SouthGobi Resources announces third quarter 2019 financial and operating results
- 1 -
RESOURCES November 13, 2019
SouthGobi Resources announces third 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 nine months ended September 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 September 30,
2019 and the subsequent period up to November 13, 2019 are as follows:
• Operating Results – The Company increased sales volume to 0.8 million tonnes for the
third quarter of 2019 from 0.7 million tonnes for the third quarter of 2018. The average
realized selling price is $35.0 per tonne for the third quarter of 2019, which is similar to
$35.8 per tonne for the third quarter of 2018.
• Financial Results – The Company recorded a gross profit of $12.8 million in the third
quarter of 2019 compared to $9.2 million in the third quarter of 2018 while a $2.1 million
net profit was recorded in the third quarter of 2019 compared to $2.7 million net loss in
the third quarter of 2018 (restated). The Company recorded a profit from operations of
$9.5 million in the third quarter of 2019 compared to a $3.0 million in the third quarter of
2018 (restated). The improvement in profit from operations was principally attributable
to (i) the lower provision for doubtful trade and other receivables being made during the
quarter ($0.3 million and $3.9 million for the third quarter of 2019 and third quarter of
2018, respectively); and (ii) a reversal of the impairment of coal stockpile inventories of
$5.3 million (nil for third quarter of 2018).
- 2 -
• Notice of Arbitration – As of the date hereof, the Company has not paid the November
2018, January 2019, May 2019 and September 2019 monthly payments due under a
deed of settlement (the “Settlement Deed”) with First Concept Industrial Group Limited
(“First Concept”). On October 16, 2019, SouthGobi Sands LLC (“SGS”), a subsidiary
of the Company, received a notice from 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. Since
a default under the Settlement Deed is only triggered when 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 September 30, 2019, the outstanding amount payable
to First Concept amounted to $5.5 million (December 31, 2018: $12.5 million), which is
due and payable as of the date hereof.
• Termination of Soumber Deposit Mining Licenses – On August 26, 2019,SGS received
a letter (the “Notice Letter”) from the Mineral Resources and Petroleum Authority of
Mongolia (“MRAM”) notifying that the Company’s three mining licenses (MV-016869,
MV-020436 and MV-020451) (the “Soumber Licenses”) for the Soumber Deposit have
been terminated by the Head of Cadastre Division of MRAM effective as of August 21,
2019.
According to the Notice Letter, the Soumber Licenses have been terminated pursuant to
Clause 56.1.5 of Article 56 of the Minerals Law, Clauses 4.2.1 and 4.2.5 of Article 4 and
Clause 28.1.1 of Article 28 of the General Administrative Law and a decision order of a
working group established under an order of the Minister of Environment and Tourism
(Mongolia). According to this decision order, the working group determined that SGS had
violated its environmental reclamation obligations with respect to the Soumber Deposit.
The Soumber Deposit is an undeveloped coal deposit covering approximately 22,263
hectares located approximately 20 kilometers east of the Company’s Ovoot Tolgoi coal
mine in Mongolia. The Company owned a 100% interest in the Soumber Deposit.
The Company believes the cancelation of the Soumber Licenses is without merit. The
Company is not aware of any failure on its part to fulfill its environmental reclamation duties
as they relate to the Soumber Deposit. On October 4, 2019, SGS filed a claim against
MRAM and the Ministry of Environment and Tourism of Mongolia in the Administration
Court of the Capital City (the “Administration Court”) seeking an order to restore the
Soumber Licenses. The Company anticipates that the Administration Court will issue
its ruling before the end of the 2019 calendar year. The Company will take all such
actions, including additional legal actions, as it considers necessary to reinstate the
Soumber Licenses. However, there can be no assurance that a favorable outcome will
be reached. The termination of the Soumber Licenses does not have any impact on its
current mining operations at the Ovoot Tolgoi mine site.
- 3 -
• 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.
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 nine months period
ended September 30, 2018, the net effect of the Prior Restatement was a decrease in
the net comprehensive loss of $1.3 million and $3.3 million for the respective periods.
A summary of the requisite adjustments on the financial statements for the three and
nine months period ended September 30, 2018 is set forth in the table below:
- 4 -
$ in thousands
Three months
ended
September 30,
2018
(As previously
reported)
Loss decrease/
(increase)
Three months
ended
September 30,
2018
(Restated)
Statement of comprehensive income extract
Other operating expenses (4,721) 1,304 (3,417)
Net loss attributable to equity holders of the
Company $ (3,990) $ 1,304 $ (2,686)
Other comprehensive loss for the period (7,247) (16) (7,263)
Net comprehensive loss attributable to equity
holders of the Company $ (11,237) $ 1,288 $ (9,949)
$ in thousands
Nine months
ended
September 30,
2018
(As previously
reported)
Loss decrease/
(increase)
Nine months
ended
September 30,
2018
(Restated)
Statement of comprehensive income extract
Other operating expenses $ (24,150) $ 3,464 $ (20,686)
Finance income 472 (290) 182
Net loss attributable to equity holders of the
Company $ (34,053) $ 3,174 $ (30,879)
Other comprehensive loss for the period (9,677) 119 (9,558)
Net comprehensive loss attributable to equity
holders of the Company $ (43,730) $ 3,293 $ (40,437)
• 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. On July 31, 2019, the Company
entered into an agreement with the wash plant operator regarding the operation of the
wash plant which expires on December 31, 2019; however, there can be no assurance
that the Company will extend this agreement after the expiry date.
- 5 -
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 September 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 November 13, 2019, the Company
had $2.6 million of cash.
- 6 -
OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS
Summary of Operational Data
Three months ended
September 30,
Nine months ended
September 30,
2019 2018 2019 2018
Sales Volumes, Prices and Costs
Premium semi-soft coking coal
Coal sales (millions of tonnes) 0.05 0.25 0.28 0.35
Average realized selling price (per tonne) $ 31.49 $ 48.15 $ 38.27 $ 52.36
Standard semi-soft coking coal/premium
thermal coal
Coal sales (millions of tonnes) 0.51 0.26 1.95 0.86
Average realized selling price (per tonne) $ 31.67 $ 34.40 $ 33.87 $ 39.93
Standard thermal coal
Coal sales (millions of tonnes) – 0.22 0.09 0.66
Average realized selling price (per tonne) $ – $ 23.49 $ 29.43 $ 25.21
Washed coal
Coal sales (millions of tonnes) 0.25 – 0.43 –
Average realized selling price (per tonne) $ 42.37 $ – $ 43.10 $ –
Total
Coal sales (millions of tonnes) 0.81 0.73 2.75 1.87
Average realized selling price (per tonne) $ 34.98 $ 35.77 $ 35.54 $ 37.03
Raw coal production (millions of tonnes) 1.21 1.11 3.57 2.47
Cost of sales of product sold (per tonne) $ 19.16 $ 23.44 $ 22.17 $ 27.70
Direct cash costs of product sold (per tonne) (i) $ 18.03 $ 7.41 $ 15.03 $ 11.08
Mine administration cash costs of product sold
(per tonne) (i) $ 1.09 $ 1.24 $ 1.26 $ 1.16
Total cash costs of product sold (per tonne) (i) $ 19.12 $ 8.65 $ 16.29 $ 12.24
Other Operational Data
Production waste material moved (millions of
bank cubic meters) 4.36 4.56 14.61 12.62
Strip ratio (bank cubic meters of waste
material per tonne of coal produced) 3.61 4.11 4.09 5.08
Lost time injury frequency rate (ii) 0.08 0.00 0.05 0.06
(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.
- 7 -
Overview of Operational Data
For the three months ended September 30, 2019
For the three months ended September 30, 2019, the Company had a lost time injury frequency
rate of 0.08 per 200,000 man hours based on a rolling 12 month average.
The average realized selling price is $35.0 per tonne for the third quarter of 2019, which is
similar to $35.8 per tonne for the third quarter of 2018.
The product mix for the third quarter of 2019 consisted of approximately 6% of premium
semi-soft coking coal, 63% of standard semi-soft coking coal/premium thermal coal and 31%
of washed coal compared to approximately 34% of premium semi-soft coking coal, 36% of
standard semi-soft coking coal/premium thermal coal and 30% of standard thermal coal in
the third quarter of 2018.
The Company sold 0.8 million tonnes for the third quarter of 2019 as compared to 0.7 million
tonnes for the third quarter of 2018.
The Company’s production in the third quarter of 2019 was higher than the third 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 1.2 million tonnes for the third quarter of 2019 as compared
to 1.1 million tonnes for the third quarter of 2018.
The Company’s unit cost of sales of product sold decreased to $19.2 per tonne in the third
quarter of 2019 from $23.4 per tonne in the third quarter of 2018. The decrease was mainly
driven by (i) increased sales and the related economies of scale; and (ii) the reversal of
impairment of coal stockpile inventories of $5.3 million during the quarter (nil for the third
quarter of 2018).
For the nine months ended September 30, 2019
The Company sold 2.8 million tonnes for the first nine months of 2019 as compared to 1.9
million tonnes for the first nine months of 2018. The average selling price decreased from
$37.0 per tonne for the first nine months of 2018 to $35.5 per tonne for the first nine months
of 2019.
The Company’s production in the first nine months of 2019 was higher than the first nine
months of 2018 as a result of pacing the production to meet the expected sales, yielding
3.6 million tonnes for the nine months of 2019 as compared to 2.5 million tonnes for the first
nine months of 2018.
The Company’s unit cost of sales of product sold decreased to $22.2 per tonne in the first
nine months of 2019 from $27.7 per tonne in the first nine months of 2018. The decrease
was mainly driven by increased sales and the related economies of scale.
- 8 -
Summary of Financial Results
Three months ended
September 30,
Nine months ended
September 30,
$ in thousands, except per share
information
2019 2018 (iii) 2019 2018 (iii)
(Restated) (Restated)
Revenue (i) $ 28,309 $ 26,277 $ 97,599 $ 69,990
Cost of sales (i) (15,518) (17,110) (60,954) (51,808)
Gross profit excluding idled mine
asset costs (ii) 13,664 13,195 39,339 29,524
Gross profit 12,791 9,167 36,645 18,182
Other operating expenses (1,245) (3,417) (3,992) (20,686)
Administration expenses (2,074) (2,724) (8,061) (8,957)
Evaluation and exploration
expenses (22) (40) (70) (320)
Profit/(loss) from operations 9,450 2,986 24,522 (11,781)
Finance costs (7,184) (5,758) (20,915) (17,690)
Finance income 68 106 4,381 182
Share of earnings of a joint venture 277 247 1,104 1,215
Income tax expense (468) (267) (2,708) (2,805)
Net profit/(loss) 2,143 (2,686) 6,384 (30,879)
Basic and diluted earnings/(loss)
per share $ 0.01 $ (0.01) $ 0.02 $ (0.11)
(i) 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. Royalties have been
reclassified from revenue to cost of sales.
(ii) A non-IFRS financial measure, idled mine asset costs represents the depreciation expense
relates to the Company’s idled plant and equipment.
(iii) The financial results for the three and nine months ended September 30, 2018 were restated.
Refer to section “Significant events and highlights” of this press release under the heading
entitled “Key Findings of Formal Investigation” for details.
Overview of Financial Results
For the three months ended September 30, 2019
The Company recorded a $9.5 million profit from operations in the third quarter of 2019
compared to a $3.0 million in the third quarter of 2018 (restated). The improvement in profit
from operations was principally attributable to (i) the lower provision for doubtful trade and
other receivables being made during the quarter ($0.3 million and $3.9 million for the third
quarter of 2019 and third quarter of 2018, respectively); and (ii) the reversal of the impairment
of coal stockpile inventories of $5.3 million (nil for the third quarter of 2018).