SouthGobi Resources announces first quarter 2017 financial and operating results
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May 12, 2017
SouthGobi Resources announces first quarter 2017 financial and
operating results
HONG KONG – SouthGobi Resources Ltd. (TSX: SGQ, HK: 1878) (the “Company” or
“SouthGobi”) today announces its financial and operating results for the three months ended
March 31, 2017. 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, 2017
and the subsequent period to May 12, 2017 are as follows:
• Operating Results – As a result of improved market conditions and prices for coal in
China, the Company’s operating results for the quarter improved with an increase in the
average selling price of coal as well as the volume of coal sales, as compared to the
first quarter of 2016. The Company sold 1.11 million tonnes of its coal product during
the first quarter of 2017 as compared to 0.88 million tonnes for the first quarter of 2016.
The average realized selling price increased from $16.11 per tonne for the first quarter
of 2016 to $24.52 per tonne for the first quarter of 2017, which was mainly a result of
improved market conditions as well as improved product mix.
• Financial Results – The Company recorded a gross profit of $1.5 million during the
quarter compared to gross loss of $6.4 million in the first quarter of 2016. The Company
recorded a $4.1 million loss from operations during the first quarter of 2017, as compared
to a $9.8 million loss from operations in the first quarter of 2016. Revenue was $25.3
million in the first quarter of 2017 as compared to $12.7 million in the first quarter of
2016. The operations during the first quarter of 2017 improved over the comparative
2016 quarter given the improved market conditions in China.
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• Settlement of Trade Receivable – During the year ended December 31, 2016, the
Company entered into a settlement agreement with one of its major customers (the
“Customer”) pursuant to which 200 residential units and 40 parking spaces (collectively,
the “240 Units”) located in Ulaanbaatar, Mongolia, are to be transferred to the Company
as partial consideration for settling an outstanding trade receivables in the amount of
$12.0 million owing by the Customer to the Company, with the balance of the receivable,
totaling $7.5 million, payable in cash by the Customer to the Company by March 31,
2017 (subsequently extended to June 30, 2017). As the transfers of title to the 240 Units
were substantially completed during the first quarter of 2017, the 240 Units have been
recorded in the Company’s accounts accordingly. The settlement agreement includes an
option for the Company to return any unsold units back to the Customer, until September
30, 2017, at the same price per unit for immediate payment of the balance in cash. The
Company anticipates that the sales of the 240 Units will commence during the second
quarter of 2017. As of the date of this announcement, the Company has collected $5.8
million from the Customer to settle the amount of trade receivables outstanding and, on
May 9, 2017, the Company agreed with the Customer to extend the payment due date
on the remaining uncollected balance to June 30, 2017.
• Tax Investigation Case in Mongolia – In May 2016, Resolution No. 258 of the Government
of Mongolia (“Resolution 258”) was issued, which approved the Company’s proposal
to settle the Tax Penalty (as defined and described in this announcement under the
heading entitled “Regulatory Issues and Contingencies – Governmental and Regulatory
Investigations”) by making a series of cash payments and by performing mining operations
at the Tavan Tolgoi deposit in Southern Mongolia on behalf of Erdenes Tavan Tolgoi
JSC (“Erdenes”), a company owned by the Government of Mongolia. During 2016, the
Company made cash payments of $2.4 million as a partial settlement of the Tax Penalty.
In compliance with Resolution 258, in November 2016, the Company entered into an
agreement with Erdenes under which the Company agreed to perform certain mining
operations equivalent to MNT 20.3 billion (approximately $8.1 million) in the West Tsankhi
section of the Tavan Tolgoi deposit during the period from November 2016 to February
2017. As at March 31, 2017, the Company had completed the mining operations at the
Tavan Tolgoi deposit equivalent to MNT 20.3 billion (approximately $8.1 million).
As at March 31, 2017, the provision for the Tax Verdict (as defined below in this
announcement under the heading entitled “Regulatory Issues and Contingencies –
Governmental and Regulatory Investigations”) was reduced to $3.1 million. The Company
is required to make further cash payments of $3.1 million in 2017 to complete repayment
of the balance of the penalty owing.
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• Settlement of Lawsuit Notice from a Former Fuel Supplier – On January 20, 2017, the
Company announced that SouthGobi Sands LLC (“SGS”), a subsidiary of the Company,
received a notice from the Khan-Uul District Civil Court of First Instance in Mongolia (the
“DC Court”) in relation to a claim for damages from Magnai Trade LLC (“MTLLC”), a
former fuel supplier of SGS, in the aggregate amount of MNT 22.2 billion (approximately
$8.9 million) representing outstanding fuel supply payments and related penalties and
interest costs.
On January 25, 2017, the DC Court dismissed the litigation and the matter was referred
to arbitration. The Company signed a settlement agreement with MTLLC on February
10, 2017, pursuant to which SGS would pay MTLLC $8.0 million in equal monthly
installments of $2.0 million each from March 2017 to June 2017 in full satisfaction of the
debt outstanding. The terms of the settlement agreement was subsequently acknowledged
by the arbitrator in the arbitration award.
As a result of the Company failing to honor the repayment schedule set out in the
settlement agreement, the Company received on May 1, 2017 a judicial order issued
by the DC Court which stated that, subject to MTLLC filing the requisite notice with the
DC Court, the arbitration award will be executed by the Court Decision Implementation
Agency of Mongolia (“CDIA”) and taken to bailiff service for further action. The Company
is currently in discussion with MTLLC to revise the repayment schedule. As of May 12,
2017, the Company has made payments in the aggregate of $2.0 million to MTLLC
pursuant to the settlement agreement. See section “Regulatory Issues and Contingencies”
of this announcement under the heading entitled “Settlement of Lawsuit Notice from a
Former Supplier” for more information.
• Novel Sunrise Investments Limited (“Novel Sunrise”) Sold 25.8 million Shares
to a Company Owned by Members of Management – On January 11, 2017, Novel
Sunrise, the Company’s largest shareholder at the time, reported that it had sold 25.8
million common shares of the Company effective December 31, 2016 to Voyage Wisdom
Limited (“Voyage Wisdom”), a company owned by three members of the Company’s
management team, for consideration of $24 million.
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• Going Concern – As at the date hereof, the Company has initiated a plan to change
the existing product mix to higher value and higher margin outputs by washing certain
grades of coal commencing in the second half of 2017 in order to produce more premium
semi-soft coking coal and to initiate more processing of the lower grades of coal in order
to reduce the ash content and improve the selling price and margins on its thermal coal
product. The Company has also completed a new mine plan, which incorporates the
coal washing and processing systems and contemplates significantly higher volumes of
production in order to complement the Company’s new product mix and sales volume
targets. Such plans will involve the need for a significant level of stripping activities over
the next two years and require certain capital expenditures to achieve the designed
production outputs. Such expenditures will require the Company to seek additional
financing in the form of finance leases, debt or equity. The Company has entered into
an agreement for a finance lease on the new wash plant facility but will need financing
to complete the thermal coal processing facilities.
There is no guarantee that the Company will be able to successfully secure additional
sources of financing. This could result in adjustments to the amounts and classifications
of assets and liabilities in the Company’s condensed consolidated financial statements
and such adjustments could be material. Unless the Company acquires additional sources
of financing and/or funding in the short term, the ability of the Company to continue as a
going concern is threatened. If the Company is unable to continue as a going concern, it
may be forced to seek relief under applicable bankruptcy and insolvency legislation. See
section “Liquidity and Capital Resources” for details. As at May 12, 2017, the Company
had $1.2 million of cash.
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OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS
Summary of Operational Data
Three months ended
March 31,
2017 2016
Sales Volumes, Prices and Costs
Premium semi-soft coking coal
Coal sales (millions of tonnes) 0.19 0.06
Average realized selling price (per tonne) (i) $ 45.61 $ 21.38
Standard semi-soft coking coal
Coal sales (millions of tonnes) 0.64 0.58
Average realized selling price (per tonne) (i) $ 23.36 $ 18.42
Thermal coal
Coal sales (millions of tonnes) 0.28 0.24
Average realized selling price (per tonne) (i) $ 13.17 $ 9.19
Total
Coal sales (millions of tonnes) 1.11 0.88
Average realized selling price (per tonne) (i) $ 24.52 $ 16.11
Raw coal production (millions of tonnes) 1.51 0.37
Cost of sales of product sold (per tonne) $ 21.40 $ 21.62
Direct cash costs of product sold (per tonne) (ii) $ 9.42 $ 7.88
Mine administration cash costs of product sold (per tonne) (ii) $ 1.01 $ 1.24
Total cash costs of product sold (per tonne) (ii) $ 10.43 $ 9.12
Other Operational Data
Production waste material moved
(millions of bank cubic meters) 3.30 0.72
Strip ratio (bank cubic meters of waste material per tonne
of coal produced) 2.18 1.94
Lost time injury frequency rate (iii) 0.02 0.00
(i) Average realized selling price is presented before deduction of royalties and selling fees.
(ii) A Non-International Financial Reporting Standards (“IFRS”) financial measure, which does not
have a standardized meaning according to IFRS. See “Non-IFRS Financial Measures” section.
Cash costs of product sold exclude idled mine asset cash costs.
(iii) Per 200,000 man hours and calculated based on a rolling 12 month average.
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Overview of Operational Data
As at March 31, 2017, the Company had a lost time injury frequency rate of 0.02 per 200,000
man hours based on a rolling 12 month average.
As a result of improved market conditions and prices for coal in China, the Company’s
operational results for the quarter improved with an increase in the average selling price of
coal as well as the volume of coal sales, as compared to the first quarter of 2016.
The Company sold 1.11 million tonnes of its coal product during the first quarter of 2017 as
compared to 0.88 million tonnes for the first quarter of 2016. The average realized selling price
increased from $16.11 per tonne for the first quarter of 2016 to $24.52 per tonne for the first
quarter of 2017, which was mainly a result of improved market conditions as well as improved
product mix. The product mix for the first quarter of 2017 consisted of approximately 17% of
Premium semi-soft coking coal, 58% of Standard semi-soft coking coal and 25% of thermal
coal compared to approximately 7% of Premium semi-soft coking coal, 66% of Standard
semi-soft coking coal and 27% of thermal coal for the first quarter of 2016.
The Company also improved the pacing of production to meet demand, such that production
was 1.51 million tonnes for the first quarter of 2017 as compared to 0.37 million tonnes for
the first quarter of 2016.
The Company’s unit cost of sales of product sold decreased to $21.40 per tonne in the first
quarter of 2017 from $21.62 per tonne in the first quarter of 2016. The decrease was mainly
driven by increased sales and the related economies of scale.
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Summary of Financial Results
Three months ended
March 31,
$ in thousands, except per share information 2017 2016
Revenue (i),(ii) $ 25,254 $ 12,727
Cost of sales (ii) (23,759) (19,080)
Gross profit/(loss) excluding idled mine asset costs 4,714 (1,049)
Gross profit/(loss) including idled mine asset costs 1,495 (6,353)
Other operating expenses (3,208) (1,711)
Administration expenses (2,385) (1,642)
Evaluation and exploration expenses (29) (47)
Loss from operations (4,127) (9,753)
Finance costs (5,715) (5,497)
Finance income 4 1
Share of earnings of a joint venture 266 83
Income tax expense (45) (235)
Net loss (9,617) (15,401)
Basic and diluted loss per share $ (0.04) $ (0.06)
(i) Revenue is presented after the deduction of royalties and selling fees.
(ii) Revenue and cost of sales relate to the Company’s Ovoot Tolgoi Mine within the Coal Division
operating segment. Refer to note 3 of the condensed consolidated financial statements for further
analysis regarding the Company’s reportable operating segments.
Overview of Financial Results
The Company recorded a gross profit $1.5 million during the quarter compared to a gross
loss of $6.4 million in the first quarter of 2016. The Company recorded a $4.1 million loss
from operations in the first quarter of 2017 compared to a $9.8 million loss from operations
in the first quarter of 2016. The operations for the three months ended March 31, 2017 were
positively impacted by improved market conditions resulting in higher sales volumes and a
better sales mix of the Company’s products as well as the improved coal prices in China.
The Company earned revenue of $25.3 million in the first quarter of 2017 compared to $12.7
million in the first quarter of 2016.
The Company’s revenue is presented after deduction of royalties and selling fees. The
Company’s effective royalty rate for the first quarter of 2017, based on the Company’s average
realized selling price of $24.52 per tonne, was 5.9% or $1.44 per tonne compared to 7.1%
or $1.14 per tonne based on the average realized selling price of $16.11 per tonne in 2016.
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Royalty regime in Mongolia
The royalty regime in Mongolia is evolving and has been subject to change since 2012.
On January 1, 2015, the “flexible tariff” royalty regime ended and royalty payments reverted to
the previous regime which is based on a set reference price per tonne published monthly by
the Government of Mongolia. The Company and other Mongolian coal producers are actively
engaging the Mongolian authorities to seek the continuation of the “flexible tariff” regime.
On February 1, 2016, the Government of Mongolia issued a resolution in connection with the
royalty regime. From February 1, 2016 onwards, royalties are to be calculated based on the
actual contract price in which transportation cost to the Mongolia border should have been
included. If such transportation cost was not included in the contract, the relevant transportation
costs, custom documentation fees, insurance and loading cost should be estimated for the
calculation of royalties. In the event that the calculated sales price as described above differs
from the contract sales price of other entities in Mongolia (same quality of coal and same
border crossing) by more than 10%, the calculated sales price will be deemed to be “non-
market” under Mongolian tax law and the royalty will then be calculated based on a reference
price as determined by the Government of Mongolia.
Cost of sales was $23.8 million in the first quarter of 2017 compared to $19.1 million in the
first quarter of 2016. Cost of sales comprises operating expenses, share-based compensation
expense, equipment depreciation, depletion of mineral properties, coal stockpile inventory
impairments and idled mine asset costs. Operating expenses in cost of sales reflect the total
cash costs of product sold (a non-IFRS financial measure, see section “Non-IFRS Financial
Measures” of this announcement for further analysis) during the period.
Three months ended
March 31,
$ in thousands 2017 2016
Operating expenses $ 10,700 $ 8,045
Share-based compensation expense/(recovery) 23 (5)
Depreciation and depletion 7,486 3,579
Impairment of coal stockpile inventories 2,331 2,157
Cost of sales from mine operations 20,540 13,776
Cost of sales related to idled mine assets 3,219 5,304
Cost of sales $ 23,759 $ 19,080