SouthGobi announces fulfilment of Resumption Guidance and trading resumption on the Hong Kong Stock Exchange and Toronto Stock Exchange
May 30, 2019
SouthGobi announces fulfilment of Resumption Guidance and
trading resumption on the Hong Kong Stock Exchange and
Toronto Stock Exchange
VANCOUVER – SouthGobi Resources Ltd. (TSX: SGQ, HK: 1878) (“SouthGobi” or the
“Company”) is pleased to announce that, further to its press release dated January 8, 2019
in which the Company announced the trading resumption guidance (“Resumption Guidance”)
provided by the Hong Kong Stock Exchange (“ HKEX”), the Company has fulfilled the
Resumption Guidance to the satisfaction of the HKEX, and the HKEX and the Toronto Stock
Exchange (“TSX”) have accepted the Company’s trading resumption application. Trading in
the common shares of the Company on the TSX will resume effective as of 9:00 a.m. (Toronto
time) before the opening of trading on May 30, 2019, and trading in the common shares of the
Company on the HKEX will resume effective as of 9:00 a.m. (Hong Kong time) befor e the
opening of trading on May 31, 2019.
Background of Resumption Guidance
Trading in the common shares of the Company ha s been suspended on the HKEX and the
TSX since December 17, 2018. As disclosed in the Company’s press release dated January
8, 2019, the HKEX imposed the Resumption Guidance in order for trading to resume in the
common shares of the Company, pursuant to which the Company is to:
(i) conduct a forensic investigation (the “Formal Investigation”) of the past conduct (the
“Suspicious Transaction s”) engaged in by former senior executive officers and
employees of the Company (the “ Former Management and Employees ”) which
raised suspicions of serious fraud, misappropriation of Company assets and other
criminals acts by the Former Management and Emplo yees relating to transactions
between 2016 and the first half of 2018 involving the Company, Inner Mongolia
SouthGobi Energy Co., Ltd. (a subsidiary of the Company) and certain coal trading
and transportation companies, some of which are allegedly related to or controlled by
the Former Management and Employees or their related persons (the “ First
Resumption Guidance”);
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(ii) disclose the findings of the Formal Investigation and take appropriate remedial actions
(the “Second Resumption Guidance”); and
(iii) inform the m arket of all material information for its shareholders and investors to
appraise the Company’s position (the “Third Resumption Guidance”).
Fulfillment of Resumption Guidance
The Company is pleased to announce that, as of the date hereof, the Resumption Gui dance
has been fulfilled, details of which are set out below.
The First Resumption Guidance
As disclosed in its press release dated December 15, 2018, the Company expanded the
mandate of the special committee of independent non -executive directors of the Company
(the “Special Committee”) to conduct a formal investigation into the conduct of the Suspicious
Transactions, the implicated Former Management and Employees, and the impact of such
conduct, if any, on the business and affairs of the Company. As disclosed in its press releases
dated March 15, 2019 and March 30, 2019, the Special Committee engaged Ernst & Young
(China) Advisory Limited (the “Independent Forensic Accountant”) as forensic investigator
in January 2019 to oversee the Formal Investigation. The Special Committee also engaged
Blake, Cassels & Graydon LLP, as independent Canadian legal counsel, and Zhong Lun Law
Firm, as independent Chinese legal counsel, to assist in the Formal Investigation and to
conduct a review of the Company’s applicable policies and procedures from the perspectives
of both Canadian and PRC law.
The Formal Investigation concentrated on the following areas of focus (the “Areas of Focus”):
(i) the arrangements of the Suspicious Transactions; (ii) the relationships between the Former
Management and Employees and certain coal trading and transportation companies; (iii) any
unidentified questionable transactions relating to the Former Management and Employees;
and (iv) the potential impact of (i), (ii) and (iii) on the financial statements of the Company and
its subsidiaries. During the course of the Formal Investigation, certain incomplete
accounting/operational records of one of the companies under investigation (“ Company A”)
were identified in Company employee computers. As a result, the Special Committee
expanded the scope of the Area of Focus of the Formal Investigation to include: (i) a fund flow
analysis of Company A; and (ii) a price analysis of the difference between Company A’s
purchase prices from the Company and selling prices to downstream customers.
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The Special Committee concluded the Formal Investigation and delivered a final report
summarizing its key findings to the board of directors of the Company (the “ Board”), as
detailed in the Company’s press release dated March 30, 2019.
In light of the above, the Company is of the view that the First Resumption Guidance has been
fulfilled.
The Second Resumption Guidance
Based on the Areas of Focus, the Special Committee examined and made findings in respect
of a number of matters in connection with the Formal Investigation, including the following: (i)
allegations that Mr. Aminbuhe, the Company’s former Chairman and Chief Executive Officer,
controlled certain companies with which the Company had business dealings; (ii)
uncollectable receivables from certain former customers and suppliers of the Company; (iii)
the impact of the lawsuit filed by Jiayuguan Xiyuan Trading Co., Ltd.; and (iv) allegations of
misconduct by the Former Management and Employees, including: (I) the g rant of a RMB5
million loan; (II) embezzlement of bank acceptance bills of RMB12 million; (III) endorsement
of commercial acceptance bills of RMB71 million which were not supported by genuine
commercial transactions; (IV) prepayments of RMB8.5 million for coal transportation services
which were never received by the Company; and (V) prepayment of RMB16.4 million for coal
transportation services which were never received by the Company. A summary of the
material findings of the Special Committee in respect of the Suspicious Transactions that were
investigated pursuant to the Formal Investigation is disclosed in the Company’s press release
dated March 30, 2019.
Based on the information obtained from the Formal Investigation, the Special Committee
concluded that four matters examined in connection with the Formal Investigation, having an
aggregate value of approximately RMB41 million, involved improper conduct, fraud or
misappropriation of assets (the “Fraudulent Transactions”) and that one matter examined in
connection with the Formal Investigation, having an aggregate value of approximately RMB71
million, involved an accounting reclassification error. From an accounting perspective, the
Company does not anticipate that the Fraudulent Transactions will have any impact on its
financial statements (the “Financial Statements”) in the future as the Company has already
recorded the appropriate provisions in the Financial Statements as at December 31, 2018,
2017 and 2016 and for the years then ended. Based on the key f indings of and information
obtained from the Formal Investigation, the Company considered the resulting financial impact
on the Financial Statements and determined that a restatement of prior period financial
information was required, details of which were disclosed in the Company’s press release
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dated March 30, 2019.
On March 31, 2019, the Company announced its annual results for the financial year ended
December 31, 2018. The Company’s annual financial statements for the year ended
December 31, 2018 were audited by the Company’s independent external auditor, who
expressed an unqualified opinion on such financial statements.
As disclosed in the Company’s press release dated April 30, 2019, the Special Committee,
with the assistance of the Independent Forensic Accountant, completed its assessment of the
potential remedial actions and preventative measures to improve and strengthen the
Company’s commitment to a culture of honesty, integrity and accountability and compliance
with the highest standards of professional and ethical conduct and delivered its report setting
out a set of recommended remedial actions and preventative measures (the “ Remedial
Actions and Preventative Measures”) to the Board, which was approved at a meeting held
on April 28, 2019.
The Remedial Actions and Preventative Measures are intended to remediate the incidents
identified in the Formal Investigation and address deficiencies in the implementation of the
Company’s existing practices and procedures. Issues identified of note for the purposes of
such remediation include a lack of preventative measures to avoid conflicts of interests, the
need for additional employee oversight and the need to enhance compliance with accounting
protocols and documentation retention. As announced its press release dated April 30, 2019,
the Company had already taken proactive steps to address some of the issues raised by the
Formal Investigation, including but not limited to: ceasing business activities with companies
allegedly controlled by the Company’s former management, taking steps to defend claims by
third parties attempting to link the Company to the aforementioned companies, and
considering whether legal recourse, such as collection actions, can be taken in respect of
certain matters.
The following is a summary of the Remedial Actions and Preventative Measures which were
adopted and approved by the Board and the actions that the Company has taken, or will be
taking, to implement the Remedial Actions and Preventative Measures:
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Remedial Actions and Preventative
Measures
Actions by the Company
Enhance the Company’s anti -fraud
program, including establishing an
internal audit function, conducting
routine internal audits and developing
a communication and training
program for employees to effectively
establish a culture of compliance
within the Co mpany, ensure existing
policies (such as the whistleblower
policy) work effectively and support
the implementation of the Remedial
Actions and Preventative Measures
The Company has established a new internal
audit function which will report directly to the
Audit Committee on a regular basis. The
Company has hired a full-time internal auditor to
oversee the Company’s internal audit function.
The internal auditor will be responsible for
designing and implementing an internal audit
program for the Company whic h will include
routine internal audits and risk assessments of
the Company’s existing anti-fraud program and
other internal controls and procedures.
Enhance “know your customer”
procedures relating to the intake of
new customers and/or granting of
credit to customers
The Company has implemented improvements
to its customer credit approval procedures,
which includes enhanced customer due
diligence procedures and a stricter credit -
approval process which requires that all credit
sales be subject to pre -approval by the Board.
The Company will also conduct quarterly
reviews of the Company’s existing credit terms.
Management has also taken proactive steps to
convey to all employees the importance of
adhering to strict customer credit approval
controls and procedures.
Enhance vendor due diligence and
monitoring processes to screen third
parties
The Company has introduced enhanced vendor
due diligence requirements that must be
satisfied before a new supplier or service
provider with a contract that exceeds a pre -
established monetary threshold can be added to
the pre -approved list. The Company has also
established procedures to periodically review
the terms of existing contracts with suppliers or
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Remedial Actions and Preventative
Measures
Actions by the Company
service providers that exceed a pre-established
monetary threshold a nd the Company’s list of
pre-approved suppliers and service providers.
The Company is in the process of reviewing all
existing vendors and will establish a pre -
approved list of vendors with which the
Company is authorized to transact.
Formalize a process to perform
routine reconciliation of balances with
customers and/or suppliers on a
regular basis
The Company has implemented improvements
to its controls, policies and guidelines relating to
the reconciliation of balances with customers,
suppliers and services providers to ensure that
proper records are maintained and routinely
reconciled.
Enhance the Company’s Financial
Delegation of Authority document
relating to payment authorization and
contract approval processes
The Company has made enhancements to its
Financial Delegation of Authority policy by
introducing enhanced due diligence
requirements and review procedures if a
proposed transaction exceeds certain pre -
established monetary thresholds.
Enhance controls around the use of
commercial bills
The Company has strengthened its controls and
processes in connection with cash advances,
offset arrangements and the use or acceptance
of commercial acceptance bills or other similar
monetary instruments as a method of payment,
including improved pre -approval procedures
and review processes to ensure such monetary
instruments are supported by genuine
commercial transactions.
Introduce segregation of duties in
relation to offset arrangements to
mitigate the risk of collusion which is
The Company has strengthened its controls and
processes in connection with offset
arrangements with different counterparties,
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Remedial Actions and Preventative
Measures
Actions by the Company
detrimental to the Company
including requirements to consult legal counsel
in advance of entering into such arrangements,
document the business rationale and obtain pre-
approval of such arrangements from
management.
Enhance the standardization of
human resources process and
controls across different locations
The Company has standardized its human
resources policies and procedures relating to
employee h iring and termination and data
retention requirements.
Ensure IT back up and document
retention protocols, including
employee return of Company -issued
devices and subsequent archiving
The Company has improved its policies and
procedures relating to data retention
requirements and use of computer and
telecommunication devices and the
establishment of formal data retention protocols
and systems.
Monitor the implementation of the
Remedial Actions and Preventative
Measures by establishing a special
task force, comprised of managers of
the Company’s various business units
and members of the internal audit
function, which will be tasked with this
responsibility, and will consider the
engagement of third party experts to
conduct a review of the results of th e
implementation and advise on further
enhancements if necessary
The Company has appointed the Independent
Forensic Accountant to assist management with
the implementation of the Remedial Actions and
Preventative Measures, to conduct an
independent review of the implementation
results and, based on the implementation
results, to advise the Company on further
enhancements to its internal controls and
procedures if required. The Company’s internal
auditor will be responsible for carrying out
independent test ing of the Remedial Actions
and Preventative Measures implemented.
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Based on the Remedial Actions and Preventative Measures that have been implemented, the
Board is of the view that the Company now has in place robust internal controls and
procedures which are adequate to prevent future occurrence of the issues which caused the
suspension of trading in the Company’s common shares. In addition, the Company has
developed a training program for employees to support the implementation of the Remedial
Actions and Preventative Measures.
In light of the above, the Company is of the view that the Second Resumption Guidance has
been fulfilled.
The Third Resumption Guidance
The Company has published announcements from time to time in compliance with the HKEX’s
Listing Rules and the requirements to disclose inside information under Part XIVA of the
Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) (“ SFO”) in order
to keep shareholders and potential investors appraised of the Company’s status and latest
developments relating to the Resumption Guidance, including, but not limited to, the
Company’s progress in fulfilling the Resumption Guidance, the findings of the Formal
Investigation, the Remedial Actions and Preventative Measures adopted and approved by the
Board and the actions that the Company has taken, or will be taking, to implement the
Remedial Actions and Preventative Measures. Having made such enquiry with respect to the
Company as is reasonable in the circumstances, the members of the Board consider that, to
the best of their knowledge, save as disclosed in this press release and other announcements
previously made by the Company, there is no other material information that needs to be
disclosed and brought to the attention of sharehol ders and potential investors in connection
with the Resumption Guidance as at the date of this press release.
In light of the above, the Company is of the view that the Third Resumption Guidance has
been fulfilled.
Resumption of Trading
Trading in the co mmon shares of the Company has been suspended on the HKEX and the
TSX since December 17, 2018. As the Resumption Guidance has now been fulfilled, the
HKEX and TSX have accepted the Company’s trading resumption application. Trading in the
common shares of t he Company on the TSX will resume effective as of 9:00 a.m. (Toronto
time) before the opening of trading on May 30, 2019, and trading in the common shares of the
Company on the HKEX will resume effective as of 9:00 a.m. (Hong Kong time) before the
opening of trading on May 31, 2019.