SouthGobi Resources announces fourth quarter and full year 2019 unaudited financial and operating results and postpones filing of 2019 audited consolidated financial statements and annual filings
March 30, 2020
SouthGobi Resources announces fourth quarter and full year 2019 unaudited
financial and operating results and postpones filing of 2019 audited consolidated
financial statements and annual filings
HONG KONG - SouthGobi Resources Ltd. (Toronto Stock Exchange (“TSX”): SGQ, Hong Kong Stock
Exchange (“HKEX”): 1878) (the "Company" or “SouthGobi”) today announces its unaudited financial and
operating results for the quarter and the year ended December 31, 201 9. All figures are in U.S. dollars
(“USD”) unless otherwise stated.
For the reason set forth below under the heading “Review of Unaudited Annual Results”, the audit process
for the Company’s annual results for the year ended 2019 has not been completed by the Company’s
auditors (the “Auditors”) as of the date of this press release. Accordingly, the Company cautions that the
financial results for its finan cial year ended December 31, 2019 disclosed herein are unaudited and have
not been agreed upon with the Auditors as required under Rule 13.49(2) of the Hong Kong Stock Exchange
Listing Rules. The unaudited financial results of the Company for the financial year ended December 31,
2019 disclosed herein were reviewed by the Audit Committee of the Company and approved and authorized
for issue by the Board on March 30, 2020.
The Company is postponing the filing of its audited consolidated financial statements for its financial year
ended December 31, 2019, the accompanying Management’s Discussion and Analysis of Financial
Condition and Results of Operations (“MD&A”) and its Annual Information Form for the financial year ended
December 31, 2019 (collectively, th e “2019 Annual Filings”), as a result of the Auditors being unable to
complete the audit process for the Company’s annual results for the year ended 2019 prior to the filing
deadline for the 2019 Annual Filings of March 30, 2020. In deciding to postpone the filing of the 2019 Annual
Filings, the Company is relying upon the Canadian Securities Administrators’ blanket relief, which, in light
of recent developments relating to the Coronavirus Disease 2019 (“COVID-19”) pandemic and their impact
on capital market participants, provides a 45-day extension for certain periodic filings normally required to
be made by reporting issuers on or before June 1, 2020 under applicable Canadian securities laws.
Until such time as the Company files its 2019 Annual Filings, shareholders and potential investors of the
Company are advised to exercise caution when dealing in the securities of the Company.
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Significant Events and Highlights
The Company’s significan t events and highlights for the year ended December 31, 2019 and the
subsequent period to March 30, 2020 are as follows:
Operating Results – The Company’s sales volume increased from 2.8 million tonnes in 2018 to 3.7
million tonnes in 2019 . The average selling price of coal in 2019 decreased from $37.1 per tonne in
2018 to $34.9 per tonne in 2019. The decrease in the average selling price was principally attributable
to (i) a change of the Company’s product mix, as sales of premium semi-soft coking coal represented
a smaller proportion of total sales in 2019; and (ii) 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 $29. 8 million profit from operations in 2019 compared
to a $10.5 million loss from operations in 2018. The improvement in profit from operations was
principally attributable to (i) a lower provision for doubtful trade and other receivables being made during
the year ($0.5 million and $20.9 million for 2019 and 2018, respectively); and (ii) increased sales volume.
Impact of the COVID-19 Pandemic – The Company was informed that effective as of February 11,
2020, the Mongolian State Emergency Commission closed Mongolia’s southern border with China in
order to prevent the spread of COVID-19. Accordingly, the Company suspended coal exports to China
since February 11, 2020 as a result of the border closure.
On March 28, 2020, the Company learned that the Mongolian-Chinese border was re-opened for coal
export on a trial basis, with a limit imposed on the total volume of coal that is permitted to be exported
during this trial period. As of the date hereof, the Company has not received any formal communication
from the Mongolian State Emergency Commission regarding the details of the re-opening of the border
crossings on a trial basis, including the estimated length of the trial period and the proposed limitations
on the coal export volume into China during this trial period. There can be no guarantee, however, that
the Company wil l be able to continue exporting coal to China during this trial period, or the border
crossings between Mongolia and China will be fully reopened in a timely manner or at all and, if the
border crossing is fully re -opened in the future, the border crossing s would not be the subject of
additional closures as a result of COVID-19 in the future.
The border closure has had, and will continue to have an adverse impact on the Company’s sales and
cash flows in the first and second quarter of 2020. In order to address the financial impact of the border
closures and preserve its working capital, the Company ceased major mining operations (including coal
mining activities), reduced production to only coal -blending activities and placed approximately half of
its workforce on furlough effective as of February 2020 until further notice. The Company anticipates
that its existing coal inventories are sufficient to satisfy expected sales demand for a period of at least
2 months as of the date hereof. The Company will continue to closely monitor the development of the
COVID-19 pandemic and the impact it has on coal exports to China and its operations as a whole.
Based on a preliminary review of the information and operational data of the Company currently
available, the Company expects to record a net loss between $13 million to $18 million for the three
months ending March 31, 2020. The anticipated net loss is principally attributable to decreased sales
volumes in the first quarter of 2020 as a result of the closure of the Mongolian-Chinese border crossings
which took effect in February 2020 and the Company being unable to export coal into China as a result.
As at March 30, 2020, the Company had $1.5 million of cash. In the event that the Company’s ability
to export coal into the Chinese market continues to be restricted or limited as a result of the restrictions
at the Mongolian -Chinese border crossing, this is expected to have a material adverse effect on the
business and operations of t he 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.
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China Investment Corporation (together with its wholly-owned subsidiaries and affiliates, “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 a deferral agreement executed with CIC
on June 12, 2017 (the “June 2017 Deferral Agreement”); and (ii) $27.9 million of 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 501(c) of the TSX Company Manual, the 2019
Deferral Agreement was approved at the Company’s adjourned annual and special meeting of
shareholders on June 13, 2019.
The key repayment terms of the 2019 Deferral Agreement are: (i) the Company agreed to pay a total
of $14.3 million over eight instalments from 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 the remaining balance of $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, 2019 between SouthGobi Sands LLC (“SGS”), a
subsidiary of the Company, and CIC , be amended and restated (the “Amended and Restated
Cooperation Agreement”) to clarify the manner in which the service fee (the “Management Fee”)
payable to CIC under the Cooperation Agreement is calculated, with effect as of January 1, 2017.
Specifically, the Management Fee under the Amended and Restated Cooperation Agreement is
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 pay ment
of the additional Management Fee payable to CIC as a result of the Amended and Restated
Cooperation Agreement, the Company agreed to pay to CIC a deferral fee at the rate of 2.5% on the
outstanding Management Fee. Pursuant to the Amended and Restated Cooperation Agreement, the
Company agreed to pay CIC the total outstanding Management Fee and related accrued deferral fee
of $4.2 million over six instalments from June 2019 to November 2019. The Company executed the
Amended and Restated Cooperation Agreement with CIC on April 23, 2019.
Pursuant to their terms, both the 2019 Deferral Agreement and the Amended and Restated Cooperation
Agreement became effective on June 13, 2019, being the date on which the 2019 Deferral Agreement
was approved by shareholders at the Company’s adjourned annual and special meeting of
shareholders.
In connection with the 2019 Deferral Agreement, the Company also announced that it intends to discuss
a potential debt restructuring plan with respect to amounts owing to CIC which is mutually beneficial to
the Company and CIC; 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. As
of the date hereof, there has not been any significant progress in relations to the restructuring plan.
On February 19, 2020, the Company and CIC entered into an agreement (the “2020 February Deferral
Agreement”) pursuant to which CIC agreed to grant the Company a deferral of: (i) deferred cash interest
and deferral fees of $1.3 million and $2.0 million which were due and payable to CIC on January 19,
2020 and February 19, 2020, respectively, under the 2019 Deferral Agreement (collectively, the “2020
February Deferral Amounts”); and (ii) approximately $0.7 million of the Management Fee which was
due and payable on February 14, 2020 to CIC under the Amended and Restated Cooperation
Agreement. The 2020 February Deferral Agreement became effective on March 10, 2020, being the
date on which the Company obtained the requisite acceptance of the 2020 February Deferral
Agreement from the TSX as required under applicable TSX rules.
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The principal terms of the 2020 February Deferral Agreement are as follows:
Payment of the 2020 February Deferral Amounts will be deferred until June 20, 2020, while the
Management Fee will be deferred until they are repaid by the Company.
As consideration for the deferral of these amounts, the Company agreed to pay CIC: (i ) a deferral
fee equal to 6.4% per annum on the 2020 February Deferral Amounts, commencing on the date on
which each such 2020 Deferral Amount would otherwise have been due and payable under the
2019 Deferral Agreement; and (ii) a deferral fee equal to 2.5% per annum on the Management Fee,
commencing on the date on which the Managements Fee would otherwise have been due and
payable under the Amended and Restated Cooperation Agreement.
The Company agreed to provide CIC with monthly updates regarding its operational and financial
affairs.
As the Company anticipates that a deferral will likely be required in respect of the monthly payments
due and payable in the period between April 2020 and June 2020 under the 2019 Deferral
Agreement and Amended and Re stated Cooperation Agreement, the Company and CIC have
agreed to discuss in good faith a deferral of these payments on a monthly basis as they become
due. There can be no assurance, however, that a favorable outcome will be reached either at all or
on favorable terms.
The Company agreed to comply with all of its obligations under the 2019 Deferral Agreement and
the Amended and Restated Cooperation Agreement, as amended by the 2020 February Deferral
Agreement.
The Company and CIC agreed that nothing in the 2020 February Deferral Agreement prejudices
CIC’s rights to pursue any of its remedies at any time pursuant to the 2019 Deferral Agreement and
Amended and Restated Cooperation Agreement, respectively.
On March 10, 2020, the Company agreed with CIC (the “2020 March Deferral Agreement”) that the
$2.0 million which was due and payable to CIC on March 19, 2020 under the 2019 Deferral Agreement
(the “2020 March Deferral Amount”) will be deferred until June 20, 2020. The terms of the 2020 March
Deferral Agreement are substantially the same as the terms of the 2020 February Deferral Agreement,
including that the Company agreed to pay CIC a deferral fee equal to 6.4% per annum on the 2020
March Deferral Amount, commencing on March 19, 2020. The 2020 March Deferral Agreement became
effective on March 25, 2020, being the date on which the Company obtained the requisite acceptance
of the 2020 March Deferral Agreement from the TSX as required under applicable TSX rules.
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Notice from First Concept Industrial Group Limited (“First Concept”) and Frozen Mongolian
Bank Account – As of the date hereof, the Company has not paid the November 2018, January 2019,
May 2019 and September 2019 monthly payments (collectively, the “Outstanding Settlement Deed
Payments”) due under a deed of settlement (the “Settlement Deed”) with First Concept. On October 16,
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 Settlement Deed
Payments due under the Settlement Deed, otherwise First Concept intends to commence legal action
against SGS pursuant to the Settlement Deed. On February 7, 2020, SGS was informed by its
Mongolian banks that they received a request from the Court Decision Implementing Agency of
Mongolia (the “CDIA”) to freeze the respective bank accounts of SGS in Mongolia in relation to the
enforcement of an arbitration award related to the Settlement Deed. Approximately $0.8 million in cash
was frozen by the banks as at February 7, 2020 and such amount was subsequently transferred to the
CDIA on March 6, 2020. Since a default under the Settlement Deed is only triggered when there has
been a failure to pay two or more consecutive monthly i nstalment payments, the Company is of the
view that SGS is not in default under the Settlement Deed.
The Company expects that the freezing of bank accounts in Mongolia will have an adverse impact on
its ability to make payment transactions to carry out operations and business affairs in Mongolia in the
ordinary course. The Company is liaising with First C oncept to resolve the issue. There can be no
assurance, however, that any resolution can be successfully reached either at all or on favorable terms.
As at December 31, 2019, the outstanding amount payable to First Concept amounted to $5.6 million
(December 31, 2018: $12.5 million), which is due and payable as of the date hereof.
The seizure of the frozen funds by the CDIA may constitute an event of default under the CIC
Convertible Debenture and the 2019 Deferral Agreement , which could result in the autom atic
termination of the deferral periods under the 2019 Deferral Agreement and the acceleration of all
principal, interest and other amounts owing under the CIC Convertible Debenture and the 2019 Deferral
Agreement becoming immediately due and payable, in each case without the necessity of any demand
upon or notice to the Company by CIC. Furthermore, if First Concept is successful in enforcing the
Outstanding Settlement Deed Payments and the Waived Costs (as defined below) against SGS, this
may represent an event of default under the CIC Convertible Debenture. Either of these events 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 s uch shares could suffer a
significant decline or total loss in value.
Termination of Soumber Deposit Mining Licenses – On August 26, 2019, SGS received a letter (the
“Notice Letter”) from the Mineral Resources and Petroleum Authority of Mongolia (“ MRAM”) notifying
that the Company’s three mining licenses (MV -016869, MV-020436 and MV -020451) (the “So umber
Licenses”) for the Soumber Deposit have been terminated by the Head of Cadastre Division of MRAM
effective as of August 21, 2019.
According to the Notice Letter, the Soumber Licenses have been terminated pursuant to Clause 56.1.5
of Article 56 of the Minerals Law, Clauses 4.2.1 and 4.2.5 of Article 4 and Clause 28.1.1 of Article 28
of the General Administrative Law and a decision order of a working group established under an order
of the Minister of Environment and Tourism (Mongolia). According to this decision order, the working
group determined that SGS had violated its environmental reclamation obligations with respect to the
Soumber Deposit. The Soumb er Deposit is an undeveloped coal deposit covering approximately
22,263 hectares located approximately 20 kilometers east of the Company’s Ovoot Tolgoi coal mine in
Mongolia. The Company owned a 100% interest in the Soumber Deposit.
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The Company believes the cancelation of the Soumber Licenses is without merit. The Company is not
aware of any failure on its part to fulfill its environmental reclamation duties as they relate to the
Soumber D eposit. On October 4, 2019, SGS filed a claim against MRAM and the Ministry of
Environment and Tourism of Mongolia in the Administration Court of the Capital City (the
“Administration Court”) seeking an order to restore the Soumber Licenses. The Company anticipates
that the Administration Court w ill issue its r uling before the end of the second quarter of 2020 . The
Company will take all such actions, including additional legal actions, as it considers necessary to
reinstate the Soumber Licenses. However, there can be no assurance that a favorable outcome will be
reached. The termination of the Soumber Licenses does not have any impact on the Company’s current
mining operations at the Ovoot Tolgoi mine site.
Key Findings of Formal Investigation – Following the learning of certain information relating to past
conduct engaged in by former sen ior 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, Inner
Mongolia SouthGobi Energy Co. Ltd. (“IMSGE”), a subsidiary of the Company and certain coal trading
and transportatio n companies, some of which are allegedly related to or controlled by the Former
Management and Employees or their related persons, the Company’s board of directors (the “Board”)
expanded the mandate of its special committee of independent non -executive directors (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, and Ernst & Young (China) Advisory Limited (the “Forensic
Accountant”), as forensic accountants, to assist in the Formal Investigation. The Special Committee
and the Forensic Accountant jointly engaged Zhong Lun Law Firm, as independent Chinese legal
counsel.
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. Please refer to the Company’s MD&A for the three
months ended March 31, 2019 for a summary of the key findings of the Formal Investigation, a copy of
which is available under the Company’s profile on SEDAR at www.sedar.com.
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 ende d December 31, 2016 and December 31, 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 a vailable 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.
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Remedial Actions and Preventativ e Measures – On April 30, 2019, the Company announced that
the Special Committee, with the assistance of the Forensic Accountant, completed its assessment of
the potential remedial actions and preventative measures 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. The Special Committee delivered its report setting out a
set of recommended remedial actions and preventative mea sures (the “Remedial Actions and
Preventative Measures”) to the Board which was approved at a meeting of the Board held on April 28,
2019. Please refer to the Company’s MD&A for the three months ended March 31, 2019 for a summary
of the Remedial Actions an d Preventative Measures which were adopted and approved by the Board
and the acti ons that the Company has taken to implement the Remed ial Actions and Preventative
Measures, a copy of which is available under the Company’s profile on SEDAR at www.sedar.com.
Resumption of Trading on HKEX and TSX – On May 30, 2019, the Company announced the
Company had fulfilled the trading resumption guidance to the satisfaction of the HKEX and the HKEX
and the TSX had accepted the Company’s trading resumption application. T rading in the Common
Shares on the TSX and the HKEX resumed on May 30, 2019 and May 31, 2019, respectively.
Changes in Directors
Ms. Lan Cheng: Ms. Cheng did not stand for re-election at the Company’s annual and special meeting
of shareholders (the “AGM”) held on May 30, 2019 and ceased to be a non-executive director following
the conclusion of the AGM.
Mr. Ben Niu: On May 30, 2019, Mr. Niu was elected as a non-executive director of the Company at the
AGM.
Mr. Wen Yao: Mr. Yao resigned as a non-executive director on March 11, 2020.
Mr. Jianmin Bao: On March 18, 2020, Mr. Bao was appointed as a non -executive director of the
Company by CIC pursuant to a contractual nomination right granted to CIC in connection with the CIC
Convertible Debenture in 2009.
Going Concern – Several adverse conditions and material uncertainties relating to the Company cast
significant doubt upon the going concern assumption which includes the deficiency in assets and the
working capital deficiency. The current operation plan contemplates significant operational funding in
the Company’s mining operations as well as equipment maintenance in order to achieve the Company’s
revenue and cash flow targets. Such expenditures and other working capital requirements may require
the Company to seek additional financing. There is no guarantee that the Company will be able to
secure other sources of financing.
In addition, the current import restrictions on F -grade coal by Chinese authorities will fur ther affect the
short term cash inflow and may in turn undermine the execution of the operation plan. If the import
restrictions on F -grade coal continue for an indefinite period, or the Company is unable to secure
additional capital financing, or otherwis e restructure or refinance its business in order to address its
cash requirements through December 31, 2020, then the Company is unlikely to have sufficient cash
flows from mining operations in order to satisfy its current ongoing obligations and future co ntractual
commitments.
Further, the closure of the border resulted from the COVID -19 pandemic has had, and will continue to
have, an adverse impact on the Company’s sales and cash flows in the first and second quarter of
2020. 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. If the Company
is unable to continue as a going concern, it may be forced to seek relief under appl icable bankruptcy
and insolvency legislation. See section Liquidity and Capital Resources of this press release for details.
As at March 30, 2020, the Company had $1.5 million of cash.
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OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS
The Company cautions that the financial results for its financial year ended December 31, 2019 set forth
below are unaudited and have not been agreed upon with the Auditors.
Summary of Annual Operational Data
(i) A non-IFRS financial measure, see section “Non-IFRS financial measures”. Cash costs of product sold exclude idled mine asset cash costs.
(ii) Per 200,000 man hours and calculated based on a rolling 12 -month average.
Overview of Annual Operational Data
As at December 31, 2019, the Company had a lost time injury frequency rate of 0.06 per 200,000 man
hours based on a rolling 12-month average.
The Company experienced a decrease in the average selling price of coal in 2019 from $37.1 per tonne in
2018 to $34.9 per tonne in 2019. The decrease in the average selling price was principally attributable to
(i) a change of the Company’s product mix, as sales of premium semi-soft coking coal represented a smaller
proportion of total sales in 2019 ; and (ii) a higher portion of s ales made at the mine gate instead of
transporting the coal to the Company’s Inner Mongolia subsidiary and selling to third party customers within
China. The product mix for 2019 consisted of approximately 1 8% of premium semi -soft coking coal, 63%
of standard semi-soft coking coal/premium thermal coal, 1 7% of washed coal and 2% of standard thermal
coal compared to approximately 21% of premium semi -soft coking coal, 45% of standard semi-soft coking
coal/premium thermal coal, 5% of washed coal and 28% of standard thermal coal in 2018.
2019 2018
Sales Volumes, Prices and Costs
Premium semi-soft coking coal
Coal sales (millions of tonnes) 0.67 0.59
Average realized selling price (per tonne) 32.96$ 50.34$
Standard semi-soft coking coal/ premium thermal coal
Coal sales (millions of tonnes) 2.35 1.26
Average realized selling price (per tonne) 33.54$ 37.61$
Standard thermal coal
Coal sales (millions of tonnes) 0.09 0.78
Average realized selling price (per tonne) 29.43$ 25.07$
Washed coal
Coal sales (millions of tonnes) 0.63 0.15
Average realized selling price (per tonne) 43.05$ 44.02$
Total
Coal sales (millions of tonnes) 3.74 2.78
Average realized selling price (per tonne) 34.88$ 37.12$
Raw coal production (millions of tonnes) 5.05 4.34
Cost of sales of product sold (per tonne) 22.57$ 28.72$
Direct cash costs of product sold (per tonne) (i) 14.84$ 14.90$
Mine administration cash costs of product sold (per tonne) (i) 1.08$ 1.50$
Total cash costs of product sold (per tonne) (i) 15.92$ 16.40$
Other Operational Data
Production waste material moved (millions of bank cubic 18.22 18.16
meters)
Strip ratio (bank cubic meters of waste material per tonne of 3.61 4.17
coal produced)
Lost time injury frequency rate (ii) 0.06 0.05
December 31,
Year ended