SouthGobi Resources announces second quarter 2020 financial and operating results
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RESOURCES December 23, 2020
SouthGobi Resources announces second quarter 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 three and six months ended June 30, 2020. 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, 2020
and the subsequent period up to December 23, 2020 are as follows:
• Operating Results – The Company suspended coal exports to China beginning as of
February 11, 2020 as a result of the closure of Mongolia’s southern border with China
in order to prevent the spread of Coronavirus Disease 2019 (“COVID-19”). On March
28, 2020, 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 was permitted to be exported during
this trial period. The Company resumed coal exports to China gradually thereafter. As
a result, the Company’s sales volume decreased from 0.9 million tonnes for the second
quarter of 2019 to 0.5 million tonnes for the second quarter of 2020.
Despite an improvement of the product mix, the average selling price of coal decreased
from $36.8 per tonne in the second quarter of 2019 to $31.7 per tonne in the second
quarter of 2020 as a result of 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 $1.9 million loss from operations in the
second quarter of 2020 compared to a $5.2 million profit from operations in the second
quarter of 2019. The financial results were impacted by (i) the decreased sales resulting
from the export volume limitation imposed following the reopening of the Mongolian-
Chinese border on a trial basis on March 28, 2020; and (ii) 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 Mongolian-Chinese 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. During the period between
April to October 2020, an aggregate of 1.9 million tonnes of coal was exported by the
Company from Mongolia to China, as compared to an aggregate of 2.0 million tonnes
of coal during the same period in the 2019 calendar year.
The border closure has 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 closures 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 from February 2020.
Since August 2, 2020, the Company has resumed its mining operations, which includes
mining, blending and washing of coal. As at October 31, 2020, SouthGobi Sands LLC
(“SGS”), a subsidiary of the Company, employed 208 employees at the Ovoot Tolgoi Mine
site (December 31, 2019: 383 employees). The Company produced 1.1 million tonnes
from August to October 2020, as compared to 1.3 million tonnes from August to October
2019. There were a few COVID-19 cases reported in Ulaanbaatar (being the capital city
of Mongolia) on November 11, 2020. As a result, the Mongolian local authorities have
taken certain precautionary steps to minimize further transmission and announced a
lockdown of Ulaanbaatar effective as of November 12, 2020. Although the Company’s
mining operations and 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 closures
as a result of COVID-19 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 Mongolian-Chinese 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.
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• 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 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, 2009 between SGS 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 payment 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.
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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
(collectively, the “2020 February Deferral Amounts”) which were due and payable to
CIC on January 19, 2020 and February 19, 2020, respectively, under the 2019 Deferral
Agreement; 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.
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.
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• 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.
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.
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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 to 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 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”). The effectiveness of
the 2020 November Deferral Agreement and the respective covenants, agreements and
obligations of each party under the 2020 November Deferral Agreement are subject to the
Company obtaining the requisite approval of the 2020 November Deferral Agreement from
the Company’s shareholders in accordance with applicable TSX rules. On October 29,
2020, the Company obtained an order from the British Columbia Securities Commission
(“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 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 of 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.
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• 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 Amount would otherwise have been due and payable under the
CIC Convertible Debenture or the 2020 June 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 2020
June 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.
• 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.
Until such time as the 2020 November Deferral Agreement is approved by the Company’s
shareholders and the deferral and waiver thereunder in favour of the Company become
effective, the Company remains in default under the CIC Convertible Debenture and
2020 June Deferral Agreement and CIC may declare the amounts owing thereunder
immediately due and payable, and may take steps to enforce payment thereof, which
would have a material adverse effect on the business and operations of the Company and
could 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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• Settlement with First Concept – On June 7, 2020, SGS 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 Results of Operations (“MD&A”); (ii) its Annual Information Form for the
year ended December 31, 2019; and (iii) its interim consolidated 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.
The CTO will remain in effect until such time as the Company fully remedies its filing
defaults under applicable Canadian securities laws, including filing of its interim financial
statements for the three and nine-month periods ended September 30, 2020 and the
accompanying MD&A, and makes a successful application to the BCSC to have the
CTO revoked. While the Company is taking such actions as it considers necessary in
order to remedy its filing defaults as soon as possible, there can be no assurance that
the Company will have the CTO lifted in a timely manner or at all. For so long as the
CTO remains in effect, it will have a significant adverse impact on the liquidity of the
Common Shares and shareholders may suffer a significant decline or total loss in value
of its investment in the Common Shares as a result.