SouthGobi announces fourth quarter and full year 2021 financial and operating results
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R ESOURCE S
May 30, 2022
SouthGobi announces fourth quarter and full year 2021
financial and operating results
HONG KONG – 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 quarter and the year ended December 31, 2021. All figures
are in U.S. dollars ( “USD”) unless otherwise stated.
Reference is made to the press release of the Company dated March 30, 2022 in relation to the
unaudited financial and operating results for the year ended December 31, 2021 (the “Unaudited
Annual Results Press Release ”) and the press releases dated March 31, 2022, April 14, 2022, April
29, 2022, May 17, 2022 and May 27, 2022 in relation to, among other things, the further delay in
publication of the audited annual results press release and the dispatch of the annual report for
the year ended December 31, 2021 (collectively the “Press Release ”). Unless otherwise defined,
capitalised terms used in this press release shall have the same meanings as those defined in the
Unaudited Annual Results Press Release and the Press Release.
The Board of Directors (the “Board”) wish to inform that the Company ’s independent auditors,
BDO Limited ( “BDO”), have completed their audit of the consolidated financial statements of the
Company for the year ended December 31, 2021 in accordance with the Canadian generally
accepted auditing standards and would like to announce the audited annual results of the Company
for the year ended December 31, 2021 together with the comparative figures for the previous year
and the respective notes in this press release.
Shareholders and potential investors should be aware that this press release of audited financial
results for the year ended 31 December 2021 was made to replace the Unaudited Financial Results
Press Release which has not been agreed with the auditor of the Company. The Board would like to
draw attention to the shareholders and potential investors that, there were no changes contained in
the consolidated statement of profit or loss and other comprehensive income and the consolidated
statement of financial position, the 2021 audited annual results are consistent with the unaudited
financial results contained in the Unaudited Financial Results Press Release. Shareholders and
potential investors are advised to exercise caution when dealing in the shares and other securities
of the Company.
SIGNIFICANT EVENTS AND HIGHLIGHTS
The Company ’s significant events and highlights for the year ended December 31, 2021 and the
subsequent period to May 30, 2022 are as follows:
• Operating Results – In response to the increase in the Coronavirus Disease 2019
(“COVID-19 ”) case numbers in Mongolia, the Chinese authorities has been restricting the
number of trucks permitted to cross the Ceke Port of Entry, and such restriction has severely
impacted the sales volume of the Company in the third and fourth quarters of 2021. As a
result, the Company ’s sales volume decreased from 2.6 million tonnes in 2020 to 0.9 million
tonnes in 2021.
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In response to the restrictions on the number of trucks crossing the Mongolian border into
China which began as of the second quarter of 2021, the Company temporarily suspended
its major mining operations (including coal mining) in the second quarter of 2021 in order to
control the inventory level and preserve the Company ’s working capital. Mining operations
(including coal mining) resumed in the third quarter of 2021. However, mining operations were
temporarily suspended again by the Company beginning in November 2021 in response to the
temporary closure of the Ceke Port of Entry in the fourth quarter of 2021. See “Impact of the
COVID-19 Pandemic ” below.
The Company experienced an increase in the average selling price of coal from $35.5 per
tonne in the fourth quarter of 2020 to $55.4 per tonne in the fourth quarter of 2021, as a result
of improved market conditions in China and an improvement of the overall product mix.
• Financial Results – The Company recorded a $4.4 million profit from operations in 2021
compared to a $15.3 million profit in 2020. The financial results were impacted by the
decreased sales resulting from the export volume limitations and temporary closure of the
Ceke Port of Entry experienced by the Company during the year.
• Impact of the COVID-19 Pandemic – Since the second quarter of 2021, additional
precautionary measures were imposed by the Chinese authorities at the Ceke Port of Entry
in response to the increase of COVID-19 cases in Mongolia, which included restricting the
number of trucks crossing the Mongolian border into China. The restrictions on trucking
volume have had an adverse impact on the Company ’s ability to import its coal products into
China in 2021.
In response to the increase in the number of 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.
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.
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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 (together with its wholly-owned subsidiaries and
affiliates, “CIC”) Convertible Debenture ( “CIC Convertible Debenture ”) – On July 30,
2021, the Company and CIC entered into an agreement (the “2021 July Deferral Agreement ”)
pursuant to which CIC agreed to grant the Company a deferral of: (i) semi-annual cash
interest payments of $8.1 million payable to CIC on November 19, 2021; and (ii) $4.0 million
worth of payment in kind interest ( “PIK Interest ”) shares (collectively, the “2021 Deferral
Amounts ”) issuable to CIC on November 19, 2021 under the CIC Convertible Debenture.
The principal terms of the 2021 July Deferral Agreement are as follows:
• Payment of the 2021 Deferral Amounts will be deferred until August 31, 2023.
• As consideration for the deferral of the 2021 Deferral Amounts, the Company agreed to pay
CIC a deferral fee equal to 6.4% per annum on the 2021 Deferral Amounts payable under the
CIC Convertible Debenture, commencing on November 19, 2021.
On May 15, 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 CIC 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 CIC
Convertible Debenture, commencing on May 19, 2022.
• As consideration for the deferral of the Deferred Management Fee, the Company agreed to
pay CIC a deferral fee equal to 2.5% per annum on the outstanding balance of the Deferred
Management Fee 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.
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• 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 BCSC, the Company ’s principal
securities regulator in Canada, on April 1, 2022 (the “2022 MCTO ”).
• 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.
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In connection with the 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 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.
• Changes in Management
Mr. Weiguo Zhang: Mr. Zhang resigned as Chief Financial Officer on February 10, 2021.
Mr. Alan Ho: Mr. Ho was appointed as acting Chief Financial Officer on February 10, 2021.
Mr. Aiming Guo: Mr. Guo resigned as Chief Operating Officer on February 10, 2021.
Mr. Tao Zhang: Mr. Zhang has been re-designated from Vice President to Vice President of
Sales on February 10, 2021.
Mr. Munkhbat Chuluun: Mr. Chuluun was appointed as Vice President of Public Relations on
February 10, 2021.
• 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 Annual Operational Data
Year ended
December 31,
2021 2020
Sales Volumes, Prices and Costs
Premium semi-soft coking coal
Coal sales (millions of tonnes) 0.60 1.01
Average realized selling price (per tonne) $ 51.80 $ 33.22
Standard semi-soft coking coal/premium thermal coal
Coal sales (millions of tonnes) 0.33 1.43
Average realized selling price (per tonne) $ 35.01 $ 31.69
Washed coal
Coal sales (millions of tonnes) 0.01 0.19
Average realized selling price (per tonne) $ 48.53 $ 41.96
Total
Coal sales (millions of tonnes) 0.94 2.63
Average realized selling price (per tonne) $ 46.02 $ 33.01
Raw coal production (millions of tonnes) 1.36 1.49
Cost of sales of product sold (per tonne) $ 33.30 $ 22.30
Direct cash costs of product sold (per tonne) (i) $ 17.81 $ 12.73
Mine administration cash costs of product sold (per tonne) (i) $ 1.53 $ 1.33
Total cash costs of product sold (per tonne) (i) $ 19.34 $ 14.06
Other Operational Data
Production waste material moved (millions of bank cubic meters) 5.94 5.34
Strip ratio (bank cubic meters of waste material per tonne of
coal produced) 4.36 3.59
Lost time injury frequency rate (ii) 0.00 0.03
(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 Annual Operational Data
The Company ended 2021 without a lost time injury. In comparison, as at December 31, 2020, the
Company had a lost time injury frequency rate of 0.03 per 200,000 man hours based on a rolling
12-month average.
The Company sold 0.9 million tonnes in 2021 as compared to 2.6 million tonnes in 2020. The
average selling price increased from $33.0 per tonne for 2020 to $46.0 per tonne for 2021, as a
result of improved market conditions in China and an improvement of the overall product mix.
The product mix for 2021 consisted of approximately 64% of premium semi-soft coking coal,
34% of standard semi-soft coking coal/premium thermal coal and 2% of washed coal compared
to approximately 39% of premium semi-soft coking coal, 54% of standard semi-soft coking coal/
premium thermal coal and 7% of washed coal in 2020.
The Company ’s production in 2021 was lower than 2020 as a result of the Company ’s major mining
operations (including coal mining) being temporarily suspended for a relatively longer period in
2021 in order to mitigate the financial impact of the border closures and to preserve the Company ’s
working capital, yielding 1.4 million tonnes for 2021 as compared to 1.5 million tonnes for 2020.
The Company ’s unit cost of sales of product sold increased from $22.3 per tonne in 2020 to $33.3
per tonne in 2021. The increase was mainly driven by the increase in the effective royalty rate.
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Summary of Annual Financial Results
Year ended
December 31,
$ in thousands, except per share information 2021 2020
Revenue (i) $ 43,398 $ 85,951
Cost of sales (i) (31,304) (58,657)
Gross profit excluding idled mine asset costs (ii) 15,011 32,147
Gross profit 12,094 27,294
Other operating expenses, net (1,426) (4,821)
Administration expenses (6,068) (6,971)
Evaluation and exploration expenses (223) (226)
Profit from operations 4,377 15,276
Finance costs (39,118) (31,692)
Finance income 23,165 2,613
Share of earnings/(loss) of a joint venture (159) 1,313
Current income tax expenses (2,638) (7,599)
Net loss attributable to equity holders of the Company (14,373) (20,089)
Basic and diluted loss per share $ (0.05) $ (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 2 of the selected information from the notes to the consolidated
financial statements for further analysis regarding the Company ’s reportable operating segments.
(ii) A Non-IFRS financial measure. Refer to “Non-IFRS Financial Measures ” section. Idled mine asset costs
represents the depreciation expense relates to the Company ’s idled plant and equipment.
Overview of Annual Financial Results
The Company recorded a $4.4 million profit from operations in 2021 compared to a $15.3 million
profit in 2020. The financial results were impacted by (i) the export volume limitations experienced
by the Company during the year and (ii) the temporary closure of the Chinese-Mongolia border
which resulted in the Company being unable to export its coal products to China during the fourth
quarter of 2021.
Revenue was $43.4 million in 2021 compared to $86.0 million in 2020. The Company ’s effective
royalty rate for 2021, based on the Company ’s average realized selling price of $46.0 per tonne,
was 18.7% or $8.6 per tonne, compared to 12.2% or $4.0 per tonne in 2020 (based on the average
realized selling price of $33.0 per tonne).