Southgobi Announces Third Quarter 2023 Unaudited Financial and Operating Results
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R E S O U R C E S
November 14, 2023
SOUTHGOBI ANNOUNCES THIRD QUARTER 2023
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, 2023. 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, 2023
and the subsequent period to November 14, 2023 are as follows:
• – In late 2022, the Company resumed its major mining operations,
including coal mining, and the volume of coal production has gradually increased since then.
The Company also resumed coal washing operations in April 2023. In response to the market
demand, the Company has been mixing some higher ash content product with its semi-soft
coking coal product and selling this mixed product to the market as processed coal.
The Company experienced an increase in the average selling price of coal from $65.4 per
tonne in the third quarter of 2022 to $85.6 per tonne in the third quarter of 2023 as a result of
improved market conditions in China, expansion of its sales network and diversification of its
customer base.
• – The Company recorded a $46.3 million profit from operations in the third
quarter of 2023 compared to a $3.5 million profit from operations in the third quarter of 2022.
The Company experienced increased sales volume and improvement in its average realised
selling price during the first nine months of 2023.
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• – On October 13, 2023, the Company and JD Zhixing Fund L.P.
(“JDZF ”) entered into the 2023 November Deferral Agreement pursuant to which JDZF
agreed to grant the Company a deferral of (i) payment-in-kind interest ( “PIK Interest ”) of
approximately $4.0 million (the “2023 November PIK Interest ”) which will be due and payable
on November 19, 2023 under the Convertible Debenture; and (ii) the management fees
payable to JDZF on November 15, 2023, February 15, 2024, May 16, 2024 and August 15,
2024, respectively, under the amended and restated mutual cooperation agreement signed on
April 23, 2019 (the “Amended and Restated Cooperation Agreement ”) (together with the 2023
November PIK Interest, the “2023 November Deferred Amounts ”).
The principal terms of the 2023 November Deferral Agreement are as follows:
• Payment of the 2023 November Deferred Amounts will be deferred until August 31, 2024
(the “Deferral Date ”).
• As consideration for the deferral of the 2023 November 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
2023 November Deferred Amounts, commencing on the date on which each such 2023
November Deferred Amounts would otherwise have been due and payable under the
Convertible Debenture.
• As consideration for the deferral of the 2023 November Deferred Amounts which relate
to payment obligations arising from 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 2023 November Deferred Amounts, commencing on the
date on which each such 2023 November Deferred Amounts would otherwise have been
due and payable under the Amended and Restated Cooperation Agreement.
• The 2023 November Deferral Agreement does not contemplate a fixed repayment
schedule for the 2023 November Deferred Amounts or related deferral fees. Instead, the
2023 November Deferral Agreement requires the Company to use its best efforts to pay
the 2023 November Deferred Amounts and related deferral fees due and payable under
the 2023 November Deferral Agreement to JDZF. During the period beginning as of the
effective date of the 2023 November Deferral Agreement and ending as of the 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 2023 November 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.
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• If at any time before the 2023 November 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 August 29, 2023, the Company convened a special
meeting of shareholders during which the Company obtained the requisite approvals from
shareholders for the 2023 March Deferral Agreement.
• – On July 18,
2023, SouthGobi Sands LLC ( “SGS”), a wholly owned subsidiary of the Company received an
official notice (the “Notice ”) issued by MTA stating that MTA has recently completed a periodic
tax audit (the “Audit”) on the financial information of SGS between 2017 and 2020, including
transfer pricing, royalty, air-pollution fee and unpaid tax payables. As a result of the Audit,
the MTA has notified SGS that they are imposing a tax penalty against SGS in the amount
of approximately $75.0 million. Under Mongolian law, the Company has 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.
As at September 30, 2023, the Company recorded a provision for a tax penalty in the amount
of $75.0 million. If any subsequent event occurs that may impact the amount of the provision
for the tax penalty, an adjustment would be recognised in profit or loss and the carrying
amount of the provision shall be adjusted.
• – 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.
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OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS
Summary of Operational Data
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Overview of Operational Data
The Company experienced an increase in the average selling price of coal from $65.4 per tonne
in the third quarter of 2022 to $85.6 per tonne in the third quarter of 2023, as a result of improved
market conditions in China, expansion of its sales network and diversification of its customer base.
The product mix for the third quarter of 2023 consisted of approximately 56% premium semi-soft
coking coal, 15% standard semi-soft coking coal/premium thermal coal and 29% of processed coal
compared to approximately 31% premium semi-soft coking coal, 5% standard semi-soft coking coal/
premium thermal coal and 64% processed coal in the third quarter of 2022.
The Company ’s unit cost of sales of product sold decreased from $58.3 per tonne in the third
quarter of 2022 to $42.2 per tonne in the third quarter of 2023. The decrease was mainly driven by
the economies of scale due to increased sales.
The Company sold 2.6 million tonnes for the first nine months of 2023 as compared to 0.6 million
tonnes for the first nine months of 2022. The average selling price increased from $65.5 per
tonne for the first nine months of 2022 to $93.1 per tonne for the first nine months of 2023, due
to improved market conditions in China, expansion of its sales network and diversification of its
customer base.
The Company ’s production in the first nine months of 2023 was higher than the first nine months of
2022 due to the Company resuming its major mining operations, including coal mining in late 2022,
and the volume of coal production has gradually increased since then. The Company also resumed
coal washing operations in April 2023.
The Company ’s unit cost of sales of product sold decreased from $59.6 per tonne for the first nine
months of 2022 to $46.2 per tonne in the first nine months of 2023. The decrease was mainly driven
by the economies of scale due to increased sales.
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Summary of Financial Results
Three months ended
September 30,
Nine months ended
September 30,
2023 2022 2023 2022
Revenue $ 97,979 $ 36,807 $ 243,002 $ 42,597
Cost of sales (48,569) (32,036) (121,550) (38,110)
Gross profit excluding idled mine
asset costs 49,491 4,982 121,579 5,361
Gross profit 49,410 4,771 121,452 4,487
Other operating income/(expenses), net (413) 546 (5,178) 6,382
Administration expenses (1,846) (1,830) (6,558) (4,808)
Evaluation and exploration expenses (808) (31) (900) (121)
Provision of tax penalty – – (74,990) –
Profit from operations 46,343 3,456 33,826 5,940
Finance costs (13,266) (10,800) (36,732) (31,029)
Finance income 4,915 69 5,038 1,188
Share of earnings/(loss) of joint ventures 809 237 1,739 (24)
Current income tax expenses (9,452) (979) (27,299) (1,917)
Net profit/(loss) attributable to equity
holders of the Company 29,349 (8,017) (23,428) (25,842)
Basic and diluted earnings/(loss) per share $ 0.10 $ (0.03) $ (0.08) $ (0.09)
Overview of Financial Results
The Company recorded a $46.3 million profit from operations in the third quarter of 2023 compared
to a $3.5 million profit from operations in the third quarter of 2022. The financial results for the
third quarter of 2023 were impacted by increased sales volume and improvement in the Company ’s
average realised selling price.
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Revenue was $98.0 million in the third quarter of 2023 compared to $36.8 million in the third quarter
of 2022. The increase was due to (i) coal export volumes through the Ceke Port of Entry gradually
increased since the second quarter of 2023; and (ii) the Company experienced an increase in the
average selling price of coal from $65.4 per tonne in the third quarter of 2022 to $85.6 per tonne in
the third quarter of 2023 as a result of improved market conditions in China, expansion of its sales
network and diversification of its customer base.
Cost of sales was $48.6 million in the third quarter of 2023 compared to $32.0 million in the
third quarter of 2022. The increase in cost of sales was mainly due to the increased sales during
the quarter. 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) during the quarter.
Three months ended
September 30,
2023 2022
Operating expenses $ 38,044 $ 23,599
Share-based compensation expense 1 8
Depreciation and depletion 1,361 1,419
Royalties 9,082 6,799
Cost of sales from mine operations 48,488 31,825
Cost of sales related to idled mine assets 81 211
Cost of sales $ 48,569 $ 32,036
Operating expenses in cost of sales were $38.0 million in the third quarter of 2023 compared to
$23.6 million in the third quarter of 2022. Cost of sales related to idled mine assets in the third
quarter of 2023 included less than $0.1 million related to depreciation expenses for idled equipment
(third quarter of 2022: $0.2 million).
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Other operating expenses was $0.4 million in the third quarter of 2023 (third quarter of 2022: $0.5
million of other operating income). Management fee of $1.8 million were recorded and offset by
foreign exchange gain of $1.2 million in the third quarter of 2023.
Three months ended
September 30,
2023 2022
Management fee $ 1,754 $ 666
Reversal of provision for doubtful trade and
other receivables (2) (64)
Foreign exchange gain, net (1,246) (2,198)
Gain on disposal of items of property, plant and equipment, net – (162)
Reversal of impairment on materials and supplies inventories (81) –
Rental income from short term leases (12) (39)
Discount on settlement of trade payables – (127)
Written off of other payables – (482)
Penalty on late settlement of trade payables – 1,860
Other operating expenses/(income), net $ 413 $ (546)
Administration expenses were $1.8 million in the third quarter of 2023 which was similar to the third
quarter of 2022.
Three months ended
September 30,
2023 2022
Corporate administration $ 593 $ 369
Legal and professional fees 478 556
Salaries and benefits 671 776
Share-based compensation expense 1 25
Depreciation 103 104
Administration expenses $ 1,846 $ 1,830
The Company continued to minimise evaluation and exploration expenditures in the third quarter of
2023 in order to preserve the Company ’s financial resources. Evaluation and exploration activities
and expenditures in the third quarter of 2023 were limited to ensuring that the Company met the
Mongolian Minerals Law requirements in respect of its mining licenses.