Southgobi Resources Announces Third Quarter 2021 Financial and Operating Results
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R ESOURCE S
November 12, 2021
SOUTHGOBI RESOURCES ANNOUNCES THIRD QUARTER 2021
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, 2021. 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, 2021
and the subsequent period to November 12, 2021 are as follows:
• Operating Results – In response to the increase in Coronavirus Disease 2019 ( “COVID-19 ”)
case numbers in Mongolia, the Chinese authorities has been restricting the number of trucks
permitted to cross the Ceke port of entry, and such restriction has severely impacted the sales
volume of the Company in the third quarter of 2021. As a result, the Company ’s sales volume
decreased from 1.0 million tonnes in the third quarter of 2020 to 0.2 million tonnes in the third
quarter of 2021.
In response to the restrictions on the number of trucks crossing the Mongolian border into
China, the Company temporarily suspended its major mining operations (including coal
mining) in the second quarter of 2021 in order to control the inventory level and preserve the
Company ’s working capital. Mining operations (including coal mining) resumed in the third
quarter of 2021 and 0.3 million tonnes were produced during the quarter. However, mining
operations were temporarily suspended again by the Company beginning in November 2021
in response to the temporary closure of the Ceke Port of Entry. See “Impact of the COVID-19
Pandemic ” below.
The Company experienced an increase in the average selling price of coal from $31.6 per
tonne in the third quarter of 2020 to $53.5 per tonne in the third quarter of 2021, as a result of
improved market conditions in China and an improvement of the overall product mix.
• Financial Results – The Company recorded a $1.0 million profit from operations in the third
quarter of 2021 compared to a $8.5 million profit from operations in the third quarter of 2020.
The financial results for the third quarter of 2021 were impacted by the decreased sales
resulting from the export volume limitations experienced by the Company during the quarter.
• Impact of the COVID-19 Pandemic – Since the second quarter of 2021, additional
precautionary measures were imposed by the Chinese authorities at the Ceke port of entry
in response to the increase of COVID-19 cases in Mongolia, which included restricting the
number of trucks crossing the Mongolian border into China. The restrictions on trucking
volume have had an adverse impact on the Company ’s ability to import its coal products into
China in the third quarter of 2021.
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In response to the increase in the number of COVID-19 cases in Ejinaqi, a region in China ’s
Inner Mongolia Autonomous Region, reported in late October 2021, the local government
authorities have imposed stringent preventive measures throughout the region, including
the temporary closure of the Ceke port of entry located at the border of Mongolia and
China. Accordingly, the Company ’s coal exports into China have been suspended and such
suspension remains in effect as of the date hereof. The Company anticipates the temporary
closure of the Ceke port of entry will have a material adverse impact on the Company ’s sales
and cash flow until such time as coal exports into China are allowed to resume. In order to
control the inventory level and preserve the Company ’s working capital, the Company decided
to temporarily suspend mining operations (including coal mining) beginning as of early
November 2021.
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 continue to react promptly to preserve
the working capital of the Company and mitigate any negative impacts on the business and
operations of the Company.
In the event that the Company ’s ability to export coal into the Chinese market continues to be
restricted or limited, 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.
• China Investment Corporation ( “CIC ”) Convertible Debenture ( “CIC Convertible
Debenture ”) – On July 30, 2021, the Company and CIC entered into an agreement (the “2021
July Deferral Agreement ”) pursuant to which CIC agreed to grant the Company a deferral of:
(i) semi-annual cash interest payments of $8.1 million payable to CIC on November 19, 2021;
and (ii) $4.0 million worth of payment in kind interest ( “PIK Interest ”) shares (collectively, the
“2021 Deferral Amounts ”) issuable to CIC on November 19, 2021 under the CIC Convertible
Debenture.
The principal terms of the 2021 July Deferral Agreement are as follows:
• Payment of the 2021 Deferral Amounts will be deferred until August 31, 2023.
• As consideration for the deferral of the 2021 Deferral Amounts, the Company agreed to
pay CIC a deferral fee equal to 6.4% per annum on the 2021 Deferral Amounts payable
under the CIC Convertible Debenture, commencing on November 19, 2021.
• Going Concern – Several adverse conditions and material uncertainties relating to the
Company cast significant doubt upon the going concern assumption which includes the
deficiencies in assets and working capital.
See section “Liquidity and Capital Resources ” of this press release for details.
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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,
2021 2020 2021 2020
Sales Volumes, Prices and Costs
Premium semi-soft coking coal
Coal sales (millions of tonnes) 0.11 0.35 0.59 0.63
Average realized selling price (per tonne) $ 64.25 $ 30.17 $ 51.53 $ 29.48
Standard semi-soft coking coal/premium thermal coal
Coal sales (millions of tonnes) 0.06 0.54 0.32 0.93
Average realized selling price (per tonne) $ 33.56 $ 30.80 $ 35.01 $ 31.71
Washed coal
Coal sales (millions of tonnes) – 0.10 0.01 0.12
Average realized selling price (per tonne) $ – $ 41.30 $ 48.53 $ 41.64
Total
Coal sales (millions of tonnes) 0.17 0.99 0.92 1.68
Average realized selling price (per tonne) $ 53.52 $ 31.63 $ 45.87 $ 31.58
Raw coal production (millions of tonnes) 0.26 0.52 1.30 0.53
Cost of sales of product sold (per tonne) $ 40.39 $ 20.23 $ 32.35 $ 21.70
Direct cash costs of product sold (per tonne) (i) $ 17.50 $ 12.38 $ 17.82 $ 11.57
Mine administration cash costs of product sold
(per tonne) (i) $ 1.62 $ 1.15 $ 1.53 $ 1.47
Total cash costs of product sold (per tonne) (i) $ 19.12 $ 13.53 $ 19.35 $ 13.04
Other Operational Data
Production waste material moved (millions of
bank cubic meters) 0.59 1.67 5.63 2.24
Strip ratio (bank cubic meters of waste material
per tonne of coal produced) 2.23 3.20 4.31 4.24
Lost time injury frequency rate (ii) 0.00 0.00 0.00 0.04
(i) A Non-International Financial Reporting Standards ( “non-IFRS ”) financial measure. Refer to “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 September 30, 2021
The Company experienced an increase in the average selling price of coal from $31.6 per tonne
in the third quarter of 2020 to $53.5 per tonne in the third quarter of 2021, as a result of improved
market conditions in China and an improvement of the overall product mix. The product mix for
the third quarter of 2021 consisted of approximately 65% premium semi-soft coking coal and 35%
standard semi-soft coking coal/premium thermal coal compared to approximately 35% premium
semi-soft coking coal, 55% standard semi-soft coking coal/premium thermal coal and 10% washed
coal in the third quarter of 2020.
In response to the increase in COVID-19 case numbers in Mongolia in the third quarter of 2021,
the Chinese authorities has been restricting the number of trucks permitted to cross the Ceke port
of entry, and such restriction has severely impacted the sales volume of the Company in the third
quarter of 2021. As a result, the Company ’s sales volume decreased from 1.0 million tonnes in the
third quarter of 2020 to 0.2 million tonnes in the third quarter of 2021.
In response to the restrictions on the number of trucks crossing the Mongolian border into China,
the Company temporarily suspended its major mining operations (including coal mining) in the
second quarter of 2021 in order to control the inventory level and preserve the Company ’s working
capital. Mining operations (including coal mining) resumed in the third quarter of 2021 and 0.3
million tonnes were produced during the quarter. However, mining operations were temporarily
suspended again by the Company beginning in November 2021 in response to the temporary
closure of the Ceke Port of Entry. See “Significant Events and Highlights - Impact of the COVID-19
Pandemic ” above.
The Company ’s unit cost of sales of product sold increased from $20.2 per tonne in the third quarter
of 2020 to $40.4 per tonne in the third quarter of 2021. The increase was mainly driven by the
diseconomies of scale due to decreased sales as well as the increase in the effective royalty rate.
For the nine months ended September 30, 2021
The Company sold 0.9 million tonnes for the first nine months of 2021 as compared to 1.7 million
tonnes for the first nine months of 2020. The average selling price increased from $31.6 per tonne
for the first nine months of 2020 to $45.9 per tonne for the first nine months of 2021, as a result of
improved market conditions in China and an improvement of the overall product mix.
The Company ’s production in the first nine months of 2021 was higher than the first nine months
of 2020 as a result of the Company ’s major mining operations (including coal mining) being
temporarily suspended for a relatively longer period in 2020 in order to mitigate the financial impact
of the border closures and to preserve the Company ’s working capital.
The Company ’s unit cost of sales of product sold increased from $21.7 per tonne for the first nine
months of 2020 to $32.4 per tonne in the first nine months of 2021. The increase was mainly driven
by the increase in the effective royalty rate.
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Summary of Financial Results
Three months ended Nine months ended
September 30, September 30,
2021 2020 2021 2020
$ in thousands, except per
share information
Revenue (i) $ 9,295 $ 30,960 $ 42,550 $ 52,072
Cost of sales (i) (6,866) (20,027) (29,765) (36,464)
Gross profit excluding idled mine
asset costs 3,269 11,789 15,062 19,537
Gross profit 2,429 10,933 12,785 15,608
Other operating income/(expenses), net 100 (575) (348) (5,255)
Administration expenses (1,467) (1,789) (4,733) (4,851)
Evaluation and exploration expenses (36) (63) (148) (171)
Profit from operations 1,026 8,506 7,556 5,331
Finance costs (11,457) (9,885) (32,484) (24,250)
Finance income 2,040 2,583 23,055 2,600
Share of earnings/(loss) of a joint venture (261) 660 (22) 882
Current income tax expenses (78) (793) (1,059) (2,425)
Net profit/(loss) attributable to
equity holders of the Company (8,730) 1,071 (2,954) (17,862)
Basic and diluted earnings/(loss) per share $ (0.03) $ – $ (0.01) $ (0.07)
(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 interim financial statements for
further analysis regarding the Company ’s reportable operating segments.
Overview of Financial Results
For the three months ended September 30, 2021
The Company recorded a $1.0 million profit from operations in the third quarter of 2021 compared
to an $8.5 million profit from operations in the third quarter of 2020. The financial results for the
third quarter of 2021 were impacted by the decreased sales resulting from the export volume
limitations experienced by the Company during the quarter.
Revenue was $9.3 million in the third quarter of 2021 compared to $31.0 million in the third quarter
of 2020. The Company ’s effective royalty rate for the third quarter of 2021, based on the Company ’s
average realized selling price of $53.5 per tonne, was 25.5% or $13.7 per tonne, compared to
11.1% or $3.5 per tonne in the third quarter of 2020 (based on the average realized selling price of
$31.6 per tonne).
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Royalty regime in Mongolia
The royalty regime in Mongolia is evolving and has been subject to change since 2012.
On September 4, 2019, the Government of Mongolia issued a resolution in connection with the
royalty regime. From September 1, 2019 onwards, in the event that the contract sales price is less
than the reference price as determined by the Government of Mongolia by more than 30%, then the
royalty payable will be calculated based on the Mongolian government ’s reference price instead of
the contract sales price.
On June 23, 2021, the Government of Mongolia issued a new resolution in connection with the
royalty regime. From July 1, 2021 onwards, the royalty payable is to be calculated based on the
reference price as determined by the Government of Mongolia, and the reference to the contract
sales price will be removed.
Cost of sales was $6.9 million in the third quarter of 2021 compared to $20.0 million in the third
quarter of 2020. The decrease in cost of sales was mainly due to the decreased sales during
the quarter. Cost of sales consists of operating expenses, share-based compensation expense,
equipment depreciation, depletion of mineral properties, royalties 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.
Three months ended
September 30,
$ in thousands 2021 2020
Operating expenses $ 3,251 $ 13,390
Share-based compensation expense 38 4
Depreciation and depletion 366 2,297
Royalties 2,371 3,480
Cost of sales from mine operations 6,026 19,171
Cost of sales related to idled mine assets 840 856
Cost of sales $ 6,866 $ 20,027
Operating expenses in cost of sales were $3.3 million in the third quarter of 2021 compared to
$13.4 million in the third quarter of 2020. The overall decrease in operating expenses was primarily
due to the decreased sales volume from 1.0 million tonnes in the third quarter of 2020 to 0.2 million
tonnes in the third quarter of 2021.
Cost of sales related to idled mine assets in the third quarter of 2021 included $0.8 million related to
depreciation expenses for idled equipment (third quarter of 2020: $0.9 million).
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Other operating income were $0.1 million in the third quarter of 2021 (third quarter of 2020: other
operating expenses of $0.6 million).
Three months ended
September 30,
$ in thousands 2021 2020
CIC management fee $ 199 $ 864
Reversal of provision for doubtful trade and other receivables (16) (482)
Foreign exchange loss, net 13 113
Discount on settlement of trade payables (127) –
Loss on disposal of items of property, plant and equipment, net – 80
Written off of other payables (169) –
Other operating expenses/(income), net $ (100) $ 575
Administration expenses were $1.5 million in the third quarter of 2021 compared to $1.8 million in
the third quarter of 2020 as follows:
Three months ended
September 30,
$ in thousands 2021 2020
Corporate administration $ 186 $ 394
Legal and professional fees 294 395
Salaries and benefits 685 781
Share-based compensation expense 137 15
Depreciation 165 204
Administration expenses $ 1,467 $ 1,789
The Company continued to minimize evaluation and exploration expenditures in the third quarter of
2021 in order to preserve the Company ’s financial resources. Evaluation and exploration activities
and expenditures in the third quarter of 2021 were limited to ensuring that the Company met the
Mongolian Minerals Law requirements in respect of its mining licenses.
Finance costs were $11.5 million and $9.9 million in the third quarter of 2021 and 2020 respectively,
which primarily consisted of interest expense on the $250.0 million CIC Convertible Debenture.
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For the nine months ended September 30, 2021
The Company recorded a $7.6 million profit from operations in the first nine months of 2021
compared to a $5.3 million profit from operations in the first nine months of 2020. The financial
results were impacted by (i) the higher selling price achieved by the Company; (ii) the decreased
sales resulting from the export volume limitations and (iii) a provision for commercial arbitration of
$4.6 million recorded for the first nine months of 2020 in connection with the settlement agreement
entered into with First Concept Industrial Group Limited ( “First Concept ”).
Revenue was $42.6 million in the first nine months of 2021 compared to $52.1 million in the first
nine months of 2020. The Company ’s effective royalty rate for the first nine months of 2021, based
on the Company ’s average realized selling price of $45.9 per tonne, was 18.1% or $8.3 per tonne,
compared to 12.2% or $3.9 per tonne in the first nine months of 2020 (based on the average
realized selling price of $31.6 per tonne).
Cost of sales were $29.8 million in the first nine months of 2021 compared to $36.5 million in the
first nine months of 2020, as follows:
Nine months ended
September 30,
$ in thousands 2021 2020
Operating expenses $ 17,802 $ 21,912
Share-based compensation expense 37 23
Depreciation and depletion 1,943 4,163
Royalties 7,706 6,437
Cost of sales from mine operations 27,488 32,535
Cost of sales related to idled mine assets 2,277 3,929
Cost of sales $ 29,765 $ 36,464
Operating expenses in cost of sales were $17.8 million in the first nine months of 2021 compared
to $21.9 million in the first nine months of 2020. The overall decrease in operating expenses was
primarily due to the decreased sales volume.
Cost of sales related to idled mine assets in the first nine months of 2021 included $2.3 million
related to depreciation expenses for idled equipment (first nine months of 2020: $3.9 million).