Southgobi Resources Announces Fourth Quarter and Full Year 2017 Financial and Operating Results
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RESOURCES March 28, 2018
SOUTHGOBI RESOURCES ANNOUNCES FOURTH QUARTER AND
FULL YEAR 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 quarter and the year
ended December 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 year ended December 31, 2017 and
the subsequent period to March 28, 2018 are as follows:
• Operating Results – As a result of improved market conditions and prices for coal in
China, the Company experienced an increase in the average selling price of coal from
$16.44 per tonne in 2016 to $28.31 per tonne in 2017. The volume of coal sales has
also increased from 3.91 million tonnes in 2016 to 4.65 million tonnes in 2017.
• Financial Results – The Company recorded a gross profit of $15.1 million in 2017
compared to a gross loss of $28.6 million in 2016 while $16.8 million loss from operations
was recorded in 2017 compared to a $38.1 million loss from operations in 2016. Revenue
increased from $58.5 million in 2016 to $121.0 million in 2017. As a result of improved
market conditions and prices for coal in China, the overall financial results improved
when compared to 2016, which was principally attributable to increased coal sales as
well as higher average selling price achieved during the year.
• China Investment Corporation (“CIC”) Convertible Debenture (the “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.
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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. 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 discussions with CIC for a deferral of the November 19th Payments and
the November 2017 PIK Interest; however, there can be no assurance that a favorable
outcome will be reached.
As a consequence of the Company not entering into a deferral agreement with CIC
as at December 31, 2017, International Accounting Standard 1 (“IAS 1”) requires the
Company to classify the entire balance of the CIC Convertible Debenture as a current
liability as at December 31, 2017, 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.
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• 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 (formerly known as First Concept Logistics 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 December 31,
2017, the Company recorded a provision of $13.9 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. 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. In the event that First Concept
applies to enforce the Arbitration Award against SGS through judicial measures in courts
of Mongolia or in other applicable jurisdiction(s), the Company intends to defend itself
against such enforcement proceedings through independent litigation counsel retained
by the Company for this purpose. However, due to the inherent uncertainties of litigation,
it is not possible to predict whether the Company will be successful in defending itself
against any such enforcement proceedings.
• Tax Investigation Case in Mongolia – On January 10, 2018, SGS was informed by the
Court Decision Implementation Agency of Capital City in Mongolia that the enforcement
procedure in relation to the previously disclosed judgment of the Mongolian Second
Criminal Court (the “Tax Verdict”) rendered against SGS in January 2015 has been
terminated and no party shall have any right to make any further claims in connection
with the Tax Verdict. As of the date hereof, SGS has fulfilled its obligations under the
Tax Verdict.
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• Settlement of Lawsuit Notice from a Former Fuel Supplier – On January 20, 2017,
SGS 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 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.
On June 30, 2017, the Company signed a triparty settlement agreement (the “Triparty
Settlement Agreement”) with MTLLC and ICIC LLC (“ICIC”) (an independent fuel supplier
of the Company), pursuant to which: (i) MTLLC transferred to ICIC its right to receive
payment from the Company for the outstanding balance of approximately $8.0 million
owing under the settlement agreement dated February 10, 2017 (the “Outstanding
Amount”) and its right to enforce the arbitration award against the Company; and (ii)
the Company and ICIC agreed to a revised payment schedule for repayment of the
Outstanding Amount. Pursuant to the Triparty Settlement Agreement, the Company
agreed to pay interest on the Outstanding Amount, which accrues at a monthly rate of
1.8% and will be settled on a monthly basis. The Company was required to repay on
average $1.3 million monthly during the period from July 2017 to November 2017.
As of the date of this press release, the Company has fulfilled its obligations under the
Triparty Settlement Agreement and has fully repaid the Outstanding Amount.
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• Class Action Lawsuit – On September 18, 2017, the Ontario Court of Appeal dismissed
the Company’s appeal of the original Ontario lower court decision to permit the plaintiff
to commence and proceed with a class action (the “Class Action”) against the Company
claiming damages under the Ontario Securities Act in connection with the Company’s
restatement of certain financial statements previously disclosed in the Company’s public
fillings (the “Restatement”). Concurrently, the Ontario Court of Appeal allowed the
plaintiff’s appeal of the original Ontario lower court decision to dismiss the plaintiff’s leave
motion against certain of the Company’s former officers and directors and made an order
granting leave for the plaintiff to proceed against such former officers and directors of
the Company in relation to the Restatement. As a result, the plaintiff is now permitted
to proceed with the Class Action against both the Company and the former officers and
directors of the Company.
The Company has filed an application for leave to appeal to the Supreme Court of Canada
in November 2017. Leave to appeal is expected to be decided by May 2018. If leave
to appeal is granted, the appeal would likely be scheduled to be heard in early 2019.
• Ceke Logistics Park Project – On October 10, 2017, the Company entered into an
investment agreement (the “Investment Agreement”) with Beijing De Rong Tai Investment
Co., Ltd. (“BDRT”) in connection with the Company’s development of the Ceke Port
Eco-friendly Bonded Logistics Park project (the “Ceke Logistics Park”). Pursuant to the
Investment Agreement, BDRT has agreed, subject to fulfilment of certain conditions, to
invest RMB231 million in installments by July 30, 2018 in return for a 30% interest in
Inner Mongolia SouthGobi Enterprise Co. Ltd. (“IMSE”), while the Company will hold the
remaining 70% interest in IMSE. Proceeds from BDRT’s equity investment will be used by
IMSE for the construction of the Ceke Logistics Park. IMSE is the project company which
holds a 100% interest in the Ceke Logistics Park. As of the date of this press release,
IMSE has received RMB15 million from BDRT pursuant to the Investment Agreement.
• 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.
• Equipment Loan – Inner Mongolia SouthGobi Energy Ltd., a subsidiary of the Company
executed a $10.4 million loan agreement on August 31, 2017 with Beijing Jin Rui Tian
Chen Asset Management Co Ltd. (the “Equipment Loan”) for the purpose of financing the
purchase of mining equipment to increase the production capacity of the Company. As
at December 31, 2017, the outstanding principal and accrued interest for the Equipment
Loan amounted to $2.3 million and $0.1 million, respectively (December 31, 2016: nil).
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• Changes in Management and Directors
Mr. Yingbin Ian He: Mr. He was appointed as an independent non-executive director
on May 16, 2017.
Mr. Wen Yao : Mr. Yao was appointed as a non-executive director on May 18, 2017.
Mr. Joseph Belan : Mr. Belan did not stand for the re-election at the Company’s Annual
General Meeting (the “AGM”) and ceased to be an independent non-executive director
on June 30, 2017.
Mr. Ningqiao Li : Mr. Li did not stand for the re-election at the AGM and ceased to be an
executive director and the Executive Chairman of the Board of Directors of the Company
(the “Board”) on June 30, 2017.
Mr. Huiyi Wang : Mr. Wang resigned as a non-executive director on July 24, 2017.
Mr. Aminbuhe: Mr. Aminbuhe commenced a leave from his role as the Chief Executive
Officer of the Company effective as of November 13, 2017. The Board subsequently
terminated the employment of Mr. Aminbuhe due to his incapability to fulfil his daily
duties and responsibilities as the Chief Executive Officer of the Company effective as
of November 22, 2017. Mr. Aminbuhe was also removed as the Chairman of the Board,
but remains on the Board as a non-executive director of the Company.
The Company learned that Mr. Aminbuhe was arrested on October 11, 2017 and is being
detained at Rizhao City Detention Center in China as a suspect in a fraudulent loan case.
The Board has formed a special committee of independent non-executive directors (the
“Special Committee”) to initiate a formal internal investigation into the charges against
Mr. Aminbuhe and the connection, if any, between those charges and the Company and
his conduct as Chairman and Chief Executive Officer of the Company, which includes
engaging external advisors to assist in the investigation. The Special Committee is
required to report to the Board from time to time with respect to the results and status
of its investigation and the potential impact of these matters, if any, on the business
and affairs of the Company.
Mr. Bing Wang: Mr. Wang was appointed as interim Chief Executive Officer of the
Company, effective as of November 13, 2017.
• Strategic Advisory Board – In light of the reconstitution of the Board and appointment
of new directors, the Company’s Strategic Advisory Board was dissolved on June 30,
2017.
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• 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.
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 December 31, 2018, 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 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”. As at March 28, 2018, the Company had $7.1 million of cash.
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OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS
Summary of Annual Operational Data
Year ended December 31,
2017 2016
Sales Volumes, Prices and Costs
Premium semi-soft coking coal
Coal sales (millions of tonnes) 0.86 0.28
Average realized selling price (per tonne) (i) $ 47.84 $ 31.14
Standard semi-soft coking coal
Coal sales (millions of tonnes) 2.44 2.52
Average realized selling price (per tonne) (i) $ 28.72 $ 16.71
Thermal coal
Coal sales (millions of tonnes) 1.35 1.11
Average realized selling price (per tonne) (i) $ 15.24 $ 12.16
Total
Coal sales (millions of tonnes) 4.65 3.91
Average realized selling price (per tonne) (i) $ 28.31 $ 16.44
Raw coal production (millions of tonnes) 6.38 3.38
Cost of sales of product sold (per tonne) $ 22.77 $ 22.26
Direct cash costs of product sold (per tonne) (ii) $ 9.32 $ 8.66
Mine administration cash costs of product sold (per tonne) (ii) $ 2.80 $ 2.32
Total cash costs of product sold (per tonne) (ii) $ 12.12 $ 10.98
Other Operational Data
Production waste material moved (millions of bank cubic
meters) 20.79 7.38
Strip ratio (bank cubic meters of waste material per tonne of
coal produced) 3.26 2.18
Lost time injury frequency rate (iii) 0.03 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, 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.