SouthGobi Resources Announces First Quarter 2013 Financial and Operating Results
HONG KONG, CHINA -- (Marketwired) -- 05/13/13 -- SouthGobi Resources Ltd. (TSX: SGQ)(HKSE: 1878), (the "Company" or "SouthGobi") today announced its financial and operating results for the quarter ended March 31, 2013. All figures are in U.S. Dollars unless otherwise stated.
SIGNIFICANT EVENTS
The Company's significant events for the quarter ended March 31, 2013 and subsequent weeks are as follows:
-- Received a pre-mining agreement ("PMA") pertaining to the Soumber
Deposit;
-- Provided an update on the ongoing governmental, regulatory and internal
investigations;
-- Announced the resumption of operations at its flagship Ovoot Tolgoi Mine
on March 22, 2013. The Company plans to produce 3.2 million tonnes of
semi-soft coking coal in 2013. Operations had been fully curtailed since
the end of June 2012;
-- Announced updated NI 43-101 compliant resource estimates for the Soumber
and Zag Suuj Deposits, which increased SouthGobi's total measured and
indicated resources to 533 million tonnes (8% increase) and inferred
resources to 302 million tonnes (24% increase);
-- Announced the appointment of Bertrand Troiano as its Chief Financial
Officer, effective April 8, 2013; and
-- First quarter coal sales volumes and revenue declined to 0.08 million
tonnes and $3.3 million, respectively, in 2013 compared to 0.84 million
tonnes and $40.2 million in 2012.
REVIEW OF QUARTERLY OPERATING RESULTS
The Company's operating results for the previous eight quarters are summarized in the table below:
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2013 2012
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QUARTER ENDED 31-Mar 31-Dec 30-Sep 30-Jun 31-Mar
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Raw coal production
(millions of tonnes) 0.02 - - 0.27 1.07
Sales volumes and prices
(i)
SouthGobi premium
semi-soft coking coal
Coal sales (millions
of tonnes) 0.08 0.03 - 0.12 0.31
Average realized
selling price (per
tonne) $ 45.81 $ 47.86 $ - $ 67.17 $ 67.59
SouthGobi standard
semi-soft coking coal
Coal sales (millions
of tonnes) - - - 0.04 0.53
Average realized
selling price (per
tonne) $ - $ - $ - $ 49.91 $ 50.40
SouthGobi thermal coal
Coal sales (millions
of tonnes) 0.00 - 0.31 0.00 -
Average realized
selling price (per
tonne) $ 13.67 $ - $ 15.79 $ 38.80 $ -
Total
Coal sales (millions
of tonnes) 0.08 0.03 0.31 0.16 0.84
Average realized
selling price (per
tonne) $ 45.02 $ 47.86 $ 15.79 $ 62.56 $ 56.79
Costs
Direct cash costs of
product sold excluding
idled mine costs $ 35.46 $ 33.11 $ 8.23 $ 22.57 $ 10.80
(per tonne) (ii)
Total cash costs of
product sold excluding
idled mine costs $ 40.52 $ 38.17 $ 12.12 $ 31.49 $ 15.04
(per tonne) (ii)
Waste movement and
stripping ratio
Production waste
material moved
(millions of bank
cubic meters) 0.40 - - 1.16 2.20
Strip ratio (bank
cubic meters of waste
material per tonne of
coal produced) 26.21 - - 4.31 2.07
Pre-production waste
material moved
(millions of bank
cubic meters) - - - - -
Other operating capacity
statistics
Capacity
Number of mining
shovels/excavators
available at period
end 5 5 4 4 3
Total combined stated
mining
shovel/excavator
capacity at period
end (cubic meters) 113 113 98 98 64
Number of haul trucks
available at period
end 31 27 27 27 27
Total combined stated
haul truck capacity
at period end
(tonnes) 5,615 4,743 4,743 4,743 4,743
Employees and safety
Employees at period
end 444 465 644 693 720
Lost time injury
frequency rate (iii) - 0.1 0.2 0.2 0.3
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2011
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QUARTER ENDED 31-Dec 30-Sep 30-Jun
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Raw coal production
(millions of tonnes) 1.34 1.25 0.87
Sales volumes and prices
(i)
SouthGobi premium
semi-soft coking coal
Coal sales (millions
of tonnes) 0.53 0.66 0.60
Average realized
selling price (per
tonne) $ 67.62 $ 66.83 $ 65.96
SouthGobi standard
semi-soft coking coal
Coal sales (millions
of tonnes) 0.37 0.20 -
Average realized
selling price (per
tonne) $ 48.59 $ 48.17 $ -
SouthGobi thermal coal
Coal sales (millions
of tonnes) 0.25 0.51 0.45
Average realized
selling price (per
tonne) $ 40.30 $ 39.74 $ 38.32
Total
Coal sales (millions
of tonnes) 1.15 1.37 1.05
Average realized
selling price (per
tonne) $ 55.51 $ 54.01 $ 54.06
Costs
Direct cash costs of
product sold excluding
idled mine costs $ 22.14 $ 22.64 $ 26.77
(per tonne) (ii)
Total cash costs of
product sold excluding
idled mine costs $ 23.09 $ 23.17 $ 27.61
(per tonne) (ii)
Waste movement and
stripping ratio
Production waste
material moved
(millions of bank
cubic meters) 4.58 4.10 4.08
Strip ratio (bank
cubic meters of waste
material per tonne of
coal produced) 3.42 3.28 4.74
Pre-production waste
material moved
(millions of bank
cubic meters) - 0.39 0.80
Other operating capacity
statistics
Capacity
Number of mining
shovels/excavators
available at period
end 3 3 4
Total combined stated
mining
shovel/excavator
capacity at period
end (cubic meters) 64 64 98
Number of haul trucks
available at period
end 25 16 16
Total combined stated
haul truck capacity
at period end
(tonnes) 4,561 2,599 2,599
Employees and safety
Employees at period
end 720 695 658
Lost time injury
frequency rate (iii) 0.2 0.2 0.1
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(i) The sales volumes and prices that have been previously disclosed as
raw semi-soft coking coal, raw medium-ash coal and raw higher-ash coal
have now been reclassified as SouthGobi premium semi-soft coking coal,
SouthGobi standard semi-soft coking coal and SouthGobi thermal coal,
respectively, to reflect the Company's new product strategy
(ii) A non-International Financial Reporting Standards ("IFRS") financial
measure, see Non-IFRS Financial Measures section
(iii) Per 200,000 man hours
On March 22, 2013, SouthGobi announced the resumption of operations at the Ovoot Tolgoi Mine after having been fully curtailed since the end of the second quarter of 2012. The Company plans to produce 3.2 million tonnes of semi-soft coking coal in 2013. The 2013 mine plan assumes a conservative resumption of operations, designed to achieve a cost effective approach that will allow operations to continue on a sustainable basis and align production levels with forecast market conditions.
Moving forward, saleable products from the Ovoot Tolgoi Mine will primarily be based on a two product strategy and will consist of SouthGobi standard ("Standard") and SouthGobi premium ("Premium") semi-soft coking coal products. The Standard and Premium semi-soft coking coal products will be produced from raw semi-soft coking coals, together with raw medium and higher-ash coals which can be washed and blended into the Standard and Premium semi-soft coking coal products. Some higher-ash product will be sold as a thermal coal product as required.
For the three months ended March 31, 2013, the Company produced 0.02 million tonnes of raw coal with a strip ratio of 26.21 compared to production of 1.07 million tonnes of raw coal with a strip ratio of 2.07 for the three months ended March 31, 2012. In the first quarter of 2013, the Company's production was significantly impacted by the curtailment of mining operations until March 22, 2013. The Company's strip ratio of 26.21 in the first quarter of 2013 is due to a higher proportion of waste material being mined over the limited operating period and is not indicative of the Company's strip ratio moving forward.
For the three months ended March 31, 2013, SouthGobi recorded revenue of $3.3 million compared to $40.2 million in the first quarter of 2012. Revenue decreased primarily due to decreased sales volumes and a lower average realized selling price. The Company sold 0.08 million tonnes of coal at an average realized selling price of $45.02 per tonne in the first quarter of 2013 compared to sales of 0.84 million tonnes of coal at an average realized selling price of $56.79 per tonne in the first quarter of 2012. In the first quarter of 2013, SouthGobi generated revenue through the sale of existing coal stockpiles. SouthGobi's sales volume and average realized selling price was negatively impacted by the continued softness of the inland China coking coal markets closest to SouthGobi's operations. The Company's thermal coal product continued to be impacted more substantially than its other products. Market participants continue to deplete their existing stockpiles on the Mongolian and Chinese sides of the Shivee Khuren-Ceke crossing at the Mongolia-China border ("Shivee Khuren Border Crossing") and this movement provides some indication of future sales once the remaining stockpiles are depleted in the second quarter of 2013. However, this has adversely impacted SouthGobi's ability to sign new contracts to date in the second quarter of 2013.
Direct cash costs of product sold excluding idled mine costs (a non-IFRS financial measure, see Non-IFRS Financial Measures section) were $35.46 per tonne for the three months ended March 31, 2013 compared to $10.80 per tonne for the three months ended March, 31 2012. Direct cash costs of product sold excluding idled mine costs primarily increased in the first quarter of 2013 due to higher cost coal inventory being sold. In the first quarter of 2012, direct cash costs of product sold excluding idled mine costs were also lower due to a below-trend strip ratio.
REVIEW OF QUARTERLY FINANCIAL RESULTS
The Company's financial results for the previous eight quarters are summarized in the table below:
($ in thousands, except for per share information, unless otherwise indicated)
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2013 2012
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QUARTER ENDED 31-Mar 31-Dec 30-Sep 30-Jun 31-Mar
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Revenue $ 3,259 $ 1,213 $ 3,337 $ 8,412 $ 40,153
Gross profit/(loss)
excluding idled mine
costs (2,187) (6,894) (8,601) 1,778 22,674
Gross profit margin
excluding idled
mine costs -67% -568% -258% 21% 56%
Gross profit/(loss)
including idled mine
costs (18,601) (25,336) (27,532) (13,809) 22,674
Other operating
expenses (383) (18,664) (29,301) (3,803) (2,578)
Administration
expenses (3,733) (6,079) (5,178) (7,497) (5,882)
Evaluation and
exploration expenses (273) (508) (958) (2,099) (5,033)
Income/(loss) from
operations (22,990) (50,586) (62,969) (27,208) 9,181
Net income/(loss) (24,901) (51,818) (54,564) 237 3,126
Basic income/(loss)
per share (0.14) (0.28) (0.30) 0.00 0.02
Diluted income/(loss)
per share (0.14) (0.28) (0.30) (0.12) 0.02
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2011
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QUARTER ENDED 31-Dec 30-Sep 30-Jun
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Revenue $ 51,064 $ 60,491 $ 47,336
Gross profit/(loss)
excluding idled mine
costs 16,637 17,635 9,744
Gross profit margin
excluding idled
mine costs 33% 29% 21%
Gross profit/(loss)
including idled mine
costs 16,637 17,635 9,744
Other operating
expenses (24,644) (138) (3,024)
Administration
expenses (8,612) (7,993) (6,808)
Evaluation and
exploration expenses (14,513) (10,908) (4,356)
Income/(loss) from
operations (31,132) (1,404) (4,444)
Net income/(loss) (18,897) 55,921 67,323
Basic income/(loss)
per share (0.10) 0.31 0.37
Diluted income/(loss)
per share (0.14) (0.02) -
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2013 2012
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QUARTER ENDED 31-Mar 31-Dec 30-Sep 30-Jun 31-Mar
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Net income/(loss) $ (24,901) $ (51,818) $ (54,564) $ 237 $ 3,126
Income/(loss)
adjustments, net of
tax
Idled mine costs 12,312 14,474 13,572 10,966 -
Share-based
compensation
expense/(recovery) 154 (1,144) 1,490 4,383 3,799
Net impairment
loss/(recovery) on
assets 1,621 22,814 34,299 2,583 -
Unrealized foreign
exchange
losses/(gains) (38) 750 179 (511) (950)
Unrealized
loss/(gain) on
embedded
derivatives in CIC
debenture (748) (662) (12,856) (26,770) 776
Realized loss/(gain)
on disposal of
FVTPL investments
(i) - 15 - 46 (85)
Unrealized
loss/(gain) on
FVTPL investments (5) 664 1,197 2,282 339
Adjusted net
income/(loss) (ii) (11,605) (14,907) (16,683) (6,784) 7,005
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2011
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QUARTER ENDED 31-Dec 30-Sep 30-Jun
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Net income/(loss) $ (18,897) $ 55,921 $ 67,323
Income/(loss)
adjustments, net of
tax
Idled mine costs - - -
Share-based
compensation
expense/(recovery) 4,050 4,296 3,349
Net impairment
loss/(recovery) on
assets 23,818 (2,925) -
Unrealized foreign
exchange
losses/(gains) 34 103 263
Unrealized
loss/(gain) on
embedded
derivatives in CIC
debenture (10,790) (62,058) (70,422)
Realized loss/(gain)
on disposal of
FVTPL investments
(i) - - -
Unrealized
loss/(gain) on
FVTPL investments 155 2,449 (3,629)
Adjusted net
income/(loss) (ii) (1,630) (2,214) (3,116)
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(i) FVTPL is defined as "fair value through profit or loss"
(ii) A non-IFRS financial measure, see Non-IFRS Financial Measures section
The Company recorded a net loss of $24.9 million in the first quarter of 2013 compared to a net loss of $51.8 million in the fourth quarter of 2012 and a net income of $3.1 million in the first quarter of 2012.
Gross Profit/(Loss):
The Company's gross profit/(loss) is composed of revenue (net of royalties and selling fees) and cost of sales and relates solely to the Mongolian Coal Division. In the first quarter of 2013 and the fourth quarter of 2012, gross profit was negatively impacted by $16.4 million and $18.4 million of idled mine costs, respectively, contributing to a gross loss of $18.6 million in the first quarter of 2013 and $25.3 million in the fourth quarter of 2012. The Company recorded a gross loss excluding idled mine costs of $2.2 million in the first quarter of 2013 compared to a gross loss excluding idled mine costs of $6.9 million in the fourth quarter of 2012 and a gross profit excluding idled mine costs of $22.7 million in the first quarter of 2012. Gross profit will vary by quarter depending on sales volumes, sales prices and unit costs.
The Company recognized revenue of $3.3 million in the first quarter of 2013 compared to $1.2 million in the fourth quarter of 2012 and $40.2 million in the first quarter of 2012. The significant decrease in revenue in the first quarter of 2013 and the fourth quarter of 2012 compared to the first quarter of 2012 can be attributed to decreased sales volumes and a reduction in the Company's average realized selling price. In the first quarter of 2013, the Company's sales volumes and average realized selling price continued to be negatively impacted by the softness of the inland China coking coal markets closest to SouthGobi's operations. Although the Company signed contracts with customers in the first quarter of 2013 to sell the majority of its remaining thermal coal stockpiles, customers did not collect contracted volumes.
SouthGobi's effective royalty rate in the first quarter of 2013 was 6%. Effective October 1, 2012 (for a six month trial period) the royalty was determined using the contracted sales price per tonne, not the reference price per tonne published by the Government of Mongolia. SouthGobi, together with other Mongolian mining companies, continued the dialog with the appropriate Government of Mongolia authorities with the goal of extending the trial period until the end of 2013. To date, this dialog has not been successful and effective April 1, 2013 the royalty on all coal sales exported out of Mongolia will again be based on a set reference price per tonne published monthly by the Government of Mongolia.
Cost of sales was $21.9 million in the first quarter of 2013 compared to $26.5 million in the fourth quarter of 2012 and $17.5 million in the first quarter of 2012. Cost of sales comprise the direct cash costs of product sold, mine administration cash costs of product sold, idled mine costs, inventory impairments, equipment depreciation, depletion of mineral properties and share-based compensation expense. Of the $21.9 million and $26.5 million recorded as cost of sales in the first quarter of 2013 and the fourth quarter of 2012, $5.4 million and $8.1 million related to mine operations and $16.4 million and $18.4 million related to idled mine costs, respectively. Cost of sales related to mine operations decreased in the first quarter of 2013 compared to the fourth quarter of 2012 primarily due to reduced coal stockpile impairments, partially offset by higher sales volumes. Cost of sales related to mine operations decreased in the first quarter of 2013 compared to the first quarter of 2012 primarily due to lower sales volumes, partially offset by higher unit costs and coal stockpile impairments totaling $2.2 million. In the first quarter of 2013, the Company recorded a coal stockpile impairment of $2.2 million to reduce the carrying value to its estimated net realizable value.
Other Operating Expenses:
Other operating expenses in the first quarter of 2013 decreased to $0.4 million compared to $18.7 million in the fourth quarter of 2012 and $2.6 million in the first quarter of 2012. In the first quarter of 2013, other operating expenses primarily related to $0.3 million of foreign exchange losses; whereas in the fourth quarter of 2012, other operating expenses primarily related to a $4.7 million loss provision for doubtful trade and other receivables, a $3.1 million impairment loss on available-for-sale financial assets and $13.0 million of impairment charges related to property plant and equipment. In the first quarter of 2012, other operating expenses primarily related to $2.4 million of foreign exchange losses.
Administration Expenses:
Administration expenses in the first quarter of 2013 were $3.7 million compared to $6.1 million in the fourth quarter of 2012 and $5.9 million in the first quarter of 2012. Administration expenses decreased in the first quarter of 2013 compared to the fourth quarter of 2012 primarily due to decreased legal and professional fees and salaries and benefits. Administration expenses decreased in the first quarter of 2013 compared to the first quarter of 2012 primarily due to decreased corporate administration, salaries and benefits and share-based compensation expenses, partially offset by increased legal and professional fees.
Evaluation and Exploration Expenses:
Exploration expenses in the first quarter of 2013 were $0.3 million compared to $0.5 million in the fourth quarter of 2012 and $5.0 million in the first quarter of 2012. Exploration expenses will vary from quarter to quarter depending on the number of projects and the related seasonality of the exploration programs. The Company continues to minimize exploration expenditures to preserve the Company's financial resources.
Finance Income & Finance Costs:
Finance costs in the first quarter of 2013 were $5.0 million compared to $1.5 million in the first quarter of 2012. Finance costs in the first quarter of 2013 primarily consisted of $5.0 million of interest expense on the China Investment Corporation ("CIC") convertible debenture; whereas, finance costs in the first quarter of 2012 primarily consisted of a $0.8 million unrealized loss on the fair value change of the embedded derivatives in the CIC convertible debenture, a $0.3 million unrealized loss on FVTPL investments and $0.3 million of interest expense on the CIC convertible debenture.
Finance income in the first quarter of 2013 was $0.8 million compared to $0.2 million in the first quarter of 2012. In the first quarter of 2013, finance income primarily consisted of a $0.7 million unrealized gain on the fair value change of the embedded derivatives in the CIC convertible debenture; whereas, in the first quarter of 2012, finance income primarily consisted of $0.2 million of interest income.
The Company's investment in Aspire Mining Limited ("Aspire") continues to be classified as an available-for-sale financial asset and for the three months ended March 31, 2013, the Company recorded an after-tax mark to market gain of $0.9 million related to Aspire that has been recorded in other comprehensive income. Other comprehensive income for the three months ended March 31, 2012 consists of an unrealized loss (net of tax) of $5.4 million related to the Company's investment in Aspire.
Taxes:
In the first quarter of 2013, the Company recorded a current income tax expense of $1.0 thousand related to its Mongolian operations compared to a current income tax expense of $4.9 million in the first quarter of 2012. The Company has recorded a deferred income tax recovery related to deductible temporary differences and loss carry-forwards of $2.3 million in the first quarter of 2013 compared to a deferred income tax recovery related to deductible temporary differences of $0.1 million in the first quarter of 2012.
FINANCIAL POSITION AND LIQUIDITY
Cash Position and Liquidity
As at March 31, 2013, the Company had cash of $24.8 million compared to cash of $19.7 million and short term money market investments of $15.0 million for a total of $34.7 million in cash and money market investments as at December 31, 2012. Working capital (excess current assets over current liabilities) was $115.8 million as at March 31, 2013 compared to $127.2 million as at December 31, 2012.
The Company's total assets as at March 31, 2013 were $708.1 million compared with $729.4 million as at December 31, 2012. The Company's non-current liabilities as at March 31, 2013 were $103.1 million compared with $103.8 million as at December 31, 2012.
Consistent with the Company's capital risk management strategy, the Company expects to have sufficient liquidity and capital resources to meet its ongoing obligations and future contractual commitments for at least twelve months from the end of the March 31, 2013 reporting period. The Company expects its liquidity to remain sufficient based on existing capital resources and estimated income from mining operations. Liquidity beyond the twelve month period is dependent on the success of the recommencement of operations and ongoing demand and prices in the coal market. On March 22, 2013, the Company recommenced mining activities at the Ovoot Tolgoi Mine. The Company continues to minimize uncommitted capital expenditures and exploration expenditures in order to preserve the Company's financial resources.
During the three months ended March 31, 2013, the Mongolian Independent Authority Against Corruption (the "IAAC") informed the Company that orders, placing restrictions on certain of its Mongolian assets, had been imposed in connection with its continuing investigation.
The orders placing restrictions on certain of the Company's Mongolian assets could ultimately result in an event of default of the Company's CIC convertible debenture. This matter remains under review by the Company and its advisers but to date, it is the Company's view that this would not result in an event of default as defined under the CIC convertible debenture terms. However, in the event that the orders result in an event of default of the Company's CIC convertible debenture that remains uncured for ten business days, the principal amount owing and all accrued and unpaid interest will become immediately due and payable upon notice to the Company by CIC.
The orders relate to certain items of operating equipment and infrastructure and the Company's Mongolian bank accounts. The orders related to the operating equipment and infrastructure restricts the sale of these items; however, the orders do not restrict the use of these items in the Company's mining activities. The orders related to the Company's Mongolian bank accounts restrict the use of in-country funds. While the orders restrict the use of in-country funds pending outcome of the investigation, they are not expected to have any material impact on the Company's activities.
Impairment Analysis
During the three months ended March 31, 2013, the Company determined that an indicator of impairment existed for its property, plant and equipment related to the Ovoot Tolgoi Mine. The impairment indicator was the continued weakness in the Company's share price.
Therefore, the Company conducted an impairment test whereby the carrying values of the Company's property, plant and equipment, including mineral properties, related to the Ovoot Tolgoi Mine were compared to their "value-in-use" using a discounted future cash flow valuation model as at March 31, 2013. The Company's property, plant and equipment, including mineral properties, totaled $512.1 million as at March 31, 2013.
Key estimates and assumptions incorporated in the valuation model included the following:
-- Inland Chinese coking coal market coal prices;
-- Life-of-mine coal production and operating costs; and
-- A discount rate based on an analysis of market, country and company
specific factors.
The impairment analysis did not result in the identification of an impairment loss and no charge was required as at March 31, 2013. The Company believes that the estimates and assumptions incorporated in the impairment analysis are reasonable; however, the estimates and assumptions are subject to significant uncertainties and judgments.
PROCESSING INFRASTRUCTURE
On February 13, 2012, the Company announced the successful commissioning of the dry coal-handling facility ("DCHF") at the Ovoot Tolgoi Mine. The DCHF has capacity to process nine million tonnes of run-of-mine ("ROM") coal per year. The DCHF includes a 300-tonne-capacity dump hopper, which receives ROM coal from the Ovoot Tolgoi Mine and feeds a coal rotary breaker that sizes coal to a maximum of 50mm and rejects oversize ash. The DCHF is anticipated to reduce screening costs and improve yield recoveries.
The Company has received all permits to operate the DCHF. However, the 2013 mine plan considers only limited utilization of the DCHF at the latter end of 2013 due to higher quality coals being mined that likely will not require processing through the DCHF and can be sold raw or processed directly through the wet washing facility. The 2013 mine plan assumes a conservative resumption of operations, designed to achieve a cost effective approach that will allow operations to continue on a sustainable basis.
The Company has delayed construction to upgrade the DCHF to include dry air separation modules and covered load out conveyors with fan stackers to take processed coals to stockpiles and enable more efficient blending. Uncommitted capital expenditures have been minimized to preserve the Company's financial resources.
To further enhance product value, in 2011, the Company entered into an agreement with Ejinaqi Jinda Coal Industry Co. Ltd ("Ejin Jinda"), a subsidiary of China Mongolia Coal Co. Ltd ("CMC") to toll-wash coals from the Ovoot Tolgoi Mine. The agreement has a duration of five years from commencement and provides for an annual wet washing capacity of approximately 3.5 million tonnes of input coal. Pursuant to the terms of the agreement, the Company prepaid $33.6 million of toll washing fees.
Ejin Jinda's wet washing facility is located approximately 10 kilometers ("km") inside China from the Shivee Khuren Border Crossing, approximately 50km from the Ovoot Tolgoi Mine. Primarily, medium and higher-ash coals with only basic processing through Ovoot Tolgoi's on-site DCHF will be transported from the Ovoot Tolgoi Mine to the facility under a separate transport agreement. Based on preliminary studies, the Company expects these coals can then be washed to produce coals with ash in the range of 8% to 11% at a yield of 85% to 90%. Ejin Jinda will charge the Company a single toll washing fee which will cover their expenses, capital recovery and profit. Washed coal will generally meet semi-soft coking coal specifications.
Construction of Ejin Jinda's wet washing facility is now complete and it has been connected to utility supply. The Company plans to commence wet washing coals in the second half of 2013. As at March 31, 2013, the delay in commencing wet washing coals has had no impact on the carrying value of the Company's prepaid toll washing fees of $33.6 million.
REGIONAL TRANSPORTATION INFRASTRUCTURE
On August 2, 2011, the State Property Committee of Mongolia awarded the tender to construct a paved highway from the Ovoot Tolgoi Complex to the Shivee Khuren Border Crossing to consortium partners NTB LLC and SouthGobi Sands LLC (together referred to as "RDCC"). SouthGobi Sands LLC holds a 40% interest in RDCC. On October 26, 2011, RDCC signed a concession agreement with the State Property Committee of Mongolia. RDCC has the right to conclude a 17 year build, operate and transfer agreement under the Mongolian Law on Concessions. Construction on the paved highway has re-commenced in the second quarter of 2013 after a scheduled demobilization in the fourth quarter of 2012 due to winter weather conditions. Completion of the paved highway is expected in late 2013. The paved highway will have an intended carrying capacity upon completion in excess of 20 million tonnes of coal per year.
REGULATORY ISSUES
Governmental, Regulatory and Internal Investigations
The Company is subject to continuing investigations by the IAAC and the State Investigation Office (the "SIA") in the Republic of Mongolia regarding allegations against SouthGobi and some of its employees involving possible breaches of Mongolian laws, including anti-corruption and taxation laws. Certain of those allegations (including allegations of bribery, money laundering and tax evasion) have been the subject of public statements and Mongolian media reports, both prior to and in connection with the recent trial and conviction of the former Chairman and the former director of the Geology, Mining and Cadastral Department of the MRAM, and others. SouthGobi was not a party to that case. The Company understands that the court's decision is the subject of an appeal.
A number of the media reports referred to above suggest that, in its decision, the court in the above-mentioned case referred to two matters specifically involving SouthGobi Sands LLC.
In respect of the first matter, being an alleged failure to meet minimum expenditure requirements under the Mongolian Minerals Law in relation to four exploration licenses, the Company is investigating these allegations, but advises that three of the four licenses were considered to be non-material and allowed to lapse between November 2009 and December 2011. Activities historically carried out on the fourth (and the only currently-held) license include drilling, trenching and geological reconnaissance. The Company has no immovable assets located on this license and it does not contain any of SouthGobi's NI 43-101 reserves or resources. This license does not relate to the Company's Ovoot Tolgoi Mine and SouthGobi does not consider this license to be material to its business.
The second matter referred to by the court was an alleged impropriety in the transfer of License 5261X by SouthGobi Sands LLC to a third party in March 2010 in violation of Mongolian anti-corruption laws. The Company understands, based on media reports, that the court has invalidated the transfer of this license, and so the license's current status is unclear.
In addition, the IAAC and SIA have advised the Company that they continue to investigate other alleged improprieties by SouthGobi Sands LLC as described above. Neither SouthGobi nor any of its employees have been charged in connection with the IAAC or SIA investigations, but certain former employees have been advised that they are suspects. The IAAC has imposed orders placing a travel ban on those employees, and administrative restrictions on certain of the Company's Mongolian assets, including local bank accounts, in connection with its continuing investigation of those allegations. While the orders restrict the use of in-country funds pending the outcome of the investigation, they are not expected to have a material impact on the Company's activities in the short term, although they could create potential difficulties for the Company in the medium to long term. SouthGobi is taking and intends to take all necessary steps to protect its ability to continue to conduct its business activities in the ordinary course.
Through its Audit Committee (comprised solely of independent directors), SouthGobi is conducting an internal investigation into possible breaches of law, internal corporate policies and codes of conduct arising from the allegations that have been raised. The Audit Committee has the assistance of independent legal counsel in connection with its investigation. The Chair of the Audit Committee is also participating in a tripartite committee, comprised of the Audit Committee Chairs of the Company and Turquoise Hill and a representative of Rio Tinto, which is focused on the investigation of those allegations, including possible violations of anti-corruption laws. Independent legal counsel and forensic accountants have been engaged by this committee to assist it with its investigation. All of these investigations are ongoing but are not yet complete. Information that has been provided to the IAAC by the Company has also been provided by the tripartite committee to Canadian and United States regulatory authorities that are monitoring the Mongolian investigations. The Company continues to cooperate with all relevant regulatory agencies in respect of the ongoing investigations.
The investigations referred to above could result in one or more Mongolian, Canadian, United States or other governmental or regulatory agencies taking civil or criminal action against the Company, its affiliates or its current or former employees. The likelihood or consequences of such an outcome are unclear at this time but could include financial or other penalties, which could be material, and which could have a material adverse effect on the Company.
Pending the completion of the investigations, the Company, through its Board of Directors and new management, has taken a number of steps to focus ongoing compliance by employees with all applicable laws, internal corporate policies and codes of conduct, and with the Company's disclosure controls and procedures and internal controls over financial reporting.
NOTICE OF INVESTMENT DISPUTE
On July 11, 2012, SouthGobi announced that SGQ Coal Investment Pte. Ltd., a wholly-owned subsidiary of SouthGobi Resources Ltd. that owns 100% of the Company's Mongolian operating subsidiary SouthGobi Sands LLC, filed a Notice of Investment Dispute on the Government of Mongolia pursuant to the Bilateral Investment Treaty between Singapore and Mongolia. The Company filed the Notice of Investment Dispute following a determination by management that they had exhausted all other possible means to resolve an ongoing investment dispute between SouthGobi Sands LLC and the Mongolian authorities.
The Notice of Investment Dispute consists of, but is not limited to, the failure by MRAM to execute the PMAs associated with certain exploration licenses of the Company pursuant to which valid PMA applications had been lodged in 2011. The areas covered by the valid PMA applications include the Zag Suuj Deposit and certain areas associated with the Soumber Deposit outside the existing mining license.
The Notice of Investment Dispute triggers the dispute resolution process under the Bilateral Investment Treaty whereby the Government of Mongolia has a six-month cure period from the date of receipt of the notice to satisfactorily resolve the dispute through negotiations. If the negotiations are not successful, the Company will be entitled to commence conciliation/arbitration proceedings under the auspices of the International Centre for Settlement of Investment Disputes ("ICSID") pursuant to the Bilateral Investment Treaty. However, in the event that the Government of Mongolia fails to negotiate, ICSID arbitration proceedings may be accelerated before the six months have expired. The Company continues to have the right to commence conciliation/arbitration proceedings under the auspices of the ICSID pursuant to the Bilateral Investment Treaty. On January 18, 2013, MRAM issued the Company a PMA pertaining to the Soumber Deposit; however, four valid PMA applications remain outstanding.
Activities historically carried out on the exploration licenses with valid PMA applications include drilling, trenching and geological reconnaissance. The Company has no immovable assets located on these licenses and the loss of any or all of these licenses would not materially and adversely affect the existing operations.
OUTLOOK
Economic activity post transition in China's leadership has been slower than expected. The Chinese steel industry has been particularly affected and, as a result, demand and prices for coking coal have been negatively impacted. Nevertheless, market sentiment remains that demand in the second half of 2013 should improve; albeit, more slowly than anticipated at the beginning of this year. Looking forward, the more positive market position, as previously outlined, endures.
The Company resumed operations at the Ovoot Tolgoi Mine on March 22, 2013 after having been fully curtailed since the end of the second quarter of 2012. Full safety inductions and retraining were undertaken as part of the ramp-up which has taken place without incident. The Company has been producing at conservative levels reflecting lower demand and managing quality and stockpiles. The rate of production is expected to pick up as demand improves and the Company continues to target production of 3.2 million tonnes of semi-soft coking coal in 2013. Once toll washing commences, it will enable SouthGobi to develop a predominantly two product strategy of a Premium and Standard semi-soft coking coal product from the Ovoot Tolgoi Mine. The Premium product will be washed and the Standard product will be a predominantly unwashed product. The capability to begin supplying a washed semi-soft coking coal product in the second half of the year is another important step in improving both the Company's market position and access to end customers.
The Company continues to minimize uncommitted capital expenditures, exploration and operational expenditures in order to preserve its financial resources. For at least twelve months from the end of the March 31, 2013 reporting period, the Company expects its liquidity to remain sufficient based on existing capital resources and estimated income from mining operations. Liquidity beyond the twelve month period is dependent on the success of the recommencement of operations and ongoing demand and prices in the coal market.
To date, the Company has not signed any semi-soft coking coal sales contracts for the second quarter of 2013. However, discussions are actively continuing in order to meet the Company's commercial objectives. Market participants at the Ceke border have been selling coal from existing stockpiles rather than contracting new volumes as they deal with current market uncertainty. A request from the Ceke Coal Import Association received April 1, 2013 and indirectly supported by the Ejina Qi banner government in China for coal to be bought through the association has exacerbated this uncertainty. As a result, customers have been reluctant to purchase coal under individual contracts.
On April 8, 2013, the Government of Mongolia advised that the royalty regime trial period had not been extended beyond April 1, 2013. Under the trial period, royalties on all coal sales exported out of Mongolia were determined using the contracted sales price per tonne. However, effective April 1, 2013, royalties on all coal sales exported out of Mongolia will be based on the reference price per tonne published by the Government of Mongolia. The reference price applied does not adequately reflect the price applicable to the range of products of varying quality and prices sold ex-mine in Mongolia. This can result in effective royalty rates being far in excess of the prescribed royalty rates and will impact Mongolian producers' margins going forward if it is not changed. The current monthly royalty reference price system is not supported by any of the Mongolian coal producers and collectively these companies, including SouthGobi continue to engage with the Government of Mongolia to resolve this matter in the interests of all parties.
Longer term, SouthGobi remains well positioned, with a number of key competitive strengths, including:
-- Strategic location - SouthGobi is the closest major coking coal producer
in the world to China. The Ovoot Tolgoi Mine is approximately 40km from
China, which is approximately 190km closer than Tavan Tolgoi coal
producers in Mongolia and 7,000 to 10,000km closer than Australian and
North American coking coal producers. The Company has an infrastructure
advantage, being approximately 50km from existing railway
infrastructure, which is approximately one tenth the distance to rail of
Tavan Tolgoi coal producers in Mongolia.
-- Premium quality coals - Most of the Company's coal resources have coking
properties, including a mixture of semi-soft coking coals and hard
coking coals. SouthGobi is also completing its investment in
infrastructure to capture more of the value from the products it sells.
-- Favorable cost structure - The long-term cost structure of SouthGobi
provides a strong base for sustainable growth when access to end-user
markets is obtained even though competition from other Chinese and
Mongolian semi-soft coals indicate that capturing margins relative to
other international coals is difficult.
-- Substantial resource base - The Company's aggregate coal resources
(including reserves) include measured and indicated resources of 533
million tonnes and inferred resources of 302 million tonnes.
Objectives
The Company's objectives for 2013 are as follows:
-- Resume production at the Ovoot Tolgoi Mine - The Company has reviewed
the overall structure of its workforce and market conditions and has
recommenced mining activities at the Ovoot Tolgoi Mine in March 2013
with plans to produce 3.2 million tonnes in 2013. The focus is to do
this in a safe manner that provides a sustainable long-term operating
base.
-- Continue to develop regional infrastructure - The Company's priority is
to complete the construction of the paved highway from the Ovoot Tolgoi
Mine to the Shivee Khuren Border Crossing as part of the existing
consortium that was awarded the tender by the end of 2013.
-- Advance the Soumber Deposit - The Company intends to substantially
advance the feasibility, planning and physical preparation for a mine at
Soumber by 2014.
-- Value-adding/upgrading coal - Implement an effective and profitable
utilization of the wet washing facility contracted with Ejin Jinda to
toll-wash coal from the Ovoot Tolgoi Mine and further develop the
Company's marketing plans on product mix and seek to expand the
Company's customer base.
-- Re-establish the Company's reputation - The Company's vision is to be a
respected and profitable Mongolian coal company. This will require re-
establishing good working relationships with all our external
stakeholders.
-- Operations - Continuing to focus on production safety, environmental
protection, operational excellence and community relations.
NON-IFRS FINANCIAL MEASURES
Cash Costs:
The Company uses cash costs to describe its cash production costs. Cash costs incorporate all production costs, which include direct and indirect costs of production, with the exception of idled mine costs which are excluded. Non-cash adjustments include share-based compensation expense, inventory impairments, depreciation and depletion of mineral properties.
The Company uses this performance measure to monitor its operating cash costs internally and believes this measure provides investors and analysts with useful information about the Company's underlying cash costs of operations. The Company believes that conventional measures of performance prepared in accordance with IFRS do not fully illustrate the ability of its mining operations to generate cash flows. The Company reports cash costs on a sales basis. This performance measure is commonly utilized in the mining industry.
The cash costs of product sold may differ from cash costs of product produced depending on the timing of stockpile inventory turnover.
Adjusted Net Income/(Loss):
Adjusted net income/(loss) excludes idled mine costs, share-based compensation expense/(recovery), net impairment loss/(recovery) on assets, unrealized foreign exchange losses/(gains), unrealized loss/(gain) on the fair value change of the embedded derivatives in the CIC convertible debenture, realized losses/(gains) on the disposal of FVTPL investments and unrealized losses/(gains) on FVTPL investments. The Company excludes these items from net income/(loss) to provide a measure which allows the Company and investors to evaluate the results of the underlying core operations of the Company and its profitability from operations. The items excluded from the computation of adjusted net income/(loss), which are otherwise included in the determination of net income/(loss) prepared in accordance with IFRS, are items that the Company does not consider to be meaningful in evaluating the Company's past financial performance or the future prospects and may hinder a comparison of its period-to-period results.
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Condensed Consolidated Interim Statements of Comprehensive Income
(Unaudited)
(Expressed in thousands of U.S. Dollars, except for share and per share
amounts)
Three months ended
March 31,
------------------------------
2013 2012
------------------------------
Revenue $ 3,259 $ 40,153
Cost of sales (21,860) (17,479)
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Gross profit/(loss) (18,601) 22,674
Other operating expenses (383) (2,578)
Administration expenses (3,733) (5,882)
Evaluation and exploration expenses (273) (5,033)
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Income/(loss) from operations (22,990) 9,181
Finance costs (4,996) (1,497)
Finance income 775 236
Share of loss of joint venture (17) -
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Income/(loss) before tax (27,228) 7,920
Current income tax expense (1) (4,874)
Deferred income tax recovery 2,328 80
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Net income/(loss) attributable to equity
holders of the Company (24,901) 3,126
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OTHER COMPREHENSIVE INCOME/(LOSS)
Item that may be reclassified to profit or
loss:
Gain/(loss) on available-for-sale financial
asset, net of tax 930 (5,422)
----------------------------------------------------------------------------
Net comprehensive loss attributable to equity
holders of the Company $ (23,971) $ (2,296)
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BASIC INCOME/(LOSS) PER SHARE $ (0.14) $ 0.02
DILUTED INCOME/(LOSS) PER SHARE $ (0.14) $ 0.02
Condensed Consolidated Interim Statements of Financial Position
(Unaudited)
(Expressed in thousands of U.S. Dollars)
As at
-------------------------------
March 31, December 31,
2013 2012
--------------- ---------------
ASSETS
Current assets
Cash $ 24,813 $ 19,674
Trade and other receivables 15,331 17,430
Short term investments - 15,000
Inventories 51,506 53,661
Prepaid expenses and deposits 43,894 37,982
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Total current assets 135,544 143,747
Non-current assets
Prepaid expenses and deposits 8,389 16,778
Property, plant and equipment 512,144 521,473
Long term investments 26,417 24,084
Deferred income tax assets 25,612 23,285
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Total non-current assets 572,562 585,620
----------------------------------------------------------------------------
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Total assets $ 708,106 $ 729,367
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EQUITY AND LIABILITIES
Current liabilities
Trade and other payables $ 12,468 $ 10,216
Current portion of convertible debenture 7,233 6,301
----------------------------------------------------------------------------
Total current liabilities 19,701 16,517
Non-current liabilities
Convertible debenture 98,945 99,667
Decommissioning liability 4,157 4,104
----------------------------------------------------------------------------
Total non-current liabilities 103,102 103,771
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total liabilities 122,803 120,288
Equity
Common shares 1,059,751 1,059,710
Share option reserve 51,457 51,303
Investment revaluation reserve 930 -
Accumulated deficit (526,835) (501,934)
----------------------------------------------------------------------------
Total equity 585,303 609,079
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Total equity and liabilities $ 708,106 $ 729,367
----------------------------------------------------------------------------
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Net current assets $ 115,843 $ 127,230
Total assets less current liabilities $ 688,405 $ 712,850
REVIEW OF INTERIM RESULTS
The condensed consolidated interim financial statements for the Company for the three months ended March 31, 2013 were reviewed by the Audit Committee of the Company.
SouthGobi's results for the quarter ended March 31, 2013 are contained in the unaudited Condensed Consolidated Interim Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), available on the SEDAR website at www.sedar.com and SouthGobi Resources' website at www.southgobi.com.
ABOUT SOUTHGOBI RESOURCES
SouthGobi Resources is listed on the Toronto and Hong Kong stock exchanges, in which Turquoise Hill Resources Ltd., also publicly listed in Toronto and New York, has a 58% shareholding. Turquoise Hill took management control of SouthGobi in September 2012 and made changes to the board and senior management. Rio Tinto has a majority shareholding in Turquoise Hill.
SouthGobi Resources is focused on exploration and development of its metallurgical and thermal coal deposits in Mongolia's South Gobi Region. It has a 100% shareholding in SouthGobi Sands LLC, the Mongolian registered company that holds the mining and exploration licenses in Mongolia and operates the flagship Ovoot Tolgoi coal mine. Ovoot Tolgoi produces and sells coal to customers in China.
Disclosure of a scientific or technical nature in this release and the Company's MD&A with respect to the Company's Mongolian Coal Division was prepared by, or under the supervision of, RungePincockMinarco ("RPM"). The professionals at RPM meet the definition of a "qualified person" for the purposes of National Instrument 43-101 of the Canadian Securities Administrators.
Forward-Looking Statements: This document includes forward-looking statements. Forward-looking statements include, but are not limited to: the statement that gross profit will vary by year depending on sales volume, sales price and unit costs; statements relating to the determination of the royalty rate on coal sales exported out of Mongolia; statements regarding future variances in exploration expenses; the statement that the Company expects to have sufficient liquidity and capital resources to meet its ongoing obligations and future contractual commitments for at least twelve months from the end of the March 31, 2013 reporting period; the statement that the Company expects its liquidity to remain sufficient based on existing capital resources and estimated income from mining operations; statements regarding the estimates and assumptions incorporated into the impairment analysis on the carrying values of certain assets related to the Ovoot Tolgoi Mine; the statement that the Company plans to commence wet washing coals in the second half of 2013; the statement that completion of the paved highway is expected late 2013; the statement that the capacity of the paved highway is in excess of 20 million tonnes of coal per year; statements regarding the Company's entitlement to conciliation or arbitration proceedings under ICSID; statements regarding the outlook for 2013; statements regarding the supply and demand of the coking coal market; statements regarding the production forecast for the Ovoot Tolgoi Mine; statements regarding the Company's objectives for 2013 (including the production of the Ovoot Tolgoi Mine, plans to continue to develop regional infrastructure from Ovoot Tolgoi to the Shivee Khuren Border Crossing, plans regarding the implementation of the wet washing facility to toll-wash coal from the Ovoot Tolgoi mine, plans to re-establish the Company's reputation and plans regarding operations); and other statements that are not historical facts. When used in this document, the words such as "plan", "estimate", "expect", "intend", "may", and similar expressions are forward-looking statements. Although SouthGobi believes that the expectations reflected in these forward-looking statements are reasonable, such statements involve risks and uncertainties and no assurance can be given that actual results will be consistent with these forward-looking statements. Important factors that could cause actual results to differ from these forward-looking statements are disclosed under the heading "Risk Factors" in SouthGobi's MD&A for the year ended December 31, 2012 and which are available at www.sedar.com.
Contacts:
Mongolia:
SouthGobi Sands LLC (Mongolia)
Altanbagana Bayarsaikhan
+976 9910 7589
Altanbagana.Bayarsaikhan@southgobi.com
www.southgobi.com
Brunswick Group (Hong Kong)
Joseph Lo
+852 9850 5033
Brunswick Group (Hong Kong)
Joanna Donne
+852 9221 3930
southgobi@brunswickgroup.com