Migao Corporation
TSX : MGO

Migao Corporation

February 16, 2015 12:58 ET

Migao Reports Fiscal 2015 Third Quarter Financial Results

TORONTO, ONTARIO--(Marketwired - Feb. 16, 2015) - Migao Corporation (TSX:MGO), a China-based specialty potash fertilizer producer, today reported financial results for the three and nine months periods ended December 31, 2014.

Migao reported revenues of $125.5 million for the third quarter ended December 31, 2014, representing $52.3 million (71%) increase from $73.2 million for the quarter ended December 31, 2013. The revenue increase for the quarter ended December 31, 2014 is mainly due to increased sales of potassium sulphate, potassium nitrate and potassium chloride (direct sales) primarily as a result of higher sales volumes for these products, coupled with higher average selling price for potassium sulphate during the quarter ended December 31, 2014 compared with the same quarter one year ago. Strong market demands for potassium sulphate continued into the third quarter of fiscal 2015. The above sales increases were partly offset by approximately $15.3 million decreases in sales of compound fertilizers, ammonium chloride as well as hydrochloric acid. The sales decreases in compound fertilizers and ammonium chloride were mainly caused by lower sales volume as well as lower average selling prices for these products during the current quarter as compared with the same period last year. Weak market demands contributed to the decreasing sales volume and average selling prices. The effect of increased sales volume of hydrochloric acid was offset by the decline in the average selling prices as the market demands were limited by the slow-down of the Chinese economy. The appreciation of Chinese Yuan (RMB) against Canadian dollar also contributed to the higher dollar sales reported in the third quarter of fiscal 2015.

Gross profit was $10.3 million for the third quarter of fiscal 2015, compared with the gross loss of $4.2 million for the same period one year ago. The increase in gross profit registered during the quarter ended December 31, 2014 was mainly due to higher sales volumes of potassium sulphate coupled with higher gross profit margins generated from the products primarily as a result of higher average selling prices during the current quarter as compared with the same period last year. Migao's profitability in the sales of potassium sulphate mainly benefited from lower raw material prices, favorable PRC potassium sulphate market conditions as a result of strong demands for potassium sulphate and tight market supply as well as the stabilization of global and PRC potash market prices during 2014 calendar year. The effect of higher gross profit from the sale of potassium sulphate was partially offset by the decreases in gross profit of other products during the current quarter. During the quarter ended December 31, 2014, Migao had a gross loss from the sale of ammonium chloride and potassium chloride. The weak conditions in the PRC agricultural grade potassium nitrate market continued during the quarter ended December 31, 2014. The profitability of Migao's potassium nitrate is also negatively impacted by rising energy costs especially the cost of natural gas which accounts for approximately 12% of the production cost of potassium nitrate during the year ended March 31, 2014.

Selling, general and administrative expenses were $11.6 million for the third quarter of fiscal 2015, up by $2.2 million from $9.4 million for the same quarter last year. Finance costs were $1.4 million which were comparable to $1.4 million for the same quarter last year.

As a result, for the three months ended December 31, 2014 Migao reported a net profit of $5.0 million or $0.09 per basic and diluted share, as compared with a net loss of $11.9 million or $(0.23) per basic and diluted share for the same quarter last year.

For the nine months ended December 31, 2014, Migao reported total revenue of $235.7 million as compared with revenue of $135.4 million for the nine months ended December 31, 2013. Migao reported a net profit of $5.1 million or $0.10 per basic and diluted share for the most recent nine-month period as compared with a net loss of $35.6 million or $ (0.68) per basic share for the same nine-month period one year ago.

For the quarter ended December 31, 2014, the average selling price for potassium nitrate was RMB3,559 ($657) per tonne, RMB3,431 ($634) per tonne for potassium sulphate, RMB2,895 ($535) for compound fertilizers and RMB2,052 ($379) per tonne for potassium chloride, as compared with RMB3,672 ($633) per tonne for potassium nitrate, RMB3,055 ($526) per tonne for potassium sulphate, RMB3,096 ($533) per tonne for compound fertilizers and RMB2,040 ($351) per tonne for potassium chloride the same period one year ago.

As at December 31, 2014, Migao reported cash and restricted cash of $162.2 million and working capital of $151.3 million.

At the end of the quarter, Migao had $134.3 million of inventory, which included $101.9 million (281,714 tonnes) of potassium chloride inventory with an average delivered price of $362 per tonne, and $18.0 million of various other raw materials. Also included in inventory was $12.6 million (90,479 tonnes) of finished goods inventory on hand, including co-products. During the quarter of fiscal 2015, the Migao sold 49,452 tonnes of potassium nitrate, 86,662 tonnes of potassium sulphate, 84,510 tonnes of potassium chloride (direct sale), 6,956 tonnes of compound fertilizers, 1,945 tonnes of ammonium chloride, and 104,949 tonnes of hydrochloric acid, excluding 50% of sales in SQM JV.

Cash and cash equivalents was $44.8 million as at December 31, 2014, compared with $13.8 million as at March 31, 2014. The increase in cash and cash equivalents during the nine months ended December 31, 2014 was mainly from the combined results of $56.1 million cash inflows from operations, a net $2.3 million of cash used in investing activities mainly because of the $15.7 million of cash used in the purchase of plant and equipment and payments for land use rights deposits, $21.6 million of net cash inflow from the disposition of Yunnan Migao and Sichuan Ruigao Logistic Co., Ltd, and $8.3 million of cash used in the share capital contribution to Eurochem JV, as well as a net $24.3 million of cash used in financing activities primarily from repayments of loan principal and loan interest for $59.3 million net off by $35.0 million of cash inflows from new loan drawdowns. The impact from the changes in foreign exchange rates on the cash flow was approximately $1.5 million for the nine months ended December 31, 2014.

SUMMARY FINANCIAL RESULTS
In $'000 except per share data
3 months ended 3 months ended YTD YTD
December 31,
2014
December 31,
2013
fiscal
2015
fiscal
2014
Revenue 125,493 73,192 235,743 135,378
Gross profit (loss) 10,253 (4,217 ) 25,749 (9,836 )
Gross profit (Loss) (% of revenue) 8.2% (5.8% ) 10.9% (7.3% )
Profit (loss) 4,952 (11,911 ) 5,099 (35,581 )
EBITDA 7,872 (10,560 ) 15,483 (28,157 )
Earning per share
Basic 0.09 (0.23 ) 0.10 (0.68 )
Diluted 0.09 (0.23 ) 0.10 (0.68 )
Weighted average number of shares
(in millions of shares)
Basic 52.5 52.5 52.5 52.5
Diluted 52.9 52.5 53 52.5
Balance Sheet Highlights
In $'000 except ratio
December 31, 2014 March 31, 2014
Current ratio 1.40:1 1.41:1
Cash, cash equivalents and restricted cash 162,156 152,832
Working capital 151,301 148,287
Total assets 689,475 647,169
Total liabilities 386,394 364,785
Total equity 303,081 282,384
Long term debt to equity ratio 0.01:1 0.01:1

Migao's financial statements and MD&A have been filed on SEDAR and will be available at www.sedar.com.

Recent developments

1) Eurochem JV

On November 28, 2013, Migao entered into a joint venture shareholder agreement ("Eurochem JV Agreement") with Eurochem International Holding B.V. ("Eurochem") to establish a joint venture, Eurochem Migao Limited ("Eurochem JV"). In accordance with the Eurochem JV Agreement, Eurochem JV was to be incorporated in Hong Kong to enter into certain business operations in China directly and through its subsidiaries.

Eurochem JV was incorporated in Hong Kong on February 14, 2014. Eurochem and Migao each owns 50% of Eurochem JV. Accordingly, Migao's interest in Eurochem JV is accounted for using equity method. Eurochem and Migao anticipated that would contribute US$18 million (approximately $20 million) to Eurochem JV for a total capital contribution of US$36 million (approximately $38 million). During the quarter ended December 31, 2014, Migao contributed US$7.21 million (approximately $8.3 million) and Eurochem contributed US$18 million (approximately $20 million) to the capital of Eurochem JV.

During the quarter ended June 30, 2014, Eurochem JV obtained the approval from the Ministry of Commerce of the PRC to conduct business in China. On October 28, 2014, Eurochem JV purchased 100% of equity interest of Yunnan Migao Fertilizer Co., Ltd. ("Yunnan Migao"), a wholly-owned subsidiary of Migao that was incorporated on July 12, 2013, for cash consideration of US$18 million (approximately $20 million). From October 28, 2014 and on, Yunnan Migao is a wholly owned subsidiary of Eurochem JV.

As at December 31, 2014, Migao is committed to contribute an additional US$10.79 million (approximately $12.5 million) to the capital of Eurochem JV in the 2015 calendar year.

2) Financial guarantee contracts

In December 2014, two of Migao's wholly-owned subsidiaries - Liaoning Migao and Changchun Migao, have entered into financial guarantee contracts with the Bank of China Suifenhe branch for the provision of financial guarantee in respect of a bank facility of RMB 98 million (approximately $18.3 million) being granted to a major raw material supplier of Migao in China for a period from December 28, 2014 to December 21, 2015. The bank facility will be used in the purchase of raw materials on Migao's behalf and such a financial guarantee is intended to be provided for the purchase of imported potassium chloride Migao entered into this transaction with the anticipation that prepayments for Migao's raw material purchase will be reduced in future with more utilizations of letter of credit in purchase settlements and less amounts of bank deposits or notes receivable will be required to be pledged with the bank than without the above bank facility. This helps to reduce the amount of cash tied up in working capital and associated costs, thus improving Migao's liquidity position and further enhancing Migao's competitive advantage in access to low cost raw materials.

Migao subsequently obtained a clarification with respect to the financial guarantee from the lending bank that the bank facility guaranteed by the Group can only be used for the purpose of issuing letter of credit for the purchase of imported potash fertilizer on behalf of Migao. The management is currently working towards entering a formal and legally binding agreement for such condition on the guarantee. The directors of Migao consider that the default risk of such financial guarantee is minimal.

3) Pelletizing production line

Migao completed the construction of two 120,000 tonne per annum fertilizer pelletizing production lines and commenced the production of prilled fertilizers during the third quarter of fiscal 2015. Each production line has the capacity of pelletizing 120,000 tonne of potassium sulphate in a year. Compared with powdered fertilizers, prilled fertilizers tend to have prolonged effects due to a slower releasing rate and therefore are commonly used in subsoil application. Plant and vegetable growers and compound fertilizer producers are the main targeted users for the prilled fertilizers. These two pelletizing production lines were built by Liaoning Migao and Changchun Migao to meet the growing demands for prilled fertilizers in the local markets.

About Migao

Migao Corporation, through its wholly owned subsidiaries, owns and operates fertilizer production plants in various strategic locations across China for the production and sale of specialty potash fertilizer (potassium nitrate and potassium sulphate) to China's agricultural market. Migao Corporation is subject to, and complies with strict government regulations that govern safety, quality and environmental protection. Migao's Sichuan facility, Guangdong facility, Liaoning facility, Changchun facility, Zunyi facility and Sichuan SQM Migao joint venture are ISO 14001 certified, an international environmental management standard. Please visit www.migaocorp.com for further information.

USE OF NON-GAAP MEASURES

Certain non-GAAP measures referenced in this news release have no standardized meaning under International Financial Reporting Standards ("IFRS") and, therefore, are unlikely to be comparable to similar measures presented by other issuers. Where we reference non-GAAP measures, we provide definitions. For example, EBITDA is commonly defined as earnings before interest, taxes, depreciation and amortization. EBITDA is most directly comparable to the GAAP measure operating income or loss, except that depreciation and amortization of plant assets are included in measuring operating income or loss, but depreciation and amortization expenses are excluded in measuring EBITDA. In Migao's earnings releases, consolidated financial statements and MD&As, unless otherwise noted, all financial data is prepared in accordance with IFRS.

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

This news release may include forward-looking statements within the meaning of applicable securities laws in Canada. These forward-looking statements include, among others, statements with respect to our objectives and goals, and strategies to achieve those objectives and goals, as well as statements with respect to our beliefs, plans, objectives, expectations, anticipations, estimates and intentions. The words "may", "will", "could", "should", "would", "suspect", "outlook", "believe", "plan", "anticipate", "estimate", "expect", "intend", "forecast", "objective", and "continue" (or the negative or grammatical variations thereof), and words and expressions of similar meaning, are intended to identify forward-looking statements.

By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, which give rise to the possibility that predictions, forecasts, projections and other forward-looking statements will not be achieved. Certain material factors or assumptions are applied in making forward-looking statements and actual results, performance or achievements may differ materially from those expressed or implied in such statements. We caution readers not to place undue reliance on forward-looking statements as a number of important factors, many of which are beyond our control, could cause actual results, performance or achievements to differ materially from the beliefs, plans, objectives, expectations, anticipations, estimates and intentions expressed in such forward-looking statements. These factors that relate to our company include, but are not limited to: risks related to raw materials; execution of the business plan; expansion plans; dependence on key personnel; key relationships; dependence on key customers; dependence on key suppliers; competition; market factors and volatility of commodity prices; environmental risks and hazards; operating risks; proprietary rights; infrastructure; future capital requirements; technical substitution; exchange rate fluctuations; insurance; foreign operations; tobacco industry considerations; weather conditions and natural disasters; control by management; seasonality; dividends; conflicts of interest; global financial conditions; and the implementation of the Labour Contract Law in the People's Republic of China in 2008. In addition to the foregoing risk factors, there are also risks related to doing business in China which include, but are not limited to: state ownership; government sector intervention; foreign investment; repatriation of profit and currency conversion; tax; shareholders' rights and enforcement of judgments; developing legal system; protection of intellectual property rights; permits and business licenses; appropriation; and availability of land. Should one or more of these factors materialize, or should our estimates or underlying assumptions prove incorrect, actual results, performance or achievements may vary materially from those described in forward-looking statements.

We caution that the foregoing list of important factors that may affect our future results, performance or achievements is not exhaustive. When reviewing our forward-looking statements, readers should carefully consider the foregoing factors and other uncertainties and potential events. Additional information about factors that may cause actual results to differ materially from expectations, and about material factors or assumptions applied in making forward-looking statements, may be found under the "Risk Factors" sections in our Annual Information Form and annual MD&A and elsewhere in our filings with Canadian securities regulatory authorities. Except as required by Canadian securities laws, we do not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by us or on our behalf; such statements speak only as of the date made. We cannot assure readers that actual results, performance and achievements will be consistent with these forward- looking statements, and the differences may be material. The forward-looking statements included herein are expressly qualified in their entirety by this cautionary language.

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