SouthGobi Announces First Quarter 2022 Financial and Operating Results
SouthGobi Announces First Quarter 2022 Financial and Operating
Results
HONG KONG, CHINA / ACCESSWIRE / June 6, 2022 / SouthGobi Resources Ltd.
(Toronto Stock Exchange ("TSX"):SGQ, Hong Kong Stock Exchange ("HKEX"):1878)
(the "Company" or "SouthGobi") today announces its financial and operating results for the three
months ended March 31, 2022. 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 March 31, 2022 and
the subsequent period to June 6, 2022 are as follows:
• Operating Results - In response to the increase in the number of the Coronavirus Disease
2019 ("COVID-19") cases in Ejinaqi, a region in China's Inner Mongolia Autonomous
Region where the custom and border crossing are located, reported in late October 2021,
the local government authorities have imposed stringent preventive measures throughout
the region, including the temporary closure of the Ceke Port of Entry located at the
border of Mongolia and China. Accordingly, the Company's coal exports into China were
suspended from November 2021 to May 2022. In order to control the inventory level and
preserve the Company's working capital, the Company temporarily suspended mining
operations (including coal mining) beginning in early November 2021.
• Financial Results - The Company recorded a $0.2 million loss from operations in the
first quarter of 2022 compared to a $7.5 million profit in the first quarter of 2021. The
financial results were impacted by the decreased sales resulting from the temporary
closure of the Ceke Port of Entry experienced by the Company during the quarter.
• Impact of the COVID-19 Pandemic - On May 25, 2022, the Ceke Port of Entry re-
opened for coal export on a trial basis, with a limited number of trucks permitted to cross
the border during the trial period. The Company has been proactively adjusting its sales
strategy in response and exploring opportunities to expand its sales accordingly.
Although the export of coal from Mongolia to China has resumed as of the date hereof,
there can be no guarantee that the Company will be able to continue exporting coal to
China, or the Chinese-Mongolian border crossings would not be the subject of additional
closure as a result of COVID-19 or any variants thereof in the future. The Company
anticipates that its revenue, liquidity and profitability will continue to be adversely
impacted until such time as the coal exports into China are allowed to resume at normal
levels.
The Company will continue to closely monitor the situation at the Ceke Port of Entry, including
the number of trucks that are permitted to cross the border and the impact on the operations and
financials of the Company, and will evaluate the most suitable time for the resumption of its
mining operation.
In the event that the Company's ability to export coal into the Chinese market continues to be
restricted or limited, this is expected to 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.
• China Investment Corporation ("CIC") convertible debenture ("Convertible
Debenture") - On May 13, 2022, the Company and CIC entered into an agreement (the
"2022 May Deferral Agreement"), pursuant to which CIC agreed to grant the Company a
deferral of (i) semi-annual cash interest payments of $7.9 million payable to CIC on May
19, 2022 (the "Deferred Amounts"); and (ii) the management fee which payable to CIC
on February 14, 2022 and August 14, 2021 (the "Deferred Management Fee") under the
Amended and Restated Cooperation Agreement (collectively, the "2022 Deferral
Amounts") under the Convertible Debenture.
The principal terms of the 2022 May Deferral Agreement are as follows:
• Payment of the 2022 Deferral Amounts will be deferred until August 31, 2023.
• As consideration for the deferral of the Deferred Amounts, the Company agreed to pay
CIC a deferral fee equal to 6.4% per annum on the Deferred Amounts payable under the
Convertible Debenture, commencing on May 19, 2022.
• As consideration for the deferral of the Deferred Management Fees, the Company agreed
to pay CIC a deferral fee equal to 2.5% per annum on the outstanding balance of the
Deferred Management Fees payable under the Amended and Restated Cooperation
Agreement, commencing on the date on which each such 2022 May Deferred
Management Fee would otherwise have been due and payable under the Amended and
Restated Cooperation Agreement.
• The Company agreed to provide CIC with monthly updates regarding its operational and
financial affairs.
• If at any time before the 2022 Deferral Amounts and related deferral fee 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 CIC prior
to effecting such appointment, replacement or termination.
• The Company and CIC agreed that nothing in the 2022 May Deferral Agreement
prejudices CIC's rights to pursue any of its remedies at any time pursuant to the prior
deferral agreements.
• Management Cease Trade Order ("MCTO") - On March 11, 2022, the Company
announced that it was advised by its external auditors that they would not be in a position
to render an unmodified opinion on the Company's annual consolidated financial
statements for the year ended December 31, 2021 (the "2021 Financial Statements") prior
to the filing deadline of March 31, 2022 because they were not able to obtain sufficient
evidence to support management's going concern assumptions. As a result, the Company
was unable to file: (i) the 2021 Financial Statements, accompanying Management's
Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")
and chief executive officer and chief financial officer certificates prior to the filing
deadline of March 31, 2022; and (ii) the Annual Information Form for the financial year
ended December 31, 2021 prior to the filing deadline of March 31, 2022 (collectively, the
"2022 Required Filings"). The Company was also unable to file its 2021 Annual Report
prior to the filing deadline of March 31, 2022 as required under applicable HKEX listing
rules.
On March 17, 2022, the Company applied for a management cease trade order with the
applicable Canadian securities regulators in connection with the anticipated delayed filing of the
2022 Required Filings. A MCTO was issued by the British Columbia Securities Commission
(the "BCSC"), the Company's principal securities regulator in Canada, on April 1, 2022.
On May 30, 2022, the Company completed the filing of its annual consolidated financial
statements for the year ended December 31, 2021 and accompanying MD&A and chief executive
officer and chief financial officer certifications, and its Annual Information Form for the year
ended December 31, 2021. Together with the filing today of the Company's interim financial
statements for the quarter ended March 31, 2022 and accompanying MD&A and chief executive
officer and chief financial officer certifications, the Company expects the management cease
trade order issued on April 1, 2022 by the BCSC pursuant to National Policy 12-203 - Cease
Trade Orders for Continuous Disclosure Defaults will be revoked in the near future.
• Application for New Listing on the TSX Venture Exchange (the "TSX-V") and
Primary Listing on the Hong Kong Stock Exchange - On April 20, 2022, the Company
announced that it would be making an application (the "Listing Application") to the TSX-
V to list its common shares on the TSX-V. In conjunction with the foregoing, the
Company would also apply for voluntary delisting of its common shares from the TSX,
subject to the Company receiving approval from the TSX-V of the Listing Application.
Pursuant to the Rules Governing the Listing of Securities on the Hong Kong Stock
Exchange (the "Listing Rules"), the Company announced it intends to submit a written
notification to the HKEX stating, among other things, that it will be able to fully comply
with the applicable Listing Rules in connection with the approval of the Listing
Application and the Listing Application becoming effective, and such that its current
secondary listing on the HKEX will be converted to a primary listing.
• Sale by CIC of its Interests in the Company- On May 27, 2022, the Company announced
that as disclosed in the press release issued by CIC on May 26, 2022 (the "CIC Press
Release"), CIC has entered into an agreement to sell (the "CIC Sale Transaction") all of
its interests in the Company, including its 64,766,591 common shares of the Company
and the Convertible Debenture, to JD Zhixing Fund L.P. (the "Buyer"). The Company
has been advised that the Buyer is an exempted limited partnership formed under the laws
of Cayman Islands. The Buyer's general partner is JD Dingxing Limited, a corporation
formed under the laws of the Cayman Islands. The Buyer's limited partner is Inner
Mongolia Tianyu Trading Limited, a corporation formed under the laws of Hong Kong.
As disclosed in the CIC Press Release, completion of the Sale Transaction is subject to
the satisfaction of certain conditions precedent.
In connection with the CIC Sale Transaction, CIC has agreed to assign (the "Assignment") to the
Buyer all of CIC's rights in and obligations under: (i) the Convertible Debenture and related
security documents; (ii) the Amended and Restated Cooperation Agreement and related
documents; (iii) the deferral agreements between CIC, the Company and certain of its
subsidiaries in connection with the deferral of interest payments and other outstanding fees under
the Convertible Debenture and the Amended and Restated Cooperation Agreement (the "Deferral
Agreements"); and (iv) the Securityholders Agreement.
Subject to completion of the CIC Sale Transaction and related Assignment, the Buyer has
agreed, effective as of July 1, 2022, to reduce the service fee payable by the Company under the
Amended and Restated Cooperation Agreement from 2.5% to 1.5% of all net revenues realized
by the Company and all of its subsidiaries derived from sales into China.
Upon the completion of the Sale Transaction and related Assignment:
• while the Convertible Debenture is outstanding, or while the Buyer has a minimum 15%
direct or indirect stake in the Company, the Buyer will have the right to nominate one
director to the Board pursuant to the board nomination rights contained in the
Securityholders Agreement;
• the buyer also will have the right to nominate two additional directors to the Board if it
and its affiliates have a minimum 20% direct or indirect stake in Company, or one
additional director to the Board if it and its affiliate have a minimum 10% direct or
indirect stake in Company, pursuant to the board nomination rights contained in the
Deferral Agreements; and
• while the Convertible Debenture is outstanding, or while the buyer has a minimum 15%
direct or indirect stake in Company, the buyer will have certain pre-emption rights on a
pro-rata basis to subscribe for any new shares to be allotted and issued by Company. The
pre-emption rights do not apply to new shares issued pursuant to pro-rata public equity
offerings made to all shareholders, exercise of stock options and shares issued to achieve
a 25% public float.
• 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.
OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS
Summary of Operational Data
1. 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.
2. Per 200,000 man hours and calculated based on a rolling 12 month average.
3. Not presented as nil sales was noted for the quarter.
Overview of Operational Data
The Company ended the first quarter of 2022 without a lost time injury.
In response to the increase in the number of COVID-19 cases in Ejinaqi, the Ceke Port of Entry
was closed in October 2021. Accordingly, the Company's coal exports into China were
suspended from November 2021 to May 2022. As a result, the Company's sales volume
decreased from 0.6 million tonnes in the first quarter of 2021 to nil in the first quarter of 2022.
In order to control the inventory level and preserve the Company's working capital, the Company
temporarily suspended mining operations (inc luding coal mining) beginning in early November
2021. See "Significant Events and Highlights - Impact of the COVID-19 Pandemic" above.
Summary of Financial Results
1. 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.
2. A non-IFRS financial measure, idled mine asset costs represents the depreciation expense
relates to the Company's idled plant and equipment.
Overview of Financial Results
The Company recorded a $0.2 million loss from operations in the first quarter of 2022 compared
to a $7.5 million profit from operations in the first quarter of 2021. The financial results for the
first quarter of 2022 were impacted by the decreased sales resulting from the border closure
experienced by the Company during the quarter.
Royalty regime in Mongolia
On June 23, 2021, the Government of Mongolia issued a new resolution in connection with the
royalty regime. From July 1, 2021 onwards, the royalty payable is to be calculated based on the
reference price as determined by the Government of Mongolia, and the reference to the contract
sales price will be removed.
Cost of sales was $1.0 million in the first quarter of 2022 compared to $18.3 million in the first
quarter of 2021. The decrease in cost of sales was mainly due to the decreased sales during the
quarter. Cost of sales consists of operating expenses, share-based compensation
expense/recovery, 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 section "Non-IFRS Financial Measures" of this press
release for further analysis) during the quarter.
Operating expenses in cost of sales were $0.5 million in the first quarter of 2022 compared to
$12.3 million in the first quarter of 2021. The overall decrease in operating expenses was
primarily due to the decreased sales volume.
Cost of sales related to idled mine assets in the first quarter of 2022 included $0.4 million related
to depreciation expenses for idled equipment (first quarter of 2021: $0.5 million).
Other operating income were $2.1 million in the first quarter of 2022 (first quarter of 2021: other
operating expenses of $0.3 million).
Administration expenses were $1.2 million in the first quarter of 2022 as compared to $1.8
million in the first quarter of 2021, as follows:
The Company continued to minimize evaluation and exploration expenditures in the first quarter
of 2022 in order to preserve the Company's financial resources. Evaluation and exploration
activities and expenditures in the first quarter of 2022 were limited to ensuring that the Company
met the Mongolian Minerals Law requirements in respect of its mining licenses.
Finance costs were $10.0 million and $14.6 million in the first quarter of 2022 and 2021
respectively, which primarily consisted of interest expense on the $250.0 million Convertible
Debenture. The decrease was mainly due to the Company recording a loss of $3.3 million on the
fair value of the embedded derivatives relating to the Convertible Debenture and the associated
increase in interest expenses following the recording of gain on extinguishment of Convertible
Debenture in the first quarter of 2021.
Summary of Quarterly Operational Data
1. A non-IFRS financial measure. Refer to section "Non-IFRS Financial Measures". Cash
costs of product sold exclude idled mine asset cash costs.
2. Per 200,000 man hours and calculated based on a rolling 12 month average.
3. Not presented as nil sales was noted for the quarter.
Summary of Quarterly Financial Results
The Company's consolidated financial statements are reported under International Financial
Reporting Standards ("IFRS") issued by the International Accounting Standards Board. The
following table provides highlights, extracted from the Company's annual and interim
consolidated financial statements, of quarterly results for the past eight quarters.