SouthGobi Resources Limited
TSX : SGQ
HKSE : 1878

SouthGobi Resources Limited

November 08, 2013 07:40 ET

SouthGobi Anticipates Delay in Filing 3rd Quarter 2013 Financial Statements to Reflect Restatement and Provides Further Updated Information

HONG KONG, CHINA--(Marketwired - Nov. 8, 2013) - SouthGobi Resources Ltd. (TSX:SGQ) (HKSE:1878) ("SouthGobi" or the "Company") announced today that it anticipates a delay in the filing of its interim statements (the "Interim Statements") for the three and nine month periods ended September 30, 2013 and the related Management's Discussion and Analysis ("MD&A") and certifications by the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") (collectively, the "Required Filings").

The anticipated delay is a result of the decision by the Company's board of directors today to restate the Company's financial statements for 2011 and 2012, and consequently its comparative interim financial statements for 2013 and the related MD&A (collectively, the "Restated Financials").

The restatement and anticipated delay in filing the Required Filings follows a review by the Company of its prior revenue recognition practices for its coal sales in the fourth quarter of 2010, full year 2011 and in the first half of 2012. This review has been conducted in consultation with PricewaterhouseCoopers LLP ("PwC"), the Company's current auditors, and Deloitte LLP ("Deloitte"), the Company's auditors during the 2010 and 2011 fiscal years.

As a result of this review, the Company has determined that certain revenue transactions were previously recognized in the Company's consolidated financial statements prior to meeting relevant revenue recognition criteria. These transactions relate to coal that had been delivered to the customer's stockpile in a stockyard located within the SouthGobi's Ovoot Tolgoi mining license area (the "Stockyard"), the location at which title transferred, but from which the coal had not been collected by the customers. The restatement of the Company's consolidated financial statements will reflect a change in the point of revenue recognition from: (A) the delivery of coal to the customer stockpiles within the Stockyard to (B) the loading of coal onto the customer's trucks at the time of collection.

The Company adopted new terms in its sales contracts starting in the second half of 2012 such that title transfers when coal is loaded onto the customer's trucks which results in the latter point of revenue recognition for all its sales starting from the second half of 2012. Until the recent review, it was determined that a restatement of financial statements for periods prior to the second half of 2012 was not required. The restatement of the Company's 2011 and 2012 financials in order to reflect this change in the point of revenue recognition will, in turn, require restatements to the comparative information in the Company's previously filed interim financial statements for 2013.

As a result of the potentially material effects on the Company's financial statements, the previous financial information provided by the Company in respect of the periods to be covered by the Restated Financials are no longer accurate and should not be relied upon.

Under National Instrument 51-102 ("NI 51-102") of the Canadian Securities Administrators, the Required Filings should be made no later than November 14, 2013. The Company is working expeditiously with PwC and Deloitte to complete the Required Filings and the Restated Financials as soon as possible. The Restated Financials are expected to be available on or before January 16, 2014.

The Company will be applying to the British Columbia Securities Commission (the "Principal Regulator") pursuant to Part 4 of National Policy 12-203 ("NP 12-203") for a Management Cease Trade Order ("MCTO") in connection with the anticipated late filing of the Required Filings and the Restated Financials. If issued, the MCTO will prohibit trading in securities of the Company, whether direct or indirect, by the Company's CEO, CFO and board of directors or other persons or companies who had, or may have had, access directly or indirectly to any material fact or material change with respect to the Company that has not been generally disclosed. There can be no assurance that an MCTO will be issued.

If an MCTO is not issued, or should an MCTO be issued and should the Company thereafter fail to make the Required Filings on or before January 16, 2014, the Principal Regulator can impose a general cease trade order ceasing all trading in securities of the Company for such period of time as the Principal Regulator may deem appropriate.

As part of the process described above, the Company is re-examining the Company's internal controls over financial reporting and disclosure controls and procedures in order to identify material weaknesses with such processes which gave rise to the decision to prepare the Restated Financials.

Any delay in filing the Required Filings, or the related financial statement restatements, could ultimately result in an event of default of the Company's convertible debenture held by China Investment Corporation ("CIC"), which if not cured within applicable cure periods in accordance with the terms of such debenture, may result in the principal amount owing and all accrued and unpaid interest becoming immediately due and payable upon notice to the Company by CIC.

The Company intends to satisfy the provisions of the Alternate Information Guidelines as set out in NP 12-203, including the requirement to file bi-weekly status reports in the form of news releases containing prescribed updating information, for as long as it remains in default in respect of the Required Filings.

Other information for the third quarter of 2013

The Company achieved strong production results in the third quarter of 2013 with production up at 1.13 million tonnes of raw coal produced and a strip ratio of 1.39 compared to 0.17 million tonnes of raw coal produced with a strip ratio of 15.55 in the second quarter of 2013.

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 Company has received all permits to operate the DCHF. The 2013 mine plan considered limited utilization of the DCHF at the latter end of 2013. However there is now no plan to use the DCHF in 2013 due to higher quality coals being mined that likely will not require processing through the DCHF and the Company has delayed construction to upgrade the DCHF. A review of the DCHF, and its future contribution to the Company's product strategy, is currently ongoing. The total construction capital investment to date is $85 million.

CIC Convertible Debenture

During the second quarter of 2013, the Company and the CIC mutually agreed upon a three month deferral of the convertible debenture semi-annual $7.9 million cash interest payment due on May 19, 2013. The Company and the CIC subsequently agreed to an additional deferral of one month, and the cash interest payment became due on September 19, 2013.

On September 19, 2013, the Company settled the $7.9 million amount, plus additional accrued interest of $0.2 million, as follows:

  • The Company issued 1.8 million shares to the CIC for the November 19, 2012 1.6% share interest payment, where the number of common shares was based on the 50-day volume-weighted average share price on November 19, 2012 of Cdn.$2.16;
  • In consideration of the common share issuance, CIC applied the $4.0 million in cash already paid by the Company in the first quarter of 2013 for the November 19, 2012 share interest payment against the amount due on September 19, 2013; and
  • The Company paid the remaining $4.1 million balance in cash.

Liquidity and capital management

As of September 30, 2013, the Company had cash of $16.1 million compared to cash of $19.2 million as of June 30, 2013. 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 September 30, 2013 reporting period. The Company expects its liquidity to remain sufficient based on existing capital resources and estimated income from mining operations. Estimated income from mining operations is subject to a number of external market factors including supply and demand and pricing in the coal industry. The Company continues to minimize uncommitted capital expenditures and exploration expenditures in order to preserve the Company's financial resources.

Impairment analysis

Unchanged from the assessment made as of June 30, 2013, the Company determined that an indicator of impairment existed for its Ovoot Tolgoi Mine cash generating unit as of September 30, 2013. The impairment indicator was the continued weakness in the Company's share price during the third quarter of 2013 and the fact that the market capitalization of the Company, as of September 30, 2013, was less than the carrying value of its net assets.

Therefore, the Company conducted an impairment test whereby the carrying value of the Company's Ovoot Tolgoi Mine cash generating unit was compared to its "value-in-use" using a discounted future cash flow valuation model. The Company's Ovoot Tolgoi Mine cash generating unit carrying value was $517.5 million as of September 30, 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 of September 30, 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.

Governmental, Regulatory and Internal Investigations

The Company is subject to investigations by Mongolia's Independent Authority against Corruption ("the IAAC") and the Mongolian State Investigation Office (the "SIA") regarding allegations against SouthGobi and some of its former employees. The IAAC investigation concerns possible breaches of Mongolia's anti-corruption laws, while the SIA investigation concerns possible breaches of Mongolia's money laundering and taxation laws.

While the IAAC investigation into allegations of possible breaches of Mongolian anti-corruption laws has been suspended, the Company has not received notice that the IAAC investigation is complete. To date, four former SouthGobi employees have been named as suspects in the IAAC investigation and are subject to a continuing travel ban imposed by the IAAC. The IAAC has not formally accused any current or former SouthGobi employees of breach of Mongolia's anti-corruption laws.

The SIA has not accused any current or former SouthGobi employees of money laundering. However, three former SouthGobi employees have been informed that they have each been designated as "accused" in connection with the allegations of tax evasion, and are subject to a travel ban. The Company has been designated as a "civil defendant" in connection with the tax evasion allegations, and it may potentially be held financially liable for the criminal misconduct of its former employees under Mongolian Law. The Company has shown full cooperation with the investigation by providing relevant information. The relevant authorities are yet to conclude on this information. Accordingly, the likelihood or consequences for the Company of a judgment against its former employees is unclear at this time.

The SIA also continues to enforce administrative restrictions, which were initially imposed by the IAAC investigation, on certain of the Company's Mongolian assets, including local bank accounts, in connection with its continuing investigation of these 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 will continue to take all appropriate steps to protect its ability to conduct its business activities in the ordinary course.

Certain of the allegations raised by the SIA and IAAC against SouthGobi (concerning 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, conviction, and unsuccessful appeal 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 this case. The Company understands that the court process is now concluded following the decision of the Supreme Court of Mongolia to uphold the convictions. As far as the Company is aware from publicly available information, the court concluded that the transfer of one of SouthGobi Sands LLC's licenses (5261X) involved government officials and violated applicable Mongolian anti-corruption laws. License 5261X was transferred to an entity nominated by MRAM, after the license had been reinstated by MRAM for this purpose, in exchange for MRAM renewing certain SouthGobi Sands LLC licenses (5259X, 5277X, 12388X and 9442X) that were due to expire. As a result the court invalidated the transfer of 5261X and cancelled the other licenses. At that time only one of the licenses at issue (9442X) was held by SouthGobi Sands LLC, with the other licenses having earlier been allowed to lapse when they were determined not to be prospective. The Company considers that it was entitled under applicable law to the renewal of the relevant licenses and that it received reasonable payment for the transfer of license 5261X.

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 which 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 a number 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. The tripartite committee substantially completed the investigative phase of its activities during the third quarter of 2013. The Company continues to cooperate with the IAAC, SIA and with Canadian and United States government and regulatory authorities that are monitoring the Mongolian investigations. It is possible that these authorities may subsequently conduct their own review or investigation or seek further information from the Company and until all such reviews or investigations are complete the Audit Committee's and the tripartite committee's work may be considered ongoing.

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. Reference is made to the Company's MD&A for the year ended December 31, 2012, which is available at www.sedar.com, Section 13, Risk Factors, "the Company is subject to continuing governmental, regulatory and internal investigations, the outcome of which is unclear at this time but could have a material adverse effect on the Company".

The Company, through its Board of Directors and new management, has taken a number of steps to address issues noted during the investigations and 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.

Withdrawal of Notice of Investment Dispute

On August 22, 2013, SouthGobi announced that it had withdrawn the Notice of Investment Dispute on the Government of Mongolia in recognition of the fact that the dispute was resolved following the grant of three pre-mining agreements ("PMAs") on August 14, 2013 relating to the Zag Suuj Deposit and certain areas associated with the Soumber Deposit, and the earlier grant of a PMA on January 18, 2013 pertaining to the Soumber Deposit.

About SouthGobi Resources

SouthGobi is listed on the Toronto and Hong Kong stock exchanges, in which Turquoise Hill Resources Ltd. ("Turquoise Hill"), also publicly listed in Toronto and New York, has a 57% 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 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, Mongolian registered company that holds the mining and exploration licences in Mongolia and operates the flagship Ovoot Tolgoi coal mine. Ovoot Tolgoi produces and sells coal to customers in China.

Forward-Looking Statements: This document includes forward-looking statements. Forward-looking statements include, but are not limited to, the respective timing of the filing of the Required Filings and the Restated Financials; the impact of the revised revenue recognition approach on the financial statements subject to restatement; whether an MCTO will be granted by the Principal Regulator; the conclusions of the Company in respect of any material weaknesses in the Company's controls and procedures; the intention to satisfy the Alternative Information Guidelines, if applicable; the outcome of a review of the DCHF to the Company's corporate strategy; the Company's expectations of sufficient liquidity and capital resources to meets its ongoing obligations and future contractual commitments; the estimates and assumptions included in the Company's impairment analysis; the outcome of the Mongolian Government regulatory and internal investigations; implications of financial statement restatements or delay in Required Filings with respect to the Company's existing contractual covenants; and other statements that are not historical facts. When used in this document, the words such as "plan," "estimate," "expect," "intend," "may," "likely" 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 Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2012 which is available at www.sedar.com.

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