SouthGobi Resources announces fourth quarter and full year 2015 financial and
March 29, 2016
SouthGobi Resources announces fourth quarter and full year 2015 financial and operating results and update on Ovoot Tolgoi resource estimate
HONG KONG - SouthGobi Resources Ltd. (TSX: SGQ, HK: 1878) (“SouthGobi” or the "Company"). The Company today announced its financial and operating results for the quarter and the year ended December 31, 2015. All figures are in U.S. Dollars unless otherwise stated.
Significant Events and Highlights
The Company’s significant events and highlights for the year ended December 31, 2015 and subsequent period to March 29, 2016 are as follows:
- Operating results – The Company continues to operate under difficult market conditions as prices for coal remained weak in the People’s Republic of China (“China”) in 2015. The impact of these conditions on the Company's operations continues to be exacerbated given the Company’s liquidity constraints. The Company sold 0.2 million tonnes of its coal products during the fourth quarter of 2015 compared to 0.4 million tonnes in the fourth quarter of 2014. The production for the fourth quarter of 2015 was 0.6 million tonnes, allowing the Company to position itself to meet its commitments under existing and expected new coal offtake contracts.
- Updated Resource Estimate – Ovoot Tolgoi Mine – As a consequence of material changes in some key assumptions underlying the analysis of its resources subsequent to the last detailed review of the project in 2012, particularly those relating to ongoing changes in coal market conditions and geologic analysis, the Company has updated its mineral resource estimate for the Ovoot Tolgoi Project, resulting in a decrease in estimated mineral resources from the previous estimate completed in 2012. The decrease is principally based on the exclusion of underground mineralization from the resources estimate and a reclassification of the geology type of certain zones in the mine based on detailed analysis of the results of additional drilling and mining activities since 2012, resulting in updated resources estimated as of January 1, 2015 (and confirmed as at March 24, 2016) of 170 million tonnes (Mt) of indicated resources and inferred resources of 78 Mt, compared to 133.3 Mt of measured resources, 59.9 Mt of indicated resources, and 24 Mt of inferred resources estimated in 2012. The Company previously reported 175.7 million tonnes of proven and probable reserves in respect of the Ovoot Tolgoi deposit based on a preliminary feasibility study completed in 2012. Since the Company's 2012 estimate of reserves was derived from the 2012 resource estimate, and a number of key assumptions upon which the 2012 reserve estimate was based have now materially changed, it is expected that, once all relevant factors have been fully analyzed such that an updated reserve estimate can be prepared, the Company's 2012 reserve estimates will also be quantitatively reduced and qualitatively downgraded. Additional drilling will likely be required to establish the degree of confidence required to produce an updated estimate of reserves.
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- Tax investigation case in Mongolia - On October 6, 2015, the Company was informed by its Mongolian banks that held $1.2 million of deposits subject to restrictions on use (the “Restricted Funds”) that they had received an official request from the Court Decision Implementing Agency of Mongolia (the “CDIA”) to transfer the Restricted Funds to CDIA in partial payment of the MNT35.3 billion (approximately $17.6 million on February 1, 2016) tax penalty imposed on SouthGobi Sands LLC (“SGS”), the Company’s wholly-owned subsidiary, as a result of being found financially liable as a "civil defendant" in the tax evasion case of its three former employees (the "Tax Penalty"). $1.2 million was transferred to CDIA from the frozen bank accounts in October and November 2015. As at December 31, 2015, the provision for the Tax Penalty was reduced to $16.5 million.
- Novel Sunrise Investments Limited (“Novel Sunrise”) private placement - On February 24, 2015, the Company announced it had entered into a private placement agreement with Novel Sunrise providing for the subscription of up to 21.75 million Common Shares for gross proceeds of up to approximately $7.5 million.
On March 3, 2015, the initial tranche of the private placement consisting of approximately US$3.5 million of Mandatory Convertible Units was closed. The Mandatory Convertible Units were converted into approximately 10.1 million Common Shares on April 23, 2015 at a conversion price of CAD$0.432 per Common Share.
On April 23, 2015, the Company successfully closed the second tranche of the Novel Sunrise private placement for gross proceeds of approximately $4.0 million through the issue of approximately 11.6 million Common Shares.
- Swiss Life Gestion Privee (“Swiss Life GP”) private placement – On July 14, 2015, the Company announced it had obtained all the necessary regulatory approvals for the private placement and subsequently successfully closed the Swiss Life GP Private Placement, raising $2.9 million for the issuance of 5 million Common Shares.
- TSX remedial delisting review - On November 30, 2015, the Company announced that the Toronto Stock Exchange (“TSX”) has confirmed and announced it has completed its review of the Company and has determined that the Company meets the TSX’s continued listing requirements.
- China Investment Corporation (“CIC”) convertible debenture (“CIC Convertible Debenture”) – On May 20, 2015 under the terms of the CIC Convertible Debenture, CIC confirmed to the Company that, subject to certain conditions and limitations, it would grant a deferral of payment of approximately $7.9 million in cash interest due by the Company to CIC on May 19, 2015 (“May 2015 cash interest installment”) until July 22, 2015, subject to a three day cure period which expired on July 27, 2015.
On July 27, 2015, CIC confirmed to the Company that, subject to certain conditions and limitations, it agreed to grant a further deferral of payment of the May 2015 cash interest installment until November 19, 2015 to allow the Company to execute its Funding Plan (as defined below in the section entitled "Going Concern”).
On November 24, 2015, CIC confirmed to the Company that, subject to certain conditions and limitations, it had agreed to grant further deferral of payment of the May 2015 cash interest installment to be due and repayable between November 2015 and May 2016 while the cash interest payment due on November 19, 2015 of approximately $8.1 million shall be due and repayable on May 18, 2016.
On February 18, 2016, CIC confirmed to the Company that, subject to certain conditions and limitations, it had agreed to grant further deferral of a payment due on February 19, 2016 of $1 million to be due and repayable on February 29, 2016. It was subsequently paid in February 2016.
- Novel Sunrise change in ownership - On July 20, 2015 Novel Sunrise reported that China Cinda (HK) Investments Management Company Limited (“Cinda”), a wholly-owned subsidiary of China Cinda Asset
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Management Corporation Limited, had acquired ownership and control of all of the outstanding voting (ordinary) shares of Novel Sunrise through Hope Rosy Limited, a wholly-owned subsidiary of Cinda.
- Shareholder loan extension - On October 27, 2015, Turquoise Hill Resources Ltd. (“Turquoise Hill”) signed a Deferral Letter Agreement with the Company, in which Turquoise Hill agreed to a limited and circumscribed deferral of repayment of all remaining amounts and obligations now and hereafter owing under the Turquoise Hill Loan Facility to April 22, 2016.
- Notice of arbitration - On June 24, 2015, First Concept Logistics Limited (“First Concept”) served a notice of arbitration (the “Notice”) on SGS in respect of a coal supply agreement dated May 19, 2014 as amended on June 27, 2014 (the "Coal Supply Agreement").
According to the Notice, First Concept: alleged, inter alia, (i) that SGS had failed and/or wrongfully refused to sell any coal to First Concept; (ii) expressed its wish to have the dispute settled in an arbitration to be administered by the Hong Kong International Arbitration Centre; and (iii) sought the repayment of the prepayment, in the sum of $11.5 million, it made to SGS under the Coal Supply Agreement, as well as any and all damages that may be due to it.
The Company firmly rejects the allegations of the First Concept in the Notice as lacking any merit. On October 26, 2015, the Company received the Statement of Claim from First Concept and will vigorously defend itself in the Arbitration, including claiming the relevant fees and damages from First Concept. The trial dates of the Arbitration are scheduled to be held in the fourth quarter of 2016.
- Notice of claim - On July 2, 2015, the Company announced it had been served with a notice of claim by former President and Chief Executive Officer, Alexander Molyneux. The claim relates to alleged breaches of Mr. Molyneux’s employment agreement by the Company and is seeking damages in excess of $1 million. The Company considers the claim has no merit and is vigorously defending the action. The Company filed a response to Civil Claim and Counterclaim in September 2015. A trial date has not yet been set.
- Short-term Bridge loan - On October 27, 2015, the Company executed a $10 million bridge loan agreement with an independent Asian based private equity fund. As at December 31, 2015, the outstanding balance for the short-term bridge loan was $4.9 million.
- Class Action Lawsuit – On November 5, 2015, the Ontario Superior Court of Justice (the "Ontario Court") rendered its decision on preliminary motions to seek leave to bring a claim under applicable Canadian securities legislation and certification of an Ontario class action (the "Class Action"). The Ontario Court dismissed the plaintiff’s motions as against each of the former senior officers and former and current directors of the Company named in the Class Action. The plaintiff has appealed this decision. The Ontario Court granted the preliminary leave motion against the Company and the Company is seeking leave to appeal the decision. The appeal by the plaintiff and, if leave to appeal is granted, the appeal by the Company, are scheduled to be heard in June 2016. Rulings are expected by the end of September 2016.
- Changes in Management and Directors
Mr. Enkh-Amgalan Sengee: Mr. Sengee tendered his resignation as President and Chief Executive Officer on March 13, 2015.
Mr. Ted Chan: Mr. Chan was initially appointed as an Executive Director of the Company on March 3, 2015. On July 26, 2015, following the appointment of Mr. Yulan Guo as Interim Chief Executive Officer, Mr. Chan ceased to be an Executive Director but remained as a Non-Executive Director of the Company until August 6, 2015, the date of the Company's Annual Meeting of Shareholders (the "AGM"), where Mr. Chan did not stand for election.
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Mr. Jeffery Tygesen: Mr. Tygesen resigned as a Non-Executive Director on March 17, 2015.
Mr. Yulan Guo: Mr. Guo was initially appointed to the board of directors as a Non-Executive Director on May 15, 2015. On July 26, 2015, Mr. Guo was appointed as Interim Chief Executive Officer and an Executive Director of the Company and was re-elected as a director of the Company at the AGM. On September 1, 2015, Mr. Guo was appointed as Chief Financial Officer and ceased to be Interim Chief Executive Officer.
Mr. Ningqiao Li: Mr. Li was appointed to the board of directors as a Non-Executive Director on May 15, 2015 and was re-elected as a director of the Company at the AGM. On September 17, 2015, Mr. Li was appointed as an Executive Director and Executive Chairman of the board of directors.
Mr. Aminbuhe: On August 6, 2015, Mr. Aminbuhe was elected to the board of directors as Non- Executive Director following the conclusion of the AGM. On September 1, 2015, Mr. Aminbuhe was appointed as an Executive Director and Chief Executive Officer.
Mr. Bold Baatar: Mr. Baatar resigned as a Non-Executive Director on May 15, 2015.
Mr. Zhu Liu and Ms. Jin Lan Quan: On August 6, 2015, Mr. Liu and Ms. Quan were elected to the board of directors as Independent Non-Executive Directors following the conclusion of the AGM.
Mr. Kelly Sanders: On August 6, 2015, Mr. Sanders did not stand for the re-election at the AGM and ceased to be a Non-Executive Director.
Mr. Bertrand Troiano: Mr. Troiano stepped down as Chief Financial Officer of the Company following the conclusion of a two-year secondment from Rio Tinto plc (“Rio Tinto”) which ended on July 31, 2015.
Mr. André Deepwell: Mr. Deepwell resigned as an Independent Non-Executive Director and Chairman of the Audit Committee on August 31, 2015.
Mr. Mao Sun: Mr. Sun was appointed as an Independent Non-Executive Director and Chairman of the Audit Committee on November 5, 2015.
Mr. Gordon Lancaster: Mr. Lancaster retired as an Independent Non-Executive Director on December 14, 2015.
Mr. Huiyi Wang: Mr. Wang was appointed as a Non-Executive Director on February 18, 2016.
- Going Concern - As at the date hereof, the Company, together with its strategic partner and significant shareholder, Novel Sunrise, continues to execute a funding plan (the “Funding Plan”) in order to pay the interest due under the CIC Convertible Debenture and the Turquoise Hill shareholder loan (the "TRQ Loan"), meet the Company’s obligations as they fall due and achieve its business objectives in 2016. However, there is no guarantee that the Company will be able to successfully advance the Funding Plan or secure other sources of financing. As at March 29, 2016, the Company had cash of $0.7 million.
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OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS
Summary of Annual Operational Data(iv)
Year ended December 31, 2015 2014 Sales Volumes, Prices and Costs
Premium semi-soft coking coal Coal sales (millions of tonnes) 0.22 0.02 Average realized selling price (per tonne) (i) $ 22.33 $ 26.77 Standard semi-soft coking coal Coal sales (millions of tonnes) 0.59 0.86 Average realized selling price (per tonne) (i) $ 19.12 $ 19.52 Thermal coal Coal sales (millions of tonnes) 0.26 1.16 Average realized selling price (per tonne) (i) $ 10.24 $ 10.99 Total
| Coal sales(millions of tonnes) | 1.07 | 2.04 | ||
| Average realized selling price(per tonne) (i) | $17.66 | $14.76 | ||
| Raw coal production (millions of tonnes) | 1.95 | 1.57 | ||
| Direct cash costs of product sold(per tonne) (ii) | $13.63 | $ |
8.33 Mine administration cash costs of product sold (per tonne) (ii) $ 3.44 $ 2.69 Total cash costs of product sold (per tonne) (ii) $ 17.07 $ 11.02
Other Operational Data
Production waste material moved (millions of bank 7.02 5.47 cubic meters)
Strip ratio (bank cubic meters of waste material per tonne of 3.60 3.51 coal produced)
Lost time injury frequency rate (iii) 0.00 0.21
(i) Average realized selling price is presented before deduction of royalties and selling fees.
(ii) A non-International Financial Reporting Standards (“IFRS”) financial measure, refer to “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.
(iv) In reviewing operational data and financial results, readers are advised to note the Company’s current mine optimization initiatives for the Ovoot Tolgoi Mine which there can be no assurance that the continuing optimization of the mine plan at the Ovoot Tolgoi Mine will ultimately provide the basis for an updated preliminary feasibility study that will support a new estimate of mineral reserves.
Overview of Annual Operational Data
The Company has operated under difficult market conditions throughout 2015 which have affected the Company’s results in respect of sales prices and volumes. In 2015, the Company sold 1.07 million tonnes of coal compared to 2.04 million tonnes in 2014.
The Company’s production in 2015 was higher than 2014, at 1.95 million tonnes compared to 1.57 million tonnes. On March 30, 2015, the Company resumed mining operations allowing the Company to position itself to meet its commitments under existing and expected new coal offtake contracts.
The cash cost of product sold per tonne was $17.07 for 2015, which significantly increased compared to $11.02 per tonne for 2014. The reason for the increase is primarily related to fewer costs being allocated to idled mine asset costs during the year. ($3.0 million for 2015 as compared to $5.6 million for 2014 in which the Company placed approximately half of its workforces on furlough for the second half of 2014.)
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The Company maintained a strong safety record throughout 2015. As at December 31, 2015, the Company has a lost time injury frequency rate of 0.00 per 200,000 man hours based on a rolling 12 month average.
Summary of Annual Financial Results
Year ended December 31, $ in thousands, except per share information 2015 2014 Revenue (i),(ii) $ 16,030 $ 24,494
| Cost of sales(ii) | (63,691) | (82,132) |
| Gross loss excluding idled mine asset costs | (22,226) | (21,699) |
| Gross loss including idled mine asset costs | (47,661) | (57,638) |
| Other operating expenses | (18,951) | (5,960) |
| Administration expenses | (7,509) | (8,944) |
| Evaluation and exploration expenses | (145) | (1,312) |
| Impairment of property, plant and equipment | (92,651) | (8,880) |
| Loss from operations | (166,917) | (82,734) |
| Finance costs | (21,371) | (21,848) |
| Finance income | 1,302 | 1,586 |
| Share of earnings/(losses) of a joint venture | 225 | (101) |
| Income tax expense | (4) | (586) |
| Net loss | (186,765) | (103,683) |
Basic loss per share $ (0.79) $ (0.55) Diluted loss per share $ (0.79) $ (0.55)
(i) Revenue is presented after deduction of royalties and selling fees.
(ii) Revenue and cost of sales relate to the Company’s Ovoot Tolgoi Mine within the Mongolian Coal Division operating segment. Refer to note 2 of the selected information from the notes to the consolidated financial statements for further analysis regarding the Company’s reportable operating segments.
Overview of Annual Financial Results
The Company recorded a $166.9 million loss from operations in 2015 compared to an $82.7 million loss from operations in 2014. The 2015 operations were impacted by continuing difficult market conditions which resulted in lower sales volumes and prices compared to 2014. The lower cost of sales and lower administration expense were offset by lower revenue generated, higher impairment losses and provisions in 2015.
Revenue was $16.0 million in 2015 compared to $24.5 million in 2014. The Company sold 1.07 million tonnes of coal at an average realized selling price of $17.66 per tonne in 2015, compared to sales of 2.04 million tonnes at an average realized selling price of $14.76 per tonne in 2014. The increase in the average realized selling price mainly resulted from differences in product mix in 2015 compared to 2014. The product mix in 2015 consisted of approximately 55% of Standard semi-soft coking coal and 21% of Premium semisoft coking coal compared to approximately 43% of sales consisting of either Premium or Standard semisoft coking coal in 2014.
The Company’s revenue is presented after deduction of royalties and selling fees. The Company’s effective royalty rate for 2015, based on the Company’s average realized selling price of $17.66 per tonne, was 12.7% or $2.25 per tonne compared to 12.5% or $1.85 per tonne based on the average realized selling price of $14.76 per tonne in 2014.
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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 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 $63.7 million in 2015 compared to $82.1 million in 2014. 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 Non-IFRS Financial Measures section for further analysis) during the period.
Year ended December 31, $ in thousands 2015 2014
| Operating expenses Share-based compensation expense Depreciation and depletion Impairment of coal stockpile inventories | $ 18,266 42 5,361 14,588 | $ 22,472 230 7,235 16,256 |
|---|---|---|
| Cost of sales from mine operations Cost of sales related to idled mine assets | 38,257 25,434 | 46,193 35,939 |
| Cost of sales | $ 63,691 | $ 82,132 |
Operating expenses in cost of sales were $18.3 million in 2015 compared to $22.5 million in 2014. The overall decrease in operating expenses is primarily the result of the combined effect of (i) decreased sales volume from 2.04 million tonnes in 2014 to 1.07 million tonnes in 2015; and (ii) continued focus on cost saving initiatives, including the curtailment of mining operations in the first quarter of 2015. However the cost of sales per tonne is higher in 2015, which is mainly due to reduced production levels and the impairment of coal stockpile inventories during the year.
Cost of sales in 2015 and 2014 included coal stockpile impairments of $14.6 million and $16.3 million, respectively, to reduce the carrying value of the Company’s coal stockpiles to their net realizable value. The coal stockpile impairments recorded in both years reflect the challenging coal market conditions and primarily related to the Company’s higher-ash products.
Cost of sales related to idled mine asset costs primarily consisted of period costs, which were expensed as incurred and included mainly depreciation expense. Cost of sales related to idled mine assets in 2015 included $22.5 million related to depreciation expenses for idled equipment (2014: $30.3 million).
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Other operating expenses were $19.0 million in 2015 compared to $6.0 million in 2014.
Year ended December 31, $ in thousands 2015 2014
| Sustainability and community relations Foreign exchange gain Provision for doubtful trade and other receivables Impairment of available-for-sale financial asset Loss on settlement of prepayments Impairment of prepaid expenses and deposits Impairment of materials and supplies inventories Gain on disposal of mining licenses Provision for court case penalty | $ 250 (896) 161 - 712 - 675 - 18,049 | $ 252 (1,151) 567 1,766 - 3,780 2,981 (2,235) - |
|---|---|---|
| Other operating expenses | $ 18,951 | $ 5,960 |
Compared to 2014, the increase in other operating expenses is primarily related to the provision for the court case penalty (refer to “Governmental and Regulatory Investigations” of Regulatory Issues and Contingencies section for details) in 2015.
In 2015, the Company also recognized an impairment charge of $0.7 million in respect of obsolete materials and supplies inventories as the Company continued to operate below capacity in 2015 (2014: $3.0 million).
The Company recognized an impairment loss of $1.8 million in 2014 which was related to its investment in Aspire, which is accounted for as an available-for-sale financial asset and carried at its fair value. The Company disposed all of its investment in Aspire during 2014.
In 2014, the Company recognized an impairment loss of $3.4 million related to prepaid toll washing fees under the contract with Ejin Jinda. The impairment charge was a result of the continued delay in starting the commercial operations at the wet washing facility and the continued soft coal market in China.
A gain of $2.2 million was recorded from the disposal of mining licenses in 2014. In the second quarter of 2014, $1.8 million was recorded after the Company completed the sale of the Tsagaan Tolgoi mining license. A further $0.4 million was recorded in the fourth quarter of 2014 after the partial sale of exploration license 9449X.
Administration expenses were $7.5 million in 2015 compared to $8.9 million in 2014.
Year ended December 31, $ in thousands 2015 2014
| Corporate administration Legal and professional fees Salaries and benefits Share-based compensation expense Depreciation | $ 2,112 2,921 2,155 199 122 | $ 2,591 2,680 2,955 590 128 |
|---|---|---|
| Administration expenses | $ 7,509 | $ 8,944 |
Administration expenses were lower in 2015 compared to 2014 which reflects the Company’s cost reduction initiatives.
Evaluation and exploration expenses were $0.1 million in 2015 compared to $1.3 million in 2014. The Company continued to minimize evaluation and exploration expenditures in 2015 in order to preserve the Company’s financial resources. Evaluation and exploration activities and expenditures in 2015 were limited
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to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining and exploration licenses.
Given the difficult market conditions and the associated delays in projects and the commissioning of equipment, the Company recorded $92.7 million of impairment charges to reduce various items of property, plant and equipment to their recoverable amounts for the year ended December 31, 2015 (2014: $8.9 million). In particular, after conducting an impairment test on the Ovoot Tolgoi Mine cash generating unit, the Company recorded an $76.7 million impairment charge in 2015 (refer to “Ovoot Tolgoi Mine Impairment Analysis” of Financial Position and Liquidity section for details). After a further review of the dry coal handling facility (“DCHF”) in the fourth quarter of 2015 related to the new mine plan, the Company concluded that there is no longer a plan to restart the DCHF project or to utilize the facility. As a result of the impairment assessment, the Company recorded an $8.5 million impairment charge in 2015 to reduce the carrying value of the DCHF to $nil as at December 31, 2015.
Finance costs were $21.4 million and $21.8 million in 2015 and 2014 respectively, which primarily consisted of the interest expense on the $250.0 million CIC Convertible Debenture.
Finance income was $1.3 million in 2015 compared to $1.6 million in 2014, primarily relating to unrealized gains on the change in fair value of the embedded derivatives in the CIC Convertible Debenture ($1.1 million and $1.6 million respectively for 2015 and 2014). The fair value of the embedded derivatives in the CIC Convertible Debenture is driven by many factors including: the Company’s common share price, U.S. Dollar and Canadian Dollar exchange rates and share price volatility.
Income tax expense was negligible in 2015 compared to an expense of $0.6 million in 2014. In 2014, $0.5 million relate to taxes paid in respect of the sale of the Tsagaan Tolgoi mining license.
Summary of Quarterly Operational Data
| 2015 | 2014 | |||||||
| Quarter Ended | 31-Dec | 30-Sep | 30-Jun | 31-Mar | 31-Dec | 30-Sep | 30-Jun | 31-Mar |
| Sales Volumes, Prices and Costs Premium semi-soft coking coal Coal sales (millions of tonnes) Average realized selling price (per tonne) (i) Standard semi-soft coking coal Coal sales (millions of tonnes) Average realized selling price (per tonne) (i) Thermal coal Coal sales (millions of tonnes) Average realized selling price (per tonne) (i) Total Coal sales (millions of tonnes) Average realized selling price (per tonne) (i) Raw coal production (millions of tonnes) Direct cash costs of product sold (per tonne) (ii) Mine administration cash costs of product sold (per tonne) (ii) Total cash costs of product sold (per tonne) (ii) Other Operational Data Production waste material moved (millions of bank cubic meters) Strip ratio (bank cubic meters of waste material per tonne of coal produced) Lost time injury frequency rate (iii) | 0.04 $ 2 1.72 0.12 $ 1 8.91 0.05 $ 9.26 0.21 $ 1 7.19 0.62 $ 6.55 $ 1.78 $ 8.33 1.08 1.75 | 0.16 $ 2 2.32 0.31 $ 1 9.10 0.02 $ 1 0.48 0.49 $ 1 9.76 0.71 $ 1 7.46 $ 2.81 $ 2 0.27 2.33 3.25 | 0.02 $ 2 3.37 0.11 $ 1 9.97 0.06 $ 1 0.47 0.19 $ 1 7.42 0.62 $ 1 5.57 $ 7.90 $ 2 3.47 3.62 5.87 | - $ - 0.05 $ 1 7.95 0.13 $ 1 0.46 0.18 $ 1 2.66 - $ 8.68 $ 2.11 $ 1 0.79 - - 0.25 | 0.02 $ 2 6.77 0.14 $ 1 8.32 0.21 $ 1 1.69 0.37 $ 1 5.04 0.21 $ 8.09 $ 2.44 $ 1 0.53 0.55 2.61 | - $ - 0.31 $ 17.41 0.34 $ 10.66 0.65 $ 13.87 0.17 $ 7 .38 $ 2 .30 $ 9 .68 0.20 1.20 0.17 | - $ - 0.12 $ 20.33 0.51 $ 10.72 0.63 $ 12.52 0.55 $ 8 .23 $ 2 .49 $ 10.72 2.17 3.97 0.15 | - $ - 0.29 $ 22.00 0.10 $ 12.07 0.39 $ 19.54 0.64 $ 10.43 $ 3 .80 $ 14.23 2.55 4.02 |
| 0.00 | 0.00 | 0.00 | 0.21 | 0.00 |
(i) Average realized selling price is presented before deduction of royalties and selling fees.
(ii) A non-IFRS financial measure, refer to “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.
Overview of Quarterly Operational Data
Due to difficult market conditions, the Company has paced production with existing and expected demand for its coal products. The coal market remained challenging in the fourth quarter of 2015. As a result the Company operated significantly below capacity during the quarter and its production decreased slightly from 0.71 million tonnes in the third quarter of 2015 to 0.62 million tonnes in the fourth quarter of 2015.
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The Company maintained a strong safety record and completed the fourth quarter of 2015 without a lost time injury.
Summary of Quarterly Financial Results
The Company’s financial statements are reported under IFRS issued by the International Accounting Standards Board (“IASB”). The following table provides highlights from the Company’s financial statements of quarterly results for the past eight quarters.
| $ in thousands, except per share information | 2015 | 2014 | ||||||
| Quarter Ended | 31-Dec | 30-Sep | 30-Jun | 31-Mar | 31-Dec | 30-Sep | 30-Jun | 31-Mar |
| Financial Results Revenue (i), (ii) Cost of sales (ii) Gross loss excluding idled mine asset costs Gross loss including idled mine asset costs Other operating income/(expenses) Administration expenses Evaluation and exploration expenses Impairment of property, plant and equipment Loss from operations Finance costs Finance income Share of earnings/(losses) of a joint venture Income tax expense Net loss Basic loss per share Diluted loss per share | $ 8 ,621 (22,108) (10,641) (13,487) 621 (1,967) (40) - (14,873) (5,351) 1,984 99 (1) (18,142) $ (0.07) $ (0.07) | $ 2 ,949 (11,833) (5,017) (8,884) (19,450) (1,963) 22 - (30,275) (5,222) 274 151 (1) (35,073) $ (0.15) $ (0.15) | $ 1 ,587 (17,678) (1,230) (16,091) 971 (1,425) (81) - (16,626) (6,648) 8 (18) - (23,284) $ (0.11) $ (0.11) | |||||
| $ 2 ,873 | $ 5 ,054 | $ 7,611 | $ 6,691 | $ 5,137 | ||||
| (12,072) (5,338) (9,199) (1,093) (2,154) (46) (92,651) (105,143) (5,694) 580 (7) (2) (110,266) $ (0.44) $ (0.44) | (19,757) (821) (14,703) (3,386) (1,924) (911) (8,603) (29,527) (6,351) 317 (40) (40) (35,641) $ (0.19) $ (0.19) | (23,922) (2,178) (16,311) (2) (2,530) (122) - (18,965) (5,257) 135 (32) - (24,119) $ ( 0.13) $ ( 0.13) | (20,086) (8,497) (13,395) (1,499) (2,253) (107) (277) (17,531) (5,215) 127 (3) (546) (23,168) $ ( 0.12) $ ( 0.12) | (18,366) (10,202) (13,229) (1,073) (2,237) (172) - (16,711) (5,025) 1,007 (26) - (20,755) $ ( 0.11) $ ( 0.11) |
(i) Revenue is presented after deduction of royalties and selling fees.
(ii) Revenue and cost of sales relate to the Company’s Ovoot Tolgoi Mine within the Mongolian Coal Division operating segment. Refer to note 2 of the selected information from the notes to the consolidated financial statements for further analysis regarding the Company’s reportable operating segments.
Overview of Quarterly Financial Results
The Company recorded a $105.1 million loss from operations in the fourth quarter of 2015 compared to a $29.5 million loss from operations in the fourth quarter of 2014. Continuing difficult market conditions resulted in lower sales volumes in the fourth quarter of 2015 compared to the fourth quarter of 2014. This lower revenue and higher impairment charge was offset by a lower cost of sales and lower administration expenses in the fourth quarter of 2015 compared to the fourth quarter of 2014.
Revenue was $2.9 million in the fourth quarter of 2015 compared to $5.1 million in the fourth quarter of 2014. The Company sold 0.21 million tonnes of coal at an average realized selling price of $17.19 per tonne in the fourth quarter of 2015 compared to sales of 0.37 million tonnes at an average realized selling price of $15.04 per tonne in the fourth quarter of 2014. Revenue decreased in the fourth quarter of 2015 compared to the fourth quarter of 2014 as a result of the lower sales volumes. The average realized selling price in the fourth quarter of 2015 compared to the fourth quarter of 2014 was impacted by differences in product mix. The majority of the Company’s sales in the fourth quarter of 2015 were of Standard semi-soft coking coal while Thermal coal product comprised the majority of sales in the fourth quarter of 2014.
The Company’s revenue is presented after deduction of royalties and selling fees. The Company’s effective royalty rate for the fourth quarter of 2015, based on the Company’s average realized selling price of $17.19 per tonne, was 13.8% or $2.38 per tonne while the Company’s effective royalty rate was 8.1% or $1.22 per tonne based on the average realized selling price of $15.04 per tonne in the fourth quarter of 2014. The difference in the effective royalty rate is mainly driven by the change from the flexible tariff royalty regime to previous regime which is based on a set reference price on January 1, 2015 (refer to “Royalty regime in Mongolia” of Overview of Operational Data and Financial Measures section for details).
Cost of sales was $12.1 million in the fourth quarter of 2015 compared to $19.8 million in the fourth quarter of 2014. 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 Non-IFRS Financial Measures section for further analysis) during the period.
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| Operating expenses Share-based compensation expense/(recovery) Depreciation and depletion Impairment of coal stockpile inventories | $ 1,780 8 946 5,477 | $ 3,895 (3) 953 1,030 |
|---|---|---|
| Cost of sales from mine operations Cost of sales related to idled mine assets | 8,211 3,861 | 5,875 13,882 |
| Cost of sales | $ 12,072 | $ 19,757 |
Operating expenses included in cost of sales were $1.8 million in the fourth quarter of 2015 compared to $3.9 million in the fourth quarter of 2014. The overall decrease in operating expenses is primarily the result of both (i) decrease of sales volume from 0.37 million tonnes in the fourth quarter of 2014 to 0.21 million tonnes in the fourth quarter of 2015; and (ii) continued focus on cost saving initiatives.
Cost of sales in the fourth quarter of 2015 and the fourth quarter of 2014 included coal stockpile impairments of $5.5 million and $1.0 million, respectively, to reduce the carrying value of the Company’s coal stockpiles to their net realizable value. The coal stockpile impairments recorded in both 2015 and 2014 reflect the challenging coal market conditions.
Idled mine asset costs included in cost of sales decreased in the fourth quarter of 2015 compared to the fourth quarter of 2014 as a result of the mining operations’ slowdown which commenced in June 2014 and then resumed on March 30, 2015. Idled mine asset costs in the fourth quarter of 2015 included $3.9 million related to depreciation expense for idled mine equipment (2014: $11.6 million).
Other operating expenses were $1.1 million in the fourth quarter of 2015 (2014: $3.4 million).
The Company’s other operating expenses were lower in the fourth quarter of 2015 compared to the fourth quarter of 2014 primarily due to decreased impairment of prepaid expenses and deposits and materials and supplies inventories totaling $0.7 million in the fourth quarter of 2015 compared to $3.4 million in the fourth quarter of 2014.
In the fourth quarter of 2015, the Company also recognized an impairment charge of $0.7 million in respect of obsolete materials and supplies inventories as the Company continued to operate below capacity in 2015 (2014: $3.0 million).
Administration expenses were $2.2 million in the fourth quarter of 2015 compared to $1.9 million in the fourth quarter of 2014.
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Corporate administration $ 647 $
| Legal and professional fees | 786 | 243 |
| Salaries and benefits | 682 | 774 |
| Share-based compensation expense | 12 | 10 |
| Depreciation | 27 | 32 |
Administration expenses $ 2,154 $ 1,924
Administration expenses increased in the fourth quarter of 2015 compared to the fourth quarter of 2014 mainly due to higher legal and professional fees. The legal fees incurred in the fourth quarter of 2015 includes consultancy and advisory fees in relation to different financing projects as well as the TSX delisting hearing and lawsuits.
Evaluation and exploration expenses were $0.1 million in the fourth quarter of 2015 compared to $0.9 million in the fourth quarter of 2014. The Company continued to minimize evaluation and exploration expenditures in the fourth quarter of 2015 in order to preserve the Company’s financial resources. Evaluation and exploration activities and expenditures in the fourth quarter of 2015 were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining and exploration licenses.
Given the difficult market conditions and the associated delays in projects and the commissioning of equipment, the Company recorded $92.7 million of impairment charges to reduce various items of property, plant and equipment to their recoverable amounts in the fourth quarter of 2015 (2014: $8.6 million). In particular, after conducting an impairment test on the Ovoot Tolgoi Mine cash generating unit, the Company recorded an $76.7 million impairment charge in 2015 (refer to “Ovoot Tolgoi Mine Impairment Analysis” of Financial Position and Liquidity section for details). A further review has been performed on DCHF in the fourth quarter of 2015 related to the new mine plan, the Company concluded that there is no longer a plan to restart the DCHF project or to utilize the rotary breaker facility. As a result of the impairment assessment, the Company recorded an $8.5 million impairment charge in 2015 to reduce the carrying value of the DCHF to $nil as at December 31, 2015.
Finance costs were $5.7 million and $6.4 million in the fourth quarters of 2015 and 2014 which primarily consisted of interest expense on the $250.0 million CIC Convertible Debenture. Further, $1.1 million of realized loss was recorded in relation to the disposal of Aspire shares in the fourth quarter of 2014.
Finance income was $0.6 million in the fourth quarter of 2015 compared to $0.3 million in the fourth quarter of 2014 and primarily consisted of unrealized gains on the fair value change of the embedded derivatives in the CIC Convertible Debenture ($0.4 million in the fourth quarter of 2015 and $0.3 million in the fourth quarter of 2014). The fair value of the embedded derivatives in the CIC Convertible Debenture is driven by many factors including: the Company’s common share price, U.S. Dollar and Canadian Dollar exchange rates and share price volatility.
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