SouthGobi Resources announces second quarter 2018 financial and operating results
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RESOURCES August 14, 2018
SouthGobi Resources announces second quarter 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 three and six months
ended June 30, 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 three months ended June 30, 2018
and the subsequent period up to August 14, 2018 are as follows:
• Operating Results – As a result of improved market conditions and prices for coal
in China as well as a higher portion of sales were made through our Inner Mongolia
subsidiary, the Company experienced an increase in the average selling price of coal from
$25.2 per tonne in the second quarter of 2017 to $32.8 per tonne in the second quarter
of 2018. However, the volume of coal sales has decreased from 1.5 million tonnes in the
second quarter of 2017 to 0.6 million tonnes in the second quarter of 2018 as a result of
the delay in the customs clearance process at the Ceke border which the Company has
been experiencing since July 2017 and a certain portion of the Company’s coal products
failing to meet the quality standards established under Chinese import regulations.
• Financial Results – The Company recorded a gross profit of $2.3 million in the second
quarter of 2018 compared to $7.3 million in the second quarter of 2017 while a $19.8
million loss from operations was recorded in the second quarter of 2018 compared to a
$0.9 million profit from operations in the second quarter of 2017. The overall financial
results have worsened when compared to the second quarter of 2017, which was
principally attributable to the diseconomies of scale driven by decreased sales volume,
the recognition of a provision for doubtful notes receivables of $7.7 million and the
recognition of a provision for doubtful trade and other receivables of $8.2 million during
the quarter. The recognition of a provision for doubtful notes receivables and trade and
other receivables follows after a credit reassessment exercise carried out during the
second quarter of 2018 which concluded with the Company only continuing coal deliveries
to customers with above-standard credit ratings in order to preserve the capital of the
Company and discontinuing coal deliveries to certain other customers. The provision
recognized relates to receivables from those customers that the Company has ceased
coal shipments to. The Company is investigating the matter and exploring different
options to retrieve the balance of these doubtful trade and notes receivables.
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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”). In addition, pursuant to the
terms of the CIC Convertible Debenture, the Company was required to pay $8.1 million
and $7.9 million of anniversary cash interest to CIC on November 19, 2017 and May 19,
2018, respectively (the “Anniversary Interest Payment” and together with the June 2017
Deferral Agreement Payment, the “November 19 th and May 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.
As of the date of this press release, the Company: (i) has neither paid the November
19th and May 19 th 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 discussion with CIC for a deferral of the November 19 th and May 19 th
Payments and the November 2017 PIK Interest; 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 June 30, 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 June 30, 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.
• Changes in Management and Directors
Mr. Zhiwei Chen: Mr. Chen was appointed as a non-executive director on April 13, 2018.
Mr. Xiaoxiao Li: Mr. Li was appointed as a non-executive director on April 13, 2018.
Mr. Shougao Wang: Mr. Wang was appointed as Chief Executive Officer on June 1,
2018 and was subsequently appointed as an executive director on July 3, 2018.
Mr. Weiguo Zhang: Mr. Zhang was appointed as Chief Financial Officer on June 1, 2018.
Mr. Aiming Guo: Mr. Guo was appointed as Chief Operating Officer on June 1, 2018.
Mr. Bing Wang: Mr. Wang stepped down as interim Chief Executive Officer and returned
to his prior position as General Manger, Sales and Marketing of the Company on June
1, 2018.
Mr. Yulan Guo: Mr. Guo stepped down as Chief Financial Officer of the Company on
June 1, 2018. On June 28, 2018, Mr. Guo did not stand for re-election at the Company’s
annual general meeting of shareholders (the “AGM”) and ceased to be a non-executive
director.
Mr. Aminbuhe: On June 28, 2018, Mr. Aminbuhe did not stand for re-election at the
AGM and ceased to be a non-executive director.
Mr. Zhu Liu: On June 28, 2018, Mr. Liu did not stand for re-election at the AGM and
ceased to be an Independent non-executive director.
Ms. Lan Cheng: On June 28, 2018, Ms. Cheng was elected as a non-executive director
of the Company at the AGM.
Mr. Tao Zhang: Mr. Zhang was appointed as a vice president of the Company on July
3, 2018.
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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 washing certain
grades of coal 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 construction of
the wash plant was substantially completed in 2017, however commencement of washing
has been delayed to the fourth 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 June 30, 2019, 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 condensed consolidated interim 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, 2018, the Company had $3.4 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,
2018 2017 2018 2017
Sales Volumes, Prices and Costs
Premium semi-soft coking coal
Coal sales (millions of tonnes) 0.07 0.18 0.10 0.37
Average realized selling price
(per tonne) (i) $ 59.98 $ 45.67 $ 62.54 $ 45.64
Standard semi-soft coking coal/premium
thermal coal
Coal sales (millions of tonnes) 0.19 0.79 0.60 1.43
Average realized selling price
(per tonne) (i) $ 33.80 $ 26.69 $ 42.32 $ 25.20
Standard thermal coal
Coal sales (millions of tonnes) 0.32 0.51 0.44 0.79
Average realized selling price
(per tonne) (i) $ 26.32 $ 15.79 $ 26.07 $ 14.85
Total
Coal sales (millions of tonnes) 0.58 1.48 1.14 2.59
Average realized selling price
(per tonne) (i) $ 32.81 $ 25.24 $ 37.83 $ 24.93
Raw coal production (millions of tonnes) 0.98 1.89 1.36 3.40
Cost of sales of product sold (per tonne) $ 26.00 $ 18.50 $ 27.71 $ 19.75
Direct cash costs of product sold
(per tonne) (ii) $ 10.12 $ 7.84 $ 13.43 $ 8.52
Mine administration cash costs of
product sold (per tonne) (ii) $ 1.00 $ 2.22 $ 1.12 $ 1.70
Total cash costs of product sold
(per tonne) (ii) $ 11.12 $ 10.06 $ 14.55 $ 10.22
Other Operational Data
Production waste material moved
(millions of bank cubic meters) 5.18 6.36 8.06 9.66
Strip ratio (bank cubic meters of waste
material per tonne of coal produced) 5.26 3.37 5.90 2.84
Lost time injury frequency rate (iii) 0.06 0.18 0.10 0.15
(i) Average realized selling price is presented before deduction of royalties.
(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.
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Overview of Operational Data
For the second quarter of 2018, the Company had a lost time injury frequency rate of 0.06
per 200,000 man hours based on a rolling 12 month average.
For the three months ended June 30, 2018
As a result of improved market conditions and prices for coal in China as well as a higher
portion of sales were made through our Inner Mongolia subsidiary, the Company experienced
an increase in the average selling price of coal from $25.2 per tonne in the second quarter of
2017 to $32.8 per tonne in the second quarter of 2018. The product mix for the second quarter
of 2018 consisted of approximately 12% of premium semi-soft coking coal, 33% of standard
semi-soft coking coal/premium thermal coal and 55% of standard thermal coal compared to
approximately 12% of premium semi-soft coking coal, 53% of standard semi-soft coking coal/
premium thermal coal and 35% of standard thermal coal in the second quarter of 2017.
The Company sold 0.6 million tonnes for the second quarter of 2018 as compared to 1.5
million tonnes for the second quarter of 2017, as a result of the delay in the customs clearance
process at the Ceke border which the Company has been experiencing since July 2017 and a
certain portion of the Company’s coal products failing to meet the quality standards established
under Chinese import regulations. The Company’s production in the second quarter of 2018
was lower than the second quarter of 2017 as a result of pacing the production to meet the
expected sales, yielding 1.0 million tonnes for the second quarter of 2018 as compared to
1.9 million tonnes for the second quarter of 2017.
The Company’s unit cost of sales of product sold increased to $26.0 per tonne in the second
quarter of 2018 from $18.5 per tonne in the second quarter of 2017. The increase was mainly
driven by decreased sales volume and the related diseconomies of scale.
For the six months ended June 30, 2018
Due to the delays experienced in the custom clearance process at the Ceke border and a
certain portion of the Company’s coal products failing to meet the quality standards established
under Chinese import regulations, the Company sold 1.1 million tonnes for the first six months
of 2018 as compared to 2.6 million tonnes for the first six months of 2017.
The average selling price increased from $24.9 per tonne for the first six months of 2017
to $37.8 per tonne for the first six months of 2018, which was mainly due to the improved
market conditions and prices for coal in China as well as a higher portion of sales were made
through our Inner Mongolia subsidiary.
The Company’s production in the first six months of 2018 was lower than the first six months
of 2017 as a result of pacing the production to meet the expected sales, yielding 1.4 million
tonnes for the six months of 2018 as compared to 3.4 million tonnes for the first six months
of 2017.
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The Company’s unit cost of sales of product sold increased to $27.7 per tonne in the first
six months of 2018 from $19.8 per tonne in the first six months of 2017. The increase was
principally attributable to the diseconomies of scale driven by decreased sales volume.
Summary of Financial Results
$ in thousands, except per share
information
Three months ended
June 30,
Six months ended
June 30,
2018 2017 2018 2017
Revenue (i),(ii) $ 17,377 $ 34,665 $ 40,600 $ 59,919
Cost of sales (ii) (15,078) (27,385) (31,585) (51,144)
Gross profit excluding idled mine asset
costs 6,079 9,445 16,329 14,159
Gross profit including idled mine asset
costs 2,299 7,280 9,015 8,775
Other operating expenses (18,091) (4,045) (19,429) (7,253)
Administration expenses (3,856) (2,234) (6,233) (4,619)
Evaluation and exploration expenses (156) (144) (280) (173)
Profit/(loss) from operations (19,804) 857 (16,927) (3,270)
Finance costs (5,958) (5,494) (11,932) (11,169)
Finance income 140 50 366 14
Share of earnings of a joint venture 628 388 968 654
Income tax expense (1,609) (2,714) (2,538) (2,759)
Net loss (26,603) (6,913) (30,063) (16,530)
Basic and diluted loss per share $ (0.10) $ (0.03) $ (0.11) $ (0.06)
(i) Revenue is presented after the deduction of royalties.
(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.
Overview of Financial Results
For the three months ended June 30, 2018
The Company recorded a $19.8 million loss from operations in the second quarter of 2018
compared to a $0.9 million profit from operations in the second quarter of 2017. The overall
financial results have worsened when compared to the second quarter of 2017, which was
principally attributable to the diseconomies of scale driven by decreased sales, the recognition
of a provision for doubtful notes receivables of $7.7 million and the recognition of a provision
for doubtful trade and other receivables of $8.2 million during the quarter. The recognition of a
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provision for doubtful notes receivables and trade and other receivables follows after a credit
reassessment exercise carried out during the second quarter of 2018 which concluded with
the Company only continuing coal deliveries to customers with above-standard credit ratings
in order to preserve the capital of the Company and discontinuing coal deliveries to certain
other customers. The provision recognized relates to receivables from those customers that
the Company has ceased coal shipments to. The Company is investigating the matter and
exploring different options to retrieve the balance of these doubtful trade and notes receivables.
Revenue was $17.4 million in the second quarter of 2018 compared to $34.7 million in the
second quarter of 2017. The Company’s revenue is presented after deduction of royalties.
The Company’s effective royalty rate for the second quarter of 2018, based on the Company’s
average realized selling price of $32.8 per tonne, was 9.9% or $3.2 per tonne compared to
5.5% or $1.4 per tonne based on the average realized selling price of $25.2 per tonne in the
second quarter of 2017.
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, customs 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. See the section entitled “Risk
Factors – Company’s Projects in Mongolia” in the Company’s most recently filed Annual
Information Form for the year ended December 31, 2017, a copy of which is available under
the Company’s profile on SEDAR at www.sedar.com.
Cost of sales was $15.1 million in the second quarter of 2018 compared to $27.4 million in the
second quarter of 2017. The decrease in cost of sales was mainly due to the decreased sales
during the quarter. 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
measure” for further analysis) during the quarter.