Southgobi Resources Announces Fourth Quarter and Full Year 2018 Financial and Operating Results
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RESOURCES March 31, 2019
SOUTHGOBI RESOURCES ANNOUNCES FOURTH QUARTER AND
FULL YEAR 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 quarter and the year
ended December 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 year ended December 31, 2018 and
the subsequent period to March 31, 2019 are as follows:
• Operating Results – With a higher proportion of sales made through Inner Mongolia
SouthGobi Energy Co., Ltd. (“IMSGE”), a subsidiary of the Company, in 2018, the
Company experienced an increase in the average selling price of coal from $28.3 per
tonne in 2017 to $37.1 per tonne in 2018. The Company sold 2.8 million tonnes in 2018
as compared to 4.7 million tonnes in 2017, which was mainly as a result of the delays
in the custom clearance process at the Ceke border which the Company has been
experiencing since July 2017, as well as the decreased production level for 2018.
• Financial Results – The Company recorded a gross profit of $24.0 million in 2018
compared to $15.1 million in 2017, while a $10.5 million loss from operations was
recorded in 2018 compared to a $14.6 million loss from operations in 2017 (Restated).
The improvement of overall financial results when compared to 2017 is as a result of
the Company experiencing a higher average selling price for coal in China during the
year.
• Wash plant – The construction of the wash plant at the Ovoot Tolgoi mine was completed,
and commissioning at the wash plant commenced, in October 2018. The Company sold
0.2 million tonnes of washed coal in the fourth quarter of 2018. The Company is in the
process of making improvements to the wash plant in order to enhance the operational
efficiency, as well as the output throughput. The Company is currently in discussions with
the wash plant operator concerning an agreement regarding the operation of the wash
plant; however, there can be no assurance that a favorable outcome will be reached.
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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”). Pursuant to the
terms of the CIC Convertible Debenture, the Company was required to pay $8.1 million,
$7.9 million and $8.1 million of anniversary cash interest to CIC on November 19, 2017,
May 19, 2018 and November 19, 2018, respectively (the “Anniversary Interest Payments”
and together with the June 2017 Deferral Agreement Payment, the “Outstanding Cash
Interest Payable”). Pursuant to the CIC Convertible Debenture, the Company was also
obligated to issue to CIC $4.0 million worth of payment in kind (“PIK”) interest shares
on November 19, 2017 and $4.0 million worth of PIK interest shares on November 19,
2018 (collectively, the “PIK Interest Shares”).
As of the date of this press release, the Company: (i) has neither paid the Outstanding
Cash Interest Payable nor issued the 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. Furthermore,
the Common Shares have now been suspended from trading on The Stock Exchange
of Hong Kong Limited (“HKEX”) and the Toronto Stock Exchange (“TSX”), for a period
of more than 5 trading days since December 17, 2018 (“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.
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 payment of amounts outstanding
under the CIC Convertible Debenture and the June 2017 Deferral Agreement.
The Company has been in discussions with CIC for a deferral of the Outstanding Cash
Interest Payable and the PIK Interest Shares; 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 December 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 December 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 Legal Proceedings from a Former Customer – On September 20, 2018,
the Company announced that IMSGE had received a court summons (the “Summons”)
from the Ejinaqi People’s Court of Inner Mongolia Autonomous Region of China (the
“Ejinaqi Court”) in relation to a dispute over certain coal sales contracts with Jiayuguan
Xiyuan Trading Co., Ltd (“Xiyuan”), a former customer of IMSGE.
According to the Summons, Xiyuan applied to the Ejinaqi Court claiming that IMSGE
should repay a sum of RMB19.4 million (approximately $2.8 million) to Xiyuan, comprised
of RMB19.1 million of coal prepayments and RMB0.3 million of interest. Xiyuan also
claimed against Ejinaqi Fulemeng Energy Industry Co., Ltd. (“FLM”) for joint liability of
the above sums, as it alleged that FLM acted as an agent for IMSGE to receive coal
prepayment and deliver coal on behalf of IMSGE.
On January 24, 2019, the Company received noticed that the Ejinaqi Court rendered a
judgement allowing an application by Xiyuan to voluntarily withdraw its lawsuit against
IMSGE and FLM. Xiyuan’s application cited a lack of evidence.
• Notice of Arbitration – On January 10, 2018, the Company received a confidential partial
ruling (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 (as
amended) between SouthGobi Sands LLC (“SGS”), a subsidiary of the Company, and
First Concept Industrial Group Limited (“First Concept”) (together the “Coal Supply
Agreement”) (the “Arbitration”).
Pursuant to the Arbitration Award, SGS was 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 was final,
except as to costs which were reserved for a future award.
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On November 14, 2018, the Company executed a deed of settlement (“Settlement Deed”)
with First Concept in respect of the Arbitration Award. Pursuant to the Settlement Deed,
which provides for the full and final satisfaction of the Arbitration Award as well as the
settlement of the issue of costs relating to the Arbitration and any other disputes arising
out of the Coal Supply Agreement, SGS agreed to pay to First Concept the sum of $13.9
million (“Settlement Sum”), together with simple interest thereon at the rate of 6% per
annum from November 1, 2018 until full payment, in 12 monthly installments commencing
in November 2018. Provided that SGS complies with the terms of the Settlement Deed,
First Concept agreed to waive its costs in connection with the Arbitration and interest
for the period from January 4, 2018 to October 31, 2018.
As of the date hereof, the Company has not paid the November 2018 and January 2019
monthly payments due under the Settlement Deed. On March 5, 2019, SGS received a
notice from 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, 2019, 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 December 31, 2018, the outstanding amount payable to First Concept amounted
to $12.5 million (December 31, 2017: $13.9 million).
• Special Committee – On November 17, 2017, the Board formed a special committee
of independent non-executive directors (the “Special Committee”) to initiate a formal
internal investigation into certain legal charges against Mr. Aminbuhe (the Company’s
former Chairman and Chief Executive Officer) and the connection, if any, between those
charges and the Company and his conduct as Chairman and Chief Executive Officer of
the Company.
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On May 7, 2018, the Company provided an update on the status of its ongoing internal
investigation into the charges against Mr. Aminbuhe, and reported that, to the best of its
knowledge, the Chinese authorities had not laid charges against Mr. Aminbuhe, made
any public statement of the basis for Mr. Aminbuhe’s arrest or sought information from
the Company in respect of this matter. The Company further reported that it was not
aware of any definitive information which would suggest that Mr. Aminbuhe’s arrest is
related to any misconduct directly related to his position as Chairman and Chief Executive
Officer of the Company.
With the assistance of its external legal counsel, the Special Committee has conducted
an extensive review of the records involving or relating to Mr. Aminbuhe which are in
the Company’s possession (including communications to and from Mr. Aminbuhe’s email
account with the Company, relevant public disclosure and other internal documents),
and interviewed several directors and senior officers of the Company who had direct
contact with Mr. Aminbuhe during his tenure as Chairman and Chief Executive Officer
of the Company.
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 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, IMSGE 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 the Special Committee 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 15, 2019, the Company provided a quarterly update on the status of the
Formal Investigation pursuant to Rules 13.09(2)(a) and 13.24A of the Rules Governing
the Listing of Securities on the HKEX (“HKEX’s Listing Rules”), and reported that: (i) the
Forensic Accountant had submitted a draft investigation report to the Special Committee;
and (ii) the Special Committee would review the findings of the investigation report and
work with the Company’s independent auditors and legal counsel to assess the financial
and legal implications and to plan for any further actions.
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• Key Findings of 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 the
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’s subsidiaries 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 Xiyuan;
and (iv) allegations of misconduct by the Former Management and Employees, including:
(I) the grant of a RMB5 million loan; (II) embezzlement of bank acceptance bills of
RMB12 million; (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
has 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.
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Based on the key findings of and information obtained from the Formal Investigation,
the Company has considered the resulting financial impact on the financial statements
and determined that a restatement of prior period financial information is required. For
more information, please see section “Significant Events and Highlights” of this press
release entitled “Restatement of Prior Year Financial Information” below.
As of the date of this press release, the Special Committee, with the assistance of its
professional advisors, is in the process of assessing the potential remedial actions and
preventative measures available to the Company to address the issues which caused
the Trading Suspension, which will include amendments to the Company’s existing
system of internal controls and risk management policies and procedures to improve and
strengthen the Company’s commitment to a culture of honesty, integrity and accountability
and compliance with the highest standards of professional and ethical conduct, and
such other actions as the Special Committee may consider necessary or appropriate to
protect the Company’s interests.
• 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 the 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
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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 was required to make its first quarterly update on or before
March 16, 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).
On March 30, 2019, the Company announced that, based on the key findings of, and
information obtained from, the Formal Investigation, and with the advice of its professional
advisors, the Board approved the principal actions, together with the related dates of
completion or anticipated completion, set forth in the table below (collectively, the “Trading
Resumption Plan”) 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 investigation 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 investigation 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