SouthGobi Resources announces first quarter 2018 financial and operating results
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RESOURCES May 14, 2018
SouthGobi Resources announces first quarter 2018 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, 2018. 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, 2018
and the subsequent period to May 14, 2018 are as follows:
• Operating Results – As a result of improved market conditions and prices for coal
in China as well as a higher portion of sales were made through our Inner Mongolia
subsidiary, the Company experienced an increase in the average selling price of coal
from $24.52 per tonne in the first quarter of 2017 to $43.02 per tonne in the first quarter
of 2018. However, the volume of coal sales has decreased from 1.11 million tonnes in
the first quarter of 2017 to 0.56 million tonnes in the first quarter of 2018 as a result of
the delay in the customs clearance process at the Ceke border which the Company has
been experiencing since July 2017.
• Financial Results – The Company recorded a gross profit of $6.7 million in the first
quarter of 2018 compared to $1.5 million in the first quarter of 2017 while $2.9 million
profit from operations was recorded in the first quarter of 2018 compared to a $4.1 million
loss from operations in the first quarter of 2017. As a result of improved market conditions
and prices for coal in China, the overall financial results improved when compared to
the first quarter of 2017, which was principally attributable to the higher average selling
price achieved during the quarter.
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• China Investment Corporation (“CIC”) convertible debenture (“CIC Convertible
Debenture”) – Pursuant to the terms of the deferral agreement dated June 12, 2017
(the “June 2017 Deferral Agreement”) with CIC in relation to a revised payment schedule
on the $22.3 million of cash interest and associated costs originally due under the
CIC Convertible Debenture on May 19, 2017 (the “May 2017 Interest Payable”), the
Company was required to pay $9.7 million of cash interest and associated costs to CIC
on November 19, 2017 (the “June 2017 Deferral Agreement Payment”). In addition,
pursuant to the terms of the CIC Convertible Debenture, the Company was required to pay
$8.1 million of anniversary cash interest to CIC on November 19, 2017 (the “November
Interest Payment” and together with the June 2017 Deferral Agreement Payment, the
“November 19 th Payments”). Pursuant to the CIC Convertible Debenture, the Company
was also obliged to issue $4.0 million worth of PIK interest shares (the “November 2017
PIK Interest”) to CIC on November 19, 2017.
As of the date of this press release, the Company: (i) has neither paid the November
19th Payments nor issued the November 2017 PIK Interest shares to CIC within the cure
period provided for under the CIC Convertible Debenture; and (ii) has not agreed upon
a repayment plan for such amounts with CIC. Consequently, the Company is in default
under the CIC Convertible Debenture and the June 2017 Deferral Agreement. In addition,
pursuant to the terms of the CIC Convertible Debenture, the Company is required to
pay $7.9 million of cash interest to CIC on May 19, 2018 (the “May 2018 Payment”). As
of the date of this press release, the Company expects that it will be unable to pay the
May 2018 Payment to CIC on the due date. Pursuant to the terms of the CIC Convertible
Debenture and the June 2017 Deferral Agreement, CIC may, at its discretion, provide
notice to the Company and declare all principal, interest and other amounts owing under
the CIC Convertible Debenture and the June 2017 Deferral Agreement immediately due
and payable, and take steps to enforce payment thereof, which would 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. As of the date of this press release,
the Company has received no indication from CIC of any intention to deliver a notice
of default under the CIC Convertible Debenture and the June 2017 Deferral Agreement
or to accelerate the amounts outstanding under the CIC Convertible Debenture and the
June 2017 Deferral Agreement.
The Company is in discussion with CIC for a deferral of the November 19 th Payments,
the November 2017 PIK Interest and the May 2018 Payment; however, there can be no
assurance that a favorable outcome will be reached.
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As a consequence of the Company not entering into a deferral agreement with CIC as
at March 31, 2018, International Accounting Standard (“IAS”) 1 requires the Company
to classify the entire balance of the CIC Convertible Debenture as a current liability as
at March 31, 2018, notwithstanding the fact that CIC has not indicated any intention to
deliver notice of default or accelerate the maturity of the CIC Convertible Debenture.
The Company anticipates that both the debt host and the fair value of the embedded
derivative will be classified as a non-current liability upon the execution of a deferral
agreement, unless a future event of default occurs under the terms of the CIC Convertible
Debenture.
• Notice of Arbitration – On January 10, 2018, the Company received a confidential partial
award (final except as to costs) (the “Arbitration Award”) with respect to an arbitration
proceeding in Hong Kong related to a dispute concerning a coal supply agreement
between SouthGobi Sands LLC (“SGS”), a subsidiary of the Company, and First Concept
Industrial Group Limited (“First Concept”).
Pursuant to the Arbitration Award, SGS has been ordered to repay the sum of $11.5
million (which SGS had received as a prepayment for the purchase of coal) to First
Concept, together with accrued interest at a simple interest rate of 6% per annum from
the date which the prepayment was made until the date of the Arbitration Award, and
then at a simple interest rate of 8% per annum until full payment. The Arbitration Award
is final, except as to costs which have been reserved for a future award. As at March 31,
2018, the Company recorded a provision of $14.1 million for the commercial arbitration.
On March 23, 2018, SGS received a notice from First Concept demanding payment of
the full amount of the Arbitration Award, together with the accrued interest thereon, by
no later than March 30, 2018, otherwise First Concept intends to commence enforcement
proceedings against SGS in respect of the Arbitration Award. On May 10, 2018, SGS
received a notice from First Concept advising that First Concept has obtained a court
order dated April 27, 2018 from the High Court of Hong Kong granting leave to First
Concept to enforce the Arbitration Award against SGS in Hong Kong. The Company
is consulting with its independent litigation counsel regarding this matter. However, as
SGS does not have any material assets, properties or place of business in Hong Kong,
the Company is of the view that this court order will have little or no immediate impact
on its ongoing operations.
The Company is currently considering and reviewing its options with respect to the
Arbitration Award, including exploring ways to work together with First Concept on
payment arrangements that are practical to and are in best interests of both parties;
however, there can be no assurance that a favorable outcome will be reached.
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In the event that First Concept applies to enforce the Arbitration Award against SGS
through judicial measures in courts of Mongolia or any other jurisdiction in which SGS
has assets or properties, the Company intends to take appropriate steps to respond to
such enforcement proceedings in the best interests of the Company through independent
litigation counsel which has been retained by the Company for this purpose.
• Termination of Enforcement Procedures relating to Tax Verdict – Following the
termination of enforcement procedures in relation to the previously disclosed judgment
of the Mongolian Second Criminal Court rendered against SGS (the “Tax Verdict”) in
January 2018, the dispute giving rise to the Tax Verdict has been fully resolved. The
Company will continue to work closely with the Mongolian authorities to ensure compliance
with all applicable Mongolian rules and regulations.
• Changes in Directors
Mr. Zhiwei Chen: Mr. Chen was appointed as a non-executive director on April 13, 2018.
Mr. Xiaoxiao Li: Mr. Li was appointed as a non-executive director on April 13, 2018.
• Going Concern – In the fourth quarter of 2016, the Company initiated a plan to change
the existing product mix to higher value and higher margin outputs by commencing the
washing of certain grades of coal in order to produce more premium semi-soft coking
coal upon the successful commissioning of the coal washing facility under construction
at the mine 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 construction of the wash plant was substantially completed in 2017, however, the
commencement of washing has been delayed to the second quarter of 2018. The current
mine plan 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 require a significant level of
stripping activities over the next two years and certain capital expenditures to achieve the
designed production outputs. Such expenditures and other working capital requirements
will require the Company to seek additional financing in the form of finance leases, debt
or equity.
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There is no guarantee that the Company will be able to successfully execute the measures
mentioned above and secure other sources of financing. If it fails to do so, or is unable
to secure additional capital or otherwise restructure or refinance its business in order to
address its cash requirements through March 31, 2019, then the Company is unlikely
to have sufficient capital resources or cash flows from mining operations in order to
satisfy its current ongoing obligations and future contractual commitments. This could
result in adjustments to the amounts and classifications of assets and liabilities in the
Company’s condensed consolidated interim 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” of this press release for details. As at May 14, 2018, the Company had $2.1
million of cash.
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OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS
Summary of Operational Data
Three months ended
March 31,
2018 2017
Sales Volumes, Prices and Costs
Premium semi-soft coking coal
Coal sales (millions of tonnes) 0.03 0.19
Average realized selling price (per tonne) (i) $ 67.94 $ 45.61
Standard semi-soft coking coal/premium thermal coal
Coal sales (millions of tonnes) 0.41 0.64
Average realized selling price (per tonne) (i) $ 46.34 $ 23.36
Standard thermal coal
Coal sales (millions of tonnes) 0.12 0.28
Average realized selling price (per tonne) (i) $ 25.40 $ 13.17
Total
Coal sales (millions of tonnes) 0.56 1.11
Average realized selling price (per tonne) (i) $ 43.02 $ 24.52
Raw coal production (millions of tonnes) 0.38 1.51
Cost of sales of product sold (per tonne) $ 29.48 $ 21.40
Direct cash costs of product sold (per tonne) (ii) $ 16.86 $ 9.42
Mine administration cash costs of product sold (per tonne) (ii) $ 1.23 $ 1.01
Total cash costs of product sold (per tonne) (ii) $ 18.09 $ 10.43
Other Operational Data
Production waste material moved
(millions of bank cubic meters) 2.88 3.30
Strip ratio (bank cubic meters of waste material per tonne
of coal produced) 7.55 2.18
Lost time injury frequency rate (iii) 0.13 0.11
(i) Average realized selling price is presented before deduction of royalties.
(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, 2018, the Company had a lost time injury frequency rate of 0.13 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 as well as a higher
portion of sales were made through our Inner Mongolia subsidiary, the average realized selling
price increased from $24.52 per tonne in the first quarter of 2017 to $43.02 per tonne in the
first quarter of 2018. The product mix for the first quarter of 2018 consisted of approximately
6% of premium semi-soft coking coal, 72% of standard semi-soft coking coal/premium thermal
coal and 22% of standard thermal coal compared to approximately 17% of premium semi-
soft coking coal, 58% of standard semi-soft coking coal/premium thermal coal and 25% of
standard thermal coal in the first quarter of 2017.
The Company sold 0.56 million tonnes for the first quarter of 2018 as compared to 1.11 million
tonnes for the first quarter of 2017, as a result of the delay in the customs clearance process
at the Ceke border which the Company has been experiencing since July 2017.
The Company’s production in the first quarter of 2018 was lower than the first quarter of 2017
as a result of pacing the production to meet the expected sales, yielding 0.38 million tonnes
for the first quarter of 2018 as compared to 1.51 million tonnes for the first quarter of 2017.
The Company’s unit cost of sales of product sold increased to $29.48 per tonne in the first
quarter of 2018 from $21.40 per tonne in the first quarter of 2017. The increase was mainly
driven by decreased sales and the related diseconomies of scale.
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Summary of Financial Results
Three months ended
March 31,
$ in thousands, except per share information 2018 2017
Revenue (i),(ii) $ 23,223 $ 25,254
Cost of sales (ii) (16,507) (23,759)
Gross profit excluding idled mine asset costs 10,250 4,714
Gross profit including idled mine asset costs 6,716 1,495
Other operating expenses (1,338) (3,208)
Administration expenses (2,377) (2,385)
Evaluation and exploration expenses (124) (29)
Profit/(loss) from operations 2,877 (4,127)
Finance costs (6,006) (5,715)
Finance income 258 4
Share of earnings of a joint venture 340 266
Income tax expense (929) (45)
Net loss (3,460) (9,617)
Basic and diluted loss per share $ (0.01) $ (0.04)
(i) Revenue is presented after the deduction of royalties.
(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 $2.9 million profit from operations in the first quarter of 2018
compared to a $4.1 million loss from operations in the first quarter of 2017. As a result of
improved market conditions and prices for coal in China, the overall financial results improved
when compared to the first quarter of 2017, which were principally attributable to higher
average selling price achieved during the quarter.
Revenue was $23.2 million in the first quarter of 2018 compared to $25.3 million in the
first quarter of 2017. The Company’s revenue is presented after deduction of royalties. The
Company’s effective royalty rate for the first quarter of 2018, based on the Company’s average
realized selling price of $43.02 per tonne, was 5.0% or $2.13 per tonne compared to 5.9%
or $1.44 per tonne based on the average realized selling price of $24.52 per tonne in the
first quarter of 2017.