HONG KONG, HONG KONG--(Marketwired - Nov. 10, 2014) - SouthGobi Resources Ltd. (TSX:SGQ)(HKSE:1878) (the "Company") today announced its financial and operating results for the three and nine months ended September 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 September 30, 2014 and subsequent period to November 10, 2014 are as follows:
- As at the date hereof, the Company is actively seeking sources of financing in order to be able to pay the interest due under the China Investment Corporation ("CIC") convertible debenture on November 19, 2014. The Company is also actively seeking additional sources of financing to maintain liquidity to fund its operations and meet its obligations. See section "Liquidity and Capital Resources" and section 11 "Risk Factors" of the Company's Management Discussion and Analysis for the quarter ended September 30, 2014 available on SEDAR at www.sedar.com for further detail.
- The Company continues to operate under difficult market conditions resulting from strong seaborne and domestic supply coupled with soft demand in the People's Republic of China ("China"). As a result, coal prices in China declined further in the third quarter compared to the second quarter of 2014. Softness in market conditions has been marked by a slower seasonal restocking by purchasers of coal in the third quarter of 2014 compared to the same period in 2013. Although there are signs of stabilization or modest improvements in prices at the beginning of the fourth quarter, the Company's sales volumes and revenues are expected to remain under pressure through the end of 2014.
- Production of raw coal by the Company decreased to 0.17 million tonnes in the third quarter of 2014 from 0.55 million tonnes in the second 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 on furlough. This furlough is anticipated to remain in place until the end of November 2014, subject to market conditions.
- On July 30, 2014 the Company announced Turquoise Hill Resources Ltd. ("Turquoise Hill") entered into an agreement with National United Resources Holdings Limited ("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 HKEX as well as NUR's shareholders.
- As of August 29, 2014 the Company had drawn down $3.8 million under the $10 million revolving credit facility ("the Turquoise Hill Loan Facility") from Turquoise Hill. The Turquoise Hill Loan Facility matured on August 30, 2014 and is no longer available for further drawdowns by the Company. Subject to certain terms and conditions as announced on August 31, 2014 and filed on SEDAR (www.sedar.com) on September 2, 2014, Turquoise Hill has accepted the deferral of repayments of amounts and obligations due by the Company.
- On September 28, 2014, the Company announced the construction of the paved highway from the Ovoot Tolgoi Complex to the Shivee Khuren Border Crossing had been completed. The completion of the highway was one of the Company's key objectives for 2014. The highway is anticipated to significantly increase the safety of coal transportation, reduce environmental impacts and improve the efficiency and capacity of coal transportation. Commissioning of the highway is expected by the end of 2014.
- The trial on the tax investigation commenced on August 25, 2014. Following two (2) days of hearing, the panel of three (3) appointed judges ordered the matter be returned to the Prosecutor General for further investigations due to insufficient evidence presented by the prosecutor. On October 7, 2014, the Mongolian investigation authority issued a resolution to order a re-investigation and new investigators to the case were appointed.
- Mr. Vincent H. Kou, the Company's General Counsel and Corporate Secretary, has resigned with an effective date of November 14, 2014. Mr. Kou has accepted a new role with another company.
- On October 31, 2014, the Company sold 51.4% of its stake in Aspire Mining Limited ("Aspire") for $1.4 million in net proceeds.
| OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS | ||||||||||||
| Overview of Operational Data | ||||||||||||
| Three months ended | Nine months ended | |||||||||||
| Sept 30, | Sept 30, | |||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||
| Sales Volumes, Prices and Costs | ||||||||||||
| Premium semi-soft coking coal | ||||||||||||
| Coal sales (millions of tonnes) | - | 0.04 | - | 0.33 | ||||||||
| Average realized selling price (per tonne) (i) | $ | - | $ | 37.50 | $ | - | $ | 36.01 | ||||
| Standard semi-soft coking coal | ||||||||||||
| Coal sales (millions of tonnes) | 0.31 | 0.87 | 0.72 | 0.87 | ||||||||
| Average realized selling price (per tonne) (i) | $ | 17.41 | $ | 21.67 | $ | 19.76 | $ | 21.67 | ||||
| Thermal coal | ||||||||||||
| Coal sales (millions of tonnes) | 0.34 | 0.03 | 0.95 | 0.34 | ||||||||
| Average realized selling price (per tonne) (i) | $ | 10.66 | $ | 13.07 | $ | 10.84 | $ | 13.72 | ||||
| Total | ||||||||||||
| Coal sales (millions of tonnes) | 0.65 | 0.94 | 1.67 | 1.54 | ||||||||
| Average realized selling price (per tonne) (i) | $ | 13.87 | $ | 22.05 | $ | 14.70 | $ | 23.08 | ||||
| Raw coal production (millions of tonnes) | 0.17 | 1.13 | 1.36 | 1.32 | ||||||||
| Direct cash costs of product sold (per tonne) (ii) | $ | 7.38 | $ | 9.41 | $ | 8.39 | $ | 9.96 | ||||
| Mine administration cash costs of product sold (per tonne) (ii) | $ | 2.30 | $ | 2.20 | $ | 2.73 | $ | 3.18 | ||||
| Total cash costs of product sold (per tonne) (ii) | $ | 9.68 | $ | 11.61 | $ | 11.12 | $ | 13.14 | ||||
| Other Operational Data | ||||||||||||
| Production waste material moved (millions of bank cubic meters) | 0.20 | 1.57 | 4.92 | 4.68 | ||||||||
| Strip ratio (bank cubic meters of waste material per tonne of coal produced) | 1.20 | 1.39 | 3.65 | 3.53 | ||||||||
| Lost time injury frequency rate (iii) | 0.17 | - | 0.17 | - | ||||||||
| (i) | Average realized selling price excludes royalties and selling fees. |
| (ii) | A non-IFRS financial measure, refer to "Non-IFRS Financial Measures" section. Cash costs of product sold exclude idled mine asset cash costs. |
| (iii) | 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 third quarter and first nine months of 2014 in respect of sales prices, mix and volumes.
The Company is pacing production with current demand for its coal products. As a result, the Company operated significantly below its operating capacity in the third quarter of 2014. Since Mid-June 2014 following a review of operations, the Company further reduced its production and placed approximately half of its workforce on furlough which continued throughout the third quarter of 2014. The furlough is expected to last until the end of November 2014, subject to market conditions.
The Company has maintained a strong safety record and completed the third quarter of 2014 without a lost time injury. As at September 30, 2014, the Company has a lost injury time frequency rate of 0.17 per 200,000 man hours based on a rolling 12 month average.
| Summary of Financial Results | |||||||||||||||
| Three months ended | Nine months ended | ||||||||||||||
| Sept 30, | Sept 30, | ||||||||||||||
| $ in thousands, except per share information | 2014 | 2013 | 2014 | 2013 | |||||||||||
| Revenue (i),(ii) | $ | 7,611 | $ | 15,652 | $ | 19,440 | $ | 26,179 | |||||||
| Cost of sales (ii) | (23,922 | ) | (33,486 | ) | (62,375 | ) | (72,268 | ) | |||||||
| Gross loss excluding idled mine asset costs | (2,178 | ) | (13,323 | ) | (20,877 | ) | (19,411 | ) | |||||||
| Gross loss including idled mine asset costs | (16,311 | ) | (17,834 | ) | (42,935 | ) | (46,089 | ) | |||||||
| Other operating expenses | (2 | ) | (1,003 | ) | (2,851 | ) | (16,358 | ) | |||||||
| Administration expenses | (2,530 | ) | (4,204 | ) | (7,020 | ) | (11,958 | ) | |||||||
| Evaluation and exploration expenses | (122 | ) | (186 | ) | (401 | ) | (680 | ) | |||||||
| Loss from operations | (18,965 | ) | (23,227 | ) | (53,207 | ) | (75,085 | ) | |||||||
| Finance costs | (5,257 | ) | (5,382 | ) | (15,500 | ) | (15,991 | ) | |||||||
| Finance income | 135 | 124 | 1,268 | 4,259 | |||||||||||
| Share of losses of joint venture | (32 | ) | (66 | ) | (60 | ) | (39 | ) | |||||||
| Income tax expense | - | (13,377 | ) | (546 | ) | (11,876 | ) | ||||||||
| Net loss | (24,119 | ) | (41,928 | ) | (68,045 | ) | (98,733 | ) | |||||||
| Basic loss per share | $ | (0.13 | ) | $ | (0.23 | ) | $ | (0.36 | ) | $ | (0.54 | ) | |||
| Diluted loss per share | $ | (0.13 | ) | $ | (0.23 | ) | $ | (0.36 | ) | $ | (0.54 | ) | |||
| (i) | Revenue is presented net of royalties and selling fees. |
| (ii) | Revenue and cost of sales relate to the Company's Ovoot Tolgoi Mine within the Mongolian Coal Division operating segment. |
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.
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 is 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 is deemed non-market under Mongolian tax law and the royalty per tonne is 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 amendments 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 is to be adjusted to reflect the contracted sales price and additional documentation needs 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 $19.0 million loss from operations in the third quarter of 2014 compared to a $23.2 million loss from operations in the third quarter of 2013. The third quarter of 2014 was impacted by continuing difficult market conditions which resulted in lower sales prices and volumes compared to the third quarter of 2013. This reduction in prices and volumes was offset by a lower royalty rate and lower administrative and other operating costs in the third quarter of 2014 compared to the third quarter of 2013.
Revenue was $7.6 million in the third quarter of 2014 compared to $15.7 million in the third quarter of 2013. The Company sold 0.65 million tonnes of coal at an average realized selling price of $13.87 per tonne in the third quarter of 2014 compared to sales of 0.94 million tonnes at an average realized selling price of $22.05 per tonne in the third quarter of 2013. Revenue decreased in the third quarter of 2014 compared to the third quarter of 2013 as a result of the combination of lower sales volumes and lower sales prices. The average realized selling price in the third quarter of 2014 compared to the third quarter of 2013 was also impacted by differences in product mix. The product mix in the third quarter of 2014 was split nearly evenly between Standard semi-soft coking coal and Thermal coal while the majority of sales in the third quarter of 2013 was from Standard semi-soft coking coal.
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 third quarter of 2014, based on the Company's average realized selling price of $13.87 per tonne, was 8.9% or $1.23 per tonne. In the third quarter of 2013, the Company was subject to an average 7% royalty based on a weighted average reference price of $71.17 per tonne. As a result, the Company's effective royalty rate was 22.6% or $4.99 per tonne based on the average realized selling price of $22.05 per tonne in the third quarter of 2013.
Cost of sales was $23.9 million in the third quarter of 2014 compared to $33.5 million in the third 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 | Nine months ended | ||||||||||||
| September 30, | September 30, | ||||||||||||
| $ in thousands | 2014 | 2013 | 2014 | 2013 | |||||||||
| Operating expenses | $ | 6,259 | $ | 10,927 | $ | 18,576 | $ | 20,207 | |||||
| Share-based compensation expense | 90 | (167 | ) | 232 | (320 | ) | |||||||
| Depreciation and depletion | 1,742 | 7,389 | 6,283 | 9,905 | |||||||||
| Impairment of coal stockpile inventories | 1,698 | 10,826 | 15,226 | 15,797 | |||||||||
| Cost of sales from mine operations | 9,789 | 28,975 | 40,317 | 45,589 | |||||||||
| Cost of sales related to idled mine assets | 14,133 | 4,511 | 22,058 | 26,679 | |||||||||
| Cost of sales | $ | 23,922 | $ | 33,486 | $ | 62,375 | $ | 72,268 | |||||
Operating expenses included in cost of sales were $6.3 million in the third quarter of 2014 compared to $10.9 million in the third quarter of 2013. The overall decrease in operating expenses is the result of the lower variable costs which are linked to production levels which are down to 0.17 million tonnes in the third quarter of 2014 compared to 1.13 million tonnes in the third quarter of 2013 and the continued focus on cost saving initiatives, including the furlough which commenced in Mid-June. The total cash cost of product sold decreased from $11.61 per tonne in the third quarter of 2013 to $9.68 per tonne in the third quarter of 2014.
Cost of sales in the third quarter of 2014 and the third quarter of 2013 included coal stockpile impairments of $1.7 million and $10.8 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.
Idled mine asset costs included in cost of sales increased in the third quarter of 2014 compared to the third quarter of 2013 as a result of the mining operations' slowdown which commenced in June 2014. Idled mine asset costs in the third quarter of 2014 included $14.1 million related to depreciation expense for idled mine equipment (2013: $4.5 million).
Other operating expenses were nil in the third quarter of 2014 (2013: $1.0 million).
| Three months ended | Nine months ended | ||||||||||||
| September 30, | September 30, | ||||||||||||
| 2014 | 2013 | 2014 | 2013 | ||||||||||
| Public infrastructure | $ | - | $ | - | $ | - | $ | 6 | |||||
| Sustainability and community relations | 82 | 37 | 211 | 118 | |||||||||
| Foreign exchange loss/(gain) | (80 | ) | 637 | (990 | ) | 1,028 | |||||||
| Mark-to-market loss on available-for-sale financial asset | - | - | 1,766 | 3,067 | |||||||||
| Loss on disposal of property, plant and equipment | - | 329 | - | 895 | |||||||||
| Impairment of property, plant and equipment | - | - | 277 | 4,299 | |||||||||
| Impairment of prepaid expenses and deposits | - | - | 3,405 | - | |||||||||
| Impairment of materials and supplies inventories | - | - | - | 6,930 | |||||||||
| Proceeds from disposal of mining license | - | - | (1,818 | ) | - | ||||||||
| Other | - | - | - | 15 | |||||||||
| Other operating expenses | $ | 2 | $ | 1,003 | $ | 2,851 | $ | 16,358 | |||||
The Company's other operating expenses decreased in the third quarter of 2014 compared to the third quarter of 2013 as a result of no loss being recorded in respect of the disposal of property, plant and equipment during the period and a foreign exchange gain of $0.1 million in the third quarter of 2014 compared to a loss of $0.6 million in the third quarter of 2013.
The Company's investment in Aspire is accounted for as an available-for-sale financial asset and carried at its fair value. In both the third quarter of 2014 and the third quarter of 2013, Aspire's market capitalization increased with gains for the Company being recorded in other comprehensive income.
Administration expenses were $2.5 million in the third quarter of 2014 compared to $4.2 million in the third quarter of 2013.
| Three months ended | Nine months ended | ||||||||||
| September 30, | September 30, | ||||||||||
| 2014 | 2013 | 2014 | 2013 | ||||||||
| Corporate administration | $ | 544 | $ | 857 | $ | 1,727 | $ | 2,980 | |||
| Professional fees | 971 | 2,338 | 2,437 | 5,968 | |||||||
| Salaries and benefits | 627 | 807 | 2,180 | 2,414 | |||||||
| Share-based compensation expense | 355 | 167 | 580 | 440 | |||||||
| Depreciation | 33 | 35 | 96 | 156 | |||||||
| Administration expenses | $ | 2,530 | $ | 4,204 | $ | 7,020 | $ | 11,958 | |||
Administration expenses decreased in the third quarter of 2014 compared to the third quarter of 2013 due to lower professional fees and overhead cost reduction initiatives. Professional fees in the third quarter of 2013 included $1.2 million of fees related to the internal investigations led by a tripartite committee referred to section "Regulatory Issues and Contingencies". The tripartite committee substantially completed the investigative phase of its activities during 2013. Therefore, additional professional fees were not incurred in the third quarter of 2014.
Evaluation and exploration expenses were $0.1 million in the third quarter of 2014 compared to $0.2 million in the third quarter of 2013. The Company continued to minimize evaluation and exploration expenditures in the third quarter of 2014 in order to preserve the Company's financial resources. Evaluation and exploration activities and expenditures in the third 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 $5.3 million and $5.4 million in the third 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 both the third quarter of 2014 and the third quarter of 2013 and primarily consisting of unrealized gains on the fair value change of the embedded derivatives in the CIC convertible debenture ($0.1 million in both the third quarter of 2014 and third 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 nil in the third quarter of 2014 compared to an expense of $13.4 million in the third quarter of 2013. The $13.4 million expense in the third quarter of 2013 related to deductible temporary differences and adjustments to the amount of loss carry-forwards being recognized. No corresponding amounts were recorded in the third quarter of 2014.
| Summary of Quarterly Operational Data | ||||||||||||||||||||||||
| 2014 | 2013 | 2012 | ||||||||||||||||||||||
| Quarter Ended | 30-Sep | 30-Jun | 31-Mar | 31-Dec | 30-Sep | 30-Jun | 31-Mar | 31-Dec | ||||||||||||||||
| 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) | 0.31 | 0.12 | 0.29 | 1.40 | 0.87 | - | - | - | ||||||||||||||||
| Average realized selling price (per tonne) (i) | $ | 17.41 | $ | 20.33 | $ | 22.00 | $ | 24.49 | $ | 21.67 | $ | - | $ | - | $ | - | ||||||||
| Thermal coal | ||||||||||||||||||||||||
| Coal sales (millions of tonnes) | 0.34 | 0.51 | 0.10 | 0.11 | 0.03 | 0.11 | 0.20 | - | ||||||||||||||||
| Average realized selling price (per tonne) (i) | $ | 10.66 | $ | 10.72 | $ | 12.07 | $ | 12.60 | $ | 13.07 | $ | 13.98 | $ | 13.67 | $ | - | ||||||||
| Total | ||||||||||||||||||||||||
| Coal sales (millions of tonnes) | 0.65 | 0.63 | 0.39 | 1.72 | 0.94 | 0.32 | 0.28 | 0.03 | ||||||||||||||||
| Average realized selling price (per tonne) (i) | $ | 13.87 | $ | 12.52 | $ | 19.54 | $ | 25.30 | $ | 22.05 | $ | 26.26 | $ | 22.75 | $ | 47.86 | ||||||||
| Raw coal production (millions of tonnes) | 0.17 | 0.55 | 0.64 | 1.73 | 1.13 | 0.17 | 0.02 | - | ||||||||||||||||
| Direct cash costs of product sold (per tonne) (ii) | $ | 7.38 | $ | 8.23 | $ | 10.43 | $ | 11.13 | $ | 9.41 | $ | 11.49 | $ | 10.22 | $ | 11.67 | ||||||||
| Mine administration cash costs of product sold (per tonne) (ii) | $ | 2.30 | $ | 2.49 | $ | 3.80 | $ | 1.39 | $ | 2.20 | $ | 7.14 | $ | 1.46 | $ | 5.08 | ||||||||
| Total cash costs of product sold (per tonne) (ii) | $ | 9.68 | $ | 10.72 | $ | 14.23 | $ | 12.52 | $ | 11.61 | $ | 18.63 | $ | 11.68 | $ | 16.75 | ||||||||
| Other Operational Data | ||||||||||||||||||||||||
| Production waste material moved (millions of bank cubic meters) | 0.20 | 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) | 1.20 | 3.97 | 4.02 | 2.18 | 1.39 | 15.55 | 26.21 | - | ||||||||||||||||
| Lost time injury frequency rate (iii) | 0.17 | 0.15 | - | - | - | - | - | 0.1 | ||||||||||||||||
| (i) | Average realized selling price excludes royalties and selling fees. |
| (ii) | A non-IFRS financial measure, refer to "Non-IFRS Financial Measures" section. Cash costs of product sold exclude idled mine asset cash costs. |
| (iii) | 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-Sep | 30-Jun | 31-Mar | 31-Dec | 30-Sep | 30-Jun | 31-Mar | 31-Dec | |||||||||||||||||||||||
| Financial Results | |||||||||||||||||||||||||||||||
| Revenue (i), (ii) | 7,611 | 6,691 | $ | 5,137 | $ | 32,457 | $ | 15,652 | $ | 6,129 | $ | 4,398 | $ | 1,186 | |||||||||||||||||
| Cost of sales (ii) | (23,922 | ) | (20,086 | ) | (18,366 | ) | (40,359 | ) | (33,486 | ) | (17,477 | ) | (21,305 | ) | (32,229 | ) | |||||||||||||||
| Gross loss excluding idled mine asset costs | (2,178 | ) | (8,497 | ) | (10,202 | ) | (4,141 | ) | (13,323 | ) | (5,593 | ) | (494 | ) | (12,601 | ) | |||||||||||||||
| Gross loss including idled mine asset costs | (16,311 | ) | (13,395 | ) | (13,229 | ) | (7,900 | ) | (17,834 | ) | (11,348 | ) | (16,907 | ) | (31,043 | ) | |||||||||||||||
| Other operating expenses | (2 | ) | (1,776 | ) | (1,073 | ) | (109,682 | ) | (1,003 | ) | (14,925 | ) | (431 | ) | (19,282 | ) | |||||||||||||||
| Administration expenses | (2,530 | ) | (2,253 | ) | (2,237 | ) | (3,668 | ) | (4,204 | ) | (4,024 | ) | (3,733 | ) | (6,080 | ) | |||||||||||||||
| Evaluation and exploration expenses | (122 | ) | (107 | ) | (172 | ) | (489 | ) | (186 | ) | (221 | ) | (273 | ) | (508 | ) | |||||||||||||||
| Loss from operations | (18,965 | ) | (17,531 | ) | (16,711 | ) | (121,740 | ) | (23,227 | ) | (30,518 | ) | (21,344 | ) | (56,913 | ) | |||||||||||||||
| Finance costs | (5,257 | ) | (5,215 | ) | (5,025 | ) | (5,167 | ) | (5,382 | ) | (5,617 | ) | (4,996 | ) | (4,718 | ) | |||||||||||||||
| Finance income | 135 | 127 | 1,007 | 1,301 | 124 | 3,366 | 775 | (116 | ) | ||||||||||||||||||||||
| Share of earnings/(losses) of joint venture | (32 | ) | (3 | ) | (26 | ) | (15 | ) | (66 | ) | 44 | (17 | ) | 144 | |||||||||||||||||
| Income tax recovery/(expense) | - | (546 | ) | - | (13,109 | ) | (13,377 | ) | (416 | ) | 1,916 | 5,040 | |||||||||||||||||||
| Net loss | (24,119 | ) | (23,168 | ) | (20,755 | ) | (138,730 | ) | (41,928 | ) | (33,141 | ) | (23,666 | ) | (56,564 | ) | |||||||||||||||
| Basic loss per share | $ | (0.13 | ) | $ | (0.12 | ) | $ | (0.11 | ) | $ | (0.75 | ) | $ | (0.23 | ) | $ | (0.18 | ) | $ | (0.13 | ) | $ | (0.31 | ) | |||||||
| Diluted loss per share | $ | (0.13 | ) | $ | (0.12 | ) | $ | (0.11 | ) | $ | (0.75 | ) | $ | (0.23 | ) | $ | (0.18 | ) | $ | (0.13 | ) | $ | (0.31 | ) | |||||||
| (i) | Revenue is presented net of royalties and selling fees. |
| (ii) | Revenue and cost of sales relate to the Company's Ovoot Tolgoi Mine within the Mongolian Coal Division operating segment. |
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 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.
The Turquoise Hill Loan Facility matured on August 30, 2014. As a result, subject to certain conditions and limitations, Turquoise Hill agreed to grant a deferral of payment and repayment of all amounts and obligations owing by the Company under the Turquoise Hill Loan Facility and it will not enforce its rights under the Turquoise Hill Loan Facility to demand such payment and repayment upon the maturity date of August 30, 2014. This deferral of payment and repayment is granted to the Company without prejudice to Turquoise Hill's right and ability to assert and re-assert at any point in time to demand payment and repayment of all amounts owing to Turquoise Hill under the Turquoise Hill Loan Facility.
As at August 29, 2014 the Company had drawn down $3.8 million under this facility and the Company is not eligible to draw down any further amounts under the Turquoise Hill Loan Facility.
Turquoise Hill has confirmed that subject to certain conditions and limitations, it agrees to grant deferral of payment and repayment of all amounts and obligations owing by the Company under the Turquoise Hill Loan Facility and it will not enforce its rights under the Turquoise Hill Loan Facility to demand such payment and repayment upon the maturity date of August 30, 2014. However, if (i) the Sale and Purchase Agreement entered into between Turquoise Hill and National United Resources Holdings Limited ("NUR") as announced on July 30, 2014 (the "NUR SPA") is terminated by any party thereto for any reason, (ii) the transaction contemplated by the NUR SPA shall not have been completed by November 30, 2014 or (iii) NUR is in breach of any of its obligations, covenants or undertakings under the NUR SPA, Turquoise Hill shall be immediately and automatically entitled to enforce its rights under the Turquoise Hill Loan Facility to demand payment and repayment of all amounts and obligations owing by the Company. This deferral of payment and repayment is granted to the Company without prejudice to Turquoise Hill's right and ability to assert and re-assert at any point in time to demand payment and repayment of all amounts owing to Turquoise Hill under the Turquoise Hill Loan Facility.
In addition, Turquoise Hill has also agreed that in the event the transaction contemplated the NUR SPA shall have been completed by November 30, 2014 strictly in accordance with the terms and conditions of the NUR SPA, Turquoise Hill would agree to defer repayment of amounts and obligations due by the Company under the Turquoise Hill Loan Facility as follows:
| (i) | US$1.9 million in principal and all interest that has accrued on and under the Turquoise Hill Loan Facility up to and including December 31, 2014 shall become due and payable on December 31, 2014; and |
| (ii) | US$1.9 million in principal and all interest that has accrued on and under the Turquoise Hill Loan Facility from January 1, 2015 up to and including March 31, 2015 shall become due and payable on March 31, 2015. |
Notwithstanding the provision of the Turquoise Hill Loan Facility and coal prepayments received from customers, 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 remainder 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 and the beginning of 2015, 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 and 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. If it does not do so, or if it fails to secure additional capital or further prepayments from customers or otherwise restructure or refinance its business in order to address its cash requirements through September 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 Management Discussion and Analysis for the quarter ended September 30, 2014 available on SEDAR at www.sedar.com for further detail. 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 $4.8 million and working capital (excess current assets over current liabilities) of $0.7 million at September 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 September 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 upcoming 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 September 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. Refer to section 11 "Risk Factors" of the Company's Management Discussion and Analysis for the quarter ended September 30, 2014 available on SEDAR at www.sedar.com for further detail. 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 September 30, 2014, the Company had cash of $4.8 million compared to cash of $21.8 million as at December 31, 2013. Working capital (excess current assets over current liabilities) was $0.7 million as at September 30, 2014 compared to $41.7 million as at December 31, 2013. As at November 10, 2014, the Company had cash of $5.7 million.
As at September 30, 2014, the Company's gearing ratio was 0.21 (December 31, 2013: 0.19), which was calculated based on the Company's long term liabilities to total assets. As at September 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, March 31, 2014 and June 30, 2014 respectively, the Company determined that an indicator of impairment existed for its Ovoot Tolgoi Mine cash generating unit as at September 30, 2014. The impairment indicator was the continued weakness in the Company's share price during the third quarter of 2014 and the fact that the market capitalization of the Company, as at September 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 cash flow valuation model has been updated to take into consideration the latest available information to the Company, including but not limited to, sales price and washing assumptions, operating cost assumptions and life of mine coal production assumptions as at September 30, 2014. The Company's Ovoot Tolgoi Mine cash generating unit carrying value was $383.7 million as at September 30, 2014.
Key estimates and assumptions incorporated in the valuation model included the following:
- long term real selling price of $103 per tonne for semi-soft coking coal FOB Australia;
- updated life-of-mine coal production and operating costs; and
- a pre-tax discount rate of 15.3% 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 $21.1/($21.1) 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 ($28.1)/$31.1 million.
The impairment analysis did not result in the identification of an impairment loss and no charge was required as at September 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, these estimates and assumptions are subject to significant uncertainties and judgments.
The Company is currently reviewing its mine plan for the Ovoot Tolgoi project. Changes to the mine plan may have an impact on the quantities of measured and/or indicated resources and reserves of the Ovoot Tolgoi project. Refer to section 11 "Risk Factors" of the Company's Management Discussion and Analysis for the quarter ended September 30, 2014 available on SEDAR at www.sedar.com for further details.
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 (3) 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 (3) 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 had 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 was deferred until August 25, 2014.
The trial commenced on August 25, 2014 and following two (2) days of hearing, the panel of three (3) appointed judges ordered the matter be returned to the Prosecutor General for further investigations. The Court's decision is mainly based on the following findings during the hearing:
| (i) | lack of clarity as to the nature and scope of which the three (3) former employees are being accused; |
| (ii) | insufficient evidence with respect to the accusations; |
| (iii) | significant variations in the conclusions reached by the different investigations during the investigative period over the same allegations against the three (3) former employees and SouthGobi Sands LLC; and |
| (iv) | the investigators failed to review and consider all the information and documents provided by SouthGobi Sands LLC to the investigators. |
On October 7, 2014 the Mongolian investigation authority issued a resolution to order a re-investigation and new investigators to the case were appointed under that resolution.
As the case has been returned for further investigations, 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 (3) 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 prepaid expenses and deposits 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 Management Discussion and Analysis for the year ended December 31, 2013, which is available on SEDAR 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.
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, the Company has judged a provision for this matter at September 30, 2014 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 charge 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 September 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.
When 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 is expected to charge the Company a single toll washing fee which is expected to 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 (refer to Section 5 "Liquidity and Capital Resources - Contractual Obligations and Guarantees" section of the Company's Management Discussion and Analysis for the quarter ended September 30, 2014 available on SEDAR at www.sedar.com for further detail), 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. The construction of the paved highway was substantially complete by the end of 2013. The 2014 construction program commenced in the second quarter of 2014 and the Company announced on September 28, 2014 the construction of the paved highway had been fully completed. The highway is expected to be commissioned 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 completion of the highway was one of the Company's key objectives for 2014 and will significantly increase the safety of coal transportation, reduce environmental impacts and improve the efficiency and capacity of coal transportation.
The highway will have an intended carrying capacity upon completion in excess of 20 million tonnes of coal per year.
OUTLOOK
Difficult market conditions are expected to continue through the end of 2014. After a further decline in the third quarter, coal prices have shown signs of stabilization at the end of September 2014. The slight increase in thermal coal prices in September is partially due to winter restocking and the response from major Chinese coal producers to the government of China's call to help stabilize domestic markets. Further, the introduction by the Chinese authorities of an import duty ranging from 3% to 6% on coal imports on with an effective date of October 15, 2014 appears to have led at the beginning of the fourth quarter of 2014 to a modest increase in domestic coal prices with some regional variations across China. Since Mongolia does not currently have a free trade agreement with China, the effect from the import duty on demand for Mongolian coal is uncertain and coal producers in Mongolia may not fully benefit from any resulting price increase in China.
Sales volumes of the Company's Semi-soft coking coal product increased slightly in the third quarter of 2014 compared to the second quarter of 2014 (0.3 million tonnes and 0.1 million tonnes, respectively). However, these volumes remain well below the comparative period of 2013 (0.9 million tonnes sold in total in the second and third quarters of 2013). Sales of higher ash thermal product were 0.3 million tonnes in the third quarter of 2014 and demand for this product has remained steady at these levels. The Company anticipated continuous softness in China's coal markets and as a result reduced its production and placed approximately half of its workforce on furlough in June 2014. This furlough has been extended and is now expected to remain in place until the end of November 2014 subject to the improvement in market conditions. The Company has been able to meet its contracted sales volumes from a one shift per day operations and from running down its existing coal stockpile. The Company however is well positioned to rapidly remobilize and ramp up its capacity should market conditions improve.
The Company continues to reduce its operating and administration costs and delay expenditures in order to protect its cash position. Further, the Company expects to benefit from the improvement in infrastructure conditions and the reduction in the cost of transportation for coal between the Ovoot Tolgoi Mine and the Chinese border through the recent completion of the RDCC LLC paved highway project. The paved highway is expected to be commissioned before the end of 2014.
While demand is anticipated to improve with signs of restocking at utility companies at the beginning of the fourth quarter, the Company forecasts that coal prices in China will remain at current levels with modest upside through to the end of 2014. This will continue to impact the Company's margins and liquidity. As at the date hereof, the Company is actively seeking additional sources of financing to be able to pay the $8 million cash interest on the CIC convertible debenture on November 19, 2014. 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 September 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 September 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 construction of the paved highway from the Ovoot Tolgoi Mine to the Shivee Khuren Border Crossing as part of the RDCC LLC consortium was completed in September 2014. The project commissioning is expected by the end of 2014. The completion of the highway, which will serve for the transport of coal to the border, was one of the Company's key objectives for 2014.
The Company's remaining 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.
- 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
The Company has included the non-IFRS financial measure "cash costs" to supplement its condensed consolidated interim financial statements, which have been prepared in accordance with IFRS.
The Company believes that this measure, together with measures determined in accordance with IFRS, provide investors with useful information to evaluate the underlying performance of the Company. Non- IFRS financial measures do not have a standardized meaning prescribed under IFRS and therefore may not be comparable to similar measures employed by other companies. The non-IFRS financial measure is intended to provide additional information and should not be considered in isolation or as substitute for measures of performances prepared in accordance with IFRS.
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 presented below 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 | Nine months ended | ||||||||||||||
| September 30, | September 30, | ||||||||||||||
| 2014 | 2013 | 2014 | 2013 | ||||||||||||
| Revenue | $ | 7,611 | $ | 15,652 | $ | 19,440 | $ | 26,179 | |||||||
| Cost of sales | (23,922 | ) | (33,486 | ) | (62,375 | ) | (72,268 | ) | |||||||
| Gross loss | (16,311 | ) | (17,834 | ) | (42,935 | ) | (46,089 | ) | |||||||
| Other operating expenses | (2 | ) | (1,003 | ) | (2,851 | ) | (16,358 | ) | |||||||
| Administration expenses | (2,530 | ) | (4,204 | ) | (7,020 | ) | (11,958 | ) | |||||||
| Evaluation and exploration expenses | (122 | ) | (186 | ) | (401 | ) | (680 | ) | |||||||
| Loss from operations | (18,965 | ) | (23,227 | ) | (53,207 | ) | (75,085 | ) | |||||||
| Finance costs | (5,257 | ) | (5,382 | ) | (15,500 | ) | (15,991 | ) | |||||||
| Finance income | 135 | 124 | 1,268 | 4,259 | |||||||||||
| Share of losses of joint venture | (32 | ) | (66 | ) | (60 | ) | (39 | ) | |||||||
| Loss before tax | (24,119 | ) | (28,551 | ) | (67,499 | ) | (86,856 | ) | |||||||
| Current income tax expense | - | - | (546 | ) | (1 | ) | |||||||||
| Deferred income tax expense | - | (13,377 | ) | - | (11,876 | ) | |||||||||
| Net loss attributable to equity holders of the Company | (24,119 | ) | (41,928 | ) | (68,045 | ) | (98,733 | ) | |||||||
| 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 | 1,087 | 1,261 | 987 | 1,261 | |||||||||||
| Net comprehensive loss attributable to equity holders of the Company | $ | (23,032 | ) | $ | (40,667 | ) | $ | (67,058 | ) | $ | (97,472 | ) | |||
| Basic loss per share | $ | (0.13 | ) | $ | (0.23 | ) | $ | (0.36 | ) | $ | (0.54 | ) | |||
| Diluted loss per share | $ | (0.13 | ) | $ | (0.23 | ) | $ | (0.36 | ) | $ | (0.54 | ) | |||
| Condensed Consolidated Interim Statements of Financial Position | |||||||
| (Unaudited) | |||||||
| (Expressed in thousands of U.S. Dollars) | |||||||
| As at | |||||||
| September 30, | December 31, | ||||||
| 2014 | 2013 | ||||||
| Assets | |||||||
| Current assets | |||||||
| Cash and cash equivalents | $ | 4,768 | $ | 21,837 | |||
| Trade and other receivables | 724 | 2,578 | |||||
| Inventories | 35,215 | 40,288 | |||||
| Prepaid expenses and deposits | 4,305 | 11,506 | |||||
| Total current assets | 45,012 | 76,209 | |||||
| Non-current assets | |||||||
| Property, plant and equipment | 372,138 | 399,395 | |||||
| Long term investments | 31,953 | 30,602 | |||||
| Total non-current assets | 404,091 | 429,997 | |||||
| Total assets | $ | 449,103 | $ | 506,206 | |||
| Equity and liabilities | |||||||
| Current liabilities | |||||||
| Trade and other payables | $ | 17,503 | $ | 31,241 | |||
| Deferred revenue | 13,649 | 997 | |||||
| Interest-bearing borrowings | 3,835 | - | |||||
| Current portion of convertible debenture | 9,326 | 2,301 | |||||
| Total current liabilities | 44,313 | 34,539 | |||||
| Non-current liabilities | |||||||
| Convertible debenture | 93,154 | 94,302 | |||||
| Decommissioning liability | 2,793 | 2,308 | |||||
| Total non-current liabilities | 95,947 | 96,610 | |||||
| Total liabilities | 140,260 | 131,149 | |||||
| Equity | |||||||
| Common shares | 1,067,848 | 1,067,839 | |||||
| Share option reserve | 52,033 | 51,198 | |||||
| Investment revaluation reserve | 1,501 | 514 | |||||
| Accumulated deficit | (812,539 | ) | (744,494 | ) | |||
| Total equity | 308,843 | 375,057 | |||||
| Total equity and liabilities | $ | 449,103 | $ | 506,206 | |||
| Net current assets | $ | 699 | $ | 41,670 | |||
| Total assets less current liabilities | $ | 404,790 | $ | 471,667 | |||
REVIEW OF INTERIM RESULTS
The condensed consolidated interim financial statements for the Company for the three and nine months ended September 30, 2014, were reviewed by the Audit Committee of the Company.
The Company's results for the quarter ended September 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 Company's ability to secure additional and immediate funding, to meet its obligations under the 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 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 NUR; statements regarding the Company's objectives for 2014 and beyond; the possible impact of as yet uncompleted revisions to Ovoot Tolgoi mine plan on quantities of measured and/or indicated resources and reserves of the Ovoot Tolgoi project; 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
Office: +86-21-6103-3550
Email: galina.rogova@southgobi.com
SouthGobi Resources Ltd.
Altanbagana Bayarsaikhan
Media Relations
Office: +976 70070710
Email: altanbagana.bayarsaikhan@southgobi.com
Website: www.southgobi.com