SouthGobi Resources announces second quarter 2017 financial and operating results
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August 14, 2017
SouthGobi Resources announces second quarter 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 three and six months
ended June 30, 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 three months ended June 30, 2017
and the subsequent period to August 14, 2017 are as follows:
• Operating Results – As a result of improved market conditions and prices for coal in
the People’s Republic of China (“China”), the Company’s operating results for the quarter
improved with an increase in the average selling price of coal as well as the volume of
coal sales, as compared to the second quarter of 2016. The Company sold 1.48 million
tonnes of coal product during the second quarter of 2017 as compared to 0.82 million
tonnes for the second quarter of 2016. The average realized selling price increased from
$13.65 per tonne for the second quarter of 2016 to $25.24 per tonne for the second
quarter of 2017, which was mainly a result of improved market conditions as well as an
improved product mix.
• Financial Results – The Company recorded a gross profit of $7.3 million during the
quarter compared to a gross loss of $12.7 million in the second quarter of 2016. The
Company recorded a $0.9 million profit from operations during the second quarter of
2017, as compared to a $13.8 million loss from operations in the second quarter of
2016. Revenue was $34.7 million in the second quarter of 2017 as compared to $10.4
million in the second quarter of 2016. The operations during the second quarter of 2017
improved over the comparative 2016 quarter given the improved market conditions in
China.
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• China Investment Corporation (“CIC”) Convertible Debenture (“CIC Convertible
Debenture”) – On June 12, 2017, the Company executed a deferral agreement (the
“June 2017 Deferral Agreement”) with CIC in relation to a revised repayment schedule
on the $22.3 million of cash interest and associated costs originally due on May 19,
2017 (the “May 2017 Interest Payable”). The key repayment terms of the June 2017
Deferral Agreement are: (i) the Company is required to repay on average $2.2 million
of the cash interest and associated costs monthly during the period from May 2017 to
October 2017; and (ii) the Company is required to repay $9.7 million of cash interest
and associated costs on November 19, 2017. The Company will pay a deferral fee at a
rate of 6.4% per annum in consideration of the deferral.
• Settlement of Lawsuit Notice from a Former Fuel Supplier – On January 20, 2017,
SouthGobi Sands LLC (“SGS”), a subsidiary of the Company, 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 rights to receive
payment from the Company for the outstanding balance of approximately $6.3 million
owing under the settlement agreement (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 shall pay interest on the Outstanding
Amount which shall accrue at a monthly rate of 1.8% and will be settled on a monthly
basis. The Company is required to repay on average $1.3 million monthly during the
period from July 2017 to November 2017.
To date, the Company has made all payments due under the Triparty Settlement
Agreement.
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• Settlement of Trade Receivable – During the year ended December 31, 2016, the
Company entered into a settlement agreement with one of its major customers (the
“Customer”) pursuant to which 200 residential units and 40 parking spaces (collectively,
the “240 Units”) located in Ulaanbaatar, Mongolia, were transferred to the Company as
partial consideration for settling outstanding trade receivables in the amount of $12.0
million owing by the Customer to the Company, with the balance of the receivable,
totaling $7.5 million, payable in cash by the Customer to the Company. As of the date
of this announcement, the entirety of the $7.5 million balance has been repaid by, and
collected from, the Customer.
• Changes in 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. Aminbuhe: Mr. Aminbuhe was appointed as Chairman of the Board immediately
following the Company’s Annual General Meeting (the “AGM”) held 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 on June 30, 2017.
Mr. Joseph Belan: Mr. Belan did not stand for the re-election at the AGM and ceased
to be an independent non-executive director on June 30, 2017.
Mr. Huiyi Wang: Mr. Wang resigned as a non-executive director on July 24, 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 – As at the date hereof, the Company has initiated a plan to change
the existing product mix to higher value and higher margin outputs by washing certain
grades of coal commencing in the second half of 2017 in order to produce more premium
semi-soft coking coal 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 Company has also completed a new mine plan, which 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 involve the need for a significant level of stripping activities over
the next two years and require certain capital expenditures to achieve the designed
production outputs. Such expenditures will require the Company to seek additional
financing in the form of finance leases, debt or equity. The Company has entered into
an agreement for a finance lease on the new wash plant facility but will need financing
to complete the thermal coal processing facilities.
There is no guarantee that the Company will be able to successfully secure additional
sources of financing. This could result in adjustments to the amounts and classifications
of assets and liabilities in the Company’s condensed 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” for details. As at August 14, 2017, the
Company had $2.5 million of cash.
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OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS
Summary of Operational Data
Three months ended
June 30,
Six months ended
June 30,
2017 2016 2017 2016
Sales Volumes, Prices and Costs
Premium semi-soft coking coal
Coal sales (millions of tonnes) 0.18 – 0.37 0.06
Average realized selling price
(per tonne) (i) $ 45.67 $ – $ 45.64 $ 21.38
Standard semi-soft coking coal
Coal sales (millions of tonnes) 0.79 0.52 1.43 1.10
Average realized selling price
(per tonne) (i) $ 26.69 $ 16.27 $ 25.20 $ 17.40
Thermal coal
Coal sales (millions of tonnes) 0.51 0.30 0.79 0.54
Average realized selling price
(per tonne) (i) $ 15.79 $ 9.17 $ 14.85 $ 9.18
Total
Coal sales (millions of tonnes) 1.48 0.82 2.59 1.70
Average realized selling price
(per tonne) (i) $ 25.24 $ 13.65 $ 24.93 $ 14.92
Raw coal production (millions of tonnes) 1.89 0.67 3.40 1.04
Cost of sales of product sold (per tonne) $ 18.50 $ 28.01 $ 19.75 $ 24.71
Direct cash costs of product sold
(per tonne) (ii) $ 7.84 $ 12.47 $ 8.52 $ 10.17
Mine administration cash costs of
product sold (per tonne) (ii) $ 2.22 $ 2.32 $ 1.70 $ 1.76
Total cash costs of product sold
(per tonne) (ii) $ 10.06 $ 14.79 $ 10.22 $ 11.93
Other Operational Data
Production waste material moved
(millions of bank cubic meters) 6.36 1.82 9.66 2.54
Strip ratio (bank cubic meters of waste
material per tonne of coal produced) 3.37 2.71 2.84 2.43
Lost time injury frequency rate (iii) 0.04 0.00 0.03 0.00
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(i) Average realized selling price is presented before deduction of royalties and selling fees.
(ii) A Non-International Financial Reporting Standards (“IFRS”) financial measure, which does not
have a standardized meaning according to IFRS. 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.
Overview of Operational Data
For the second quarter of 2017, the Company had a lost time injury frequency rate of 0.04
per 200,000 man hours based on a rolling 12 month average.
For the three months ended June 30, 2017
As a result of improved market conditions and prices for coal in China, the Company’s
operational results for the quarter improved with an increase in the average selling price of
coal as well as the volume of coal sales, as compared to the second quarter of 2016.
The Company sold 1.48 million tonnes of coal product during the second quarter of 2017 as
compared to 0.82 million tonnes for the second quarter of 2016. The average realized selling
price increased from $13.65 per tonne for the second quarter of 2016 to $25.24 per tonne
for the second quarter of 2017, which was mainly a result of improved market conditions as
well as improved product mix. The product mix for the second quarter of 2017 consisted of
approximately 12% of premium semi-soft coking coal, 53% of standard semi-soft coking coal
and 35% of thermal coal compared to approximately 63% of standard semi-soft coking coal
and 37% of thermal coal for the second quarter of 2016.
The Company also improved the pacing of production to meet demand, such that production
was 1.89 million tonnes for the second quarter of 2017 as compared to 0.67 million tonnes
for the second quarter of 2016.
The Company’s unit cost of sales of product sold decreased to $18.50 per tonne in the
second quarter of 2017 from $28.01 per tonne in the second quarter of 2016. The decrease
was mainly driven by economies of scale resulted from the increased productions and sales.
For the six months ended June 30, 2017
Given the improved market conditions and prices for coal in China, the Company experienced
an increase in the tonnage of coal product sold from 1.70 million tonnes during the first six
months of 2016 to 2.59 million tonnes for the first six months of 2017. The average selling
price also increased from $14.92 per tonne for the first six months of 2016 to $24.93 per tonne
for the first six months of 2017, which was mainly a result of improved market conditions as
well as improved product mix.
The production in the first six months of 2017 was higher than the first six months of 2016
as a result of pacing production with the current and expected demand.
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The Company’s unit cost of sales of product sold decreased to $19.75 per tonne in the first
six months of 2017 from $24.71 per tonne in the first six months of 2016. The decrease was
mainly driven by economies of scale resulted from the increased productions and sales.
Summary of Financial Results
Three months ended
June 30,
Six months ended
June 30,$ in thousands, except per share
information 2017 2016 2017 2016
Revenue (i),(ii) $ 34,665 $ 10,361 $ 59,919 $ 23,088
Cost of sales (ii) (27,385) (23,105) (51,144) (42,185)
Gross profit/(loss) excluding idled mine
asset costs 9,445 (9,926) 14,159 (10,975)
Gross profit/(loss) including idled mine
asset costs 7,280 (12,744) 8,775 (19,097)
Other operating income/(expenses) (4,045) 812 (7,253) (899)
Administration expenses (2,234) (1,826) (4,619) (3,468)
Evaluation and exploration expenses (144) (52) (173) (99)
Profit/(loss) from operations 857 (13,810) (3,270) (23,563)
Finance costs (5,494) (5,377) (11,169) (10,845)
Finance income 50 324 14 296
Share of earnings of a joint venture 388 256 654 339
Income tax expense (2,714) (23) (2,759) (258)
Net loss (6,913) (18,630) (16,530) (34,031)
Basic and diluted loss per share $ (0.03) $ (0.07) $ (0.06) $ (0.13)
(i) Revenue is presented after the deduction of royalties and selling fees.
(ii) Revenue and cost of sales relate to the Company’s Ovoot Tolgoi Mine within the Coal Division
operating segment. Refer to note 3 of the condensed consolidated financial statements for further
analysis regarding the Company’s reportable operating segments.
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Overview of Financial Results
For the three months ended June 30, 2017
The Company recorded a gross profit of $7.3 million during the quarter compared to a gross
loss of $12.7 million in the second quarter of 2016. The Company recorded a $0.9 million
profit from operations during the quarter compared to a $13.8 million loss from operations in
the second quarter of 2016. The operations for the three months ended June 30, 2017 were
positively impacted by improved market conditions resulting in higher sales volumes and a
better sales mix of the Company’s products as well as the improved coal prices in China.
The Company earned revenue of $34.7 million in the second quarter of 2017 compared to
$10.4 million in the second quarter of 2016.
The Company’s revenue is presented after deduction of royalties and selling fees. The
Company’s effective royalty rate for the second quarter of 2017, based on the Company’s
average realized selling price of $25.24 per tonne, was 5.5% or $1.38 per tonne compared
to 6.9% or $0.95 per tonne based on the average realized selling price of $13.65 per tonne
in the second quarter of 2016.
Royalty regime in Mongolia
The royalty regime in Mongolia is evolving and has been subject to change since 2012.
On February 1, 2016, the Government of Mongolia issued a resolution in connection with the
royalty regime. From February 1, 2016 onwards, royalties are to be calculated based on the
actual contract price in which transportation cost to the Mongolia border should have been
included. If such transportation cost was not included in the contract, the relevant transportation
costs, custom documentation fees, insurance and loading costs should be estimated for the
calculation of royalties. In the event that the calculated sales price as described above differs
from the contract sales price of other entities in Mongolia (same quality of coal and same
border crossing) by more than 10%, the calculated sales price will be deemed to be “non-
market” under Mongolian tax law and the royalty will then be calculated based on a reference
price as determined by the Government of Mongolia.
Cost of sales was $27.4 million in the second quarter of 2017 compared to $23.1 million in
the second quarter of 2016, the increase was mainly due to the higher sales volume. Cost
of sales comprises operating expenses, share-based compensation expense, equipment
depreciation, depletion of mineral properties, coal stockpile inventory impairments and idled
mine asset costs. Operating expenses in cost of sales reflect the total cash costs of product
sold (a non-IFRS financial measure, see section “Non-IFRS Financial Measures” for further
analysis) during the period.