SouthGobi Resources announces first quarter 2019 financial and operating results
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RESOURCES May 14, 2019
SouthGobi Resources announces first quarter 2019 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 three months ended March 31, 2019. 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, 2019
and the subsequent period to May 14, 2019 are as follows:
• Operating Results – The Company increased sales volume to 1.1 million tonnes for
the first quarter of 2019 from 0.6 million tonnes for the first quarter of 2018. Despite an
improvement of the product mix, the average realized selling price decreased from $43.0
per tonne in the first quarter of 2018 to $34.9 per tonne in the first quarter of 2019 as
a result of a higher portion of sales made at the mine gate instead of transporting the
coal to the Company’s Inner Mongolia subsidiary and selling to third party customers
within China.
• Financial Results – The Company recorded a gross profit of $13.4 million in the first
quarter of 2019 compared to $6.7 million in the first quarter of 2018, while a $9.9 million
profit from operations was recorded in the first quarter of 2019 compared to a $3.5 million
profit from operations in the first quarter of 2018 (restated). The improvement of overall
financial results were principally attributable to lower unit cost of sales of products sold
during the quarter.
• China Investment Corporation (“CIC”) convertible debenture (“CIC Convertible
Debenture”) – On April 23, 2019, the Company executed a deferral agreement (the
“2019 Deferral Agreement”) with CIC in relation to a deferral and revised repayment
schedule in respect of (i) $41.8 million of outstanding cash and payment in kind interest
(“PIK Interest”) and associated costs due and payable to CIC on November 19, 2018 (the
“Outstanding Interest Payable”) under the CIC Convertible Debenture and the deferral
agreement dated June 12, 2017 (the “June 2017 Deferral Agreement”); and (ii) the
cash and PIK Interest payments payable to CIC under the CIC Convertible Debenture
from April 23, 2019 to and including May 19, 2020 (the “Deferral”). Pursuant to Section
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501(c) of the TSX Company Manual, the Company will be seeking approval of the 2019
Deferral Agreement from disinterested shareholders at the Company’s upcoming annual
and special meeting of shareholders (the “Meeting”) to be held on May 30, 2019. The
effectiveness of the 2019 Deferral Agreement and the respective covenants, agreements
and obligations of each party under the 2019 Deferral Agreement are subject to the
Company obtaining the requisite approval from shareholders at the Meeting.
The key repayment terms of the 2019 Deferral Agreement are: (i) the Company agreed
to pay $14.3 million by eight instalments during November 2019 to June 2020; (ii)
the Company agreed to pay the PIK Interest covered by the Deferral by way of cash
payments, rather than the issuance of Common Shares; and (iii) the Company agreed
to pay $62.6 million on June 20, 2020. The Company agreed to pay a deferral fee at a
rate of 6.4% per annum in consideration of the deferred amounts.
As a condition to agreeing to the Deferral, CIC required that the mutual co-operation
agreement (the “Cooperation Agreement”) dated November 19, 2009 between SouthGobi
Sands LLC (“SGS”), a subsidiary of the Company, and Fullbloom Investment Corporation
(“Fullbloom”), an affiliate of CIC, be amended and restated (the “Amended and Restated
Cooperation Agreement”) to clarify the manner in which the service fee payable to
Fullbloom under the Cooperation Agreement is calculated, with effect as of January
1, 2017. Specifically, the service fee under the Amended and Restated Cooperation
Agreement will be determined based on the net revenues realized by the Company
and all of its subsidiaries derived from sales into China (rather than the net revenues
realized by the Company and its Mongolian subsidiaries as currently contemplated under
the Cooperation Agreement). As consideration for deferring payment of the additional
service fees payable to Fullbloom as a result of the Amended and Restated Cooperation
Agreement (the “Deferred Compensation”), the Company agreed to pay to Fullbloom a
deferral fee at the rate of 2.5% on the outstanding amount of the Deferred Compensation.
Pursuant to the Amended and Restated Cooperation Agreement, the Company agreed
to pay Fullbloom the Deferred Compensation and related accrued deferral fee of $4.2
million in six instalments between June 2019 and November 2019. The effectiveness of
the Amended and Restated Cooperation Agreement is subject to the Company obtaining
the requisite approval of the 2019 Deferral Agreement from shareholders at the Meeting.
The Company also announced that it intends to discuss a potential debt restructuring
plan with respect to amounts owing to Land Breeze II S.a.r.l., a wholly-owned subsidiary
of CIC, which is mutually beneficial to the Company and CIC within the next 6 months,
and to form a special committee comprised of independent directors to ensure that the
interests of its minority shareholders are fairly considered in the negotiation and review
of any such restructuring; however, there can be no assurance that a favorable outcome
will be reached.
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As of the date of this press release, the Company has neither: (i) paid the Outstanding
Interest Payable within the cure period provided for under the CIC Convertible Debenture;
nor (ii) obtained shareholders approval of the 2019 Deferral Agreement. Consequently, the
Company is in default under the CIC Convertible Debenture and the June 2017 Deferral
Agreement. Furthermore, the Common Shares have now been suspended from trading
on the HKEX and TSX for a period of more than five trading days since December 17,
2018 (the “Trading Suspension”), which represents another event of default under the
CIC Convertible Debenture. 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.
Because a deferral of the Outstanding Interest Payable was not in effect as at March
31, 2019, 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, 2019, notwithstanding the fact that CIC has not indicated any intention to deliver
notice of default or accelerate the maturity of the CIC Convertible Debenture.
• Notice of Arbitration – As of the date hereof, the Company has not paid the November
2018 and January 2019 monthly payments due under a deed of settlement (the “Settlement
Deed”). On March 5, 2019, SGS received a notice from First Concept Industrial Group
Limited (“First Concept”) claiming that the Company is in default under the Settlement
Deed and demanding payment of the full amount of the outstanding monthly payments
due under the Settlement Deed, otherwise First Concept intends to commence legal
action against SGS pursuant to the Settlement Deed. The Company is consulting with
its independent litigation counsel regarding this matter; however, as a default is only
triggered under the Settlement Deed where there has been a failure to pay two or more
consecutive monthly instalment payments, the Company is of the view that SGS is not
in default under the Settlement Deed. In the event that First Concept commences legal
action against SGS regarding this matter, the Company intends to take appropriate
steps to respond to such legal proceedings in the best interests of the Company through
independent litigation counsel which has been retained by the Company for this purpose.
As at March 31, 2019, the outstanding amount payable to First Concept amounted to
$10.6 million (December 31, 2018: $12.5 million).
• Key Findings of Formal Investigation – On December 17, 2018, the Company announced
that it had learned of certain information relating to past conduct engaged in by former
senior executive officers and employees of the Company (“Former Management and
Employees”) which raised suspicions of serious fraud, misappropriation of Company
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assets and other criminal acts by the Former Management and Employees relating to prior
transactions (“Suspicious Transactions”) between 2016 and the first half of 2018 involving
the Company, Inner Mongolia SouthGobi Energy Co. Ltd. (“IMSGE”), 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 Company filed a report with local police authorities in China in
respect of certain of the Suspicious Transactions and, on December 17, 2018, the Board
expanded the mandate of its special committee of independent non-executive directors
(the “Special Committee”), which was previously established to initiate a formal internal
investigation into certain legal charges against Mr. Aminbuhe (the Company’s former
Chairman and Chief Executive Officer), to include a formal investigation (the “Formal
Investigation”) of the Suspicious Transactions, the implicated Former Management and
Employees, and their impact, if any, on the business and affairs of the Company. The
Special Committee engaged Blake, Cassels & Graydon LLP as independent Canadian
legal counsel, Zhong Lun Law Firm, as independent Chinese legal counsel, and Ernst
& Young (China) Advisory Limited (the “Forensic Accountant”), as forensic accountants,
to assist in the formal investigation.
On March 30, 2019, the Company announced that the Special Committee concluded
the Formal Investigation and delivered a final report summarizing its key findings to the
Board, which was adopted and approved at a meeting held on March 30, 2019.
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 (as defined below) (“Company A”) were identified in
Company’s 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.
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 the Company had business dealings
(the “Companies Under Investigation”); (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., a former customer of IMSGE; and (iv) allegations of misconduct
by the Former Management and Employees, including: (I) the grant of a Renminbi
(“RMB”) 5 million loan; (II) embezzlement of bank acceptance bills of RMB12 million;
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(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.
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 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 findings of and information obtained from the Formal Investigation,
the Company considered the resulting financial impact on its prior financial statements
and restated certain items in the Company’s financial statements for the years ended
2016 and 2017 (the “Prior Restatement”), as disclosed in the Company’s audited annual
consolidated financial statements and related management’s discussion and analysis for
the year ended December 31, 2018, copies of which are available under the Company’s
profile on SEDAR at www.sedar.com. The Prior Restatement reflects the impact of the
misappropriation of assets as well as the reclassification of certain balances of assets in
the prior years. With respect to the three month period ended March 31, 2018, the net
effect of the Prior Restatement was a decrease in the net comprehensive loss of $0.4
million for the period. A summary of the requisite adjustments on the financial statements
for the three month period ended March 31, 2018 is set forth in the table below:
$ in thousands
March 31,
2018
Loss
decrease/
(increase)
March 31,
2018
(Restated)
Statement of comprehensive income
extract
Other operating expenses $ (1,338) $ 581 $ (757)
Finance income 258 (158) 100
Net loss attributable to equity
holders of the Company $ (3,460) $ 423 $ (3,037)
Other comprehensive income for the
period (3,328) – (3,328)
Net comprehensive loss attributable to
equity holders of the Company $ (6,788) $ 423 $ (6,365)
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• Trading Suspension on HKEX and TSX – Subsequent to the announcement made
by the Company on December 17, 2018 in relation to the Suspicious Transactions,
the Common Shares have been suspended from trading on the HKEX and TSX since
December 17, 2018.
On January 3, 2019, the HKEX provided the Company with certain resumption guidance,
setting out the conditions which the Company must satisfy in order for trading of the
Common Shares to resume on the HKEX. Pursuant to the resumption guidance, the
Company is required to: (i) conduct a forensic investigation (the “Forensic Investigation”)
of the Suspicious Transactions involving the Former Management and Employees;
(ii) disclose the findings of the Forensic Investigation and take appropriate remedial
actions; and (iii) inform the market of all material information in order for the Company’s
shareholders and investors to appraise the Company’s position. The HKEX has advised
that it may modify or supplement the trading resumption guidance if the Company’s
situation changes. Pursuant to Rule 6.01A(1) of the HKEX’s Listing Rules, the HKEX
may cancel the listing of any securities that have been suspended from trading for a
continuous period of 18 months. In the case of the Company, this 18-month period expires
on June 16, 2020. The HKEX has also advised that if the Company fails to remedy the
issues causing the Trading Suspension, fully comply with the HKEX’s Listing Rules to
the HKEX’s satisfaction and resume trading of the Common Shares on the HKEX by
June 16, 2020, the Listing Department of the HKEX will recommend that the HKEX’s
Listing Committee proceed with cancelling the Company’s listing on the HKEX. Pursuant
to Rules 6.01 and 6.10 of the HKEX’s Listing Rules, the HKEX also has the right to
impose a shorter specific remedial period, where appropriate. Pursuant to Rule 13.24A
of the HKEX’s Listing Rules, the Company is required to announce quarterly updates
on developments relating to its Trading Resumption Plan (as defined below), including
details of the actions taken, or to be taken, in order to remedy the issues causing the
Trading Suspension and fully comply with the HKEX’s Listing Rules, the progress of
implementing the Trading Resumption Plan, details of any material change to the Trading
Resumption Plan (including any delays thereof) and impact on the Company’s business
operations. The Company made its first quarterly update on March 15, 2019 and is
required to announce additional updates every three months thereafter until resumption
of trading on the HKEX or cancellation of the Company’s listing on the HKEX (whichever
is earlier).
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The action items set out below (the “Trading Resumption Plan”) were approved by the
Board on March 30, 2019 in order to address the issues which caused the Trading
Suspension, re-comply with the HKEX’s Listing Rules and allow trading of the Common
Shares to resume trading on the HKEX:
Action Item Date of Completion
or Anticipated Completion
The Company completes a forensic
investigation into the Suspicious
Transactions
The Forensic Accountant completed the
forensic investigation and submitted its
final investigation report to the Special
Committee on March 26, 2019
The Special Committee concludes
its formal investigation and, with the
assistance of its professional advisors,
completes its final report summarizing the
key findings of the formal investigation
and submits the same to the Board for
consideration
The Special Committee delivered its final
report to the Board on March 27, 2019
The Board meets to consider and, if
deemed appropriate, approve the Special
Committee’s final report and the Trading
Resumption Plan
The Board adopted and approved the
Special Committee’s final report and the
key findings set out therein on March 30,
2019
The Company announces the material
findings of the Special Committee in
respect of the Suspicious Transactions
that were investigated pursuant to the
Formal Investigation and the Trading
Resumption Plan
The Company announced the material
findings of the Special Committee in
respect of the Suspicious Transactions
that were investigated pursuant to the
Formal Investigation and the Trading
Resumption Plan on March 30, 2019
The Company announces its financial
results for the fiscal year ended December
31, 2018
The Company announced its 2018 fiscal
year results on March 31, 2019
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Action Item Date of Completion
or Anticipated Completion
The Special Committee, with the
assistance of its professional advisors,
completes its assessment of the potential
remedial actions and preventative
measures available to the Company to
address the issues which caused the
Trading Suspension and prepares a report
on its conclusions and recommendations
for the Board. The Board considers
the recommendations of the Special
Committee and formalizes and approves
a set of remedial actions and preventative
measures
The Special Committee delivered its report
setting out a set of recommended remedial
actions and preventative measures to
Board which was approved at a meeting
held on April 28, 2019
The Company applies to the HKEX and
the TSX for trading in the Common
Shares to resume
The Company anticipates submitting an
application to the HKEX and the TSX as
soon as practicable after the recommended
remedial actions and preventative
measures have been implemented
The Company announces the remedial
actions and preventative measures
approved by the Board and the resumption
of trading on the HKEX and the TSX
As soon as practicable after the HKEX
and the TSX accepts the Company’s
application for trading resumption
The Trading Resumption Plan set forth above was approved by the Board based on the
information and advice received as of March 30, 2019 and may be subject to change. In
accordance with Rule 13.24A of the HKEX’s Listing Rules, the Company will announce
details of any material changes to the Trading Resumption Plan (including any delays
thereof) as and when necessary.