SouthGobi Resources announces second quarter 2019 financial and operating results
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RESOURCES August 13, 2019
SouthGobi Resources announces second quarter 2019 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 three and six months ended June 30, 2019. 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, 2019
and the subsequent period up to August 13, 2019 are as follows:
• Operating Results – The Company increased sales volume to 0.9 million tonnes for the
second quarter of 2019 from 0.6 million tonnes for the second quarter of 2018. Given
the improvement of the product mix, the average realized selling price increased from
$32.8 per tonne in the second quarter of 2018 to $36.8 per tonne in the second quarter
of 2019.
• Financial Results – The Company recorded a gross profit of $10.4 million in the second
quarter of 2019 compared to $2.3 million in the second quarter of 2018, while a $5.2
million profit from operations was recorded in the second quarter of 2019 compared
to a $18.2 million loss from operations in the second quarter of 2018 (restated). The
improvement of overall financial results were principally attributable to lower unit cost of
sales of products sold during the quarter and the provision for doubtful trade and other
receivables of $14.8 million during the second quarter of 2018.
• China Investment Corporation (“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 the deferral
agreement dated 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.
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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 the common shares (the “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, 2009 between SouthGobi
Sands LLC (“SGS”), a subsidiary of the Company, and Fullbloom Investment Corporation
(“Fullbloom”), an affiliate of CIC, be amended and restated (the “Amended and Restated
Cooperation Agreement”) to clarify the manner in which the service fee payable to
Fullbloom under the Cooperation Agreement is calculated, with effect as of January
1, 2017. Specifically, the service fee under the Amended and Restated Cooperation
Agreement will be 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 payment of the additional
service fee payable to Fullbloom as a result of the Amended and Restated Cooperation
Agreement, the Company agreed to pay to Fullbloom a deferral fee at the rate of 2.5%
on the outstanding service fees. Pursuant to the Amended and Restated Cooperation
Agreement, the Company agreed to pay Fullbloom the total outstanding service 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 Fullbloom 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.
The Company also announced that it intends to discuss a potential debt restructuring
plan with respect to amounts owing to Land Breeze II S.a.r.l., a wholly-owned subsidiary
of 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.
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• Notice of Arbitration – As of the date hereof, the Company has not paid the November
2018 and January 2019 monthly payments due under a deed of settlement (the “Settlement
Deed”). On March 5, 2019, SGS received a notice from First Concept Industrial Group
Limited (“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, 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 June 30, 2019, the outstanding amount payable to First Concept amounted to $7.7
million (December 31, 2018: $12.5 million).
• Key Findings of Formal Investigation – 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, Inner Mongolia SouthGobi Energy Co. Ltd. (“IMSGE”), a
subsidiary of the Company, 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 Company’s board of directors (the “Board”) expanded the mandate of its special
committee of independent non-executive directors (the “Special Committee”), which
was previously established to initiate a formal internal investigation into certain legal
charges against Mr. Aminbuhe (the Company’s former Chairman and Chief Executive
Officer), 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.
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 Management’s Discussion and Analysis of Financial Condition
and Results of Operations (“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 .
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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 ended 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 available 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. With respect to the three and six months period
ended June 30, 2018, the net effect of the Prior Restatement was a decrease in the
net comprehensive loss of $1.6 million and $2.0 million for the respective periods. A
summary of the requisite adjustments on the financial statements for the three and six
months period ended June 30, 2018 is set forth in the table below:
$ in thousands
Statement of comprehensive income extract
Three months
ended
June 30, 2018
Loss decrease/
(increase)
Three months
ended
June 30, 2018
(Restated)
(As previously
reported)
Other operating expenses $ (18,091) $ 1,579 $ (16,512)
Finance income 140 (132) 8
Net loss attributable to equity holders of the
Company $ (26,603) $ 1,447 $ (25,156)
Other comprehensive income for the period 898 135 1,033
Net comprehensive loss attributable to equity
holders of the Company $ (25,705) $ 1,582 $ (24,123)
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$ in thousands
Statement of comprehensive income extract
Six months
ended
June 30, 2018
Loss decrease/
(increase)
Six months
ended
June 30, 2018
(Restated)
(As previously
reported)
Other operating expenses $ (19,429) $ 2,160 $ (17,269)
Finance income 366 (290) 76
Net loss attributable to equity holders of the
Company $ (30,063) $ 1,870 $ (28,193)
Other comprehensive loss for the period (2,430) 135 (2,295)
Net comprehensive loss attributable to equity
holders of the Company $ (32,493) $ 2,005 $ (30,488)
• 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.
Trading in the Common Shares on the TSX and the HKEX resumed on May 30, 2019
and May 31, 2019, respectively.
• Changes in Management and 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 Liu : On May 30, 2019, Mr. Liu was elected as a non-executive director of the
Company at the AGM.
• Going Concern – In 2016, the Company started its program to build a coal washing plant
to upgrade the low quality fractions of its run-of-mine coals to higher value and higher
margin products. The commissioning of the wash plant at the Ovoot Tolgoi mine was
completed during the second quarter of 2019. 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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The current operation plan contemplates significantly higher volumes of production in
order to achieve the Company’s revenue and cash flow targets. Such plans will require
a significant level of capital expenditure in waste rock stripping in 2019 and 2020. 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 successfully
execute the programs mentioned above and to secure other sources of financing. In
addition, the current import restrictions on F-grade coal by Chinese authorities will
further 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 if the Company fails to execute the aforementioned programs, or is unable to secure
additional capital financing, or otherwise restructure or refinance its business in order to
address its cash requirements through June 30, 2020, then the Company is unlikely to
have sufficient 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 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” of this press release for details. As at August 13, 2019, the Company had
$1.6 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,
2019 2018 2019 2018
Sales Volumes, Prices and Costs
Premium semi-soft coking coal
Coal sales (millions of tonnes) 0.12 0.07 0.23 0.10
Average realized selling price (per tonne) $ 32.72 $ 59.98 $ 39.72 $ 62.54
Standard semi-soft coking coal/premium thermal
coal
Coal sales (millions of tonnes) 0.59 0.19 1.44 0.60
Average realized selling price (per tonne) $ 35.67 $ 33.80 $ 34.29 $ 42.32
Standard thermal coal
Coal sales (millions of tonnes) – 0.32 0.09 0.44
Average realized selling price (per tonne) $ – $ 26.32 $ 33.92 $ 26.07
Washed coal
Coal sales (millions of tonnes) 0.17 – 0.18 –
Average realized selling price (per tonne) $ 44.20 $ – $ 44.20 $ –
Total
Coal sales (millions of tonnes) 0.88 0.58 1.94 1.14
Average realized selling price (per tonne) $ 36.80 $ 32.81 $ 35.77 $ 37.83
Raw coal production
(millions of tonnes) 1.33 0.98 2.36 1.36
Cost of sales of product sold
(per tonne) $ 25.04 $ 29.27 $ 23.42 $ 30.44
Direct cash costs of product sold (per tonne) (i) $ 17.18 $ 10.12 $ 13.71 $ 13.43
Mine administration cash costs of product sold
(per tonne) (i) $ 1.39 $ 1.00 $ 1.40 $ 1.12
Total cash costs of product sold (per tonne) (i) $ 18.57 $ 11.12 $ 15.11 $ 14.55
Other Operational Data
Production waste material moved (millions of
bank cubic meters) 5.34 5.18 10.25 8.06
Strip ratio (bank cubic meters of waste material
per tonne of coal produced) 4.01 5.26 4.34 5.90
Lost time injury frequency rate (ii) 0.06 0.06 0.03 0.10
(i) 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.
(ii) Per 200,000 man hours and calculated based on a rolling 12 month average.
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Overview of Operational Data
For the three months ended June 30, 2019
For both the three months ended June 30, 2019 and June 30, 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.
As a result of the improved product mix, the average realized selling price increased from $32.8
per tonne in the second quarter of 2018 to $36.8 per tonne in the second quarter of 2019.
The product mix for the second quarter of 2019 consisted of approximately 14% of premium
semi-soft coking coal, 67% of standard semi-soft coking coal and 19% of washed coal
compared to approximately 12% of premium semi-soft coking coal, 33% of standard semi-soft
coking coal and 55% of thermal coal in the second quarter of 2018.
The Company sold 0.9 million tonnes for the second quarter of 2019 as compared to 0.6
million tonnes for the second quarter of 2018.
The Company’s production in the second quarter of 2019 was higher than the second quarter
of 2018 as a result of pacing production to meet the expected sales as well as a lower strip
ratio achieved for the quarter, yielding 1.3 million tonnes for the second quarter of 2019 as
compared to 1.0 million tonnes for the second quarter of 2018.
The Company’s unit cost of sales of product sold decreased to $25.0 per tonne in the second
quarter of 2019 from $29.3 per tonne in the second quarter of 2018. The decrease was mainly
driven by increased sales and the related economies of scale.
For the six months ended June 30, 2019
The Company sold 1.9 million tonnes for the first six months of 2019 as compared to 1.1
million tonnes for the first six months of 2018. The average selling price decreased from $37.8
per tonne for the first six months of 2018 to $35.8 per tonne for the first six months of 2019.
The Company’s production in the first six months of 2019 was higher than the first six months
of 2018 as a result of pacing the production to meet the expected sales, yielding 2.4 million
tonnes for the six months of 2019 as compared to 1.4 million tonnes for the first six months
of 2018.
The Company’s unit cost of sales of product sold decreased to $23.4 per tonne in the first
six months of 2019 from $30.4 per tonne in the first six months of 2018. The decrease was
mainly driven by increased sales and the related economies of scale.