financial Results
Three months ended
September 30,
Nine months ended
September 30,
$ in thousands, except per share information 2024 2023 2024 2023
Revenue (i) $ 143,748 $ 97,979 $ 318,738 $ 243,002
Cost of sales (i) (111,354) (48,569) (230,469) (121,550)
Gross profit excluding idled mine asset costs (ii) 32,544 49,491 88,529 121,579
Gross profit 32,394 49,410 88,269 121,452
Other operating expenses, net (294) (413) (2,504) (5,178)
Administration expenses (3,400) (1,846) (9,827) (6,558)
Evaluation and exploration expenses (1,003) (808) (1,048) (900)
Additional tax and tax penalty – – – (74,990)
Profit from operations 27,697 46,343 74,890 33,826
Finance costs (10,679) (13,266) (30,873) (36,732)
Finance income 733 4,915 379 5,038
Share of earnings of joint ventures 133 809 2,021 1,739
Share of earning/(loss) of an associate (1) – 9 –
Current income tax expenses (7,844) (9,452) (26,220) (27,299)
Net profit/(loss) attributable to equity holders
of the Company 10,039 29,349 20,206 (23,428)
Basic and diluted earnings/(loss) per share $ 0.034 $ 0.099 $ 0.068 $ (0.079)
(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.
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Overview of Financial Results
For the three months ended September 30, 2024
The Company recorded a $27.7 million profit from operations for the third quarter of 2024 compared
to $46.3 million profit from operations for the third quarter of 2023. The decrease was mainly due to
changes in the Company ’s product mix and decreased pricing for processed coal.
Revenue was $143.7 million for the third quarter of 2024 compared to $98.0 million for the third
quarter of 2023. The financial results were impacted by increased sales volume, as a result of
expansion of its sales network, diversification of its customer base and expansion of the categories
of coal products in its portfolio.
Cost of sales was $111.4 million for the third quarter of 2024 compared to $48.6 million for the third
quarter of 2023. The increase in cost of sales was mainly due to increased sales and the Company
expanding into certain categories of processed coal with higher production costs.
Cost of sales consists of operating expenses, share-based compensation expense, equipment
depreciation, depletion of mineral properties, royalties and idled mine asset costs. Operating
expenses in cost of sales reflect the total cash costs of product sold (a Non-IFRS financial measure,
refer to “Non-IFRS Financial Measures ” section of this press release for further analysis) during the
quarter.
Three months ended
September 30,
$ in thousands 2024 2023
Operating expenses $ 90,046 $ 38,044
Share-based compensation expense – 1
Depreciation and depletion 5,451 1,361
Royalties 15,707 9,082
Cost of sales from mine operations $ 111,204 $ 48,488
Cost of sales related to idled mine assets 150 81
Cost of sales $ 111,354 $ 48,569
Operating expenses in cost of sales were $90.0 million for the third quarter of 2024 compared to
$38.0 million for the third quarter of 2023. The overall increase in operating expenses was due to
the increased sales and the Company expanding into certain categories of processed coal with
higher production costs.
Cost of sales related to idled mine assets for the third quarter of 2024 included $0.2 million related
to depreciation expenses for idled equipment (third quarter of 2023: less than $0.1 million).
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Other operating expenses were $0.3 million for the third quarter of 2024 (third quarter of 2023: $0.4
million).
Three months ended
September 30,
$ in thousands 2024 2023
Management fee $ 1,942 $ 1,754
Reversal of provision for doubtful trade and other receivables (9) (2)
Foreign exchange gain, net (1,562) (1,246)
Reversal of impairment loss on materials and supplies inventories (12) (81)
Rental income from short term leases – (12)
Gain on contract offsetting arrangement (65) –
Other operating expenses, net $ 294 $ 413
Administration expenses were $3.4 million for the third quarter of 2024 (third quarter of 2023: $1.8
million). The change was mainly due to higher daily administration fees and increased salaries and
benefits as a result of expansion of operations.
Three months ended
September 30,
$ in thousands 2024 2023
Corporate administration $ 1,135 $ 593
Legal and professional fees 527 478
Salaries and benefits 1,634 671
Share-based compensation expense – 1
Depreciation 104 103
Administration expenses $ 3,400 $ 1,846
The Company continued to minimise evaluation and exploration expenditures in the third quarter of
2024 in order to preserve the Company ’s financial resources. Evaluation and exploration activities
and expenditures in the third quarter of 2024 were limited to ensuring that the Company met the
Mongolian Minerals Law requirements in respect of its mining licenses.
Finance costs were $10.7 million and $13.3 million for the third quarter of 2024 and 2023
respectively, which primarily consisted of interest expense on the $250.0 million Convertible
Debenture.