SouthGobi Resources announces third quarter 2018 financial and operating results
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RESOURCES November 13, 2018
SouthGobi Resources announces third 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 nine months
ended September 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 September 30,
2018 and the subsequent period up to November 13, 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 made through our Inner Mongolia subsidiary,
the Company experienced an increase in the average selling price of coal from $26.5
per tonne in the third quarter of 2017 to $35.8 per tonne in the third quarter of 2018.
The Company sold 0.7 million tonnes for the third quarter of 2018 as compared to 0.8
million tonnes for the third quarter of 2017.
• Financial Results – The Company recorded a $1.7 million profit from operations in the
third quarter of 2018 compared to a $4.7 million loss from operations in the third quarter
of 2017. The overall financial results have improved when compared to the third quarter
of 2017, which was principally attributable to the improved coal prices in China and
the Company recording an impairment of coal stockpile inventories in the third quarter
of 2017 (third quarter of 2018: nil; third quarter of 2017: $7.9 million). The improved
financial performance in the third quarter was partially offset by the Company recognizing
a provision for doubtful trade and other receivables during the quarter (third quarter of
2018: $5.3 million; third quarter of 2017: reversal of provision of $1.4 million).
• Wash plant – The construction of the wash plant at the Ovoot Tolgoi mine was completed,
and operations at the wash plant commenced in October 2018. The Company is in the
process of making improvements to the wash plant in order to enhance the operational
efficiency, as well as the output value. The Company expects to be in position to sell
washed coal to the market in the fourth quarter of 2018. The expected annual wet
washing capacity of the wash plant for 2019 is approximately 1.8 million tonnes of input
coal. The Company is currently discussing an agreement regarding the operation of the
wash plant with the wash plant operator; however, there can be no assurance that a
favorable outcome will be reached.
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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”). 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. The Company will also be required to pay $8.1 million of cash interest to CIC
(the “November 2018 Payment”) and issue $4.0 million worth of PIK interest shares
(the “November 2018 PIK Interest”) on November 19, 2018. As of the date of this press
release, the Company expects that it will be unable to pay the November 2018 Payment
to CIC on the due date.
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
19th Payments and the November 2017 PIK Interest, the November 2018 Payment and
the November 2018 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 September 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 September 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.
• Notice of Legal Proceedings from a Former Customer – On September 20, 2018,
the Company announced that Inner Mongolia Southgobi Energy Co., Ltd. (“IMSGE”), a
subsidiary of the Company, had received a court summons (the “Summons”) from the
Ejinaqi People’s Court of Inner Mongolia Autonomous Region of China (the “Ejinaqi
Court”) in relation to a dispute over certain coal sales contracts with Jiayuguan Xiyuan
Trading Co., Ltd (“Xiyuan”), a former customer of IMSGE.
According to the Summons, Xiyuan has applied to the Ejinaqi Court claiming that IMSGE
should repay a sum of RMB 19.4 million (approximately $2.8 million) to Xiyuan, comprised
of RMB 19.1 million of coal prepayments and RMB 0.3 million of interest. Xiyuan also
claimed Ejinaqi Fulemeng Energy Industry Co., Ltd. for joint liability of the above sums
as it was alleged as an agent for IMSGE to receive coal prepayment and deliver coal
on behalf of IMSGE.
Due to the complexity and monetary amount involved, the court hearing regarding this
matter previously scheduled on October 10, 2018 was delayed and will be rescheduled
for a future date.
The Company firmly believes that it has a strong defense on the merits and has retained
independent Chinese litigation counsel to vigorously defend itself against these claims.
However, due to the inherent uncertainties of litigation, it is not possible to predict whether
IMSGE will be successful in defending itself in these proceedings.
• Changes in Management and Director
Mr. Shougao Wang : Mr. Wang was appointed as an executive director on July 3, 2018.
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 at the Ovoot Tolgoi mine was completed, and operations at the wash plant
commenced in October 2018. The Company is in the process making improvements
to the wash plant in order to enhance the operational efficiency, as well as the output
value. The Company expects to be in a position to sell washed coal to the market in
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 September 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 November 13, 2018, the Company had $5.4 million of cash.
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OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS
Summary of Operational Data
Three months ended Nine months ended
September 30, September 30,
2018 2017 2018 2017
Sales Volumes, Prices and Costs
Premium semi-soft coking coal
Coal sales (millions of tonnes) 0.25 0.12 0.35 0.49
Average realized selling price (per tonne) (i) $ 48.15 $ 46.81 $ 52.36 $ 45.93
Standard semi-soft coking coal/
premium thermal coal
Coal sales (millions of tonnes) 0.26 0.41 0.86 1.84
Average realized selling price (per tonne) (i) $ 34.40 $ 28.32 $ 39.93 $ 25.89
Standard thermal coal
Coal sales (millions of tonnes) 0.22 0.27 0.66 1.06
Average realized selling price (per tonne) (i) $ 23.49 $ 14.54 $ 25.21 $ 14.77
Total
Coal sales (millions of tonnes) 0.73 0.80 1.87 3.39
Average realized selling price (per tonne) (i) $ 35.77 $ 26.47 $ 37.03 $ 25.29
Raw coal production (millions of tonnes) 1.11 2.47 2.47 5.87
Cost of sales of product sold (per tonne) $ 20.99 $ 31.31 $ 25.08 $ 22.48
Direct cash costs of product sold (per tonne) (ii) $ 7.41 $ 10.98 $ 11.08 $ 9.10
Mine administration cash costs of product sold
(per tonne) (ii) $ 1.24 $ 2.98 $ 1.16 $ 2.00
Total cash costs of product sold (per tonne) (ii) $ 8.65 $ 13.96 $ 12.24 $ 11.10
Other Operational Data
Production waste material moved (millions of bank
cubic meters) 4.56 6.77 12.62 16.43
Strip ratio (bank cubic meters of waste material
per tonne of coal produced) 4.11 2.74 5.08 2.80
Lost time injury frequency rate (iii) 0.00 0.23 0.06 0.18
(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
The Company ended the third quarter of 2018 without a lost time injury. For the three months
ended September 30, 2018, the Company had a lost time injury frequency rate of nil per
200,000 man hours based on a rolling 12 month average as compared to 0.23 for the three
months ended September 30, 2017.
For the three months ended September 30, 2018
As a result of improved market conditions and prices for coal in China as well as a higher
portion of sales made through our Inner Mongolia subsidiary, the Company experienced
an increase in the average selling price of coal from $26.5 per tonne in the third quarter of
2017 to $35.8 per tonne in the third quarter of 2018. The improvement in the product mix
also contributed to the increase in the average price for the quarter. The product mix for the
third quarter of 2018 consisted of approximately 34% of premium semi-soft coking coal, 36%
of standard semi-soft coking coal/premium thermal coal and 30% of standard thermal coal
compared to approximately 15% of premium semi-soft coking coal, 51% of standard semi-
soft coking coal/premium thermal coal and 34% of standard thermal coal in the third quarter
of 2017.
The Company sold 0.7 million tonnes for the third quarter of 2018 as compared to 0.8 million
tonnes for the third quarter of 2017.
The Company’s production in the third quarter of 2018 was lower than the third quarter of
2017 as a result of management’s decision to pace production to meet expected sales as
well as a higher strip ratio achieved for the quarter, yielding 1.1 million tonnes for the third
quarter of 2018 as compared to 2.5 million tonnes for the third quarter of 2017.
The Company’s unit cost of sales of product sold decreased to $21.0 per tonne in the third
quarter of 2018 from $31.3 per tonne in the third quarter of 2017. The decrease was mainly
driven by the Company recognizing coal stockpile impairments of $7.9 million for the third
quarter of 2017 as compared to nil during this quarter.
For the nine months ended September 30, 2018
Due to the delays experienced in the custom clearance process at the Ceke border which the
Company has been experiencing since July 2017, the Company sold 1.9 million tonnes for the
first nine months of 2018 as compared to 3.4 million tonnes for the first nine months of 2017.
The average selling price increased from $25.3 per tonne for the first nine months of 2017
to $37.0 per tonne for the first nine 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 made
through our Inner Mongolia subsidiary.
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The Company’s production in the first nine months of 2018 was lower than the first nine
months of 2017 as a result of management’s decision to pace production to meet expected
sales as well as a higher strip ratio achieved for the period, yielding 2.5 million tonnes for
the nine months of 2018 as compared to 5.9 million tonnes for the first nine months of 2017.
The Company’s unit cost of sales of product sold increased to $25.1 per tonne in the first
nine months of 2018 from $22.5 per tonne in the first nine months of 2017. The increase
was principally attributable to the diseconomies of scale driven by decreased sales volume.
Summary of Financial Results
Three months ended Nine months ended
September 30, September 30,
$ in thousands, except per share information 2018 2017 2018 2017
Revenue (i),(ii) $ 24,487 $ 19,356 $ 65,087 $ 79,275
Cost of sales (ii) (15,320) (25,049) (46,905) (76,193)
Gross profit/(loss) excluding idled mine asset costs 13,195 (2,094) 29,524 12,065
Gross profit/(loss) including idled mine asset costs 9,167 (5,693) 18,182 3,082
Other operating income/(expenses) (4,721) 3,477 (24,150) (3,776)
Administration expenses (2,724) (2,451) (8,957) (7,070)
Evaluation and exploration expenses (40) (48) (320) (221)
Profit/(loss) from operations 1,682 (4,715) (15,245) (7,985)
Finance costs (5,758) (5,674) (17,690) (16,708)
Finance income 106 142 472 21
Share of earnings of a joint venture 247 265 1,215 919
Income tax credit/(expense) (267) 238 (2,805) (2,521)
Net loss (3,990) (9,744) (34,053) (26,274)
Basic and diluted loss per share $ (0.01) $ (0.04) $ (0.12) $ (0.10)
(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.
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Overview of Financial Results
For the three months ended September 30, 2018
The Company recorded a $1.7 million profit from operations in the third quarter of 2018
compared to a $4.7 million loss from operations in the third quarter of 2017. The overall financial
results have improved when compared to the third quarter of 2017, which was principally
attributable to the improved coal prices in China and the Company recording an impairment of
coal stockpile inventories in the third quarter of 2017 (third quarter of 2018: nil; third quarter
of 2017: $7.9 million). The improved financial performance in the third quarter was partially
offset by the Company recognizing a provision for doubtful trade and other receivables during
the period (third quarter of 2018: $5.3 million; third quarter of 2017: reversal of provision of
$1.4 million).
The provision for certain long aged doubtful notes receivables and trade and other receivables
is recognized based on the expected credit loss model that the Company has been applying.
The Company will continue to explore different options to recover the balance of these doubtful
trade and notes receivables.
Revenue was $24.5 million in the third quarter of 2018 compared to $19.4 million in the third
quarter of 2017. The Company’s revenue is presented after deduction of royalties. Royalty
for the quarter was $1.8 million, compared to $1.3 million for the third quarter of 2017. The
increase was mainly due to increase in the average price for the coal exported to China
during the quarter.
Cost of sales was $15.3 million in the third quarter of 2018 compared to $25.0 million in the
third quarter of 2017. The decrease in cost of sales was mainly due to the Company recognizing
coal stockpile impairments of $7.9 million for the third quarter of 2017 as compared to nil
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.