Southgobi Resources Announces Fourth Quarter and Full Year 2020 Financial and Operating Results
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R ESOURCE S
March 30, 2021
SOUTHGOBI RESOURCES ANNOUNCES FOURTH QUARTER AND
FULL YEAR 2020 FINANCIAL AND OPERATING RESULTS
HONG KONG – SouthGobi Resources Ltd. ( Toronto Stock Exchange ( “TSX”): SGQ, Hong Kong
Stock Exchange ( “HKEX”): 1878 ) (the “Company ” or “SouthGobi ”) today announces its financial
and operating results for the quarter and the year ended December 31, 2020. All figures are in U.S.
dollars ( “USD”) unless otherwise stated.
The Board of Directors (the “Board”) wish to inform that the Company ’s independent auditors,
BDO Limited ( “BDO”), have completed their audit of the consolidated financial statements of the
Company for the year ended December 31, 2020 in accordance with Canadian generally accepted
auditing standards and would like to announce the audited annual results of the Company for the
year ended December 31, 2020 together with the comparative figures for the previous year and the
respective notes in this announcement.
SIGNIFICANT EVENTS AND HIGHLIGHTS
The Company ’s significant events and highlights for the year ended December 31, 2020 and the
subsequent period to March 30, 2021 are as follows:
• Operating Results – The Company ’s sales volume decreased from 3.7 million tonnes in 2019
to 2.6 million tonnes in 2020 due to the impact of the Coronavirus Disease 2019 ( “COVID-19 ”)
pandemic. The average selling price of coal decreased from $34.9 per tonne in 2019 to $33.0
per tonne in 2020. The decrease in the average selling price was principally attributable
to 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 $15.3 million profit from operations in 2020
compared to a $29.8 million profit in 2019. The financial results were impacted by (i) the
closure of the Mongolia-China border beginning as of February 11, 2020 which resulted in the
Company being unable to export its coal products to China during the first quarter of 2020; (ii)
the export volume limitation imposed following the reopening of the Mongolia-China border on
a trial basis on March 28, 2020; and (iii) the provision for commercial arbitration of $4.6 million
recorded in connection with the Company entering into a settlement agreement with First
Concept Industrial Group Limited ( “First Concept ”) on June 7, 2020.
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• 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 beginning as of February 11, 2020 as a result of the border
closure.
On March 28, 2020, the Mongolia-China border was re-opened for coal export on a trial basis,
with a limit imposed on the total volume of coal that was permitted to be exported during this
trial period. The Company has experienced a continuous improvement in the volume of coal
exported to China since March 28, 2020.
The border closure had an adverse impact on the Company ’s sales and cash flows in the
first and second quarter of 2020. In order to mitigate the financial impact of the border
closure and preserve its working capital, the Company temporarily ceased major mining
operations (including coal mining), reduced production to only coal-blending activities and
placed approximately half of its workforce on furlough in February 2020. On August 2, 2020,
the Company resumed its mining operations. Although the export of coal from Mongolia to
China continues as of the date hereof, there can be no guarantee that the Company will be
able to continue exporting coal to China, or the border crossings would not be the subject of
additional closure as a result of COVID-19 or any variants thereof in the future. 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 will react promptly to preserve the working capital of the
Company.
In the event that the Company ’s ability to export coal into the Chinese market becomes
restricted or limited again as a result of any future restrictions which may be implemented at
the Mongolia-China border crossing, this is expected to 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.
• China Investment Corporation (together with its wholly-owned subsidiaries and
affiliates, “CIC”) convertible debenture ( “CIC Convertible Debenture ”) – 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 (collectively, the “2020 February
Deferral Amounts ”) which were due and payable to CIC on January 19, 2020 and February
19, 2020, respectively, under the deferral agreement signed on April 23, 2019 (the “2019
Deferral Agreement ”); and (ii) approximately $0.7 million of fees (the “Management Fee ”)
which was due and payable on February 14, 2020 to CIC under the amended and restated
mutual cooperation agreement dated November 19, 2009 (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 February Deferral Amounts 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 Management 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 anticipated prior to agreeing to the 2020 February Deferral Agreement
that a deferral was likely 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 Restated Cooperation Agreement, the Company and CIC agreed to
discuss in good faith a deferral of these payments on a monthly basis as they become
due.
• 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 of deferred cash interest and deferral fees which were 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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On April 10, 2020, the Company agreed with CIC (the “2020 April Deferral Agreement ”) that
the $2.0 million of deferred cash interest and deferral fees which were due and payable to
CIC on April 19, 2020 under the 2019 Deferral Agreement (the “2020 April Deferral Amount ”)
will be deferred until June 20, 2020. The terms of the 2020 April 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 April
Deferral Amount, commencing on April 19, 2020. The 2020 April Deferral Agreement became
effective on April 29, 2020, being the date on which the Company obtained the requisite
acceptance of the 2020 April Deferral Agreement from the TSX as required under applicable
TSX rules.
On May 8, 2020, the Company agreed with CIC (the “2020 May Deferral Agreement ”) that
the deferred cash interest and deferral fees of $2.0 million which were due and payable to
CIC on May 19, 2020 under the 2019 Deferral Agreement; and approximately $0.2 million of
Management Fee which were due and payable on May 15, 2020 to CIC under the Amended
and Restated Cooperation Agreement (collectively, the “2020 May Deferral Amount ”) will be
deferred until June 20, 2020. The terms of the 2020 May 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 deferred cash interest
and deferral fees commencing on May 19, 2020 and a deferral fee equal to 2.5% per annum
on the deferred Management Fee commencing on May 15, 2020. The 2020 May Deferral
Agreement became effective on June 8, 2020, being the date on which the Company obtained
the requisite acceptance of the 2020 May Deferral Agreement from the TSX as required under
applicable TSX rules.
On June 19, 2020, the Company agreed with CIC (the “2020 June Deferral Agreement ”) that
the deferred cash interest and deferral fees in the aggregate amount of approximately $74.0
million (the “2020 June Deferral Amount ”) which were due and payable to CIC on June 19,
2020 under the 2019 Deferral Agreement and the prior deferral agreements entered into
during the period between February and May 2020 will be deferred until September 14, 2020.
The terms of the 2020 June 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 June Deferral Amount commencing on
June 19, 2020. The 2020 June Deferral Agreement became effective on July 17, 2020, being
the date on which the Company obtained the requisite acceptance of the 2020 June Deferral
Agreement from the TSX as required under applicable TSX rules.
On November 19, 2020, the Company and CIC entered into an agreement (the “2020
November Deferral Agreement ”) pursuant to which CIC agreed to grant the Company a
deferral of: (i) deferred cash interest and deferral fees of approximately $75.2 million which
were due and payable to CIC on or before September 14, 2020, under the 2020 June Deferral
Agreement; (ii) semi-annual cash interest payments in the aggregate amount of $16.0 million
payable to CIC on November 19, 2020 and May 19, 2021; (iii) $4.0 million worth of payment
in kind interest ( “PIK Interest ”) shares ( “2020 November PIK Interest ”) issuable to CIC on
November 19, 2020 under the CIC Convertible Debenture; and (iv) the Management Fee
which payable to CIC on November 14, 2020, February 14, 2021, May 15, 2021, August 14,
2021 and November 14, 2021 under the Amended and Restated Cooperation Agreement
(collectively, the “2020 November Deferral Amounts ”).
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On October 29, 2020, the Company obtained an order from the British Columbia Securities
Commission (the “BCSC”), the Company ’s principal securities regulator in Canada, which
partially revoked the CTO (as defined below) to, amongst other things, permit the Company
to execute the 2020 November Deferral Agreement. The 2020 November Deferral Agreement
became effective on January 21, 2021, being the date on which the 2020 November Deferral
Agreement was approved by shareholders at the Company ’s annual and special meeting
of shareholders. As a consequence of the Company not entering into a deferral agreement
with CIC as at December 31, 2020, 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, 2020.
The principal terms of the 2020 November Deferral Agreement are as follows:
• Payment of the 2020 November Deferral Amounts will be deferred until August 31, 2023.
• CIC agreed to waive its rights arising from any default or event default under the CIC
Convertible Debenture as a result of trading in the Common Shares being halted on the
TSX beginning as of June 19, 2020 and suspended on the HKEX beginning as of August
17, 2020, in each case for a period of more than five trading days.
• As consideration for the deferral of the 2020 November Deferral Amounts, the Company
agreed to pay CIC: (i) a deferral fee equal to 6.4% per annum on the 2020 November
Deferral Amounts payable under the CIC Convertible Debenture and the 2020 June
Deferral Agreement, commencing on the date on which each such 2020 November
Deferral Amounts would otherwise have been due and payable under the CIC
Convertible Debenture or the June 2020 Deferral Agreement, as applicable; and (ii) a
deferral fee equal to 2.5% per annum on the 2020 November Deferral Amounts payable
under the Amended and Restated Cooperation Agreement, commencing on the date
on which the Management Fee would otherwise have been due and payable under the
Amended and Restated Cooperation Agreement.
• The 2020 November Deferral Agreement does not contemplate a fixed repayment
schedule for the 2020 November Deferral Amounts and related deferral fees. Instead,
the Company and CIC would agree to assess in good faith the Company ’s financial
condition and working capital position on a monthly basis and determine the amount,
if any, of the 2020 November Deferral Amounts and related deferral fees that the
Company is able to repay under the CIC Convertible Debenture, the June 2020 Deferral
Agreement or the Amended and Restated Cooperation Agreement, having regard to the
working capital requirements of the Company ’s operations and business at such time
and with the view of ensuring that the Company ’s operations and business would not be
materially prejudiced as a result of any repayment.
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• Commencing as of November 19, 2020 and until such time as the November 2020 PIK
Interest is fully repaid, CIC reserves the right to require the Company to pay and satisfy
the amount of the November 2020 PIK Interest, either in full or in part, by way of issuing
and delivering PIK interest shares in accordance with the CIC Convertible Debenture
provided that, on the date of issuance of such shares, the Common Shares are listed
and trading on at least one stock exchange.
• If at any time before the 2020 November Deferral Amounts and related deferral fees are
fully repaid, the Company proposes to appoint, replace or terminate one or more of its
Chief Executive Officer, its Chief Financial Officer or any other senior executive(s) in
charge of its principal business function or its principal subsidiary, then the Company
must first consult with, and obtain written consent from CIC prior to effecting such
appointment, replacement or termination.
• Settlement with First Concept – On June 7, 2020, SouthGobi Sands LLC ( “SGS”), a
subsidiary of the Company, entered into a settlement agreement with First Concept, pursuant
to which SGS agreed to pay to First Concept a settlement sum in the amount of $8.0 million
in full and final settlement of any and all claims which First Concept may have against SGS
in relation to Arbitration Award (as defined below), the subject matter of the Arbitration Award
including any claims for interests and costs and the fees and expenses of the Arbitration
Award, and any and all enforcement proceedings and applications in any jurisdictions, and
in relation to the deed of settlement with First Concept (the “Full Settlement Sum ”). The Full
Settlement Sum was fully satisfied by the Company in June 2020 and the outstanding payable
to First Concept as of the date hereof is $nil.
• Cease Trade Order and Halt Trading on TSX – On June 19, 2020, the BCSC issued a
general “failure to file ” cease trade order ( “CTO”), to prohibit the trading by any person of any
securities of the Company in Canada. Trading in the Common Shares on the TSX was halted
as a result of the CTO. The CTO was issued as a result of the Company ’s failure to file: (i)
its annual consolidated financial statements for the year ended December 31, 2019 and the
accompanying Management ’s Discussion and Analysis of Financial Condition and Result of
Operations ( “MD&A”); (ii) its Annual Information Form for the year ended December 31, 2019;
and (iii) its condensed consolidated interim financial statements for the three-month period
ended March 31, 2020 and accompanying MD&A, in each case prior to the filing deadline of
June 15, 2020.
On February 5, 2021, the BCSC and the Ontario Securities Commission granted a full
revocation of the CTO. Trading in the Common Shares resumed on the TSX on February 8,
2021.
• Suspension of Trading on HKEX – At the request of the Company, trading in the Common
Shares on the HKEX was suspended with effect as of August 17, 2020 pending the publication
of the audited annual results of the Company for the year ended December 31, 2019.
On February 9, 2021, the Company confirmed that it has fulfilled all the conditions stated
in the resumption guidance to the satisfaction of the HKEX. Trading in the Common Shares
resumed on the HKEX on February 10, 2021.
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• TSX Delisting Review – On September 11, 2020, the TSX notified the Company that it is
reviewing the eligibility for continued listing of the Common Shares on the TSX pursuant to the
TSX’s Remedial Review Process ( “TSX Delisting Review ”). On December 16, 2020, the TSX
accepted the Company ’s request for a 60 day extension of the TSX Delisting Review process
and the Company has been granted until February 16, 2021 to remedy the following delisting
criteria, as well as any other delisting criteria that become applicable during the Remedial
Review Process: (i) financial condition and/or operating results; (ii) adequate working capital
and appropriate capital structure; and (iii) disclosure issues.
On February 15, 2021, the Company announced that the TSX Continued Listing Committee
determined that the Company satisfies the TSX ’s applicable requirements for continued
listing.
• Restoration of Soumber Deposit Mining Licenses – On August 26, 2019, SGS received a
letter (the “Notice Letter ”) from the Mineral Resource Authority of Mongolia ( “MRAM”) notifying
that the Company ’s three mining licenses (MV-016869, MV-020436 and MV-020451) (the
“Soumber Mining Licenses ”) for the Soumber Deposit have been terminated by the Head of
Cadastre Division of MRAM effective as of August 21, 2019.
On March 2, 2021, SGS received a notice from the Mongolian governmental authority that the
Soumber Mining Licenses have been reinstated effective as of March 2, 2021.
• Changes in Management and Directors
Mr. Wen Yao : Mr. Yao resigned as a non-executive director on March 11, 2020.
Mr. Jianmin Bao : Mr. Bao was appointed as a non-executive director on March 18, 2020.
Mr. Shougao Wang : Mr. Wang resigned as Chief Executive Officer and an executive director
on March 31, 2020.
Mr. Dalanguerban : Mr. Dalanguerban was appointed as Chief Executive Officer and an
executive director on March 31, 2020.
Mr. Xiaoxiao Li : Mr. Li resigned as a non-executive director on November 13, 2020.
Ms. Ka Lee Ku : Ms. Ku was appointed as a non-executive director on December 9, 2020.
Mr. Weiguo Zhang : Mr. Zhang resigned as Chief Financial Officer on February 10, 2021.
Mr. Alan Ho : Mr. Ho was appointed as acting Chief Financial Officer on February 10, 2021.
Mr. Aiming Guo : Mr. Guo resigned as Chief Operating Officer on February 10, 2021.
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Mr. Tao Zhang : Mr. Zhang has been re-designated from Vice President to Vice President of
Sales on February 10, 2021.
Mr. Munkhbat Chuluun : Mr. Chuluun was appointed as Vice President of Public Relations on
February 10, 2021.
• Going Concern – Several adverse conditions and material uncertainties relating to the
Company cast significant doubt upon the going concern assumption which includes the
deficiencies in assets and working capital.
Refer to section “Liquidity and Capital Resources ” for details.