SouthGobi Resources Announces Third Quarter 2012 Financial and Operating Results
HONG KONG, CHINA -- (Marketwire) -- 11/13/12 -- SouthGobi Resources Ltd. (TSX: SGQ)(HKSE: 1878) (the "Company" or "SouthGobi") today announced its financial and operating results for the three and nine months ended September 30, 2012. All figures are in U.S. dollars unless otherwise stated.
HIGHLIGHTS
The Company's highlights for the quarter ended September 30, 2012 and subsequent weeks are as follows:
-- SouthGobi's mining activities remained fully curtailed throughout the
third quarter of 2012 to manage coal inventories and to maintain
efficient working capital levels;
-- SouthGobi continued to suspend uncommitted capital expenditures and
exploration expenditures to preserve its financial resources;
-- Sales volumes and revenue declined to 0.31 million tonnes and $3.3
million, respectively, in the third quarter of 2012;
-- SouthGobi was notified that the Aluminum Corporation of China Limited's
("CHALCO") proportional takeover bid for up to 60% of the issued and
outstanding common shares of SouthGobi had been terminated, which also
resulted in the termination of the cooperation agreement;
-- SouthGobi received a letter from the Mineral Resources Authority of
Mongolia ("MRAM") confirming that as of September 4, 2012, all
exploration and mining licenses held by the Company were in good
standing;
-- SGQ Coal Investment Pte. Ltd., a wholly-owned subsidiary of SouthGobi
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 proposed sale of the Tsagaan Tolgoi Deposit to Modun Resources
Limited ("Modun") was cancelled by mutual agreement of both parties; and
-- SouthGobi announced changes to its Board of Directors and senior
management team.
REVIEW OF QUARTERLY OPERATING RESULTS
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The Company's operating results for the previous eight quarters are
summarized in the table below:
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2012
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30- 30- 31-
QUARTER ENDED Sep Jun Mar
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Volumes and prices
Raw semi-soft coking coal
Raw coal production
(millions of tonnes) - 0.07 0.28
Coal sales (millions of
tonnes) - 0.12 0.31
Average realized selling
price (per tonne) $ - $ 67.17 $ 67.59
Raw medium-ash coal
Raw coal production
(millions of tonnes) - 0.11 0.64
Coal sales (millions of
tonnes) - 0.04 0.53
Average realized selling
price (per tonne) $ - $ 49.91 $ 50.40
Raw higher-ash coal
Raw coal production
(millions of tonnes) - 0.09 0.15
Coal sales (millions of
tonnes) 0.31 0.00 -
Average realized selling
price (per tonne) $ 15.79 $ 38.80 $ -
Total
Raw coal production
(millions of tonnes) - 0.27 1.07
Coal sales (millions of
tonnes) 0.31 0.16 0.84
Average realized selling
price (per tonne) $ 15.79 $ 62.56 $ 56.79
Costs
Direct cash costs of
product sold excluding
idled mine costs (per
tonne) (i) $ 8.23 $ 22.57 $ 10.80
Total cash costs of
product sold excluding
idled mine costs (per
tonne) (i) $ 12.12 $ 31.49 $ 15.04
Waste movement and stripping
ratio
Production waste material
moved (millions of bank
cubic meters) - 1.16 2.20
Strip ratio (bank cubic
meters of waste material
per tonne of coal
produced) - 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 4 4 3
Total combined stated
mining shovel/excavator
capacity at period end
(cubic meters) 98 98 64
Number of haul trucks
available at period end 27 27 27
Total combined stated haul
truck capacity at period
end (tonnes) 4,743 4,743 4,743
Employees and safety
Employees at period end 644 693 720
Lost time injury frequency
rate (ii) 0.8 1.1 1.4
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2011 2010
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31- 30- 30- 31- 31-
QUARTER ENDED Dec Sep Jun Mar Dec
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Volumes and prices
Raw semi-soft coking coal
Raw coal production
(millions of tonnes) 0.47 0.55 0.52 0.48 0.41
Coal sales (millions of
tonnes) 0.53 0.66 0.60 0.34 0.35
Average realized selling
price (per tonne) $ 67.62 $ 66.83 $ 65.96 $ 56.50 $ 47.08
Raw medium-ash coal
Raw coal production
(millions of tonnes) 0.37 0.20 - - -
Coal sales (millions of
tonnes) 0.37 0.20 - - -
Average realized selling
price (per tonne) $ 48.59 $ 48.17 $ - $ - $ -
Raw higher-ash coal
Raw coal production
(millions of tonnes) 0.50 0.50 0.35 0.63 0.9
7
Coal sales (millions of
tonnes) 0.25 0.51 0.45 0.11 1.12
Average realized selling
price (per tonne) $ 40.30 $ 39.74 $ 38.32 $ 31.68 $ 26.75
Total
Raw coal production
(millions of tonnes) 1.34 1.25 0.87 1.11 1.38
Coal sales (millions of
tonnes) 1.15 1.37 1.05 0.45 1.47
Average realized selling
price (per tonne) $ 55.51 $ 54.01 $ 54.06 $ 50.29 $ 31.56
Costs
Direct cash costs of
product sold excluding
idled mine costs (per
tonne) (i) $ 22.14 $ 22.64 $ 26.77 $ 18.91 $ 18.53
Total cash costs of
product sold excluding
idled mine costs (per
tonne) (i) $ 23.09 $ 23.17 $ 27.61 $ 20.61 $ 19.25
Waste movement and stripping
ratio
Production waste material
moved (millions of bank
cubic meters) 4.58 4.10 4.08 3.85 3.56
Strip ratio (bank cubic
meters of waste material
per tonne of coal
produced) 3.42 3.28 4.74 3.47 2.58
Pre-production waste
material moved (millions
of bank cubic meters) - 0.39 0.80 0.49 0.73
Other operating capacity
statistics
Capacity
Number of mining
shovels/excavators
available at period end 3 3 4 3 3
Total combined stated
mining shovel/excavator
capacity at period end
(cubic meters) 64 64 98 83 82
Number of haul trucks
available at period end 25 16 16 16 15
Total combined stated haul
truck capacity at period
end (tonnes) 4,561 2,599 2,599 2,599 2,254
Employees and safety
Employees at period end 720 695 658 600 544
Lost time injury frequency
rate (ii) 1.2 0.9 0.6 0.7 0.8
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(i) A non-IFRS financial measure, see Non-IFRS Financial Measures section
(ii) Per 1,000,000 man hours
For the three months ended September 30, 2012
For the three months ended September 30, 2012, the Company's mining activities remained fully curtailed. The Company sold 0.31 million tonnes of coal at an average realized selling price of $15.79 per tonne compared to sales of 1.37 million tonnes of coal at an average realized selling price of $54.01 per tonne for the three months ended September 30, 2011.
Sales volume declined for the three months ended September 30, 2012 due to the continued softening of inland China coking coal markets closest to SouthGobi's operations and the continued uncertainty with respect to whether SouthGobi would receive a formal request from MRAM to suspend mining activities on its Ovoot Tolgoi mining license, which caused customers concern that they would be unable to collect and export additional coal purchased from the Ovoot Tolgoi Mine. The decrease in the average realized selling price in the third quarter of 2012 is primarily related to the Company's sales mix - only higher-ash coals were sold in the third quarter of 2012 - and the significant reduction in the Company's selling price for higher-ash coals.
In the third quarter of 2012, the Company sold higher-ash stockpiles to satisfy existing sales contracts. The Company's average realized selling price was negatively impacted by the continued softening of the inland China coking coal markets closest to SouthGobi's operations.
Direct cash costs of product sold excluding idled mine costs (a non-IFRS financial measure, see Non-IFRS Financial Measures section) were $8.23 per tonne for the three months ended September 30, 2012 compared to $22.64 per tonne for the three months ended September 30, 2011. Direct cash costs of product sold excluding idled mine costs primarily decreased due to non-cash coal stockpile impairments recorded in the third quarter of 2012.
For the nine months ended September 30, 2012
For the nine months ended September 30, 2012, the Company produced 1.33 million tonnes of raw coal with a strip ratio of 2.52 compared to production of 3.22 million tonnes of raw coal with a strip ratio of 3.74 for the nine months ended September 30, 2011. The decrease in production primarily related to the curtailment of the Company's mining operations in the second and third quarters of 2012; whereas, the decrease in the strip ratio primarily related to the below-trend strip ratio in the first quarter of 2012 which will be normalized over the life-of-mine.
For the nine months ended September 30, 2012, the Company sold 1.31 million tonnes of coal at an average realized selling price of $47.76 per tonne compared to sales of 2.87 million tonnes of coal at an average realized selling price of $53.44 per tonne for the nine months ended September 30, 2011. Revenue decreased to $51.9 million for the nine months ended September 30, 2012 from $128.0 million for the nine months ended September 30, 2011 primarily due to decreased sales volumes in the second and third quarters of 2012 and lower average realized selling prices in the third quarter of 2012, partially offset by higher sales volumes in the first quarter of 2012.
Direct cash costs of product sold excluding idled mine costs (a non-IFRS financial measure, see Non-IFRS Financial Measures section) were $11.61 per tonne for the nine months ended September 30, 2012 compared to $23.55 per tonne for the nine months ended September 30, 2011. Direct cash costs of product sold excluding idled mine costs have primarily decreased as a result of a lower strip ratio, reduced fuel prices and non-cash coal stockpile impairments recorded in the third quarter of 2012.
REVIEW OF QUARTERLY FINANCIAL RESULTS
The Company's financial results for the previous eight quarters are summarized in the table below:
($ in thousands, except for per share information, unless otherwise indicated)
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2012
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QUARTER ENDED 30-Sep 30-Jun 31-Mar
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Revenue $ 3,337 $ 8,412 $ 40,153
Gross profit/(loss)
excluding idled mine
costs (8,601) 1,778 22,674
Gross profit margin
excluding idled mine
costs -258% 21% 56%
Gross profit/(loss)
including idled mine
costs (27,532) (13,809) 22,674
Other operating expenses (29,301) (3,803) (2,578)
Administration expenses (5,178) (7,497) (5,882)
Evaluation and
exploration expenses (958) (2,099) (5,033
Income/(loss) from
operations (62,969) (27,208) 9,181
Net income/(loss) (54,564) 237 3,126
Basic income/(loss) per
share (0.30) 0.00 0.02
Diluted income/(loss) per
share (0.30) (0.12) 0.02
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2011 2010
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QUARTER ENDED 31-Dec 30-Sep 30-Jun 31-Mar 31-Dec
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Revenue $ 51,064 $ 60,491 $ 47,336 $ 20,158 $ 41,595
Gross profit/(loss)
excluding idled mine
costs 16,637 17,635 9,744 7,690 3,950
Gross profit margin
excluding idled mine
costs 33% 29% 21% 38% 9%
Gross profit/(loss)
including idled mine
costs 16,637 17,635 9,744 7,690 3,950
Other operating expenses (24,644) (138) (3,024) (1,383) (2,121)
Administration expenses (8,612) (7,993) (6,808) (5,336) (6,599)
Evaluation and
exploration expenses (14,513) (10,908) (4,356) (1,991) (4,144)
Income/(loss) from
operations (31,132) (1,404) (4,444) (1,020) (8,914)
Net income/(loss) (18,897) 55,921 67,323 (46,602) (28,720)
Basic income/(loss) per
share (0.10) 0.31 0.37 (0.25) (0.16)
Diluted income/(loss) per
share (0.14) (0.02) - (0.25) (0.16)
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2012
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QUARTER ENDED 30-Sep 30-Jun 31-Mar
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Net income/(loss) $ (54,564) $ 237 $ 3,126
Income/(loss)
adjustments, net of tax
Idled mine costs 13,572 10,966 -
Share-based
compensation 1,490 4,383 3,799
Net impairment
loss/(recovery) on
assets 34,299 2,583 -
Unrealized foreign
exchange
losses/(gains) 179 (511) (950)
Unrealized loss/(gain)
on embedded
derivatives in CIC
debenture (12,856) (26,770) 776
Realized loss/(gain) on
disposal of FVTPL
investments (i) - 46 (85)
Unrealized loss/(gain)
on FVTPL investments 1,197 2,282 339
Adjusted net
income/(loss) (ii) (16,683) (6,784) 7,005
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2011 2010
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QUARTER ENDED 31-Dec 30-Sep 30-Jun 31-Mar 31-Dec
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Net income/(loss) $(18,897) $ 55,921 $ 67,323 $(46,602) $(28,720)
Income/(loss)
adjustments, net of tax
Idled mine costs - - - - -
Share-based
compensation 4,050 4,296 3,349 2,715 3,840
Net impairment
loss/(recovery) on
assets 23,818 (2,925) - - 574
Unrealized foreign
exchange
losses/(gains) 34 103 263 (993) (1,837)
Unrealized loss/(gain)
on embedded
derivatives in CIC
debenture (10,790) (62,058) (70,422) 36,780 19,995
Realized loss/(gain) on
disposal of FVTPL
investments (i) - - - - -
Unrealized loss/(gain)
on FVTPL investments 155 2,449 (3,629) 4,116 (4,375)
Adjusted net
income/(loss) (ii) (1,630) (2,214) (3,116) (3,984) (10,523)
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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
For the three months ended September 30, 2012
The Company recorded a net loss of $54.6 million for the three months ended September 30, 2012 compared to a net income of $0.2 million for the three months ended June 30, 2012 and a net income of $55.9 million for the three months ended September 30, 2011.
Gross Profit:
The Company's gross profit is composed of revenue (net of royalties and selling fees) and cost of sales and relates solely to the Mongolian Coal Division. For the three months ended September 30, 2012, gross loss was negatively impacted by $18.9 million of idled mine costs, resulting in a gross loss of $27.5 million. The Company recorded a gross loss excluding idled mine costs of $8.6 million for the three months ended September 30, 2012 compared to a gross profit excluding idled mine costs of $1.8 million for the three months ended June 30, 2012 and $17.6 million for the three months ended September 30, 2011.
The Company recognized revenue of $3.3 million in the third quarter of 2012 compared to $8.4 million in the second quarter of 2012 and $60.5 million in the third quarter of 2011. The decrease in revenue from the second quarter of 2012 can be attributed to the Company's sales mix - only higher-ash coals were sold in the third quarter of 2012 - and the significant reduction in the Company's selling price for higher-ash coals due to market conditions. The decrease in revenue from the third quarter of 2011 can primarily be attributed to decreased sales volumes and a lower average realized selling price due to the significant reduction in the Company's selling price for higher-ash coals in the third quarter of 2012. SouthGobi's effective royalty rate in the third quarter of 2012 was 30%, significantly higher than prior periods due to the Company's sales mix and the significant reduction in the Company's selling price for higher-ash coals.
SouthGobi, together with other Mongolian mining companies affected by the escalation of effective royalty rates, opened a dialog with the appropriate Government of Mongolia authorities with a view of moving to a more equitable process for setting reference prices. There has been a successful outcome and commencing October 1, 2012 (for a six month trial period) the royalty will be calculated using the contracted sales price per tonne, not the reference price per tonne published by the Government of Mongolia. Over the trial period, the Company's effective royalty rate is expected to be significantly lower.
Cost of sales was $30.9 million in the third quarter of 2012 compared to $22.2 million in the second quarter of 2012 and $42.9 million in the third quarter of 2011. 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. Of the $30.9 million and $22.2 million recorded as cost of sales in the third and second quarters of 2012, $12.0 million and $6.6 million related to mine operations and $18.9 million and $15.6 million related to idled mine costs, respectively. Cost of sales related to mine operations increased in the third quarter of 2012 compared to the second quarter of 2012 primarily due to coal stockpile impairments totaling $7.2 million and higher sales volumes, partially offset by lower unit costs. Cost of sales related to mine operations decreased in the third quarter of 2012 compared to the third quarter of 2011 primarily due to lower sales volumes, partially offset by coal stockpile impairments totaling $7.2 million.
Other Operating Expenses:
Other operating expenses in the third quarter of 2012 increased to $29.3 million compared to $3.8 million in the second quarter of 2012 and $0.1 million in the third quarter of 2011. The increase in other operating expenses primarily relates to provisions for doubtful trade and other receivables, an impairment loss on available-for-sale financial assets, and an impairment of property, plant and equipment, partially offset by reduced public infrastructure costs.
For the three months ended September 30, 2012, the Company recorded $29.5 million of provisions and impairments in other operating expenses related to the following:
-- Trade and other receivables - the Company recorded a total loss
provision of $11.1 million for certain uncollectible trade receivables.
The Company anticipates full recovery of its remaining outstanding trade
and other receivables.
-- Available-for-sale financial asset - as at September 30, 2012, the
Company determined that objective evidence of impairment in the
Company's investment in Aspire Mining Limited ("Aspire") existed.
Therefore, an impairment loss of $16.1 million was recognized in other
operating expenses.
-- Property, plant and equipment - the Company recorded $2.3 million of
impairment charges to reduce various items of property, plant and
equipment to their recoverable amounts. The impairment consists of a
$1.2 million provision on tires held for sale and a $1.1 million
impairment of construction in progress expenditures that were not
expected to be recovered.
Public infrastructure costs decreased in the third quarter of 2012 compared to the second quarter of 2012 and third quarter of 2011 due to reduced maintenance costs on transportation infrastructure from the Ovoot Tolgoi Mine to the Shivee Khuren Border Crossing and the completion of the expanded border crossing infrastructure at the Shivee Khuren Border crossing in the second quarter of 2012. Public infrastructure costs should continue to be lower than prior periods due to the completion of the expanded border crossing infrastructure at the Shivee Khuren Border Crossing.
Administration Expenses:
Administration expenses in the third quarter of 2012 were $5.2 million compared to $7.5 million in the second quarter of 2012 and $8.0 million in the third quarter of 2011. Administration expenses decreased in the third quarter of 2012 compared to the second quarter of 2012 and third quarter of 2011 primarily due to decreased corporate administration, salaries and benefits and share-based compensation expenses, partially offset by increased legal and professional fees. Legal and professional fees were higher in the third quarter of 2012 primarily due to additional legal fees as a result of the CHALCO proportional takeover bid and the Notice of Investment Dispute (refer to Notice of Investment Dispute section).
Evaluation and Exploration Expenses:
Exploration expenses in the third quarter of 2012 were $1.0 million compared to $2.1 million in the second quarter of 2012 and $10.9 million in the third quarter of 2011. Exploration expenses will vary from quarter to quarter depending on the number of projects and the related seasonality of the exploration programs. The Company continued to curtail exploration activities in the third quarter of 2012 to preserve financial resources. The majority of the exploration activities in the third quarter of 2012 related to water exploration activities. Exploration expenses in the third quarter of 2011 included a higher proportion of the 2011 exploration program expenses due to delays in receiving required government approvals in the first half of 2011.
Finance Income & Finance Costs:
The Company incurred finance costs in the third quarter of 2012 of $5.2 million compared to $4.1 million in the third quarter of 2011. Finance costs in the third quarter of 2012 primarily consisted of $3.9 million of interest expense on the China Investment Corporation ("CIC") convertible debenture and a $1.2 million unrealized loss on FVTPL investments; whereas, finance costs in the third quarter of 2011 primarily consisted of $1.5 million of interest expense on the CIC convertible debenture and a $2.4 million unrealized loss on FVTPL investments.
The Company recorded finance income in the third quarter of 2012 of $12.9 million compared to $62.3 million in the third quarter of 2011. In the third quarter of 2012, finance income primarily consisted of a $12.9 million unrealized gain on the fair value change of the embedded derivatives in the CIC convertible debenture; whereas, in the third quarter of 2011, finance income primarily consisted of a $62.1 million unrealized gain on the fair value change of the embedded derivatives in the CIC convertible debenture.
The Company's investment in Aspire continues to be classified as an available-for-sale financial asset. As at September 30, 2012, the Company determined that objective evidence of impairment in the Company's investment in Aspire existed. Therefore, an impairment loss of $16.1 million was recognized in other operating expenses. Other comprehensive income for the three months ended September 30, 2011 consists of an unrealized loss (net of tax) of $15.9 million related to the Company's investment in Aspire.
Taxes:
In the third quarter of 2012, the Company recorded a current income tax recovery of $0.9 million related to its Mongolian operations compared to a current income tax expense of $4.3 million in the third quarter of 2011. The Company has recorded a deferred income tax expense related to deductible temporary differences of $0.5 million in the third quarter of 2012 compared to a deferred income tax recovery of $3.3 million in the third quarter of 2011.
For the nine months ended September 30, 2012
The Company recorded a net loss of $51.2 million for the nine months ended September 30, 2012 compared to a net income of $76.6 million for the nine months ended September 30, 2011.
Gross Profit:
The Company's gross profit is composed of revenue (net of royalties and selling fees) and cost of sales and relates solely to the Mongolian Coal Division. For the nine months ended September 30, 2012, gross loss was negatively impacted by $34.5 million of idled mine costs, resulting in a gross profit excluding idled mine costs of $15.8 million. The Company recorded a gross profit excluding idled mine costs of $35.1 million for the nine months ended September 30, 2011.
Revenue decreased to $51.9 million for the nine months ended September 30, 2012 from $128.0 million for the nine months ended September 30, 2011 primarily due to decreased sales volumes in the second and third quarters of 2012 and lower average realized selling prices in the third quarter of 2012, partially offset by higher sales volumes in the first quarter of 2012.
Cost of sales was $70.6 million for the nine months ended September 30, 2012 compared to $92.9 million for the nine months ended September 30, 2011. 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. Of the $70.6 million recorded as cost of sales for the nine months ended September 30, 2012, $36.1 million related to mine operations and $34.5 million related to idled mine costs. Cost of sales related to mine operations decreased for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 primarily due to lower sales volumes and lower unit costs, partially offset by coal stockpile impairments totaling $7.2 million.
Other Operating Expenses:
Other operating expenses for the nine months ended September 30, 2012 increased to $35.7 million compared to $4.5 million for the nine months ended September 30, 2011. The increase in other operating expenses primarily relates to provisions for doubtful trade and other receivables, an impairment loss on available-for-sale financial assets and an impairment of property, plant and equipment, partially offset by reduced public infrastructure costs.
For the nine months ended September 30, 2012, the Company recorded $32.1 million of provisions and impairments related to the following:
-- Trade and other receivables - the Company recorded a total loss
provision of $13.7 million for certain uncollectible trade receivables.
The Company anticipates full recovery of its remaining outstanding trade
and other receivables.
-- Available-for-sale financial asset - as at September 30, 2012, the
Company determined that objective evidence of impairment in the
Company's investment in Aspire existed.
Therefore, an impairment loss of $16.1 million was recognized in other
operating expenses.
-- Property, plant and equipment - the Company recorded $2.3 million of
impairment charges to reduce various items of property, plant and
equipment to their recoverable amounts. The impairment consists of a
$1.2 million provision on tires held for sale and a $1.1 million
impairment of construction in progress expenditures that were not
expected to be recovered.
Public infrastructure costs decreased for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 due to reduced maintenance costs on transportation infrastructure from the Ovoot Tolgoi Mine to the Shivee Khuren Border Crossing and reduced works on the expanded border crossing infrastructure at the Shivee Khuren Border Crossing. Public infrastructure costs should continue to be lower than prior periods due to the completion of the expanded border crossing infrastructure at the Shivee Khuren Border Crossing.
Administration Expenses:
Administration expenses for the nine months ended September 30, 2012 were $18.6 million compared to $20.1 million for the nine months ended September 30, 2011. The decrease in administration expenses for the nine months ended September 30, 2012 primarily related to reduced corporate administration and share-based compensation expense, partially offset by increased salaries and benefits and legal and professional fees. Salaries and benefits increased for the nine months ending September 30, 2012 primarily due to severance payments resulting from personnel separations, while legal and professional fees were higher due to additional legal fees as a result of the CHALCO proportional takeover bid and the Notice of Investment Dispute (refer to Notice of Investment Dispute section).
Evaluation and Exploration Expenses:
Exploration expenses for the nine months ended September 30, 2012 were $8.1 million compared to $17.3 million for the nine months ended September 30, 2011. Exploration expenses will vary period to period depending on the number of projects and the related seasonality of the exploration programs. The Company continues to curtail 2012 exploration activities to preserve financial resources. The majority of the exploration activities for the nine months ended September 30, 2012 related to water exploration activities.
Finance Income & Finance Costs:
Finance costs for the nine months ended September 30, 2012 were $9.8 million compared to $11.6 million for the nine months ended September 30, 2011. Finance costs for the nine months ended September 30, 2012 primarily consisted of $5.7 million of interest expense on the CIC convertible debenture and a $3.8 million unrealized loss on FVTPL investments; whereas, finance costs for the nine months ended September 30, 2011 primarily consisted of $8.2 million of interest expense on the CIC convertible debenture and a $2.9 million unrealized loss on FVTPL investments.
Finance income for the nine months ended September 30, 2012 was $39.2 million compared to $96.7 million for the nine months ended September 30, 2011. For the nine months ended September 30, 2012, finance income primarily consisted of a $38.9 million unrealized gain on the fair value change of the embedded derivatives in the CIC convertible debenture; whereas, for the nine months ended September 30, 2011, finance income primarily consisted of a $95.7 million unrealized gain on the fair value change of the embedded derivatives in the CIC convertible debenture.
The Company's investment in Aspire continues to be classified as an available-for-sale financial asset. As at September 30, 2012, the Company determined that objective evidence of impairment in the Company's investment in Aspire existed. Therefore, an impairment loss of $16.1 million was recognized in other operating expenses. Other comprehensive income for the nine months ended September 30, 2011 consists of an unrealized loss (net of tax) of $4.7 million related to the Company's investment in Aspire.
Taxes:
For the nine months ended September 30, 2012, the Company recorded a current income tax expense of $0.3 million related to its Mongolian operations compared to a current income tax expense of $7.7 million for the nine months ended September 30, 2011. The Company recorded a deferred income tax recovery related to deductible temporary differences of $0.2 million for the nine months ended September 30, 2012 compared to $6.1 million for the nine months ended September 30, 2011.
FINANCIAL POSITION AND LIQUIDITY
Cash Position and Liquidity
As at September 30, 2012, the Company had $33.5 million in cash and $30.0 million in money market investments for a total liquidity of $63.5 million compared with $123.6 million in cash and $45.0 million in money market investments for a total liquidity of $168.6 million as at December 31, 2011.
The Company's total assets as at September 30, 2012 were $785.4 million compared with $920.3 million as at December 31, 2011. The Company's non-current liabilities as at September 30, 2012 were $104.2 million compared with $145.6 million as at December 31, 2011.
Consistent with the Company's overall capital management strategy, the Company continues to have sufficient liquidity and capital resources to meet its ongoing obligations and future contractual commitments. In the near term, the Company expects its liquidity to remain adequate based on residual proceeds from the CIC convertible debenture offering in 2009 and from the global equity offering in 2010. However, due to the curtailment of mining operations at the Ovoot Tolgoi Mine, the Company has suspended uncommitted capital expenditures and exploration expenditures to preserve the Company's financial resources.
Impairment Analysis
During the three months ended September 30, 2012, 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 decline in the Company's share price.
As at September 30, 2012, 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. The major assumptions incorporated in the "value in use" calculation included certain estimates and assumptions with respect to coal prices, operating costs, mine plan and life, coal quality and recovery, foreign currency exchange rates, inflation rates and an appropriate discount rate.
The analysis did not result in the identification of an impairment loss and no charge was required as at September 30, 2012.
The Company believes that the estimates and assumptions incorporated in the impairment analysis are reasonable; however, the estimates and assumptions are subject to certain risks and uncertainties which may adversely affect the future net cash flows expected to be generated.
PROPOSED TRANSACTION
On April 2, 2012, SouthGobi announced a cooperation agreement with CHALCO and received official notification of CHALCO's intention to make a proportional takeover bid for up to 60% of the issued and outstanding common shares of SouthGobi at Cdn$8.48 per share ("Proportional Offer"). SouthGobi was also informed by its 58% major shareholder, Turquoise Hill, that Turquoise Hill had signed a lock-up agreement with CHALCO, committing to tender all of its shares held or thereafter acquired by it during the offer period of CHALCO into the Proportional Offer. The Proportional Offer was to be made by way of a takeover bid circular under British Columbia law and would be made to all SouthGobi shareholders. If shareholders tendered more than 60% of the outstanding common shares of SouthGobi to the takeover bid, a proportional amount of shares were to be taken up from each shareholder.
In conjunction with the Proportional Offer, CHALCO and SouthGobi entered into a cooperation agreement. CHALCO's obligations under the cooperation agreement were to become effective upon CHALCO acquiring a shareholding in SouthGobi.
SouthGobi had also been notified that CHALCO entered into consultancy agreements with nine key senior executives, officers and staff to assist CHALCO with the integration and transition following CHALCO's acquisition of a shareholding in SouthGobi.
CHALCO stated that it expected to mail the takeover bid circular in connection with the Proportional Offer on or about July 5, 2012. On July 3, 2012, CHALCO and Turquoise Hill announced a 30 day extension for CHALCO to mail the takeover bid circular. Subsequently, on August 2, 2012, an additional 30 day extension was announced by CHALCO and Turquoise Hill. Finally, on September 3, 2012, SouthGobi was notified that CHALCO's Proportional Offer had been terminated, which also resulted in the termination of the cooperation agreement and the consultancy agreements.
REGULATORY ISSUES IN MONGOLIA
On April 16, 2012, SouthGobi announced that MRAM held a press conference announcing a request to suspend exploration and mining activity on certain licenses owned by SouthGobi Sands LLC. The request for suspension included the mining license pertaining to the Ovoot Tolgoi Mine.
The Company believes that the action was taken under the broad national security powers of the Government of Mongolia. MRAM stated that the move was in connection to the proposed proportional takeover bid by CHALCO and the agreement by Turquoise Hill to tender its controlling interest in SouthGobi to such a takeover. On September 3, 2012, the proposed proportional takeover bid by CHALCO was terminated.
The Company's June 30, 2012 condensed consolidated interim financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") disclosed that any official notification received would require a mandatory suspension of operations and may result in the impairment of the Company's property, plant and equipment.
On September 6, 2012, the Company received official notification from MRAM confirming that as of September 4, 2012 all exploration and mining licenses held by the Company were in good standing. As a result, the previously disclosed measurement uncertainty in the Company's June 30, 2012 condensed consolidated interim financial statements and MD&A pertaining to the potential impairment of the Company's property, plant and equipment was eliminated. The Notice of Investment Dispute filed by the Company pertaining to its valid Pre-Mining Agreement ("PMA") applications remains ongoing.
In addition, after receiving official notification from MRAM that the Company's exploration and mining licenses were in good standing, the Company received approval for its Environmental Impact Assessment for the dry coal handling facility ("DCHF") from the Mongolian Ministry of Environment.
Subsequent to the third quarter of 2012, the Company noted several articles in Mongolian and international media regarding allegations against SouthGobi and some of its employees. To date, neither SouthGobi nor any of its employees have been charged with any wrongdoing. SouthGobi and its employees continue to cooperate with the Mongolian government agencies including the Independent Authority Against Corruption in their ongoing investigations. Given the recent changes to management and the regulatory environment the Company is experiencing, management has increased its level of scrutiny and the Board of Directors has increased their level of involvement with respect to the Company's internal reporting policies, to ensure that all potentially material information is delivered to the Board of Directors and the Company's Disclosure Committee promptly.
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 has filed the Notice of Investment Dispute following a determination by management that they have 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. Discussions between the Company and the Government of Mongolia are ongoing.
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.
TSAGAAN TOLGOI DEPOSIT
On March 5, 2012, SouthGobi announced an agreement to sell the Tsagaan Tolgoi Deposit to Modun, a company listed on the Australian Stock Exchange under the symbol MOU. Under the transaction, SouthGobi expected to receive $30.0 million of total consideration, comprising $7.5 million up-front in cash, $12.5 million up-front in Modun shares and deferred consideration of an additional $10.0 million also payable in Modun shares. Subsequently, on August 29, 2012, SouthGobi announced that the proposed sale of the Tsagaan Tolgoi Deposit to Modun had been cancelled by mutual agreement of both parties.
BOARD OF DIRECTORS AND SENIOR MANAGEMENT
On September 4, 2012, SouthGobi announced changes to its Board of Directors, accepting the resignations of Mr. Edward Flood, the Honourable Robert Hanson and Mr. Peter Meredith (Chairman) and subsequently appointing Ms. Kay Priestly (Chairman), Mr. Sean Hinton (Deputy Chairman), Mr. Lindsay Dove, Mr. Brett Salt and Mr. Kelly Sanders. On September 17, 2012, Mr. Alexander Molyneux tendered his resignation as a director of the Company. Further, on November 8, 2012, Mr. Ross Tromans was appointed as an Executive Director.
The Company also announced senior management changes in the third and fourth quarters of 2012, with the departures of Mr. Alexander Molyneux, former President and Chief Executive Officer, Mr. Curtis Church, former Chief Operating Officer and Mr. Matthew O'Kane, former Chief Financial Officer. Mr. Tromans was newly appointed as President and Chief Executive Officer. Mr. Tromans will also assume the duties formerly handled by the Chief Operating Officer. The Company is in the process of identifying a suitable replacement for Mr. O'Kane. In the interim, Mr. Tromans will act as the Company's principal financial officer.
REGIONAL 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 now has the right to conclude a 17 year build, operate and transfer agreement under the Mongolian Law on Concessions. RDCC has engaged a contractor and construction on the paved highway has commenced; however, as planned, the contractor has demobilized until the second quarter of 2013 due to winter weather conditions. Completion of the paved highway is expected late 2013. The paved highway will have an intended carrying capacity upon completion in excess of 20 million tonnes of coal per year.
COMMON SHARE REPURCHASE PROGRAM
On June 8, 2010, the Company announced that its Board of Directors authorized a share repurchase program to purchase up to 2.5 million common shares of the Company on each or either of the TSX and the HKEX, in aggregate representing up to 5.0 million common shares of the Company. On June 8, 2011, the Company announced the renewal of its share repurchase program. The share repurchase program concluded on June 14, 2012. As at June 14, 2012, the Company had repurchased 1.6 million shares on the HKEX and 2.8 million shares on the TSX for a total of 4.4 million common shares. The Company cancelled all repurchased shares.
OUTLOOK
The announcement by CHALCO that it intended to make a Proportional Offer for SouthGobi created significant uncertainty for the Company's business with its customers and with the Mongolian authorities. This was evident from the MRAM press conference announcing a request to suspend exploration and mining activities on certain licenses owned by SouthGobi Sands LLC and general difficulty receiving permits and valid cooperation from departments of the Government of Mongolia. Subsequent to the termination of CHALCO's Proportional Offer on September 3, 2012, the Company received a letter from MRAM confirming that all exploration and mining licenses held by the Company were in good standing.
Although the termination of CHALCO's Proportional Offer has eliminated some of the uncertainty facing the Company, inland China coking coal markets closest to SouthGobi's operations have continued to soften in the third quarter of 2012. The Company has observed a substantial deterioration in demand sentiment among its customers which led to a substantial decline in key reference prices in key end-use markets. Prices have fallen to levels where customers are now more willing to purchase on expectations of improved demand. These price levels however are generally below the cost of production and logistics for most producers and need to rise in order to encourage further production. SouthGobi has begun a review of its operations and costs in response to the current market conditions in order to seek opportunities to be competitive on a sustainable cost basis. Further, the Company has begun implementing a redundancy program for approximately 33% of its employees due to the uncertain state of the coal market. The program is in accordance with the relevant Mongolian regulations.
The Company anticipates that its operations will most likely remain fully curtailed in the fourth quarter of 2012; however, the Company continues to seek opportunities through cost reductions to be able to respond to any improvement in demand and prices. The Company cautions that production volumes, sales volumes and pricing for the full year of 2012 cannot be estimated.
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 processing
infrastructure to capture more of the value from the products it sells.
-- Sustainable volume growth - Subject to market conditions, the Ovoot
Tolgoi Mine, has the potential to produce well in excess of 2011 levels.
Currently undeveloped resources at the Soumber Deposit and the Zag Suuj
Deposit may provide additional growth in the future.
-- Exploration as a core business competency - SouthGobi's resources in
Mongolia have been acquired through a long term in-house exploration
program. The Company continues to maintain exploration as a core long-
term strategy to provide additional resources of coal in a cost
effective manner.
Objectives
The Company's objectives for 2012 have been impacted by the external conditions faced by it. SouthGobi will attempt to mitigate the issues, to the extent possible, and reduce capital expenditures, operating costs and exploration to preserve the Company's financial resources.
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, 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, 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 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 Statement of Comprehensive Income
(Unaudited)
(Expressed in thousands of U.S. Dollars, except for per share amounts)
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2012 2011 2012 2011
----------- ------------ ------------ ------------
Revenue $ 3,337 $ 60,491 $ 51,903 $ 127,985
Cost of sales (30,869) (42,856) (70,569) (92,916)
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Gross profit/(loss) (27,532) 17,635 (18,666) 35,069
Other operating expenses (29,301) (138) (35,681) (4,545)
Administration expenses (5,178) (7,993) (18,558) (20,137)
Evaluation and
exploration expenses (958) (10,908) (8,090) (17,255)
----------------------------------------------------------------------------
Loss from operations (62,969) (1,404) (80,995) (6,868)
Finance costs (5,164) (4,078) (9,846) (11,620)
Finance income 12,947 62,323 39,236 96,746
Share of earnings of
joint venture 288 - 492 -
----------------------------------------------------------------------------
Income/(loss) before tax (54,898) 56,841 (51,113) 78,258
Current income tax
recovery/(expense) 859 (4,253) (268) (7,728)
Deferred income tax
recovery/(expense) (525) 3,333 180 6,112
----------------------------------------------------------------------------
Net income/(loss)
attributable to equity
holders of the Company (54,564) 55,921 (51,201) 76,642
----------------------------------------------------------------------------
OTHER COMPREHENSIVE
INCOME/(LOSS)
Loss on available-for-
sale financial asset,
net of tax - (15,859) - (4,684)
Reclassification of
loss/(gain) on
available-for-sale
financial asset, net of
tax 8,950 - (16,559) -
----------------------------------------------------------------------------
Net comprehensive
income/(loss)
attributable to equity
holders of the Company $ (45,614) $ 40,062 $ (67,760) $ 71,958
----------------------------------------------------------------------------
----------------------------------------------------------------------------
BASIC INCOME/(LOSS) PER
SHARE $ (0.30) $ 0.31 $ (0.28) $ 0.42
DILUTED LOSS PER SHARE $ (0.30) $ (0.02) $ (0.40) $ (0.05)
Condensed Consolidated Interim Statement of Financial Position
(Unaudited)
(Expressed in thousands of U.S. Dollars)
As at
----------------------------------
September 30, December 31,
2012 2011
---------------- --------------
ASSETS
Current assets
Cash $ 33,544 $ 123,567
Trade and other receivables 24,060 80,285
Short term investments 30,000 -
Inventories 59,342 52,443
Prepaid expenses and deposits 32,986 38,308
---------------------------------------------------------------------------
Total current assets 179,932 294,603
Non-current assets
Prepaid expenses and deposits 8,389 8,389
Property, plant and equipment 554,510 498,533
Long term investments 22,867 99,238
Deferred income tax assets 19,739 19,560
---------------------------------------------------------------------------
Total non-current assets 605,505 625,720
---------------------------------------------------------------------------
Total assets $ 785,437 $ 920,323
---------------------------------------------------------------------------
---------------------------------------------------------------------------
EQUITY AND LIABILITIES
Current liabilities
Trade and other payables $ 9,969 $ 52,235
Current portion of convertible debenture 9,311 6,301
---------------------------------------------------------------------------
Total current liabilities 19,280 58,536
Non-current liabilities
Convertible debenture 100,302 139,085
Deferred income tax liabilities - 2,366
Decommissioning liability 3,886 4,156
---------------------------------------------------------------------------
Total non-current liabilities 104,188 145,607
---------------------------------------------------------------------------
Total liabilities 123,468 204,143
Equity
Common shares 1,059,639 1,054,298
Share option reserve 52,446 44,143
Investment revaluation reserve - 16,559
Accumulated deficit (450,116) (398,820)
----------------------------------------------------------------------------
Total equity 661,969 716,180
---------------------------------------------------------------------------
Total equity and liabilities $ 785,437 $ 920,323
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Net current assets $ 160,652 $ 236,067
Total assets less current liabilities $ 766,157 $ 861,787
REVIEW OF INTERIM RESULTS
The condensed consolidated interim financial statements for the Company for the three and nine months ended September 30, 2012 were reviewed by the Audit Committee of the Company.
SouthGobi's results for the quarter ended September 30, 2012 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 focused on exploration and development of its Permian-age metallurgical and thermal coal deposits in Mongolia's South Gobi Region. The Company's flagship coal mine, Ovoot Tolgoi, produces and sells coal to customers in China. The Company plans to supply a wide range of coal products to markets in Asia.
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 Dave Bartel, P.Eng., the Company's Senior Engineer. Mr. Bartel is 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 Company continues to have sufficient liquidity and capital resources to meet its ongoing obligations and future contractual commitments; in the near term, the Company expects its liquidity to remain adequate based on residual proceeds from the CIC convertible debenture offering in 2009 and proceeds from the global equity offering in 2010; the capacity of the paved highway in excess of 20 million tonnes of coal per year; the Company anticipates its operations will remain fully curtailed in the fourth quarter of 2012; the Ovoot Tolgoi Mine has the potential to produce well in excess of 2011 levels; the potential to convert any undeveloped resources into reserves; SouthGobi will attempt to mitigate the issues, to the extent possible, and reduce capital expenditures, operating costs and exploration; 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 Management's Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2011 and the three months ended September 30, 2012 which are available at www.sedar.com.
Contacts:
Brunswick Group (Hong Kong)
Joseph Lo
+852 9850 5033
Brunswick Group (Hong Kong)
Joanna Donne
+852 9221 3930
southgobi@brunswickgroup.com
www.southgobi.com