HONG KONG, CHINA--(Marketwired - Aug. 11, 2014) - SouthGobi Resources Ltd. (TSX:SGQ)(HKSE:1878) (the "Company") today announced its financial and operating results for the three and six months ended June 30, 2014. All figures are in U.S. Dollars unless otherwise stated.
Significant Events and Highlights
The Company's significant events and highlights for the three months ended June 30, 2014 and subsequent period to August 11, 2014 are as follows:
- The Company continues to operate under difficult market conditions. Coal prices in China declined further in the second quarter compared to the first quarter of 2014 in response to excess seaborne and Chinese domestic supply. The decline in coal prices has been partially offset by the increase in the Company's volumes in the second quarter compared to the seasonally slow first quarter.
- Production decreased to 0.55 million tonnes of raw coal in the second quarter of 2014 compared to production of 0.64 million tonnes of raw coal in the first quarter of 2014. This decrease in production is due to the Company's decision in June in response to current market conditions to reduce its production and place approximately half of its workforce in furlough. This furlough is anticipated to remain in place until the end of August subject to market conditions.
- On May 25, 2014, the Company announced it obtained a $10 million revolving credit facility from Turquoise Hill Resources Ltd. ("Turquoise Hill") to meet its short term working capital requirements with a maturity date of August 30, 2014. At June 30, 2014 the Company had drawn down $3.8 million under this facility.
- The Company completed the sale of Tsagaan Tolgoi mining license in the second quarter of 2014. The net proceeds generated for the Company after taxes and disposal costs was $1.3 million and was received in April 2014.
- The trial date for the tax investigation case against the Company's Mongolian subsidiary SouthGobi Sands LLC and three of its former employees as detailed in the Company's announcement of June 24, 2014 has been deferred until August 25, 2014.
- On June 19, 2014, the Takeovers and Mergers Panel of Hong Kong's Securities and Futures Commission determined that the Company should be considered a public company in Hong Kong for the purposes of the Codes on Takeovers and Mergers and Share Purchases in Hong Kong (the "Takeovers Code"). The Takeovers Code now applies to the Company.
- On July 30, 2014 the Company announced Turquoise Hill mining entered into an agreement with National United Resources ("NUR") to sell shares representing 29.95% of the Company's total common shares. The closing of this transaction is subject to certain conditions, including the approval of both the Hong Kong Stock Exchange ("HKEX") as well as NUR's shareholders. Turquoise Hill expects the closing to occur no later than November 30, 2014.
- The Company announces Mr. Brett Salt, Chief Commercial Officer, has resigned with an effective date of October 1, 2014. Mr. Salt has accepted a new role with another company. The Company will announce its new sales and marketing structure in due course.
OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS
| Overview of Operational Data | |||||||||||||
| Three months ended | Six months ended | ||||||||||||
| June 30, | June 30, | ||||||||||||
| 2014 | 2013 | 2014 | 2013 | ||||||||||
| Sales Volumes, Prices and Costs | |||||||||||||
| Premium semi-soft coking coal | |||||||||||||
| Coal sales (millions of tonnes) | - | 0.21 | - | 0.29 | |||||||||
| Average realized selling price (per tonne) (i) | $ | - | $ | 32.46 | $ | - | $ | 35.82 | |||||
| Standard semi-soft coking coal | |||||||||||||
| Coal sales (millions of tonnes) | 0.12 | - | 0.41 | - | |||||||||
| Average realized selling price (per tonne) (i) | $ | 20.33 | $ | - | $ | 21.52 | $ | - | |||||
| Thermal coal | |||||||||||||
| Coal sales (millions of tonnes) | 0.51 | 0.11 | 0.61 | 0.31 | |||||||||
| Average realized selling price (per tonne) (i) | $ | 10.72 | $ | 13.98 | $ | 10.94 | $ | 13.78 | |||||
| Total | |||||||||||||
| Coal sales (millions of tonnes) | 0.63 | 0.32 | 1.02 | 0.60 | |||||||||
| Average realized selling price (per tonne) (i) | $ | 12.52 | $ | 26.26 | $ | 15.22 | $ | 24.70 | |||||
| Raw coal production (millions of tonnes) | 0.55 | 0.17 | 1.19 | 0.19 | |||||||||
| Direct cash costs of product sold (per tonne) (ii) | $ | 8.23 | $ | 11.49 | $ | 9.08 | $ | 10.90 | |||||
| Mine administration cash costs of product sold (per tonne) (ii) | $ | 2.49 | $ | 7.14 | $ | 3.00 | $ | 4.53 | |||||
| Total cash costs of product sold (per tonne) (ii) | $ | 10.72 | $ | 18.63 | $ | 12.08 | $ | 15.43 | |||||
| Other Operational Data | |||||||||||||
| Production waste material moved (millions of bank cubic meters) | 2.17 | 2.71 | 4.72 | 3.10 | |||||||||
| Strip ratio (bank cubic meters of waste material per tonne of coal produced) | 3.97 | 15.55 | 4.00 | 16.40 | |||||||||
| Lost time injury frequency rate (iii) | 0.15 | - | 0.15 | - | |||||||||
- Average realized selling price excludes royalties and selling fees.
- A non-IFRS financial measure, refer to "Non-IFRS Financial Measures" section. Cash costs of product sold exclude idled mine asset cash costs.
- Per 200,000 man hours and calculated based on a rolling 12 month average.
Summary of Operational Data
The Company continues to operate under difficult market conditions which have affected the Company's results for the second quarter in respect of sales prices, mix and volumes.
During the second quarter of 2014, the Company shipped 0.91 million tonnes of coal. Revenue was recognized in respect of 0.63 million tonnes with the remaining 0.28 million tonnes expected to meet all revenue recognition requirements in the second half of 2014.
In light of the current market, the Company continued to pace its production with current demand. As a result, the Company operated significantly below its operating capacity in the second quarter of 2014. In June 2014 following a review of operations, the Company further reduced its production and placed approximately half of its workforce in furlough.
The production in the second quarter of 2014 was higher than the second quarter of 2013 as the Company primarily moved waste material (overburden) and exposed coal in pit in preparation for sales anticipated in subsequent quarters of 2013.
On June 26, 2014, the Ovoot Tolgoi mine site region experienced torrential rain and flooding which temporarily interrupted mining operations. The region was subject to further rainfall in July. The impact on the Company's operations is not expected to be material.
The Company continues to maintain a strong safety record. It recorded one lost time injury on April 8, 2014 and has at June 30, 2014 a lost injury time frequency rate of 0.15 per 200,000 man hours based on a rolling 12 month average.
| Summary of Financial Results | ||||||||||||||||
| Three months ended | Six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| $ in thousands, except per share information | 2014 | 2013 | 2014 | 2013 | ||||||||||||
| Revenue (i),(ii) | $ | 6,691 | $ | 6,129 | $ | 11,828 | $ | 10,527 | ||||||||
| Cost of sales (ii) | (20,086 | ) | (17,477 | ) | (38,452 | ) | (38,783 | ) | ||||||||
| Gross loss excluding idled mine asset costs | (8,497 | ) | (5,593 | ) | (18,699 | ) | (6,087 | ) | ||||||||
| Gross loss including idled mine asset costs | (13,395 | ) | (11,348 | ) | (26,624 | ) | (28,256 | ) | ||||||||
| Other operating expenses | (1,776 | ) | (14,925 | ) | (2,849 | ) | (15,356 | ) | ||||||||
| Administration expenses | (2,253 | ) | (4,024 | ) | (4,490 | ) | (7,757 | ) | ||||||||
| Evaluation and exploration expenses | (107 | ) | (221 | ) | (279 | ) | (494 | ) | ||||||||
| Loss from operations | (17,531 | ) | (30,518 | ) | (34,242 | ) | (51,862 | ) | ||||||||
| Finance costs | (5,215 | ) | (5,617 | ) | (10,240 | ) | (10,608 | ) | ||||||||
| Finance income | 127 | 3,366 | 1,134 | 4,136 | ||||||||||||
| Share of earnings/(losses) of joint venture | (3 | ) | 44 | (29 | ) | 27 | ||||||||||
| Income tax (expense)/recovery | (546 | ) | (416 | ) | (546 | ) | 1,500 | |||||||||
| Net loss | (23,168 | ) | (33,141 | ) | (43,923 | ) | (56,807 | ) | ||||||||
| Basic loss per share | $ | (0.12 | ) | $ | (0.18 | ) | $ | (0.23 | ) | $ | (0.31 | ) | ||||
| Diluted loss per share | $ | (0.12 | ) | $ | (0.18 | ) | $ | (0.23 | ) | $ | (0.31 | ) | ||||
- Revenue is presented net of royalties and selling fees.
- Revenue and cost of sales relate to the Company's Ovoot Tolgoi Mine within the Mongolian Coal Division operating segment. Refer to note 4 of the condensed consolidated interim financial statements for further analysis regarding the Company's reportable operating segments.
Royalty regime in Mongolia
During a trial period from October 1, 2012 to March 31, 2013, the royalty imposed on coal sales was determined using the actual contracted sales price per tonne. The Government of Mongolia changed the royalty regime effective April 1, 2013. From April 1, 2013 to March 31, 2014, the royalty on all coal sales exported out of Mongolia was based on a set reference price per tonne published monthly by the Government of Mongolia. As a result, in the second quarter of 2013, the Company was subject to an average 7% royalty based on a weighted average reference price of $70.83 per tonne while the Company's average realized selling price was $26.26 per tonne.
The Government of Mongolia changed the royalty regime effective April 1, 2014. Under the new "flexible tariff" royalty regime, the royalty per tonne for export coal sales will be calculated based on the actual contracted sales price per tonne, whereby the contracted sales price includes the costs of transporting the coal to the Mongolia-China border. If transportation costs are not included in the contracted sales price between a buyer and seller, the following costs are required to be included in the contracted sales price for purposes of calculating the royalty per tonne: transportation costs and costs associated with transportation such as customs documentation fees, insurance, loading and unloading costs. In the event the actual contracted sales price calculated as described above differs by more than 10% from the contracted sales price of coal products with the same classification and quality being exported by other legal entities in Mongolia through the same border crossing, the calculated contracted sales price shall be deemed non-market under Mongolian tax law and the royalty per tonne will be calculated based on a reference price that will be determined by the Government of Mongolia.
The Company currently sells coal from the Ovoot Tolgoi Mine ex mine gate and the coal is exported through the Shivee Khuren Border Crossing. The Company's average realized selling price excludes transportation costs.
On July 4, 2014, the Government of Mongolia made further amendment to the royalty regime. From July 4, 2014 onwards the royalty is to be initially calculated and paid monthly based on the Government reference price. On a quarterly basis the royalty amount would be adjusted to reflect the contracted sales price and additional documentation would have to be submitted to the Mongolian Tax Authority. Once the quarterly statement has been approved by the Mongolian Tax Authority, any adjustments between the monthly payments for the quarter and the quarterly submission are adjusted in the next months' royalty calculation.
Overview of Financial Results
The Company recorded a $17.5 million loss from operations in the second quarter of 2014 compared to a $30.5 million loss from operations in the second quarter of 2013. The second quarter of 2014 was impacted by continuing difficult market conditions which resulted in lower sales prices compared to the second quarter of 2013. This reduction in prices was offset by higher sales volumes, lower royalty expenses, lower idled mine asset costs and lower impairment losses in the second quarter of 2014 compared to the second quarter of 2013.
Revenue was $6.7 million in the second quarter of 2014 compared to $6.1 million in the second quarter of 2013. The Company sold 0.63 million tonnes of coal at an average realized selling price of $12.52 per tonne in the second quarter of 2014 compared to sales of 0.32 million tonnes at an average realized selling price of $26.26 per tonne in the second quarter of 2013. Revenue increased in the second quarter of 2014 compared to the second quarter of 2013 primarily due to higher sales volumes. The average realized selling price was impacted by the product mix in the second quarter of 2014. The product mix in the second quarter of 2014 primarily consisted of thermal coal with limited Standard semi-soft coking coal compared to a mix of Premium semi-soft coking coal and thermal coal in the second quarter of 2013.
The Company's revenue is presented net of royalties and selling fees. Following the change in the Mongolia's royalty regime starting April 1, 2014, the Company's effective royalty rate for the second quarter of 2014, based on the Company's average realized selling price of $12.52 per tonne, was 8.1% or $1.00 per tonne. In the second quarter of 2013, the Company was subject to an average 7% royalty based on a weighted average reference price of $70.83 per tonne. As a result, the Company's effective royalty rate was 18.4% or $4.82 per tonne based on the average realized selling price of $26.26 per tonne in the second quarter of 2013.
Cost of sales was $20.1 million in the second quarter of 2014 compared to $17.5 million in the second quarter of 2013. Cost of sales comprises operating expenses, share-based compensation expense, equipment depreciation, depletion of mineral properties, coal stockpile inventory impairments and idled mine asset costs. Operating expenses in cost of sales reflect the total cash costs of product sold (a non- IFRS financial measure, see "Non-IFRS Financial Measures" section) during the period.
| Three months ended June 30, |
Six months ended June 30, |
|||||||||||||
| $ in thousands | 2014 | 2013 | 2014 | 2013 | ||||||||||
| Operating expenses | $ | 6,754 | $ | 5,988 | $ | 12,317 | $ | 9,209 | ||||||
| Share-based compensation expense | 127 | (153 | ) | 143 | (153 | ) | ||||||||
| Depreciation and depletion | 2,061 | 2,037 | 4,540 | 2,587 | ||||||||||
| Impairment of coal stockpile inventories | 6,246 | 3,850 | 13,527 | 4,971 | ||||||||||
| Cost of sales from mine operations | 15,188 | 11,722 | 30,527 | 16,614 | ||||||||||
| Cost of sales related to idled mine assets | 4,898 | 5,755 | 7,925 | 22,169 | ||||||||||
| Cost of sales | $ | 20,086 | $ | 17,477 | $ | 38,452 | $ | 38,783 | ||||||
Operating expenses in cost of sales were $6.8 million in the second quarter of 2014 compared to $6.0 million in the second quarter of 2013. Total cash costs of product sold were $10.72 per tonne in the second quarter of 2014 compared to $18.63 per tonne in the second quarter of 2013. The decrease in total cash costs per tonne sold primarily relates to an increase in tonnage sold as the Company focused on pit preparation in the second quarter of 2013.
Cost of sales in the second quarter of 2014 and the second quarter of 2013 included coal stockpile impairments of $6.2 million and $3.9 million, respectively, to reduce the carrying value of the Company's coal stockpiles to their net realizable value. The coal stockpile impairments recorded in both 2014 and 2013 reflect the challenging coal market conditions and primarily related to the Company's higher-ash products.
Cost of sales related to idled mine asset costs primarily consisted of period costs, which were expensed as incurred and primarily included depreciation expense. Cost of sales related to idled mine assets in the second quarter of 2014 included $4.9 million related to depreciation expenses for idled equipment (2013: $5.8 million). Idled mine asset costs decreased in the second quarter of 2014 compared to the second quarter of 2013 as a result of the recommencement of mining operations at the Ovoot Tolgoi Mine on March 22, 2013. However, the second quarter 2014 production plan did not fully utilize the Company's existing mining fleet, therefore, idled mine asset costs continued to be incurred throughout the second quarter of 2014.
Other operating expenses were $1.8 million in the second quarter of 2014 compared to $14.9 million in the second quarter of 2013.
| Three months ended | Six months ended | ||||||||||||
| June 30, | June 30, | ||||||||||||
| $ in thousands | 2014 | 2013 | 2014 | 2013 | |||||||||
| Foreign exchange loss/(gain) | $ | (146 | ) | $ | 26 | $ | (910 | ) | $ | 391 | |||
| Impairment loss on available-for-sale financial asset | - | 3,067 | 1,766 | 3,067 | |||||||||
| Impairment loss on prepaid expenses and deposits | 3,405 | - | 3,405 | - | |||||||||
| Impairment loss on property, plant and equipment | 277 | 4,299 | 277 | 4,299 | |||||||||
| Impairment loss on materials and supplies inventories | - | 6,930 | - | 6,930 | |||||||||
| Proceeds on disposal of mining license | (1,818 | ) | - | (1,818 | ) | - | |||||||
| Other | 58 | 603 | 129 | 668 | |||||||||
| Other operating expenses | $ | 1,776 | $ | 14,925 | $ | 2,849 | $ | 15,355 | |||||
The Company's investment in Aspire is accounted for as an available-for-sale financial asset and carried at its fair value. In the second quarter of 2014, Aspire's market capitalization increased with the gain for the Company being recorded in other comprehensive income. This compares to an impairment loss of $3.1 million recognized in other operating expenses in the second quarter of 2013 as a result of a decrease in Aspire's market capitalization during that period.
The Company recognized an impairment loss of $3.4 million in the second quarter of 2014 related to prepaid toll washing fees under the contract with Ejinaqi Jinda Coal Industry Co. Ltd. ("Ejin Jinda"). The impairment charge is a result of the continued delay in starting the commercial operations at the wet washing facility and the continued soft coal market in China. In the second quarter of 2014 the Company recognized an impairment charge of $0.3 million in respect of surplus construction materials. In the second quarter of 2013, the Company recognized a total of $11.2 million in impairment in respect of material and supplies ($6.9 million) and property, plant and equipment ($4.3 million).
In the second quarter of 2014 the Company completed the sale of the Tsagaan Tolgoi mining license. The gross proceeds of the sale were $2.0 million, indirect taxes and costs totaled $0.2 million and a withholding tax totaling $0.5 million was incurred. The net proceeds generated for the Company after taxes and costs were $1.3 million.
Administration expenses were $2.3 million in the second quarter of 2014 compared to $4.0 million in the second quarter of 2013.
| Three months ended | Six months ended | ||||||||||
| June 30, | June 30, | ||||||||||
| $ in thousands | 2014 | 2013 | 2014 | 2013 | |||||||
| Corporate administration | $ | 523 | $ | 992 | $ | 1,183 | $ | 2,124 | |||
| Professional fees | $ | 779 | 2,229 | 1,465 | 3,631 | ||||||
| Salaries and benefits | $ | 825 | 643 | 1,553 | 1,607 | ||||||
| Share-based compensation expense | $ | 94 | 126 | 225 | 274 | ||||||
| Depreciation | $ | 32 | 34 | 64 | 121 | ||||||
| Administration expenses | $ | 2,253 | $ | 4,024 | $ | 4,490 | $ | 7,757 | |||
Administration expenses were lower in the second quarter of 2014 compared to the second quarter of 2013 primarily due to lower professional fees. Professional fees in the second quarter of 2013 included $1.6 million of fees related to the internal investigations led by a tripartite committee referred to section "Regulatory Issues and Contingences". The tripartite committee substantially completed the investigative phase of its activities during 2013, therefore additional professional fees were not incurred in the second quarter of 2014.
Corporate administration costs were also lower in the second quarter of 2014 compared to the second quarter of 2013 as a result of the Company's cost-cutting initiatives.
Evaluation and exploration expenses were $0.1 million in the second quarter of 2014 compared to $0.2 million in the second quarter of 2013. The Company continued to minimize evaluation and exploration expenditures in the second quarter of 2014 in order to preserve the Company's financial resources. Evaluation and exploration activities and expenditures in the second quarter of 2014 were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining and exploration licenses.
Finance costs were $5.2 million and $5.6 million in the second quarter of 2014 and 2013 which primarily consisted of interest expense on the $250.0 million CIC convertible debenture.
Finance income was $0.1 million in the second quarter of 2014 compared to $3.4 million in the second quarter of 2013 primarily consisting of unrealized gains on the fair value change of the embedded derivatives in the CIC convertible debenture ($0.1 million and $3.3 million respectively for the second quarter of 2014 and second quarter of 2013). The fair value of the embedded derivatives in the CIC convertible debenture is driven by many factors including: the Company's common share price, U.S. Dollar and Canadian Dollar exchange rates and share price volatility.
Income tax expense was $0.5 million in the second quarter of 2014 compared to an expense of $0.4 million in the second quarter of 2013. The $0.5 million recognized in the second quarter of 2014 relates to taxes paid in respect of the sale of the Tsagaan Tolgoi mining license.
| Summary of Quarterly Operational Data | |||||||||||||||||||||||||
| 2014 | 2013 | 2012 | |||||||||||||||||||||||
| Quarter Ended | 30-Jun | 31-Mar | 31-Dec | 30-Sep | 30-Jun | 31-Mar | 31-Dec | 30-Sep | |||||||||||||||||
| Sales Volumes, Prices and Costs | |||||||||||||||||||||||||
| Premium semi-soft coking coal | |||||||||||||||||||||||||
| Coal sales (millions of tonnes) | - | - | 0.21 | 0.04 | 0.21 | 0.08 | 0.03 | - | |||||||||||||||||
| Average realized selling price (per tonne) (i) | $ | - | $ | - | $ | 37.54 | $ | 37.50 | $ | 32.46 | $ | 45.81 | $ | 47.86 | $ | - | |||||||||
| Standard semi-soft coking coal | |||||||||||||||||||||||||
| Coal sales (millions of tonnes) | 0.12 | 0.29 | 1.40 | 0.87 | - | - | - | 0.01 | |||||||||||||||||
| Average realized selling price (per tonne) (i) | $ | 20.33 | $ | 22.00 | $ | 24.49 | $ | 21.67 | $ | - | $ | - | $ | - | $ | 49.91 | |||||||||
| Thermal coal | |||||||||||||||||||||||||
| Coal sales (millions of tonnes) | 0.51 | 0.10 | 0.11 | 0.03 | 0.11 | 0.20 | - | 0.31 | |||||||||||||||||
| Average realized selling price (per tonne) (i) | $ | 10.72 | $ | 12.07 | $ | 12.60 | $ | 13.07 | $ | 13.98 | $ | 13.67 | $ | - | $ | 15.87 | |||||||||
| Total | |||||||||||||||||||||||||
| Coal sales (millions of tonnes) | 0.63 | 0.39 | 1.72 | 0.94 | 0.32 | 0.28 | 0.03 | 0.32 | |||||||||||||||||
| Average realized selling price (per tonne) (i) | $ | 12.52 | $ | 19.54 | $ | 25.30 | $ | 22.05 | $ | 26.26 | $ | 22.75 | $ | 47.86 | $ | 16.98 | |||||||||
| Raw coal production (millions of tonnes) | 0.55 | 0.64 | 1.73 | 1.13 | 0.17 | 0.02 | - | - | |||||||||||||||||
| Direct cash costs of product sold (per tonne) (ii) | $ | 8.23 | $ | 10.43 | $ | 11.13 | $ | 9.41 | $ | 11.49 | $ | 10.22 | $ | 11.67 | $ | 9.56 | |||||||||
| Mine administration cash costs of product sold (per tonne) (ii) | $ | 2.49 | $ | 3.80 | $ | 1.39 | $ | 2.20 | $ | 7.14 | $ | 1.46 | $ | 5.08 | $ | 3.75 | |||||||||
| Total cash costs of product sold (per tonne) (ii) | $ | 10.72 | $ | 14.23 | $ | 12.52 | $ | 11.61 | $ | 18.63 | $ | 11.68 | $ | 16.75 | $ | 13.31 | |||||||||
| Other Operational Data | |||||||||||||||||||||||||
| Production waste material moved (millions of bank cubic meters) | 2.17 | 2.55 | 3.77 | 1.57 | 2.71 | 0.40 | - | - | |||||||||||||||||
| Strip ratio (bank cubic meters of waste material per tonne of coal produced) | 3.97 | 4.02 | 2.18 | 1.39 | 15.55 | 26.21 | - | - | |||||||||||||||||
| Lost time injury frequency rate (iii) | 0.15 | - | - | - | - | - | 0.1 | 0.2 | |||||||||||||||||
- Average realized selling price excludes royalties and selling fees.
- A non-IFRS financial measure, refer to "Non-IFRS Financial Measures" section. Cash costs of product sold exclude idled mine asset cash costs.
- Per 200,000 man hours and calculated based on a rolling 12 month average.
| Summary of Quarterly Financial Results | ||||||||||||||||||||||||||||||||
| $ in thousands, except per share information | 2014 | 2013 | 2012 | |||||||||||||||||||||||||||||
| Quarter Ended | 30-Jun | 31-Mar | 31-Dec | 30-Sep | 30-Jun | 31-Mar | 31-Dec | 30-Sep | ||||||||||||||||||||||||
| Financial Results | ||||||||||||||||||||||||||||||||
| Revenue (i), (ii) | 6,691 | $ | 5,137 | $ | 32,457 | $ | 15,652 | $ | 6,129 | $ | 4,398 | $ | 1,186 | $ | 3,804 | |||||||||||||||||
| Cost of sales (ii) | (20,086 | ) | (18,366 | ) | (40,359 | ) | (33,486 | ) | (17,477 | ) | (21,305 | ) | (32,229 | ) | (31,454 | ) | ||||||||||||||||
| Gross profit/(loss) excluding idled mine asset costs | (8,497 | ) | (10,202 | ) | (4,141 | ) | (13,323 | ) | (5,593 | ) | (494 | ) | (12,601 | ) | (8,719 | ) | ||||||||||||||||
| Gross profit/(loss) including idled mine asset costs | (13,395 | ) | (13,229 | ) | (7,900 | ) | (17,834 | ) | (11,348 | ) | (16,907 | ) | (31,043 | ) | (27,650 | ) | ||||||||||||||||
| Other operating expenses | (1,776 | ) | (1,073 | ) | (109,682 | ) | (1,003 | ) | (14,925 | ) | (431 | ) | (19,282 | ) | (18,315 | ) | ||||||||||||||||
| Administration expenses | (2,253 | ) | (2,237 | ) | (3,668 | ) | (4,204 | ) | (4,024 | ) | (3,733 | ) | (6,080 | ) | (5,178 | ) | ||||||||||||||||
| Evaluation and exploration expenses | (107 | ) | (172 | ) | (489 | ) | (186 | ) | (221 | ) | (273 | ) | (508 | ) | (958 | ) | ||||||||||||||||
| Loss from operations | (17,531 | ) | (16,711 | ) | (121,740 | ) | (23,227 | ) | (30,518 | ) | (21,344 | ) | (56,913 | ) | (52,101 | ) | ||||||||||||||||
| Finance costs | (5,215 | ) | (5,025 | ) | (5,167 | ) | (5,382 | ) | (5,617 | ) | (4,996 | ) | (4,718 | ) | (5,164 | ) | ||||||||||||||||
| Finance income | 127 | 1,007 | 1,301 | 124 | 3,366 | 775 | (116 | ) | 12,947 | |||||||||||||||||||||||
| Share of earnings/ (losses) of joint venture |
(3 | ) | (26 | ) | (15 | ) | (66 | ) | 44 | (17 | ) | 144 | 288 | |||||||||||||||||||
| Income tax recovery/ (expense) |
(546 | ) | - | (13,109 | ) | (13,377 | ) | (416 | ) | 1,916 | 5,040 | (2,383 | ) | |||||||||||||||||||
| Net loss | (23,168 | ) | (20,755 | ) | (138,730 | ) | (41,928 | ) | (33,141 | ) | (23,666 | ) | (56,564 | ) | (46,413 | ) | ||||||||||||||||
| Basic loss per share | $ | (0.12 | ) | $ | (0.11 | ) | $ | (0.75 | ) | $ | (0.23 | ) | $ | (0.18 | ) | $ | (0.13 | ) | $ | (0.31 | ) | $ | (0.26 | ) | ||||||||
| Diluted loss per share | $ | (0.12 | ) | $ | (0.11 | ) | $ | (0.75 | ) | $ | (0.23 | ) | $ | (0.18 | ) | $ | (0.13 | ) | $ | (0.31 | ) | $ | (0.26 | ) | ||||||||
- Revenue is presented net of royalties and selling fees.
- Revenue and cost of sales relate to the Company's Ovoot Tolgoi Mine within the Mongolian Coal Division operating segment. Refer to note 4 of the Company's condensed consolidated interim financial statements for further analysis regarding the Company's reportable operating segments.
FINANCIAL POSITION AND LIQUIDITY
Liquidity and Capital Resources
The Company has in place a planning, budgeting and forecasting process to help determine the funds required to support the Company's normal operations on an ongoing basis and its expansionary plans.
On May 25, 2014, the Company announced it had obtained a $10 million revolving credit facility from Turquoise Hill to meet its short term working capital requirements (the "Turquoise Hill Loan Facility"). The terms and conditions of this facility were filed on SEDAR (www.sedar.com) on June 2, 2014. The key commercial terms of the facility are as follows:
- maturity date of August 30, 2014;
- interest rate of one month US dollar LIBOR Rate in effect plus 11% margin per annum;
- commitment fee of 35% of interest rate payable quarterly in arrears on undrawn principal amount of facility;
- front end fee of $0.1 million;
- draws subject to customary closing conditions and the Company's cash requirements in the ordinary course of business;
- facility is subject to certain mandatory prepayment and termination provisions; and
- the Company to continue to seek other funding alternatives.
As at June 30, 2014 the Company had drawn down $3.8 million under this facility. Notwithstanding the provision of the $10 million shareholder loan facility, the Company continues to experience negative impacts on its margins and liquidity and there can be no assurance that the Company will have sufficient funding for the balance of 2014 to be able to continue as a going concern.
The Company anticipates that coal prices in China will remain under pressure through the end of 2014, which will continue to impact the Company's margins and liquidity. Therefore the Company is actively seeking additional sources of financing to continue operating and meet its objectives, while continuing to be focused on minimizing uncommitted capital expenditures while preserving the Company's growth options. The Company is in discussions with various parties regarding potential funding solutions; however, there is no guarantee that an agreement will be reached. As of the date hereof, the Company expects to be able to secure such funding in order to pay the interest due under the CIC convertible debenture on November 19, 2014. If it does not do so, or if it fails to secure additional capital or otherwise restructure or refinance its business in order to address its cash requirements through June 30, 2015, then the Company is unlikely to have sufficient capital resources or cash flows from mining operations in order to satisfy its ongoing obligations and future contractual commitments, including cash interest payments due on the CIC convertible debenture. As a result, the Company may not be able to continue as a going concern. Refer to section 11 "Risk Factors" of the Company's MD&A for the six months ended June 30, 2014 which is available at www.sedar.com for further analysis. Therefore, the Company is actively seeking additional sources of financing to continue operating and meet its objectives.
Several adverse conditions and material uncertainties cast significant doubt upon the going concern assumption. The Company had cash of $8.8 million and working capital (excess current assets over current liabilities) of $16.7 million at June 30, 2014. The Company's consolidated financial statements have been prepared on a going concern basis which assumes that the Company will continue operating until at least June 30, 2015 and will be able to realize its assets and discharge its liabilities in the normal course of operations as they come due; however, in order to continue as a going concern, the Company must generate sufficient operating cash flows, secure additional capital or otherwise pursue a strategic restructuring, refinancing or other transaction to provide it with additional liquidity. If the Company fails to generate sufficient operating cash flows, secure additional capital or otherwise restructure or refinance its business in order to pay the interest due under the CIC convertible debenture on November 19, 2014, or if it fails to generate sufficient operating cash flows, secure additional capital or otherwise restructure or refinance its business in order to address its cash requirements through June 30, 2015, it will not have adequate liquidity to fund its operations and meet its obligations (including its debt payment obligations), it may not be able to continue as a going concern. If for any reason, the Company is unable to secure the additional sources of financing and continue as a going concern, then this could result in adjustments to the amounts and classifications of assets and liabilities in the Company's consolidated financial statements and such adjustments could be material.
While the Company intends to secure additional sources of financing as soon as possible, a continued delay in securing additional financing could ultimately result in an event of default under the $250.0 million CIC convertible debenture 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.
Factors that impact the Company's liquidity are being closely monitored and include, but are not limited to, Chinese economic growth, market prices of coal, production levels, operating cash costs, capital costs, exchange rates of currencies of countries where the Company operates and exploration and discretionary expenditures.
Cash Position and Liquidity
As at June 30, 2014, the Company had cash of $8.8 million compared to cash of $21.8 million as at December 31, 2013. Working capital (excess current assets over current liabilities) was $16.7 million as at June 30, 2014 compared to $41.7 million as at December 31, 2013. As at August 11, 2014, the Company had cash of $6.2 million and there have been no further amounts drawn down under the Turquoise Hills Loan Facility since June 30, 2014.
As at June 30, 2014, the Company's gearing ratio was 0.20 (December 31, 2013: 0.19), which was calculated based on the Company's long term liabilities to total assets. As at June 30, 2014, the Company is not subject to any externally imposed capital requirements.
Mongolian IAAC Investigation
In the first quarter of 2013, the Company was subject to orders imposed by Mongolia's Independent Authority against Corruption (the "IAAC") which placed restrictions on certain of the Company's Mongolian assets. The orders were imposed on the Company in connection with the IAAC's investigation of the Company. The Mongolian State Investigation Office (the "SIA") also continues to enforce the orders on the Company.
The orders placing restrictions on certain of the Company's Mongolian assets could ultimately result in an event of default of the Company's CIC convertible debenture. Following a review by the Company and its advisers, it is the Company's view that this does not result in an event of default as defined under the CIC convertible debenture terms. However, if an event of default of the CIC convertible debenture occurs that remains uncured for ten business days, the principal amount owing and all accrued and unpaid interest will become immediately due and payable upon notice to the Company by CIC.
The orders relate to certain items of operating equipment and infrastructure and the Company's Mongolian bank accounts. The orders related to the operating equipment and infrastructure restricts the sale of these items; however, the orders do not restrict the use of these items in the Company's mining activities. The orders related to the Company's Mongolian bank accounts restrict the use of in-country funds. While the orders restrict the use of in-country funds pending outcome of the investigation, they are not expected to have any material impact on the Company's activities.
Ovoot Tolgoi Mine Impairment Analysis
Unchanged from the assessment made as at December 31, 2013, and March 31, 2014 respectively, the Company determined that an indicator of impairment existed for its Ovoot Tolgoi Mine cash generating unit as at June 30, 2014. The impairment indicator was the continued weakness in the Company's share price during the second quarter of 2014 and the fact that the market capitalization of the Company, as at June 30, 2014, 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 $397.2 million as at June 30, 2014.
Key estimates and assumptions incorporated in the valuation model included the following:
- long term real selling price of $104 per tonne for semi-soft coking coal FOB Australia;
- life-of-mine coal production and operating costs; and
- a pre-tax discount rate of 14.9% based on an analysis of market, country and company specific factors.
Key sensitivities in the valuation model are as follows:
- for each 1% increase/(decrease) in the long term real selling price of semi-soft coking coal FOB Australia, the calculated value of the cash generating unit increases/(decreases) by approximately $24.1/($24.1) million; and
- for each 1% increase/ (decrease) in the pre-tax discount rate, the calculated value of the cash generating unit (decreases)/increases by approximately ($22.1)/$23.9 million.
The impairment analysis did not result in the identification of an impairment loss and no charge was required as at June 30, 2014. A decline of more than 2% in the long term real selling price of semi soft coking coal or an increase of more than 2% in the pre-tax discount rate may trigger an impairment charge on the cash generating unit. 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.
REGULATORY ISSUES AND CONTINGENCIES
Regulatory Issues
Governmental and Regulatory Investigations
The Company is subject to investigations by the IAAC and the SIA regarding allegations against the Company 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 formal notice that the IAAC investigation is completed. The IAAC has not formally accused any current or former Company employees of breach of Mongolia's anti-corruption laws.
A report issued by the experts appointed by the SIA on June 30, 2013 and again in January 2014 has recommended that the accusations of money laundering as alleged against the Company's three former employees be withdrawn. However, to date, the Company has not received notice or legal document confirming such withdrawal as recommended by the experts appointed by the SIA.
A third investigation ordered by the SIA and conducted by the National Forensic Center ("NFC") into alleged violations of Mongolian taxation law was concluded at the end of January 2014. The report with conclusions of the investigations by the NFC has been provided to the Prosecutor General of Mongolia. The Prosecutor General has issued criminal charges against the three former employees and the
Company's Mongolian subsidiary SouthGobi Sands LLC may be held liable as "civil defendant" for alleged violations of Mongolian taxation law. The case was transferred to a Court of Justice for review by a judge in April 2014. On May 12, 2014, the Company was advised that the appointed judge has concluded that the investigation on the case was incomplete and has ordered to return the case to the General Prosecutor for additional investigation. As announced by the Company on June 24, 2014, the Company has been informed that the additional investigation has been completed and the case was transferred back to the First Instance Second District Court which set the trial date to June 30, 2014. Following the initial appearances before the court by all concerned parties, the trial date for the case has been deferred until August 25, 2014.
The likelihood or consequences of an outcome or any action taken against SouthGobi Sands LLC as "civil defendant" are uncertain and 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.
The Company, including its Mongolian subsidiary SouthGobi Sands LLC, has prepared its financial statements in compliance with IFRS, and lodged all its tax returns in the required format under Mongolian tax law. During the investigative period, which has been ongoing since May 2012, the Company devoted considerable internal resources in reviewing and responding to the allegations raised through the investigations by the relevant authorities. The Company views these accusations as unfounded. It disputes these accusations and the procedures and conclusions of the investigations that led to these accusations and will vigorously defend itself and its former three (3) employees against these charges.
At this point, the three former employees continue to be subject to a travel ban. SouthGobi Sands LLC is designated as a "civil defendant" in connection with the tax evasion allegations, and may potentially be held financially liable for the alleged criminal misconduct of its former employees under Mongolian Law.
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 $1.5 million held in local bank accounts, in connection with its continuing investigation of these allegations. This $1.5 million is included within the cash balance in the Company's financial statements. 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. The Company will continue to take all appropriate steps to protect its ability to conduct its business activities in the ordinary course.
Internal Investigations
Through its Audit Committee (comprised solely of independent directors), the Company has conducted an internal investigation into possible breaches of law, internal corporate policies and codes of conduct arising from the allegations which have been raised through the investigations in Mongolia. The Chair of the Audit Committee has also participated in a tripartite committee, comprised of the Audit Committee Chairs of the Company and Turquoise Hill and a representative of Rio Tinto, which focused on the investigation of a number of those allegations, including possible violations of anti-corruption laws. The tripartite committee substantially completed the investigative phase of its activities during the third quarter of 2013. There have been no significant developments in respect of the internal investigations since the completion of the investigative phase during the third quarter of 2013.
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. Refer to the Company's MD&A for the year ended December 31, 2013, which is available at www.sedar.com, section 14 "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".
Mining Prohibition in Specified Areas Law
Pursuant to the Mining Prohibition in Specified Areas Law, the Government of Mongolia has defined the boundaries of certain areas in which exploration and mining is purportedly prohibited. A list of licenses has been prepared that overlap with the prohibited areas described in the law based on information submitted by water authority agencies, forest authority agencies and local authorities for submission to the Government of Mongolia.
Portions of the Company's Ovoot Tolgoi mining license and exploration licenses pertaining to the Zag Suuj Deposit and the South Biluut and Jargalant Fields within the Soumber Deposit are included on the list of licenses published by the Government of Mongolia, potentially affecting the status of those licenses under the Mining Prohibition in Specified Areas Law.
In regard to the Ovoot Tolgoi mining license, the potential area which may be affected is a relatively small area which represents approximately 3% of the entire area of the mining license and does not contain any of the Company's NI 43-101 reserves or resources or immovable assets. Accordingly, the loss of the potentially affected area would not materially and adversely affect the existing operations.
Activities historically carried out on the other licenses referred to above include drilling, trenching and geological reconnaissance. The Company has no immovable assets located in any of the potentially affected areas of these licenses and the loss of any or all of these potentially affected properties would not materially and adversely affect the existing operations.
The Company understands that the status of the Mining Prohibition in Specified Areas Law is unclear and it has not been enforced to date. Reports from Mongolia suggest that the law may be amended. The Company will continue to monitor developments and will ensure that it is fully compliant with Mongolian law.
Other Corporate Information
Prior to the listing of the securities of the Company on the HKEX in 2010, the Company applied to Hong Kong's Securities and Futures Commission (the "SFC") for, and was granted, a ruling that the Company is not a public company in Hong Kong for the purposes of the Takeovers Code (the "2009 Ruling"). Consequently the Takeovers Code has not applied to the Company since the time of its Hong Kong listing.
In June 2014, the Company made an application to the SFC for a confirmation of the SFC's prior ruling that the Company is not a public company in Hong Kong for the purposes of the Takeovers Code. The Company made this application so it could assess, with a greater degree of certainty, its options for sourcing the additional financing it requires to continue operating and meet its obligations.
Following the application to the SFC, the Takeovers and Mergers Panel of the SFC ("Takeovers Panel") determined on June 19, 2014 that the Company should be considered a public company in Hong Kong for the purposes of the Takeovers Code. The Takeovers Code now applies to the Company.
The Takeovers Panel's decision was based primary upon the material change in the greater number of Hong Kong shareholders as reflected in the proportions of shares held on the Hong Kong and Canadian register, in particular the relative proportions held by the public (excluding Turquoise Hill and CIC). The Takeovers Panel was also of the view that there is a material change in relation to the extent of trading in the shares in Hong Kong as reflected in the proportionate trading volumes on the HKEX and in Canada. As a result, the Takeover Panel has concluded that the 2009 Ruling which considered that the Company should not be a public company in Hong Kong for the purposes of the Takeovers Code is no longer valid and the Company should be considered a public company in Hong Kong within the meaning of section 4.2 of the Introduction to the Takeovers Code.
Details of the Takeovers Panel's written decision dated June 24, 2014 and published on June 30, 2014 is available in the SFC's website at www.sfc.hk.
The Company has been and continues to be subject to Canadian provincial securities laws, including those governing takeovers, mergers and share repurchases. Certain transactions that would otherwise be exempt under Canadian law from the requirement to make a formal offer to all shareholders may now trigger mandatory offer obligations under the Takeovers Code.
Contingencies
Class Action Lawsuit
On or about January 6, 2014, Siskinds LLP, a Canadian law firm, filed a proposed securities class action (the "Ontario Action") against the Company, certain of its former senior officers and current directors, and its former auditors, Deloitte LLP, in the Ontario Superior Court of Justice in relation to the Company's restatement of financial statements as previously disclosed in the Company's public filings.
There have been no significant developments in respect of the class action lawsuit since the first quarter ended March 31, 2014. For more details, refer to the Company's Management Discussion and Analysis for the quarter ended March 31, 2014 available on SEDAR at www.sedar.com, and, in particular, the sub- section on "Contingencies - Class Action Lawsuit of the section 6 on "Regulatory Issues and Contingencies".
The Company disputes and will vigorously defend itself against these claims through independent Canadian litigation counsel retained by the Company and the other defendants for this purpose. Due to the inherent uncertainties of litigation, it is not possible to predict the final outcome of the Ontario Action or determine the amount of any potential losses, if any. However, in the opinion of management of the Company, at June 30, 2014 a provision for this matter is not required.
PROCESSING INFRASTRUCTURE
Dry Coal Processing
Following an extensive review that commenced in the fourth quarter of 2013, the Company concluded in the first quarter of 2014 that it does not plan to either complete or use the dry coal handling facility ("DCHF") at the Ovoot Tolgoi Mine in the foreseeable future. As a result of the review and subsequent impairment assessment, the Company recorded a $66.9 million non-cash impairment in the fourth quarter of 2013 to reduce the carrying value of the DCHF to its recoverable amount. The DCHF had a carrying value of $11.2 million at June 30, 2014. The Company continues to use mobile screens for initial dry processing of its higher-ash coals. The use of mobile screens at stockpile areas closer to the pits has enabled the Company to realize a cost benefit compared to hauling the coal to the central DCHF and operating the rotary breaker. This provides a lower cost solution without adversely impacting the coal quality of the coal planned to be mined over the next year.
As coal markets improve and production from the Ovoot Tolgoi Mine increases in line with its anticipated annual capacity of 9 million tonnes run-of-mine production, the Company will review the use of the DCHF as part of its existing assets and continue developing beneficiation capabilities to maximize value from its product.
Wet Washing Facility
In 2011, the Company entered into an agreement with Ejin Jinda, a subsidiary of China Mongolia Coal Co. Ltd. to toll-wash coals from the Ovoot Tolgoi Mine. The agreement has a duration of five years from commencement of the contract and provides for an annual wet washing capacity of approximately 3.5 million tonnes of input coal. The facility is located approximately 10km inside China from the Shivee Khuren Border Crossing, approximately 50km from the Ovoot Tolgoi Mine. Ejin Jinda will charge the Company a single toll washing fee which will cover their expenses, capital recovery and profit. Ejin Jinda will also transport coal from the Ovoot Tolgoi Mine to the wet washing facility under a separate transportation agreement.
To date, commercial operations at the wet washing facility have not commenced. The Company identified the results of a trial sample from the wet washing facility and the delay in starting the commercial operations at the wet washing facility as indicators of impairment for the prepaid toll washing fees which are part of the contract with Ejin Jinda. Based on updated estimates and assumptions related to wash yields from the facility and potential fees to early cancel the contract, a $30.2 million impairment loss on the $33.6 million of prepaid toll washing fees was recorded in other operating expenses during the year ended December 31, 2013. During the quarter ended June 30, 2014, the Company recorded an additional impairment of $3.4 million against the prepaid toll washing fees to fully impair the deposit due to the continued delay in starting the commercial operations at the wet washing facility and the continued soft coal market in China. Subject to financing availability for the Company, further trial samples are required to be performed ahead of the wet washing facility being ready for commercial operation.
The Company's objective continues to be the implementation of an effective and profitable wet washing solution, and the Company is cooperating with Ejin Jinda in reviewing the utilization of the wet washing facility.
Transportation Infrastructure
On August 2, 2011, the State Property Committee of Mongolia awarded the tender to construct a paved highway from the Ovoot Tolgoi Complex to the Shivee Khuren Border Crossing to consortium partners NTB LLC and SouthGobi Sands LLC (together referred to as "RDCC LLC"). SouthGobi Sands LLC holds a 40% interest in RDCC LLC.
On October 26, 2011, RDCC LLC signed a concession agreement with the State Property Committee of Mongolia. RDCC LLC has the right to conclude a 17 year build, operate and transfer agreement under the Mongolian Law on Concessions. Construction of the paved highway was substantially complete by the end of 2013. The 2014 construction program commenced in the second quarter of 2014. Subject to the Company having available financial resources to fund its portion of the remaining construction costs, the remaining construction work and commissioning of the paved highway is expected to be completed by the end of 2014. On July 24, 2014 the Ministry of Economic Development of Mongolia confirmed that RDCC LLC's request to postpone the July 2014 deadline for commissioning of the paved highway until December 30, 2014 had been approved.
The paved highway will have an intended carrying capacity upon completion in excess of 20 million tonnes of coal per year.
OUTLOOK
The Company continues to operate under difficult market conditions. Coal prices in China declined further in the second quarter compared to the first quarter of 2014 as a result of strong seaborne and Chinese domestic supply. The decline in coal prices has been partially offset by the increase in the Company's volumes in the second quarter compared to the seasonally slow first quarter.
In June 2014, following a review of operations in response to current market conditions, the Company reduced its production and placed approximately half of its workforce in furlough. This furlough is anticipated to remain in place until the end of August subject to market conditions. Contracted sales volumes are expected to be met from the combination of the existing coal stockpile and reduced production volumes.
The Company anticipates that coal prices in China will remain under pressure through the end of 2014, which will continue to impact the Company's margins and liquidity. The Company continues to strive for further cost reductions and where possible delay expenditures. As at the date hereof, the Company expects to be able to make the $8 million cash interest payment on the CIC convertible debenture on November 19, 2014. However, in the event a loan or other financing arrangement is not secured by November 19, 2014, and even if such loan is secured, if the Company does not secure additional funding to address its cash requirements through June 30, 2015, the Company is unlikely to have sufficient capital resources and does not expect to generate sufficient cash flows from mining operations in order to satisfy its ongoing obligations and future contractual commitments. Therefore, the Company is actively seeking additional sources of financing to continue operating and meet its objectives.
The Company's consolidated financial statements have been prepared on a going concern basis which assumes that the Company will continue operating until at least June 30, 2015 and will be able to realize its assets and discharge its liabilities in the normal course of operations as they come due; however, in order to continue as a going concern, the Company must generate sufficient operating cash flows, secure additional capital or otherwise pursue a strategic restructuring, refinancing or other transaction to provide it with additional liquidity. If the Company fails to generate sufficient operating cash flows, secure additional capital or otherwise restructure or refinance its business as described above, it will not have adequate liquidity to fund its operations and meet its obligations (including its debt payment obligations) and it may not be able to continue as a going concern. Refer to section "Liquidity and Capital Resources". While the Company intends to secure additional sources of financing as soon as possible, a continued delay in securing additional financing could ultimately result in an event of default of the $250.0 million CIC convertible debenture, 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.
Longer term and assuming the Company's immediate liquidity challenges are resolved, the Company remains well positioned, with a number of key competitive strengths, including:
- Strategic location - The Ovoot Tolgoi Mine is located approximately 40km from China, which represents the main coal market. The Company has an infrastructure advantage, being approximately 50km from a major Chinese coal distribution terminal with rail connections to key coal markets in China.
- Large resource base - The Company's aggregate coal resources (including reserves) include measured and indicated resources of 497 million tonnes and inferred resources of 293 million tonnes.
- Several growth options - The Company has several growth options including an anticipated increase to 9 million tonnes annual run-of-mine capacity at the Ovoot Tolgoi Mine as well as greenfield options with the Soumber Deposit and Zag Suuj Deposit, located approximately 20km east and approximately 150km east of the Ovoot Tolgoi Mine, respectively.
- Flexible product offering - Most of the Company's coal resources have coking properties, including a mixture of semi-soft coking coals and hard coking coals. The Company is currently studying options to supply washed coal to the market to further improve its market position and access to end customers.
Objectives
The Company's objectives for 2014 and the medium term are as follows.
- Secure additional and immediate sources of financing - The Company is focused on securing additional and immediate sources of financing and continues to minimize uncommitted capital expenditures while preserving the Company's growth options.
- Drive operational excellence - The Company is focused on further improving operational efficiency in delivering production to meet market requirements and to further reduce operating and administrative costs.
- Continue to develop regional infrastructure - Subject to the Company having available financial resources to fund its portion of the construction costs, the Company's priority is to complete the construction of the paved highway from the Ovoot Tolgoi Mine to the Shivee Khuren Border Crossing as part of the existing consortium. Construction of the paved highway was substantially complete by the end of 2013 with the remaining construction work and commissioning expected to be completed by the end of 2014.
- Deliver value through marketing by improving the Company's access to market and end customers and the overall quality of its product - Subject to available financial resources, implement an effective business structure and beneficiation process based on wet washing that is capable of delivering a sustainable and profitable product mix to the Chinese market and expand the Company's customer base further inland in China.
- Progress growth options - Subject to available financial resources, the Company plans to further the development of the Soumber Deposit, while staying compliant with all government requirements in relation to its licenses and agreements.
- Operating in a socially responsible manner - The Company is focused on maintaining its vigilance on health, safety and environmental performance.
- Re-establish the Company's reputation - The Company's vision is to be a respected and profitable Mongolian coal company. To achieve this, the Company will continue to work on re-establishing good working relationships with all external stakeholders.
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 asset costs and non-cash expenses which are excluded. Non-cash expenses include share-based compensation expense, impairments of coal stockpile inventories, 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 coal stockpile inventory turnover and impairments of coal stockpile inventories from prior periods.
| CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS | ||||||||||||||||
| Condensed Consolidated Interim Statements of Comprehensive Income | ||||||||||||||||
| (Unaudited) | ||||||||||||||||
| (Expressed in thousands of U.S. Dollars, except for share and per share amounts) | ||||||||||||||||
| Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
| Revenue | $ | 6,691 | $ | 6,129 | $ | 11,828 | $ | 10,527 | ||||||||
| Cost of sales | (20,086 | ) | (17,477 | ) | (38,452 | ) | (38,783 | ) | ||||||||
| Gross loss | (13,395 | ) | (11,348 | ) | (26,624 | ) | (28,256 | ) | ||||||||
| Other operating expenses | (1,776 | ) | (14,925 | ) | (2,849 | ) | (15,355 | ) | ||||||||
| Administration expenses | (2,253 | ) | (4,024 | ) | (4,490 | ) | (7,757 | ) | ||||||||
| Evaluation and exploration expenses | (107 | ) | (221 | ) | (279 | ) | (494 | ) | ||||||||
| Loss from operations | (17,531 | ) | (30,518 | ) | (34,242 | ) | (51,862 | ) | ||||||||
| Finance costs | (5,215 | ) | (5,617 | ) | (10,240 | ) | (10,608 | ) | ||||||||
| Finance income | 127 | 3,366 | 1,134 | 4,136 | ||||||||||||
| Share of earnings/(losses) of joint venture | (3 | ) | 44 | (29 | ) | 27 | ||||||||||
| Loss before tax | (22,622 | ) | (32,725 | ) | (43,377 | ) | (58,307 | ) | ||||||||
| Current income tax expense | (546 | ) | - | (546 | ) | (1 | ) | |||||||||
| Deferred income tax recovery/(expense) | - | (416 | ) | - | 1,501 | |||||||||||
| Net loss attributable to equity holders of the Company | (23,168 | ) | (33,141 | ) | (43,923 | ) | (56,807 | ) | ||||||||
| Other comprehensive income/(loss) to be reclassified to profit or loss in subsequent periods | ||||||||||||||||
| Change in value of available-for-sale financial asset, net of tax | 414 | (930 | ) | (100 | ) | - | ||||||||||
| Net comprehensive loss attributable to equity holders of the Company | ||||||||||||||||
| (22,754 | ) | $ | $(34,071 | ) | $ | (44,023 | ) | $ | (56,807 | ) | ||||||
| Basic loss per share | $ | (0.12 | ) | $ | (0.18 | ) | $ | (0.23 | ) | $ | (0.31 | ) | ||||
| Diluted loss per share | $ | (0.12 | ) | $ | (0.18 | ) | $ | (0.23 | ) | $ | (0.31 | ) | ||||
| Condensed Consolidated Interim Statements of Financial Position | ||||||||
| (Unaudited) | ||||||||
| (Expressed in thousands of U.S. Dollars) | ||||||||
| As at | ||||||||
| June 30, 2014 |
December 31, 2013 |
|||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash | $ | 8,789 | $ | 21,837 | ||||
| Trade and other receivables | 896 | 2,578 | ||||||
| Inventories | 42,259 | 40,288 | ||||||
| Prepaid expenses and deposits | 5,666 | 11,506 | ||||||
| Total current assets | 57,610 | 76,209 | ||||||
| Non-current assets | ||||||||
| Property, plant and equipment | 381,704 | 399,395 | ||||||
| Long term investments | 28,918 | 30,602 | ||||||
| Total non-current assets | 410,622 | 429,997 | ||||||
| Total assets | $ | 468,232 | $ | 506,206 | ||||
| Equity and liabilities | ||||||||
| Current liabilities | ||||||||
| Trade and other payables | $ | 18,830 | $ | 31,241 | ||||
| Deferred revenue | 13,992 | 997 | ||||||
| Interest-bearing borrowings | 3,800 | - | ||||||
| Current portion of convertible debenture | 4,285 | 2,301 | ||||||
| Total current liabilities | 40,907 | 34,539 | ||||||
| Non-current liabilities | ||||||||
| Convertible debenture | 93,249 | 94,302 | ||||||
| Decommissioning liability | 2,653 | 2,308 | ||||||
| Total non-current liabilities | 95,902 | 96,610 | ||||||
| Total liabilities | 136,809 | 131,149 | ||||||
| Equity | ||||||||
| Common shares | 1,067,846 | 1,067,839 | ||||||
| Share option reserve | 51,580 | 51,198 | ||||||
| Investment revaluation reserve | 414 | 514 | ||||||
| Accumulated deficit | (788,417 | ) | (744,494 | ) | ||||
| Total equity | 331,423 | 375,057 | ||||||
| Total equity and liabilities | $ | 468,232 | $ | 506,206 | ||||
| Net current assets | $ | 16,703 | $ | 41,670 | ||||
| Total assets less current liabilities | $ | 427,325 | $ | 471,667 | ||||
REVIEW OF INTERIM RESULTS
The condensed consolidated interim financial statements for the Company for the three and six months ended June 30, 2014, were reviewed by the Audit Committee of the Company.
The Company's results for the quarter ended June 30, 2014, are contained in the unaudited Condensed Consolidated Interim Financial Statements and MD&A, available on the SEDAR website at www.sedar.com and the Company's website at www.southgobi.com.
ABOUT SOUTHGOBI RESOURCES
SouthGobi Resources is listed on the Toronto and Hong Kong stock exchanges, in which Turquoise Hill Resources Ltd., also publicly listed in Toronto and New York, has a 56% shareholding. Turquoise Hill took management control of SouthGobi in September 2012 and made changes to the board and senior management. Rio Tinto has a majority shareholding in Turquoise Hill.
SouthGobi Resources is focused on exploration and development of its metallurgical and thermal coal deposits in Mongolia's South Gobi Region. It has a 100% shareholding in SouthGobi Sands LLC, the Mongolian registered company that holds the mining and exploration licenses in Mongolia and operates the flagship Ovoot Tolgoi coal mine. Ovoot Tolgoi produces and sells coal to customers in China.
FORWARD-LOOKING STATEMENTS
Except for statements of fact relating to the Company, certain information contained herein constitutes forward-looking statements. Forward-looking statements are frequently characterized by words such as "plan", "expect", "project", "intend", "believe", "anticipate" and other similar words, or statements that certain events or conditions "may" or "will" occur. Forward-looking statements are based on the opinions and estimates of management at the dates the statements are made, and are subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those projected in the forward-looking statements. These factors include the Company's expectations of sufficient liquidity and capital resources to meets its ongoing obligations and future contractual commitments; including the ability for the Company to continue to meet the requirements for further draw down under the revolving loan facility from Turquoise Hill Resources Ltd ("Turquoise Hill"), the Company's ability to secure additional and immediate funding, to meet its obligations under the China Investment Corporation ("CIC") convertible debenture as the same become due, the estimates and assumptions included in the Company's impairment analysis; the ability of the Company to increase its market penetration in the People's Republic of China ("China");
the ability for higher-ash product to be sold as a thermal coal product; the ability to preserve liquidity and continue on a sustainable basis; the Company's expectation that its royalty per tonne calculated under the new "flexible tariff" royalty regime will decrease compared to the prior reference price royalty regime; the ability of the Company to meet the targeted annual capacity of run-of-mine production; the ability of the Company to successfully review the utilization of the wet washing facility and enhance the quality of its coal products through wet washing; the possibility of the CIC convertible debenture and all accrued and unpaid interest becoming immediately due; the continued pressure on the coal prices in China, and the related impact on the Company's margins and liquidity; the outcome of the issues described in the section "Regulatory Issues and Contingencies"; statements regarding the outlook for 2014; the completion of the share purchase transaction between Turquoise Hill and National United Resources Holdings Limited ("NUR"); statements regarding the Company's objectives for 2014 and beyond; the statement that completion of the paved highway is expected by the end of 2014; the statement that the capacity of the paved highway is in excess of 20 million tonnes of coal per year; and other statements that are not historical facts. Except as required by law, the Company undertakes no obligation to update forward-looking statements if circumstances or management's estimates or opinions should change. The reader is cautioned not to place undue reliance on forward-looking statements.
Contact Information:
Galina Rogova
Investors Relations
+852-2839-9208
galina.rogova@southgobi.com
SouthGobi Resources
Altanbagana Bayarsaikhan
Media Relations
+976 70070710
altanbagana.bayarsaikhan@southgobi.com
www.southgobi.com