SouthGobi Resources Announces First Quarter 2016 Financial and Operating Results
Tweet
Share
E-mailHONG KONG, CHINA -- (Marketwired) -- 05/16/16 -- SouthGobi Resources Ltd. (TSX: SGQ)(HKSE: 1878) (the "Company") today announced its financial and operating results for the three months ended March 31, 2016. 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 March 31, 2016 and subsequent period up to May 16, 2016 are as follows:
-- Operating results - The Company continues to operate under difficult
market conditions as prices for coal remained weak in the People's
Republic of China ("China") through the first quarter of 2016. The
impact of these conditions on the Company's operations continues to be
exacerbated given the Company's liquidity constraints. The Company sold
0.88 million tonnes of its coal products during the quarter compared to
0.18 million tonnes in the first quarter of 2015. The production for the
first quarter of 2016 was 0.37 million tonnes, allowing the Company to
position itself to meet its commitments under existing and expected new
coal offtake contracts.
-- Short-term bridge loan - On May 16, 2016, the lender of the short-term
bridge loan signed a deferral agreement with the Company, in which the
lender agreed to a deferral of repayment of all remaining amounts and
accrued interest owing under the short-term bridge loan to July 30,
2016, with the interest rate remained unchanged at 8% per annum.
-- Shareholder loan - On May 16, 2016, Turquoise Hill Resources Ltd.
("Turquoise Hill") signed a deferral letter agreement with the Company
("May 2016 Deferral Letter Agreement"), in which Turquoise Hill agreed
to a limited and circumscribed deferral of repayment of all remaining
amounts and obligations now and hereafter owing under the Turquoise Hill
shareholder loan ("TRQ Loan") to December 29, 2017. The Company has
agreed to repay $0.15 million per month starting on May 31, 2016 and
ending on April 28, 2017; $0.2 million per month starting on May 31,
2017 and ending on December 29, 2017, at which time all remaining
obligations will become due. Interest shall continue to accrue on all
outstanding obligations at 12-month US dollar LIBOR rate.
-- Addition of a Director
Mr. Huiyi Wang: Mr. Wang was appointed as a Non-Executive Director on
February 18, 2016.
-- Going Concern - As at the date hereof, the Company, together with its
strategic partner and significant shareholder, Novel Sunrise Investments
Limited ("Novel Sunrise"), has developed and continues to execute a
funding plan (the "Funding Plan") in order to pay the TRQ Loan, the
short-term bridge loan and the interest due under the China Investment
Corporation ("CIC") convertible debenture (the "CIC Convertible
Debenture"), meet the Company's obligations as they fall due and achieve
its business objectives in 2016. However, there is no guarantee that the
Company will be able to successfully advance the Funding Plan or secure
other sources of financing. See "Liquidity and Capital Management" in
section "Financial Position and Liquidity" for details. As at May 16,
2016, the Company had cash of $0.8 million.
OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS
Summary of Operational Data
Three months ended
March 31,
------------------------
2016 2015
------------ ----------
Sales Volumes, Prices and Costs
Premium semi-soft coking coal
Coal sales (millions of tonnes) 0.06 -
Average realized selling price (per tonne) (i) $ 21.38 $ -
Standard semi-soft coking coal
Coal sales (millions of tonnes) 0.58 0.05
Average realized selling price (per tonne) (i) $ 18.42 $ 17.95
Thermal coal
Coal sales (millions of tonnes) 0.24 0.13
Average realized selling price (per tonne) (i) $ 9.19 $ 10.46
Total
Coal sales (millions of tonnes) 0.88 0.18
Average realized selling price (per tonne) (i) $ 16.11 $ 12.66
Raw coal production (millions of tonnes) 0.37 -
Direct cash costs of product sold (per tonne) (ii) $ 7.88 $ 8.68
Mine administration cash costs of product sold (per
tonne) (ii) $ 1.24 $ 2.11
Total cash costs of product sold (per tonne) (ii) $ 9.12 $ 10.79
Other Operational Data
Production waste material moved (millions of bank
cubic meters) 0.72 -
Strip ratio (bank cubic meters of waste material
per tonne of coal produced) 1.94 -
Lost time injury frequency rate (iii) 0.00 0.25
i. Average realized selling price is presented before deduction of
royalties and selling fees.
ii. A non-International Financial Reporting Standards ("IFRS") financial
measure, see "Non-IFRS Financial Measure" 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.
Overview of Operational Data
Market conditions and prices for coal remained weak in China through the first quarter of 2016. The Company sold 0.88 million tonnes of its coal products during the first quarter of 2016 compared to 0.18 million tonnes for the first quarter of 2015.
The Company is pacing production with current and expected demand, production was 0.37 million tonnes for the quarter as compared to nil for the first quarter of 2015, in which the Company has cancelled the furlough and recommenced mining operations on March 30, 2015.
The Company ended the first quarter of 2016 without a lost time injury. As at March 31, 2016, the Company has a lost time injury frequency rate of nil per 200,000 man hours based on a rolling 12 month average.
Summary of Financial Results
Three months ended
March 31,
---------------------------
$ in thousands, except per share information 2016 2015
------------- -------------
Revenue (i),(ii) $ 12,727 $ 1,587
Cost of sales (ii) (19,080) (17,678)
Gross loss excluding idled mine asset costs (1,049) (1,230)
Gross loss including idled mine asset costs (6,353) (16,091)
Other operating income/(expenses) (1,711) 971
Administration expenses (1,642) (1,425)
Evaluation and exploration expenses (47) (81)
Loss from operations (9,753) (16,626)
Finance costs (5,497) (6,648)
Finance income 1 8
Share of earnings/(losses) of a joint venture 83 (18)
Income tax expense (235) -
Net loss (15,401) (23,284)
Basic loss per share $ (0.06) $ (0.11)
Diluted loss per share $ (0.06) $ (0.11)
i. Revenue is presented after deduction of royalties and selling fees.
ii. Revenue and cost of sales relate to the Company's Ovoot Tolgoi Mine
within the Coal Division operating segment.
Overview of Financial Results
The Company recorded a $9.8 million loss from operations in the first quarter of 2016 compared to a $16.6 million loss from operations in the first quarter of 2015. The operations for the three months ended March 31, 2016 were impacted by continuing difficult market conditions and weak coal prices in China.
Revenue was $12.7 million in the first quarter of 2016 compared to $1.6 million in the first quarter of 2015. The Company sold 0.88 million tonnes of coal at an average realized selling price of $16.11 per tonne in the first quarter of 2016 compared to sales of 0.18 million tonnes at an average realized selling price of $12.66 per tonne in the first quarter of 2015. The increase in the average realized selling price mainly resulted from differences in product mix. The product mix for the first quarter of 2016 consisted of approximately 73% of Premium and Standard semi-soft coking coal and 27% of Thermal coal compared to approximately 28% of Premium and Standard semi-soft coking coal and 72% of Thermal coal in the first quarter of 2015.
The Company's revenue is presented after deduction of royalties and selling fees. The Company's effective royalty rate for the first quarter of 2016, based on the Company's average realized selling price of $16.11 per tonne, was 7.1% or $1.14 per tonne compared to 29.0% or $3.67 per tonne based on the average realized selling price of $12.66 per tonne in the first quarter of 2015.
Royalty regime in Mongolia
The royalty regime in Mongolia is evolving and has been subject to change since 2012.
On February 1, 2016, the Government of Mongolia issued a resolution in connection to the royalty regime. From February 1, 2016 onwards, royalties are calculated based on the actual contract price in which transportation cost to the Mongolia border should have been included. If such transportation cost was not included in the contract, the relevant transportation costs, custom documentation fees, insurance and loading cost should be estimated for the calculation of royalties. In the event that the calculated sales price as described above differs from the contract sales price of other entities in Mongolia (same quality of coal and same border crossing) by more than 10%, the calculated sales price will be deemed to be "non-market" under Mongolian tax law and the royalty will then be calculated based on a reference price as determined by the Government of Mongolia.
Cost of sales was $19.1 million in the first quarter of 2016 compared to $17.7 million in the first quarter of 2015. 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" for further analysis) during the period.
Three months ended
March 31,
---------------------------
$ in thousands 2016 2015
------------- ------------
Operating expenses $ 8,045 $ 1,929
Share-based compensation expense/(recovery) (5) 28
Depreciation and depletion 3,579 310
Impairment of coal stockpile inventories 2,157 550
----------------------------------------------------------------------------
Cost of sales from mine operations 13,776 2,817
Cost of sales related to idled mine assets 5,304 14,861
----------------------------------------------------------------------------
Cost of sales $ 19,080 $ 17,678
----------------------------------------------------------------------------
Operating expenses in cost of sales were $8.0 million in the first quarter of 2016 compared to $1.9 million in the first quarter of 2015. The increase in operating expenses is primarily related to the increase in sales volume from 0.18 million tonnes in the first quarter of 2015 to 0.88 million tonnes in the first quarter of 2016.
Cost of sales in the first quarter of 2016 and 2015 included coal stockpile impairments of $2.2 million and $0.6 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 the first quarter of 2016 and 2015 reflected 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 included mainly depreciation expense. Cost of sales related to idled mine assets in the first quarter of 2016 included $5.3 million of depreciation expenses for idled equipment compared to $11.9 million in the first quarter of 2015.
Other operating expenses were $1.7 million in the first quarter of 2016 compared to other operating income of $1.0 million in the first quarter of 2015 as follows:
Three months ended
March 31,
---------------------------
$ in thousands 2016 2015
------------- -------------
Foreign exchange gain $ (272) $ (1,058)
Provision for doubtful trade and other
receivables 1,911 -
Other 72 87
----------------------------------------------------------------------------
Other operating expenses/(income) $ 1,711 $ (971)
----------------------------------------------------------------------------
For the three months ended March 31, 2016, the Company made a provision for doubtful trade and other receivables of $1.9 million (2015: nil) for the long aged receivables.
The decrease in foreign exchange gain was mainly because the depreciation of MNT against USD was less severe in the first quarter of 2016 compared to that in the first quarter of 2015.
Administration expenses were $1.6 million in the first quarter of 2016 compared to $1.4 million in the first quarter of 2015 as follows:
Three months ended
March 31,
--------------------------
$ in thousands 2016 2015
------------- ------------
Corporate administration $ 465 $ 446
Legal and professional fees 504 473
Salaries and benefits 643 380
Share-based compensation expense/(recovery) (7) 100
Depreciation 37 26
----------------------------------------------------------------------------
Administration expenses $ 1,642 $ 1,425
----------------------------------------------------------------------------
Administration expenses were higher for the first quarter of 2016 compared to the first quarter of 2015 primary due to the adjustment of the over-accrual of secondee costs for the first quarter of 2015.
Evaluation and exploration expenses were negligible in the first quarter of 2016 compared to $0.1 million in the first quarter of 2015. The Company continued to minimize evaluation and exploration expenditures in the first quarter of 2016 in order to preserve the Company's financial resources. Evaluation and exploration activities and expenditures in the first quarter of 2016 were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining and exploration licenses.
Finance costs were $5.5 million and $6.6 million respectively in the first quarter of 2016 and the first quarter of 2015. Finance costs primarily consisted of interest expense in respect of the $250.0 million CIC Convertible Debenture ($5.2 million for the first quarter of 2016 and $5.0 million for the first quarter of 2015).
Summary of Quarterly Operational Data
---------- ------------------------------------
2016 2015
--------------------------------------- ------------------------------------
Quarter Ended 31-Mar 31-Dec 30-Sep 30-Jun 31-Mar
--------------------------------------- ------------------------------------
Sales Volumes, Prices and
Costs
Premium semi-soft coking coal
Coal sales (millions of
tonnes) 0.06 0.04 0.16 0.02 -
Average realized selling
price (per tonne) (i) $ 21.38 $ 21.72 $ 22.32 $ 23.37 $ -
Standard semi-soft coking
coal
Coal sales (millions of
tonnes) 0.58 0.12 0.31 0.11 0.05
Average realized selling
price (per tonne) (i) $ 18.42 $ 18.91 $ 19.10 $ 19.97 $ 17.95
Thermal coal
Coal sales (millions of
tonnes) 0.24 0.05 0.02 0.06 0.13
Average realized selling
price (per tonne) (i) $ 9.19 $ 9.26 $ 10.48 $ 10.47 $ 10.46
Total
Coal sales (millions of
tonnes) 0.88 0.21 0.49 0.19 0.18
Average realized selling
price (per tonne) (i) $ 16.11 $ 17.19 $ 19.76 $ 17.42 $ 12.66
Raw coal production (millions
of tonnes) 0.37 0.62 0.71 0.62 -
Direct cash costs of product
sold (per tonne) (ii) $ 7.88 $ 6.55 $ 17.46 $ 15.57 $ 8.68
Mine administration cash
costs of product sold (per
tonne) (ii) $ 1.24 $ 1.78 $ 2.81 $ 7.90 $ 2.11
Total cash costs of product
sold (per tonne) (ii) $ 9.12 $ 8.33 $ 20.27 $ 23.47 $ 10.79
Other Operational Data
Production waste material
moved (millions of bank
cubic meters) 0.72 1.08 2.33 3.62 -
Strip ratio (bank cubic
meters of waste material per
tonne of coal produced) 1.94 1.75 3.25 5.87 -
Lost time injury frequency
rate (iii) 0.00 0.00 0.00 0.00 0.25
--------------------------------------- ------------------------------------
----------------------------------------------
2014
----------------------------- ----------------------------------------------
Quarter Ended 31-Dec 30-Sep 30-Jun
----------------------------- ----------------------------------------------
Sales Volumes, Prices and
Costs
Premium semi-soft coking coal
Coal sales (millions of
tonnes) 0.02 - -
Average realized selling
price (per tonne) (i) $ 26.77 $ - $ -
Standard semi-soft coking
coal
Coal sales (millions of
tonnes) 0.14 0.31 0.12
Average realized selling
price (per tonne) (i) $ 18.32 $ 17.41 $ 20.33
Thermal coal
Coal sales (millions of
tonnes) 0.21 0.34 0.51
Average realized selling
price (per tonne) (i) $ 11.69 $ 10.66 $ 10.72
Total
Coal sales (millions of
tonnes) 0.37 0.65 0.63
Average realized selling
price (per tonne) (i) $ 15.04 $ 13.87 $ 12.52
Raw coal production (millions
of tonnes) 0.21 0.17 0.55
Direct cash costs of product
sold (per tonne) (ii) $ 8.09 $ 7.38 $ 8.23
Mine administration cash
costs of product sold (per
tonne) (ii) $ 2.44 $ 2.30 $ 2.49
Total cash costs of product
sold (per tonne) (ii) $ 10.53 $ 9.68 $ 10.72
Other Operational Data
Production waste material
moved (millions of bank
cubic meters) 0.55 0.20 2.17
Strip ratio (bank cubic
meters of waste material per
tonne of coal produced) 2.61 1.20 3.97
Lost time injury frequency
rate (iii) 0.21 0.17 0.15
----------------------------- ----------------------------------------------
i. Average realized selling price is presented before deduction of
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
The Company's financial statements are reported under IFRS issued by the International Accounting Standards Board. The following tables provide highlights, extracted from the Company's financial statements, of quarterly results for the past eight quarters:
------------ ---------------------------------------------
$ in thousands,
except per share
information 2016 2015
------------------------------ ---------------------------------------------
Quarter Ended 31-Mar 31-Dec 30-Sep 30-Jun 31-Mar
------------------------------ ---------------------------------------------
Financial Results
Revenue (i), (ii) $ 12,727 $ 2,873 $ 8,621 $ 2,949 $ 1,587
Cost of sales (ii) (19,080) (12,072) (22,108) (11,833) (17,678)
Gross loss
excluding idled
mine asset costs (1,049) (5,338) (10,641) (5,017) (1,230)
Gross loss
including idled
mine asset costs (6,353) (9,199) (13,487) (8,884) (16,091)
Other operating
income/(expenses) (1,711) (1,093) 621 (19,450) 971
Administration
expenses (1,642) (2,154) (1,967) (1,963) (1,425)
Evaluation and
exploration
expenses (47) (46) (40) 22 (81)
Impairment of
property, plant
and equipment - (92,651) - - -
Loss from
operations (9,753) (105,143) (14,873) (30,275) (16,626)
Finance costs (5,497) (5,694) (5,351) (5,222) (6,648)
Finance income 1 580 1,984 274 8
Share of
earnings/(losses)
of a joint
venture 83 (7) 99 151 (18)
Income tax expense (235) (2) (1) (1) -
Net loss (15,401) (110,266) (18,142) (35,073) (23,284)
Basic loss per
share $ (0.06) $ (0.44) $ (0.07) $ (0.15) $ (0.11)
Diluted loss per
share $ (0.06) $ (0.44) $ (0.07) $ (0.15) $ (0.11)
------------------------------ ---------------------------------------------
---------------------------------------------------------
$ in thousands,
except per share
information 2014
------------------ ---------------------------------------------------------
Quarter Ended 31-Dec 30-Sep 30-Jun
------------------ ---------------------------------------------------------
Financial Results
Revenue (i), (ii) $ 5,054 $ 7,611 $ 6,691
Cost of sales (ii) (19,757) (23,922) (20,086)
Gross loss
excluding idled
mine asset costs (821) (2,178) (8,497)
Gross loss
including idled
mine asset costs (14,703) (16,311) (13,395)
Other operating
income/(expenses) (3,386) (2) (1,499)
Administration
expenses (1,924) (2,530) (2,253)
Evaluation and
exploration
expenses (911) (122) (107)
Impairment of
property, plant
and equipment (8,603) - (277)
Loss from
operations (29,527) (18,965) (17,531)
Finance costs (6,351) (5,257) (5,215)
Finance income 317 135 127
Share of
earnings/(losses)
of a joint
venture (40) (32) (3)
Income tax expense (40) - (546)
Net loss (35,641) (24,119) (23,168)
Basic loss per
share $ (0.19) $ (0.13) $ (0.12)
Diluted loss per
share $ (0.19) $ (0.13) $ (0.12)
------------------ ---------------------------------------------------------
i. Revenue is presented after deduction of royalties and selling fees.
ii. Revenue and cost of sales relate to the Company's Ovoot Tolgoi Mine
within the Coal Division operating segment.
FINANCIAL POSITION AND LIQUIDITY
Liquidity and Capital Management
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.
Turquoise Hill Loan Facility
On May 25, 2014, the Company announced it had obtained the TRQ Loan in the form of a $10 million revolving credit facility to meet its short term working capital requirements. The terms and conditions of this facility were filed on SEDAR at www.sedar.com on June 2, 2014. The key commercial terms of the facility were: an original maturity date of August 30, 2014 (subsequently extended); an interest rate of one month US dollar LIBOR Rate in effect plus 11% per annum; a commitment fee of 35% of interest rate payable quarterly in arrears on undrawn principal amount of facility and a front end fee of $0.1 million.
During 2014 and 2015, the due date of the TRQ Loan, was extended several times and the limit has been reduced to $3.8 million.
On October 27, 2015, Turquoise Hill signed a deferral letter agreement with the Company, in which Turquoise Hill agreed to a limited and circumscribed deferral of repayment of all remaining amounts and obligations now and hereafter owing under the TRQ Loan to April 22, 2016. Interest shall continue to accrue on all outstanding obligations but at the prevailing 12-month US dollar LIBOR rate plus 8%.
At March 31, 2016, the outstanding principal and accrued interest under this facility amounted to $3.4 million and $0.6 million respectively (at December 31, 2015, the outstanding principal and accrued interest amounted to $3.4 million and $0.6 million respectively).
On May 16, 2016, the Company and Turquoise Hill entered into the May 2016 Deferral Agreement, whereby Turquoise Hill agreed to a limited and circumscribed deferral of repayment of all remaining amounts and obligations now and hereafter owing under the TRQ Loan to December 29, 2017 in accordance with the schedule of repayment set out below:
-- The Company has agreed to effect monthly repayments on the last business
day of each month in an amount of (i) $0.15 million per month starting
on May 31, 2016 and ending on April 28, 2017, (ii) $0.2 million per
month starting on May 31, 2017 and ending on December 29, 2017, and
(iii) the remaining balance on December 29, 2017 (collectively (i) to
(iii), the Repayments, and each, a Repayment). Upon receipt of each
Repayment by Turquoise Hill, the aggregate amount of obligations owing
under the TRQ Loan will be reduced by such equal amount;
-- In the event that the Company fails to make any one of the Repayments in
its entirety on or before the dates set out above, then the Company
shall be in automatic and irremediable default of the obligations
thereunder and under the TRQ Loan, shall immediately and irremediably
lose all benefits of the May 2016 Deferral Agreement and all then
outstanding obligations shall become immediately due and payable to
Turquoise Hill; and
-- Interest shall continue to accrue on all outstanding obligations at 12-
month US dollar LIBOR rate.
Under certain conditions, including the non-payment of interest amounts as the same become due, amounts outstanding under the TRQ Loan may be accelerated. Bankruptcy and insolvency events with respect to the Company or its material subsidiaries will result in an automatic acceleration of the indebtedness under the TRQ Loan. Subject to notice and cure periods, certain events of default under the TRQ Loan will result in acceleration of the indebtedness under such loan at the option of Turquoise Hill.
Interim Funding Loan Commitment
On June 17, 2015, the Company negotiated an interim loan ("Interim Loan") for up to $8 million from Mr. Wilson Chen (a former principal of Novel Sunrise), with immediate availability, intended to address funding obligations pending the closing of certain private placements. Mr. Chen was a related party of the Company when the Interim Loan was agreed to. Drawdowns under the Interim Loan are to be in the minimum amount of $2 million, with interest at LIBOR + 12% per annum, payable in cash on a quarterly basis in arrears, and maturing on June 18, 2016. The Interim Loan is unsecured and is subject to mandatory repayment upon completion of $30 million of equity or other debt financing.
The Company has not received any funds under the Interim Loan after multiple funding requests, and therefore the Company does not expect to receive any funds from such loan facility.
Funding Plan
The Company, together with its strategic partner and significant shareholder, Novel Sunrise, continues to advance a funding plan (the "Funding Plan"), with the intention of improving cash flow for the Company and supporting its business strategy and operations in a difficult market, with the goal of positioning the Company with a strong future as a coal producer.
The Company continues to advance the Funding Plan, which includes expanding its customer base further inland in China, securing longer-term coal offtake arrangements, thereby allowing the Company to ramp up production to capacity and obtaining additional loans as required to meet existing obligations and expected further working capital requirements.
At present the Company has decided to advance the Funding Plan rather than additional equity placements.
While it is the Company's intention to continue to advance the Funding Plan, the Funding Plan is dynamic and subject to change based on a number of factors beyond its control. Such factors include but not limited to, China's economic growth and coal demand growth, market prices of coal, the availability of credit and market interest rates, and exchange rates of currencies of countries where the Company operates. There can be no assurance that the Company will be able to continue to execute the Funding Plan or to continue as a going concern.
Short-term bridge loan
On October 27, 2015, the Company executed a $10 million bridge loan agreement with an independent Asian based private equity fund. On May 16, 2016, the lender of the short-term bridge loan signed a deferral agreement with the Company, in which the lender agreed to a deferral of repayment of all remaining amounts and accrued interest owing under the short-term bridge loan to July 30, 2016, with the interest rate remained unchanged at 8% per annum.
As at March 31, 2016, the outstanding balance for the short-term bridge loan was $4.9 million (December 31, 2015: $4.9 million) and the Company owed accrued interest of $0.2 million (December 31, 2015: $0.1 million).
Under certain conditions, including the non-payment of interest amounts as the same become due, amounts outstanding under the short-term bridge loan may be accelerated. Bankruptcy and insolvency events with respect to the Company or its material subsidiaries will result in an automatic acceleration of the indebtedness under the short-term bridge loan. Subject to notice and cure periods, certain events of default under the short-term bridge loan will result in acceleration of the indebtedness under the short-term bridge loan at the option of the lender.
Going concern considerations
The Company's condensed consolidated financial statements have been prepared on a going concern basis which assumes that the Company will continue operating until at least March 31, 2017 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 it fails to do so, or is unable to secure additional capital or otherwise restructure or refinance its business in order to address its cash requirements through March 31, 2017, 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 the TRQ Loan, the short-term bridge loan and the cash interest payments due under the CIC Convertible Debenture. As a result, it may not be able to continue as a going concern.
Several adverse conditions and material uncertainties cast significant doubt upon the going concern assumption. The Company had limited cash of $0.4 million at March 31, 2016 and anticipates that coal prices in China will remain under pressure in 2016, which will continue to impact the Company's margins and liquidity. Therefore, the Company is actively seeking prepaid coal offtake agreements and other additional sources of financing to continue operating and meet its business objectives, while remaining focused on minimizing uncommitted capital expenditures and preserving the Company's growth options.
The Company, together with Novel Sunrise, continues to advance the Funding Plan in order to pay the TRQ Loan, the short-term bridge loan and the interest due under the CIC Convertible Debenture, meet its obligations as they fall due and achieve its business objectives in 2016. These obligations include the tax penalty due to the Government of Mongolia (Refer to "Governmental and Regulatory Investigations" of section "Regulatory Issues and Contingencies" for details). However, there is no guarantee that the Company will be able to continue to advance the Funding Plan or secure other sources of financing. If it fails to do so, or is unable to secure additional capital or otherwise restructure or refinance its business in order to address its cash requirements through March 31, 2017, 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 the TRQ Loan, the short-term bridge loan and the cash interest payments due under the CIC Convertible Debenture (subsequent to March 31, 2016 the Company paid the required cash interest payments under the debenture for April 2016 of $1.0 million) and the $10.1 million on May 18, 2016, $8.0 million on May 19, 2016 and $8.1 million on November 19, 2016 remain outstanding to date. As a result, the Company 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 of the CIC Convertible Debenture, the short-term bridge loan and the TRQ Loan, which if not cured within applicable cure periods in accordance with the terms of such instruments, may result in the principal amounts owing and all accrued and unpaid interest becoming immediately due and payable upon notice to the Company by CIC, the lender of the short-term bridge loan and Turquoise Hill, respectively.
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.
As at March 31, 2016, the Company had cash of $0.4 million compared to cash of $0.4 million as at December 31, 2015. The Company had a working capital deficiency (excess current liabilities over current assets) of $(48.2) million as at March 31, 2016 compared to $(42.3) million in working capital as at December 31, 2015. As at May 16, 2016, the Company had cash of $0.8 million.
As at March 31, 2016, the Company's gearing ratio was 0.34 (December 31, 2015: 0.33), which was calculated based on the Company's long term liabilities to total assets. As at March 31, 2016, the Company is not subject to any externally imposed capital requirements.
CIC Convertible Debenture
In November 2009, the Company entered into a financing agreement with a wholly-owned subsidiary of the CIC for $500 million in the form of a secured, convertible debenture bearing interest at 8.0% (6.4% payable semi-annually in cash and 1.6% payable annually in the Company's shares) with a maximum term of 30 years. The CIC Convertible Debenture is secured by a charge over the Company's assets and certain subsidiaries. The financing was required primarily to support the accelerated investment program in Mongolia and up to $120 million of the financing could also be used for working capital, repayment of debt due on funding, general and administrative expenses and other general corporate purposes. The Company's actual use of financing has been in accordance with the above.
On March 29, 2010, the Company exercised its right to call for the conversion of up to $250.0 million of the CIC Convertible Debenture into approximately 21.5 million shares at a conversion price of $11.64 (CAD$11.88). As at March 31, 2016, the CIC owned, through its indirect wholly-owned subsidiary, approximately 19.4% of the issued and outstanding common shares of the Company.
Under certain conditions, including the non-payment of interest amounts as the same become due, amounts outstanding under the CIC Convertible Debenture may be accelerated. Bankruptcy and insolvency events with respect to the Company or its material subsidiaries will result in an automatic acceleration of the indebtedness under the CIC Convertible Debenture. Subject to notice and cure periods, certain events of default under the CIC Convertible Debenture will result in acceleration of the indebtedness under such debenture at the option of CIC. Such other events of default include, but are not limited to, non-payment, breach of warranty, non-performance of obligations under the CIC Convertible Debenture, default on other indebtedness and certain adverse judgments.
Ovoot Tolgoi Mine Impairment Analysis
Unchanged from the assessment made in several prior quarters, the Company determined that an indicator of impairment existed for its Ovoot Tolgoi Mine cash generating unit as at March 31, 2016. The impairment indicator was the continued weakness in the Company's share price during the first quarter of 2016 and the fact that the market capitalization of the Company, as at March 31, 2016, was significantly 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 "fair value less cost of disposal" ("FVLCTD") 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, sales volumes, operating cost assumptions and life of mine coal production assumptions as at March 31, 2016. The Company's Ovoot Tolgoi Mine cash generating unit carrying value was $207.5 million as at March 31, 2016.
Key estimates and assumptions incorporated in the valuation model included the following:
-- Coal resources as estimated by a third party engineering firm;
-- Long term price estimates from an independent market consulting firm;
-- Forecasted sales volumes in line with production levels as per the
updated 20-year mine plan;
-- Updated life-of-mine coal production, strip ratio, capital costs and
operating costs; and
-- A post-tax discount rate of 13.6% based on an analysis of the market,
country and asset specific factors.
Key sensitivities in the valuation model are as follows:
-- For each 1% increase/(decrease) in the long term price estimates, the
calculated fair value of the cash generating unit increases/(decreases)
by approximately $12.1/($12.1) million;
-- For each 1% increase/(decrease) in the discount rate, the calculated
fair value of the cash generating unit (decreases)/increases by
approximately ($18.7)/$21.8 million; and
-- For each 1% increase/(decrease) in the cash mining cost estimates, the
calculated fair value of the cash generating unit (decreases)/increases
by approximately ($7.1)/$7.1 million.
The impairment analysis did not result in the identification of an impairment loss and no charge was required as at March 31, 2016. A decline of more than 1% in the long term price estimates, an increase of more than 1% in the post-tax discount rate or an increase of more than 2% in the cash mining cost estimates 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.
The Company is engaged in a comprehensive review of the Ovoot Tolgoi mine plan's design parameters, mine design and project development schedule in order to reflect an updated production plan and current market conditions. The objective of this exercise is to optimize the Company's mine plan having regard to the change in circumstances since the 2012 preliminary feasibility study was prepared. Factors such as the decline in coal prices in China, decreased mining quantities resulting from smaller pit dimensions as a result of changed mining parameters and coal prices and the exclusion of coal identified in the previous studies as marginally economic due to coal price reductions can be expected to exert downward pressure on resource quantities. These may be offset to some degree by an upgrading of some resources from the inferred category to the indicated category in the Sunset Pit area, a change to mine design with steeper pit walls resulting in less waste and a lower strip ratio and improved mining cash costs, simplified and lower cost coal processing and product marketing, and general cost reductions. However, there can be no assurance that the continuing optimization of the mine plan at the Ovoot Tolgoi Mine will ultimately provide the basis for an updated preliminary feasibility study that will support a new estimate of mineral reserves.
Any downward adjustments to the Company's mineral resource estimates could materially affect the Company's development and mining plans, which could materially and adversely affect its business and results of operations.
REGULATORY ISSUES AND CONTINGENCIES
Governmental and Regulatory Investigations
The Company was subject to investigations by Mongolia's Independent Authority Against Corruption (the "IAAC") regarding allegations of breaches of Mongolia's anti-corruption laws (the "Anti-Corruption Case"), and tax evasion and money laundering (the "Tax Evasion Case").
While the IAAC has not made any formal accusations against any current or former employee of the Company or the Company under the Anti-Corruption Case, administrative penalties were imposed on certain of the Company's Mongolian assets in connection with the investigation, including the Restricted Funds held in bank accounts in Mongolia. The Company has been informed that the Anti-Corruption Case has been suspended; however, it has not received formal notice that the investigation is completed.
With respect to the Tax Evasion Case, on December 30, 2014, the Capital City Prosecutor's Office (Ulaanbaatar, Mongolia) dismissed the allegations of money laundering as not having been proven during the investigation; however, proceedings in respect of tax evasion by former employees of the Company proceeded and culminated in February 2015, when the Company received the written verdict (the "Tax Verdict") of Mongolian Second District Criminal Court. The Tax Verdict pronounced the three former employees of the Company's wholly-owned subsidiary, SouthGobi Sands LLC ("SGS"), guilty and declared SGS to be financially liable as a "civil defendant" for a penalty (the "Tax Penalty") of MNT35.3 billion (approximately $18.2 million on February 1, 2015).
On February 18, 2015, the Company appealed the Tax Verdict on the grounds that it had prepared its financial statements, including those of SGS, in compliance with IFRS, and lodged all its tax returns in the required format under Mongolian tax law. The hearing of the appeal by the 10th Appeal Court for Criminal Case of Mongolia (the "Court of Appeal") took place on March 25, 2015 and a panel of three appointed judges upheld the Tax Verdict and dismissed the appeal by the Company (the "Appeal Verdict"). It is the view of the Company that there is a lack of evidence to support both the Tax Verdict and the Appeal Verdict. The Company received the written version Appeal Verdict on April 10, 2015. The Company lodged a final appeal with the Supreme Court of Mongolia on April 22, 2015. In accordance with Mongolia's criminal procedure law, SGS filed the appeal with the Supreme Court of Mongolia through the Second District Criminal Court of Justice.
On April 29, 2015 the Second District Criminal Court refused to advance SGS's appeal to the Supreme Court. Following an immediate protest by SGS, the Second District Criminal Court delivered SGS's appeal to the Supreme Court of Mongolia.
On May 20, 2015, SGS was informed that the Supreme Court had refused to hear the appeal and had returned the appeal to the Second District Criminal Court of Justice. The Supreme Court based its decision on a restrictive reading of Article 342 of the Criminal Procedure Law of Mongolia which stipulates that "the defendant, person acquitted, the victim, and their respective defense counsel have the right to lodge a complaint to the Supreme Court". The Supreme Court concluded that the omission of a specific reference to a civil defendant in Article 342, in and of itself denies SGS, in such capacity, the right to lodge an appeal to the Supreme Court.
In its decision, the Supreme Court did not address other provisions of the Criminal Procedure Law and the Law on Courts of Mongolia, which provide that civil defendants have standing to appeal to the Supreme Court and that no judicial proceedings or decisions in Mongolia are outside of the scope of supervision by the Supreme Court.
On May 21, 2015, SGS sent an official letter of protest to the Presiding Justice of the Criminal Chamber of the Supreme Court (the "Presiding Justice"), challenging the decision to refuse to hear the tax case on appeal. On June 2, 2015, SGS received a formal response from the Presiding Justice, confirming the Supreme Court's refusal to hear the tax case. In the letter, the Presiding Justice reaffirmed the restrictive interpretation of Article 342 of the Criminal Procedure Law.
With the refusal by the Supreme Court to hear the case on appeal, the Tax Verdict has entered into force. The Tax Verdict is, however, not immediately payable and enforceable against SGS absent further actions prescribed by the laws of Mongolia. In particular, SGS has not received a copy of the bailiff's resolution on execution of the Tax Verdict, as required under the Law of Mongolia on Execution of Court Decisions in order for any judgment execution process to happen. However, the Company made a corresponding provision for the court case penalty of $18.0 million in the second quarter of 2015 given the Tax Verdict has entered into force.
On October 6, 2015, the Company was informed by its Mongolian banks (where the $1.2 million deposits with restricted use were placed (the "Restricted Funds")) that they had received an official request from the Court Decision Implementing Agency of Mongolia ("CDIA") to transfer the Restricted Funds according to the court decision. $1.2 million was transferred to CDIA from the frozen bank accounts in October and November 2015. The tax penalty provision was reduced accordingly.
While the Company had various additional legal avenues available to it to continue defending itself, it has decided to and is currently seeking to resolve amicably the dispute giving rise to the Tax Verdict in a manner that is both appropriate having regard to the Company's limited financial resources and supportive of a positive environment for foreign investment in Mongolia. There can be no assurance; however, that any such resolution can be successfully negotiated by the Company either at all or on favourable terms, or that the terms of any resolution to which the Government would be prepared to agree would not be materially adverse to the Company. In such case, this may result in an event of default under each of the CIC Convertible Debenture and the TRQ Loan and CIC and Turquoise Hill would each have the right to declare the full principal and accrued interest owing to such party immediately due and payable. Such an event of default under the CIC Convertible Debenture, the TRQ Loan, or the Company's inability to pay the Tax Penalty could result in voluntary or involuntary proceedings involving the Company (including bankruptcy). For further information, please refer to the Company's Management Discussion and Analysis for the year ended December 31, 2015 available on SEDAR at www.sedar.com.
Internal Investigations
Through its Audit Committee (comprised solely of independent directors), the Company conducted an internal investigation into possible breaches of law, internal corporate policies and codes of conduct arising from allegations raised in the context of investigations by Mongolian authorities. The former Chair of the Audit Committee also participated in a tripartite committee, comprised of the Audit Committee Chairs of the Company and Turquoise Hill and a representative of Rio Tinto, focused on the investigation of a number of those allegations, including possible violations of anti-corruption laws. The tripartite committee substantially completed the investigative stage 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 investigation 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.
In the opinion of management of the Company, at March 31, 2016 a provision for this matter is not required.
Mongolian IAAC investigation
In the first quarter of 2013, the Company was subject to orders imposed by 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 investigations of the Company as described above under "Governmental and Regulatory Investigations" and continued to be enforced by the Mongolian State Investigation Office. The restrictions on the assets were reaffirmed in the Tax Verdict and form part of the Tax Penalty payable by the Company.
The orders related 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 restricted the use of in-country funds but did not have any material impact on the Company's activities. The Restricted Funds were transferred to the CDIA as partial payment of the Tax Verdict in October and November 2015. See "Governmental and Regulatory Investigations" above.
Following a review by the Company and its advisers, it is the Company's view that the orders placing restrictions on certain of the Company's Mongolian assets did not result in an event of default as defined under the terms of the CIC Convertible Debenture. However, the enforcement of the orders could ultimately result in an event of default of the Company's CIC Convertible Debenture, which if remains uncured for ten business days, would result in the principal amount owing and all accrued and unpaid interest will become immediately due and payable upon notice to the Company by CIC.
Class Action Lawsuit
In January, 2014, Siskinds LLP, a Canadian law firm, filed a class action (the "Class 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 (the "Ontario Court") in relation to the Company's restatement of financial statements as previously disclosed in the Company's public filings.
For more details in respect of the Class Action lawsuit, 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 "Regulatory Issues and Contingencies".
To commence and proceed with the Class Action, the plaintiff was required to bring the preliminary leave motion and to certify the Class Action as a class proceeding (the "Certification Motion"). The Court rendered its decision on the leave motion on November 5, 2015.
The Ontario Court dismissed the plaintiff's leave motion as against each of the former senior officers and former and current directors of the Company named in the Class Action on the basis that the "large volume of compelling evidence" proved the defense of reasonable investigation on the balance of probabilities and provided the basis for dismissing the Leave Motion as against them.
The Ontario Court granted the Certification Motion against the Company on the basis that, at this stage, the plaintiff met the low legal standard of "reasonable possibility of success". In granting leave, however, the Court acknowledged the "... compelling evidence of the defendant company ... that may prevail at trial ...". The Ontario Court refused an award of costs for the Certification Motion to the plaintiff. The Company is seeking leave to appeal this decision. The plaintiff has also appealed this decision. The appeal by the plaintiff and, if leave to appeal is granted, the appeal by the Company, are scheduled to be heard in June 2016. Rulings are expected by the end of September 2016.
The Company disputes and is vigorously defending 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 Class Action or determine the amount of any potential losses, if any. However, the Company has judged a provision for this matter at March 31, 2016 is not required.
Toll wash plant agreement with Ejin Jinda
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.
Under the original agreement with Ejin Jinda, which required the commercial operation of the wet washing facility to commence on October 1, 2011, the additional fees payable by the Company under the wet washing contract would have been $18.5 million. At each reporting date, the Company assesses the agreement with Ejin Jinda and has determined it is not probable that these $18.5 million will be required to be paid as part of the initial contract.
Mining Prohibition in Specified Areas Law
In July 2009, Mongolia promulgated the Law on Prohibiting Mineral Exploration and Extraction Near Water Sources, Protected Areas and Forests (the "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.
In order to address the issues facing its implementation, in February, 2015 the Parliament of Mongolia adopted an amendment to the Law on Implementation of the Mining Prohibition in Specified Areas Law (the "Amended Law on Implementation"). The Amended Law on Implementation provides an opportunity for license holders covered within the scope of application of the Mining Prohibition in Specified Areas Law to continue their mining operations subject to advance placement of funds to cover 100% of the future environmental rehabilitation costs. A model contract and a specific Government regulation on this requirement will be adopted by the Government. The license holders must also apply within 3 months after the amendment to the Law on Implementation comes into effect for permission to Mineral Resources Authority of Mongolia ("MRAM") to resume activities. The Company submitted its application with respect to its mining licenses before the deadline set on June 16, 2015 but has not yet received any communication from MRAM on the status of its application.
Pursuant to the Mongolian Law "To prohibit mineral exploration and mining operations at headwaters of rivers, water protection zones and forested areas", the government administrative agency has notified the Company that special license area 12726A is partly overlapping with a water reservoir. The Company has inspected the area together with the Cadastral Division of the Mineral Resource Authority as well as through the cadastral registration system of the Ministry of Environment, it is determined that 29 hectares of Sukhait Bulag is partly overlapping with a water reservoir, of which has been partly handed over. (Resolution No.6/7522 issued on September 29, 2015 by the Head of Cadastral Division of the Mineral Resource Authority)
In accordance with Article 22.3 of Law of Mongolia on Water, 5,602.96 hectares of land, including Sukhaityn Bulag, Uvur Zadgai, and Zuun Shand pertaining to exploration license 9443X, is overlapping with protected area boundary. It has been officially handed over to the local administration. (Resolution No.688 issued on September 24, 2015 by the Head of Cadastral Division of the Mineral Resource Authority)
In connection with the nullification of Annex 2 of the government order No.194 "On determining boundary" issued on June 5, 2012, area around the water reservoir located at MV-016869 license area and Soumber mining license 9449X has been annulled from the Specified Area Law.
Therefore, mining license 12726A, MV-016869 and exploration licenses 9443X, 9449X were removed from the list of licenses that is overlapping with the prohibited areas described in the law.
The potential impact of the Mining Prohibition in Specified Areas Law on the mineral exploration licenses 13779X and 5267X is unclear pending the adoption by the Government of the relevant regulations pursuant to the Amended Law on implementation. The Company will continue to monitor the developments and ensure that it follows the necessary steps in the Amended Law on Implementation to secure its operations and licenses and is fully compliant with Mongolian law.
Special Needs Territory in Umnugobi
On February 13, 2015, the whole of the Soumber mining license and a portion of SGS' exploration license No.9443X (the "License Areas") were included into a special protected area (to be further referred as Special Needs Territory "SNT") newly set up by the Umnugobi Aimag's Civil Representatives Khural (the "CRKh") to establish a strict regime on the protection of natural environment and prohibit mining activities in the territory of the SNT.
In March 2015, SGS filed a complaint with the 12th Court for Administrative Cases of First Instance (the "Administrative Court") seeking the annulment of CRKh's decision to the extent it impacted the License Areas. In parallel, SGS initiated negotiations with the CRKh in order to reach an acceptable solution.
On July 8, 2015, SGS and the Chairman of the CRKh, in his capacity as the respondent's representative, reached an agreement (the "Amicable Resolution Agreement") to exclude the License Areas from the territory of the SNT in full, subject to confirmation of the Amicable Resolution Agreement by the session of the CRKh. The parties formally submitted the Amicable Resolution Agreement to the appointed judge of the Administrative Court for her approval and requested a dismissal of the case in accordance with the Law of Mongolia on Administrative Court Procedure. On July 10, 2015, the judge issued her order approving the Amicable Resolution Agreement and dismissing the case, while reaffirming the obligation of CRKh to take necessary actions at its next session to exclude the License Areas from the SNT and register the new map of the SNT with the relevant authorities. The Company has not yet received any indication on the timing of the next session of the CRKh.
Commercial arbitration in Hong Kong
On June 24, 2015, First Concept Logistics Limited ("First Concept") served a notice of arbitration (the "Notice") on SGS in respect of a coal supply agreement dated May 19, 2014 as amended on June 27, 2014 (the "Coal Supply Agreement"). The arbitral proceedings (the "Arbitration") are deemed to have commenced on June 24, 2015, as the date when the respondent received the Notice.
According to the Notice, First Concept: alleged, inter alia, (i) that SGS had failed and/or wrongfully refused to sell any coal to First Concept; (ii) expressed its wish to have the dispute settled in an arbitration to be administered by the Hong Kong International Arbitration Centre; and (iii) sought the repayment of the prepayment, in the sum of $11.5 million, it made to SGS under the Coal Supply Agreement, as well as any and all damages that may be due to it.
Under the Coal Supply Agreement, SGS agreed to sell coal to First Concept between May 22, 2014 and May 31, 2015 for a total consideration of $11.5 million. It was also agreed that that First Concept would pre-pay the $11.5 million. While First Concept fulfilled its payment obligation under the contract, it totally failed to fulfill its obligation to collect and transport the coal. Pursuant to the Coal Supply Agreement that obligation fell squarely on First Concept, while SGS was only obliged to make the coal available at its stockpile. The sole reason for the lack of coal sales to First Concept was the continued failure of First Concept to complete the necessary legal requirements for collection and transportation of coal and to provide a pickup schedule in accordance with industry practice. Contrary to the allegation by First Concept that SGS "wrongfully refused" to sell the coal, SGS has repeatedly advised First Concept of its willingness, ability and readiness to make available the coal for collection at its stockpile. In fact, SGS, at all times during the term of the Coal Supply Agreement, had more than sufficient coal at its stockpile to meet its obligations.
The Company, therefore, firmly rejects the allegations of First Concept in the Notice as lacking any merit. On October 26, 2015, the Company received the Statement of Claim from First Concept and will vigorously defend itself in the Arbitration, including claiming the relevant fees and damages from First Concept. The trial dates of the Arbitration are scheduled to be held in the fourth quarter of 2016.
There can be no assurance, however, that the Company will prevail in the Arbitration. Should SGS be unsuccessful in the Arbitration, the Company may not be able to re-pay the sum of $11.5 million. In such case, this may result in an event of default under the CIC Convertible Debenture and CIC would have the right to declare the full principal and accrued interest owing thereunder immediately due and payable. Such an event of default under the CIC Convertible Debenture or the Company's inability to re-pay the sum of $11.5 million to First Concept could result in voluntary or involuntary proceedings involving the Company.
Notice of claim by former Chief Executive Officer
On June 30, 2015, the Company was served with a Notice of Civil Claim filed by the Company's former President and Chief Executive Officer, Alexander Molyneux, in the British Columbia Supreme Court. The claim relates to alleged breaches of Mr. Molyneux's employment agreement by the Company. In addition to the Company, Turquoise Hill, the Company's largest shareholder at the time of Mr. Molyneux's employment, was also named in the claim.
Mr. Molyneux acted as the Company's President (from April 2009) and Chief Executive Officer (from October 2009) until September 2012, when the Company terminated his employment.
Mr. Molyneux is seeking damages in excess of $1 million in his Notice of Claim. The Company considers the action is without merit. SouthGobi intends to vigorously defend the action and reserves its right to pursue all legal rights and remedies available to it in connection with the proceedings. The Company filed a response to Civil Claim and Counterclaim in September 2015. A trial date has not yet been set.
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 (the "Paved Highway") to consortium partners NTB LLC and SGS (together referred to as "RDCC LLC"). The Company has an indirect 40% shareholding in RDCC LLC through its Mongolian subsidiary SGS.
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.
On May 8, 2015, the commercial operation of the Paved Highway commenced and subsequently the unpaved highway which was previously used to transport coal through the Shivee Khuren Border Crossing was closed. The Paved Highway has significantly increased the safety of coal transportation, reduced environmental impacts and improved efficiency and capacity of coal transportation. The current toll rate is set at nine hundred (900) MNT per tonne of coal as compared to fifteen hundred (1,500) MNT as stated in the signed concession agreement between RDCC LLC and the State Property Committee of Mongolia.
On September 17, 2015, the Invest Mongolia Agency signed an amendment to concession agreement with RDCC LLC to extend the exclusive right of ownership to 30 years.
The Paved Highway is having a carrying capacity in excess of 20 million tonnes of coal per year.
For the three months ended March 31, 2016, RDCC LLC recognized toll fee revenue of $0.8 million (2015: nil).
OUTLOOK
The outlook for Mongolian coal exports remains dependent on the Chinese economy. Market conditions and prices for coal remained weak in China during the first three months of 2016.
The Company will continue to reach out to end customers in order to enhance the sales profile and revenue growth.
In addition, the Company will continue to examine ways to improve operation efficiency and productivity to reduce costs. The Company is also evaluating various other business opportunities in addition to coal mining and trading in Mongolia to diversify the risk profile.
The Company remains well positioned in the market, with a number of key competitive strengths, including:
-- Bridge between Mongolia and China - The Company is well positioned to
capture the resulting business opportunities between the two countries
given i) strong strategic support from its largest shareholders (China
Cinda Asset Management Corporation Limited and CIC), which are both
state-owned-enterprises in China; and ii) the Company's strong
operational record during the last ten years in Mongolia and being one
of the largest enterprises in Mongolia.
-- 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 - Following the updated mineral resource estimate
for the Ovoot Tolgoi Project, the Company's aggregate coal resources
include measured and indicated resources of 365 million tonnes and
inferred resources of 285 million tonnes. In addition, most of the
Company's coal resources have coking properties, including a mixture of
semi-soft coking coal and hard coking coal.
-- Several growth options - The Company has several growth options
including the Soumber Deposit and Zag Suuj Deposit, located
approximately 20km east and approximately 150km east of the Ovoot Tolgoi
Mine, respectively.
Objectives
The Company's objectives for 2016 and the medium term are as follows:
-- Expand customer base with enhanced product mix - The Company aims to
strengthen the sales and logistics capabilities to expand the customer
base further inland in China and to beneficiate the coal by washing.
-- Optimize cost structure - The Company is focused on further cost
reduction by improving productivity and operational efficiency while
maintaining product quality and the sustainability of production.
-- Progress growth options - Subject to available financial resources, the
Company plans to further the development of the Soumber Deposit, while
complying with all government requirements in relation to its licenses
and agreements.
-- Diversify the risk profile of the Company - The Company is evaluating
various business opportunities besides coal mining and coal trading in
Mongolia, including but not limited to power generation, contract mining
and real estate. The Company aims to bridge into the new era of Mongolia
prosperity committed to contribute to the long term development of
Mongolia.
-- Operate in a socially responsible manner - The Company is focused on
maintaining the highest standards in health, safety and environmental
performance.
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 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.
Summarized Comprehensive Income Information
(Unaudited)
(Expressed in thousands of U.S. Dollars, except for share and per share amounts)
Three months ended
March 31,
---------------------------
2016 2015
------------- -------------
Revenue $ 12,727 $ 1,587
Cost of sales (19,080) (17,678)
----------------------------------------------------------------------------
Gross loss (6,353) (16,091)
Other operating income/(expenses) (1,711) 971
Administration expenses (1,642) (1,425)
Evaluation and exploration expenses (47) (81)
----------------------------------------------------------------------------
Loss from operations (9,753) (16,626)
Finance costs (5,497) (6,648)
Finance income 1 8
Share of earnings/(losses) of a joint venture 83 (18)
----------------------------------------------------------------------------
Loss before tax (15,166) (23,284)
Current income tax expense (235) -
----------------------------------------------------------------------------
Net loss attributable to equity holders of the
Company (15,401) (23,284)
----------------------------------------------------------------------------
Other comprehensive loss to be reclassified to
profit or loss in subsequent periods
Exchange differences on translation of foreign
operation (512) -
----------------------------------------------------------------------------
Net comprehensive loss attributable to equity
holders of the Company $ (15,913) $ (23,284)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic loss per share $ (0.06) $ (0.11)
Diluted loss per share $ (0.06) $ (0.11)
Summarized Financial Position Information
(Unaudited)
(Expressed in thousands of U.S. Dollars)
As at
-----------------------------
March 31, December 31,
2016 2015
-------------- --------------
Assets
Current assets
Cash and cash equivalents $ 410 $ 377
Trade and other receivables 9,440 8,196
Inventories 29,260 32,262
Prepaid expenses and deposits 2,004 1,487
----------------------------------------------------------------------------
Total current assets 41,114 42,322
Non-current assets
Property, plant and equipment 212,626 222,485
Long term investment 24,973 25,667
----------------------------------------------------------------------------
Total non-current assets 237,599 248,152
----------------------------------------------------------------------------
Total assets $ 278,713 $ 290,474
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Equity and liabilities
Current liabilities
Trade and other payables $ 33,380 $ 30,917
Provision for court case penalty 16,467 16,468
Deferred revenue 11,508 11,683
Interest-bearing borrowings 9,115 8,905
Current portion of convertible debenture 18,869 16,671
----------------------------------------------------------------------------
Total current liabilities 89,339 84,644
Non-current liabilities
Convertible debenture 92,067 91,988
Decommissioning liability 2,540 3,149
----------------------------------------------------------------------------
Total non-current liabilities 94,607 95,137
----------------------------------------------------------------------------
Total liabilities 183,946 179,781
Equity
Common shares 1,094,619 1,094,618
Share option reserve 52,278 52,292
Exchange reserve (1,787) (1,275)
Accumulated deficit (1,050,343) (1,034,942)
----------------------------------------------------------------------------
Total equity 94,767 110,693
----------------------------------------------------------------------------
Total equity and liabilities $ 278,713 $ 290,474
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net current liabilities $ (48,225) $ (42,322)
Total assets less current liabilities $ 189,374 $ 205,830
REVIEW OF INTERIM RESULTS
The condensed consolidated interim financial statements for the Company for the three months ended March 31, 2016, were reviewed by the Audit Committee of the Company.
The Company's results for the quarter ended March 31, 2016, are contained in the unaudited Condensed Consolidated Interim Financial Statements and Management Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), available on the SEDAR website at www.sedar.com and the Company's website at www.southgobi.com.
ABOUT SOUTHGOBI
SouthGobi, listed on the Toronto and Hong Kong stock exchanges, owns and operates its flagship Ovoot Tolgoi coal mine in Mongolia. It also holds the mining and exploration licences of its other metallurgical and thermal coal deposits in South Gobi Region of Mongolia. SouthGobi 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", "could", "should", "seek", "likely", "estimate" 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 times 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 statements include, but are not limited to, statements regarding:
-- anticipated stock market conditions, the future prices of the Company's
common shares (the "Common Shares") and ownership thereof;
-- the Company's anticipated business activities, planned expenditures and
corporate strategies;
-- the Company's intention to develop markets for its semi-soft coking coal
brands and to pursue long-term supply offtake agreements with end users
in China;
-- costs relating to anticipated capital expenditures and the 2016
exploration program;
-- the Company's anticipated financing needs, development plans and future
production levels;
-- expected impacts of the remaining administrative restrictions on certain
of the Company's Mongolian assets and the anticipated impact on the
Company's activities;
-- the results and impact of the Class Action (as described under the
heading "REGULATORY ISSUES AND CONTINGENCIES - Contingencies - Class
Action Lawsuit" in this press release);
-- the ability of the Company to satisfy the Tax Penalty (as described
under the heading "REGULATORY ISSUES AND CONTINGENCIES - Governmental
and Regulatory Investigations" in this press release);
-- the potential effect of the list of licenses published by the Government
of Mongolia covering areas in which exploration and mining is
purportedly prohibited on the Company's mining licenses;
-- 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 funding and to meet
its obligations under each of the CIC Convertible Debenture, the TRQ
Loan and the short-term bridge loan, as the same become due;
-- the possible impact of changes to the inputs to the valuation model used
to value the embedded derivatives in the CIC Convertible Debenture;
-- the estimates and assumptions included in the Company's impairment
analysis and the possible impact of changes thereof;
-- the possible impacts of changes in useful life or depreciation rates on
depreciation expenses;
-- the potential effects of a difference between future cash flows and
profits from estimates;
-- the results of the Company's mine plan optimization efforts in respect
of the Ovoot Tolgoi Mine and corresponding mineral reserve evaluation
process;
-- the ability for higher-ash product to be sold as a thermal coal product
and the type of coal products being produced;
-- the ability of the Company to enhance the quality of its coal products
through a beneficiation process based on wet washing;
-- the agreement with Ejin Jinda and payments thereunder;
-- the future mining operations at the Soumber Deposit being allowed to
share the existing infrastructure with the Ovoot Tolgoi Mine;
-- plans for the progress of mining license application processes;
-- future coal market conditions in China and the related impact on the
Company's margins and liquidity;
-- the outcome of the issues described under the heading "REGULATORY ISSUES
AND CONTINGENCIES" in this press release;
-- business outlook, including the outlook for the remainder of 2016 and
beyond;
-- the implementation and impact of the Funding Plan (as defined under the
heading "OVERVIEW - Going Concern" in this press release) and actions to
be taken under the Funding Plan;
-- the Company continuing as a going concern and its ability to realize its
assets and discharge its liabilities in the normal course of operations
as they become due; adjustments to the amounts and classifications of
assets and liabilities in the Company's financial statements and the
impact thereof;
-- the Company's objectives for the remainder of 2016 and beyond;
-- the capacity and future toll rate of the Paved Highway;
-- the impact of amendments to, or the application of, the laws of Mongolia
and other countries in which the Company carries on business;
-- the impact of the Company's activities on the environment and actions
taken for the purpose of mitigation of potential environmental impacts
and planned focus on health, safety and environmental performance;
-- the outcome of legal proceedings involving the Company and its former
Chief Executive Officer, Mr. Alexander Molyneux;
-- the evaluation, and potential pursuit of, business opportunities other
than coal mining and coal trading in Mongolia, including but not limited
to power generation, contract mining and real estate;
-- the outcome of arbitration proceedings involving the Company and First
Concept with respect a coal supply agreement and payments thereunder;
-- greenfield development options with the Soumber Deposit and Zag Suuj
Deposit; and
-- other statements that are not historical facts.
This list is not exhaustive of the factors that may affect any of the Company's forward-looking statements. 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.
Contacts: Investor Relations SouthGobi Resources Ltd. Kino Fu Office: +852 2156 7030 [email protected] www.southgobi.com
Source: SouthGobi Resources Limited
Serious News for Serious Traders! Try StreetInsider.com Premium Free!
You May Also Be Interested In
- Etsy upgraded to buy at BofA on durable growth, buyback potential
- Advance Auto Parts falls on revenue miss, weak guidance
- UBS Reiterates Buy Rating on Dutch Bros Inc. (BROS): 'One of Strongest Growth Stories in Restaurants'
Create E-mail Alert Related Categories
Press ReleasesRelated Entities
Bankruptcy, EarningsSign up for StreetInsider Free!
Receive full access to all new and archived articles, unlimited portfolio tracking, e-mail alerts, custom newswires and RSS feeds - and more!
