SouthGobi Resources Ltd. (TSX:SGQ)(HKSE:1878) (the "Company" or "SouthGobi")
today announced its financial and operating results for the quarter and year
ended December 31, 2012. All figures are in U.S. Dollars unless otherwise
stated.
SIGNIFICANT EVENTS
The Company's significant events for the year ended December 31, 2012 and
subsequent weeks are as follows:
-- On March 22, 2013, SouthGobi announced the resumption of operations at
its flagship Ovoot Tolgoi Mine. The Company plans to produce 3.2 million
tonnes of semi-soft coking coal over the remainder of 2013. Operations
had been fully curtailed since the end of June 2012;
-- Annual coal sales volumes and revenue declined to 1.33 million tonnes
and $53.1 million, respectively, in 2012 compared to 4.02 million tonnes
and $179.0 million in 2011;
-- Commissioned dry coal-handling facility ("DCHF") at the Ovoot Tolgoi
Mine;
-- Received official notification of Aluminum Corporation of China
Limited's ("CHALCO") intention to make a proportional takeover bid for
up to 60% of the issued and outstanding common shares of SouthGobi at
Cdn$8.48 per share; subsequently, SouthGobi was notified that CHALCO's
proportional takeover bid had been terminated;
-- Mineral Resources Authority of Mongolia ("MRAM") held a press conference
announcing a request to suspend exploration and mining activity on
certain licenses owned by SouthGobi Sands LLC, a wholly-owned subsidiary
of SouthGobi Resources Ltd. Subsequently, SouthGobi received a letter
from MRAM confirming that as of September 4, 2012 all exploration and
mining licenses held by SouthGobi were in good standing;
-- The opening of expanded border crossing infrastructure at the Shivee
Khuren-Ceke crossing at the Mongolia-China border ("Shivee Khuren Border
Crossing");
-- Ribbon cutting ceremony to commemorate the start of construction on the
new paved coal highway from the Ovoot Tolgoi Complex to the Shivee
Khuren Border Crossing;
-- SGQ Coal Investment Pte. Ltd., a wholly-owned subsidiary of SouthGobi
Resources Ltd. that owns 100% of the Company's Mongolian operating
subsidiary SouthGobi Sands LLC, filed a
Notice of Investment Dispute on the Government of Mongolia pursuant to
the Bilateral Investment Treaty between Singapore and Mongolia;
-- SouthGobi announced changes to its Board of Directors and senior
management team;
-- Provided an update on the ongoing governmental, regulatory and internal
investigations;
-- Received a pre-mining agreement ("PMA") pertaining to the Soumber
Deposit;
-- On March 25, 2013, SouthGobi announced updated NI 43-101 compliant
resource estimates for the Soumber and Zag Suuj Deposits, which
increased SouthGobi's total measured and indicated resources to 533
million tonnes (8% increase) and inferred resources to 302 million
tonnes (24% increase).
REVIEW OF QUARTERLY OPERATING RESULTS
The Company's operating results for the previous eight quarters are summarized
in the table below:
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2012
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QUARTER ENDED 31-Dec 30-Sep 30-Jun 31-Mar
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Volumes and prices
Raw semi-soft coking coal
Raw coal production (millions
of tonnes) - - 0.07 0.28
Coal sales (millions of
tonnes) 0.03 - 0.12 0.31
Average realized selling price
(per tonne) $ 47.86 $ - $ 67.17 $ 67.59
Raw medium-ash coal
Raw coal production (millions
of tonnes) - - 0.11 0.64
Coal sales (millions of
tonnes) - - 0.04 0.53
Average realized selling price
(per tonne) $ - $ - $ 49.91 $ 50.40
Raw higher-ash coal
Raw coal production (millions
of tonnes) - - 0.09 0.15
Coal sales (millions of
tonnes) - 0.31 0.00 -
Average realized selling price
(per tonne) $ - $ 15.79 $ 38.80 $ -
Total
Raw coal production (millions
of tonnes) - - 0.27 1.07
Coal sales (millions of
tonnes) 0.03 0.31 0.16 0.84
Average realized selling price
(per tonne) $ 47.86 $ 15.79 $ 62.56 $ 56.79
Costs
Direct cash costs of product
sold excluding idled mine
costs $ 33.11 $ 8.23 $ 22.57 $ 10.80
(per tonne) (i)
Total cash costs of product
sold excluding idled mine
costs $ 38.17 $ 12.12 $ 31.49 $ 15.04
(per tonne) (i)
Waste movement and stripping
ratio
Production waste material
moved (millions of bank cubic
meters) - - 1.16 2.20
Strip ratio (bank cubic meters
of waste material per tonne
of coal
produced) - - 4.31 2.07
Pre-production waste material
moved (millions of bank cubic
meters) - - - -
Other operating capacity
statistics
Capacity
Number of mining
shovels/excavators available
at period end 5 4 4 3
Total combined stated mining
shovel/excavator capacity at
period end
(cubic meters) 113 98 98 64
Number of haul trucks
available at period end 27 27 27 27
Total combined stated haul
truck capacity at period end
(tonnes) 4,743 4,743 4,743 4,743
Employees and safety
Employees at period end 465 644 693 720
Lost time injury frequency
rate (ii) 0.5 0.8 1.1 1.4
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2011
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QUARTER ENDED 31-Dec 30-Sep 30-Jun 31-Mar
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Volumes and prices
Raw semi-soft coking coal
Raw coal production (millions
of tonnes) 0.47 0.55 0.52 0.48
Coal sales (millions of
tonnes) 0.53 0.66 0.60 0.34
Average realized selling price
(per tonne) $ 67.62 $ 66.83 $ 65.96 $ 56.50
Raw medium-ash coal
Raw coal production (millions
of tonnes) 0.37 0.20 - -
Coal sales (millions of
tonnes) 0.37 0.20 - -
Average realized selling price
(per tonne) $ 48.59 $ 48.17 $ - $ -
Raw higher-ash coal
Raw coal production (millions
of tonnes) 0.50 0.50 0.35 0.63
Coal sales (millions of
tonnes) 0.25 0.51 0.45 0.11
Average realized selling price
(per tonne) $ 40.30 $ 39.74 $ 38.32 $ 31.68
Total
Raw coal production (millions
of tonnes) 1.34 1.25 0.87 1.11
Coal sales (millions of
tonnes) 1.15 1.37 1.05 0.45
Average realized selling price
(per tonne) $ 55.51 $ 54.01 $ 54.06 $ 50.29
Costs
Direct cash costs of product
sold excluding idled mine
costs $ 22.14 $ 22.64 $ 26.77 $ 18.91
(per tonne) (i)
Total cash costs of product
sold excluding idled mine
costs $ 23.09 $ 23.17 $ 27.61 $ 20.61
(per tonne) (i)
Waste movement and stripping
ratio
Production waste material
moved (millions of bank cubic
meters) 4.58 4.10 4.08 3.85
Strip ratio (bank cubic meters
of waste material per tonne
of coal
produced) 3.42 3.28 4.74 3.47
Pre-production waste material
moved (millions of bank cubic
meters) - 0.39 0.80 0.49
Other operating capacity
statistics
Capacity
Number of mining
shovels/excavators available
at period end 3 3 4 3
Total combined stated mining
shovel/excavator capacity at
period end
(cubic meters) 64 64 98 83
Number of haul trucks
available at period end 25 16 16 16
Total combined stated haul
truck capacity at period end
(tonnes) 4,561 2,599 2,599 2,599
Employees and safety
Employees at period end 720 695 658 600
Lost time injury frequency
rate (ii) 1.2 0.9 0.6 0.7
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(i) A non-IFRS financial measure, see Non-IFRS Financial Measures section
(ii) Per 1,000,000 man hours
For the year ended December 31, 2012
Mining activities at the Ovoot Tolgoi Mine were curtailed to varying degrees in
the second quarter of 2012, with mining activities fully curtailed at the end of
the second quarter, to manage coal inventories and to maintain efficient working
capital levels. Mining activities remained fully curtailed for the remainder of
2012; however, operations at the Ovoot Tolgoi Mine resumed on March 22, 2013.
In 2012, the Company produced 1.33 million tonnes of raw coal with a strip ratio
of 2.52 compared to production of 4.57 million tonnes of raw coal with a strip
ratio of 3.63 in 2011. The decrease in production primarily related to the
curtailment of the Company's mining operations in the last three quarters of the
year; whereas, the decrease in the strip ratio primarily related to the
below-trend strip ratio in the first quarter of 2012 which will be normalized
over the life-of-mine.
In 2012, the Company sold 1.33 million tonnes of coal at an average realized
selling price of $47.76 per tonne compared to sales of 4.02 million tonnes of
coal at an average realized selling price of $54.03 per tonne in 2011. The
Company's average realized selling price was negatively impacted by the
softening of the inland China coking coal markets closest to SouthGobi's
operations throughout 2012. The Company's higher-ash coals were impacted more
substantially than its other products.
Direct cash costs of product sold excluding idled mine costs (a non-IFRS
financial measure, see Non-IFRS Financial Measures section) were $12.02 per
tonne in 2012 compared to $23.15 per tonne in 2011. Direct cash costs of product
sold excluding idled mine costs primarily decreased due to a lower strip ratio,
reduced fuel prices and non-cash coal stockpile impairments recorded in the
second half of 2012.
For the three months ended December 31, 2012
For the three months ended December 31, 2012, the Company's mining activities
remained fully curtailed; however, the Company generated revenue through the
sale of existing coal stockpiles.
For the three months ended December 31, 2012, the Company sold 0.03 million
tonnes of coal at an average realized selling price of $47.86 per tonne compared
to sales of 1.15 million tonnes of coal at an average realized selling price of
$55.51 per tonne in 2011. For the three months ended December 31, 2012, the
Company's sales volumes and average realized selling price continued to be
negatively impacted by the softening of the inland China coking coal markets
closest to SouthGobi's operations.
Direct cash costs of product sold excluding idled mine costs (a non-IFRS
financial measure, see Non-IFRS Financial Measures section) were $33.11 per
tonne for the three months ended December 31, 2012 compared to $22.14 for the
three months ended December 31, 2011. Direct cash costs of product sold
excluding idled mine costs primarily increased for the three months ended
December 31, 2012 due to higher cost coal inventory being sold.
REVIEW OF QUARTERLY FINANCIAL RESULTS
The Company's financial results for the previous eight quarters are summarized
in the table below:
($ in thousands, except for per share information, unless otherwise indicated)
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2012
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QUARTER ENDED 31-Dec 30-Sep 30-Jun 31-Mar
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Revenue $ 1,213 $ 3,337 $ 8,412 $ 40,153
Gross profit/(loss) excluding
idled mine costs (6,894) (8,601) 1,778 22,674
Gross profit margin excluding
idled mine costs -568% -258% 21% 56%
Gross profit/(loss) including
idled mine costs (25,336) (27,532) (13,809) 22,674
Other operating expenses (18,664) (29,301) (3,803) (2,578)
Administration expenses (6,079) (5,178) (7,497) (5,882)
Evaluation and exploration
expenses (508) (958) (2,099) (5,033)
Income/(loss) from operations (50,586) (62,969) (27,208) 9,181
Net income/(loss) (51,818) (54,564) 237 3,126
Basic income/(loss) per share (0.28) (0.30) 0.00 0.02
Diluted income/(loss) per share (0.28) (0.30) (0.12) 0.02
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2011
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QUARTER ENDED 31-Dec 30-Sep 30-Jun 31-Mar
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Revenue $ 51,064 $ 60,491 $ 47,336 $ 20,158
Gross profit/(loss) excluding
idled mine costs 16,637 17,635 9,744 7,690
Gross profit margin excluding
idled mine costs 33% 29% 21% 38%
Gross profit/(loss) including
idled mine costs 16,637 17,635 9,744 7,690
Other operating expenses (24,644) (138) (3,024) (1,383)
Administration expenses (8,612) (7,993) (6,808) (5,336)
Evaluation and exploration
expenses (14,513) (10,908) (4,356) (1,991)
Income/(loss) from operations (31,132) (1,404) (4,444) (1,020)
Net income/(loss) (18,897) 55,921 67,323 (46,602)
Basic income/(loss) per share (0.10) 0.31 0.37 (0.25)
Diluted income/(loss) per share (0.14) (0.02) - (0.25)
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2012
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QUARTER ENDED 31-Dec 30-Sep 30-Jun 31-Mar
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Net income/(loss) $ (51,818) $ (54,564) $ 237 $ 3,126
Income/(loss) adjustments, net
of tax
Idled mine costs 14,474 13,572 10,966 -
Share-based compensation
expense/(recovery) (1,144) 1,490 4,383 3,799
Net impairment loss/(recovery)
on assets 22,814 34,299 2,583 -
Unrealized foreign exchange
losses/(gains) 750 179 (511) (950)
Unrealized loss/(gain) on
embedded derivatives in CIC
debenture (662) (12,856) (26,770) 776
Realized loss/(gain) on
disposal of FVTPL investments
(i) 15 - 46 (85)
Unrealized loss/(gain) on FVTPL
investments 664 1,197 2,282 339
Adjusted net income/(loss) (ii) (14,907) (16,683) (6,784) 7,005
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2011
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QUARTER ENDED 31-Dec 30-Sep 30-Jun 31-Mar
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Net income/(loss) $ (18,897) $ 55,921 $ 67,323 $ (46,602)
Income/(loss) adjustments, net
of tax
Idled mine costs - - - -
Share-based compensation
expense/(recovery) 4,050 4,296 3,349 2,715
Net impairment loss/(recovery)
on assets 23,818 (2,925) - -
Unrealized foreign exchange
losses/(gains) 34 103 263 (993)
Unrealized loss/(gain) on
embedded derivatives in CIC
debenture (10,790) (62,058) (70,422) 36,780
Realized loss/(gain) on
disposal of FVTPL investments
(i) - - - -
Unrealized loss/(gain) on FVTPL
investments 155 2,449 (3,629) 4,116
Adjusted net income/(loss) (ii) (1,630) (2,214) (3,116) (3,984)
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(i) FVTPL is defined as "fair value through profit or loss"
(ii) A non-IFRS financial measure, see Non-IFRS Financial Measures section
For the year ended December 31, 2012
The Company recorded a net loss of $103.0 million for the year ended December
31, 2012 compared to a net income of $57.7 million for the year ended December
31, 2011.
Gross Profit/(Loss):
The Company's gross profit/(loss) is composed of revenue (net of royalties and
selling fees) and cost of sales and relates solely to the Mongolian Coal
Division. In 2012, the Company's gross profit/(loss) was negatively impacted by
$53.0 million of idled mine costs, resulting in a gross loss of $44.0 million.
The Company recorded a gross profit excluding idled mine costs of $9.0 million
in 2012 compared to a gross profit excluding idled mine costs of $51.7 million
in 2011. Gross profit will vary by year depending on sales volumes, sales prices
and unit costs.
In 2012, SouthGobi recorded revenue of $53.1 million compared to $179.0 million
in 2011. In the last three quarters of 2012, customers were reluctant to enter
into new sales contracts primarily due to the following:
-- Customers' ability to export coal through the Shivee Khuren Border
Crossing for the first half of 2012 was significantly below their
projections due to: a) the delayed opening of the expanded border
crossing infrastructure at the Shivee Khuren Border Crossing; b) the
extended closure of the Shivee Khuren Border Crossing for the Chinese
New Year and Mongolian Tsagaan Sar public holidays in the first quarter
of 2012; c) the closure of the existing gravel road used to transport
coal from the Ovoot Tolgoi Mine and neighboring mines to the Shivee
Khuren Border Crossing for over four weeks in the second quarter of
2012;
-- The uncertainty with respect to whether SouthGobi would receive a formal
request from MRAM to suspend mining activities on its Ovoot Tolgoi
mining license, which caused customers concern that they would be unable
to collect and export additional coal purchased from the Ovoot Tolgoi
Mine in the second and third quarters of 2012; and
-- The softening of inland China coking coal markets closest to SouthGobi's
operations throughout the last three quarters of 2012.
Revenues are presented net of royalties and selling fees. The Company is subject
to a 5% royalty on all coal sales exported out of Mongolia based on a set
reference price per tonne published monthly by the Government of Mongolia.
Effective January 1, 2011, the Company is also subject to a sliding scale
additional royalty of up to 5% on coal sales exported out of Mongolia based on
the set reference price. Based on the 2012 reference prices, the Company was
subject to an average 8% royalty based on a weighted average reference price of
$88.07 per tonne. The Company's effective royalty rate for 2012, based on the
Company's average realized selling price of $47.76 per tonne, was 14%.
SouthGobi, together with other Mongolian mining companies impacted by the
escalation of effective royalty rates, opened a dialog with the appropriate
Government of Mongolia authorities with a view of moving to a more equitable
process for setting reference prices. A successful outcome was achieved and
commencing October 1, 2012 (for a six month trial period) the royalty rate will
be determined using the contracted sales price per tonne, not the reference
price per tonne published by the Government of Mongolia. The dialog has
continued with the appropriate Government of Mongolia authorities with the goal
of extending the trial period until the end of 2013. In the fourth quarter of
2012 (a full quarter under the trial period), the Company's effective royalty
rate was 6%, a significant reduction from prior quarters in 2012.
Cost of sales was $97.1 million in 2012 compared to $127.3 million in 2011. Cost
of sales comprise the direct cash costs of product sold, mine administration
cash costs of product sold, idled mine costs, inventory impairments, equipment
depreciation, depletion of mineral properties and share-based compensation
expense. Of the $97.1 million recorded as cost of sales in 2012, $44.2 million
related to mine operations and $53.0 million related to idled mine costs. Cost
of sales related to mine operations decreased in 2012 compared to 2011 primarily
due to lower sales volumes and lower unit costs, partially offset by coal
stockpile impairments totaling $14.2 million. Cost of sales related to idled
mine costs primarily consist of period costs, which are expensed as incurred and
depreciation expense. The depreciation expense relates to the Company's idled
plant and equipment.
Other Operating Expenses:
Other operating expenses in 2012 increased to $54.3 million compared to $29.2
million in 2011. The increase in other operating expenses primarily relates to
provisions for doubtful trade and other receivables, an impairment loss on
available-for-sale financial assets and an impairment of property, plant and
equipment, partially offset by reduced public infrastructure costs.
In 2012, the Company recorded $52.8 million of provisions and impairments in
other operating expenses related to the following:
-- Trade and other receivables - the Company recorded a loss provision of
$18.4 million in 2012. The loss provision relates to provisions for
certain uncollectible trade receivables of $17.4 million and a reduction
in the expected insurance proceeds of $1.0 million. The Company
anticipates full recovery of its remaining outstanding trade and other
receivables.
-- Available-for-sale financial asset - in 2012, the Company determined
that objective evidence of impairment in the Company's investment in
Aspire Mining Limited ("Aspire") existed. Therefore, an impairment loss
of $19.2 million was recognized in other operating expenses.
-- Property, plant and equipment - the Company recorded $15.2 million of
impairment charges to reduce various items of property, plant and
equipment to their recoverable amounts. The impairment charges consist
of a $13.0 million impairment pertaining to non- refundable prepayments
made on cancelled mobile equipment orders to preserve the
Company's financial resources, a $1.1 million provision on tires held
for sale and a $1.1 million impairment of construction in progress
expenditures that were not expected to be recovered.
Public infrastructure costs decreased in 2012 compared to 2011 due to reduced
maintenance costs on transportation infrastructure from the Ovoot Tolgoi Mine to
the Shivee Khuren Border Crossing and reduced works on the expanded border
crossing infrastructure at the Shivee Khuren Border Crossing.
In 2011, other operating expenses primarily consisted of a $16.0 million
impairment charge on various capitalized construction projects and $8.1 million
of public infrastructure costs.
Administration Expenses:
Administration expenses in 2012 were $24.6 million compared to $28.7 million in
2011. The decrease in administration expenses primarily related to reduced
corporate administration and share-based compensation expense, partially offset
by increased legal and professional fees. Legal and professional fees were
higher due to additional legal fees as a result of the CHALCO proportional
takeover bid, the Notice of Investment Dispute and in support of the ongoing
investigations (refer to Regulatory Issues section).
Evaluation and Exploration Expenses:
Exploration expenses in 2012 were $8.6 million compared to $31.8 million in
2011. Exploration expenses will vary period to period depending on the number of
projects and the related seasonality of the exploration programs. The 2012
exploration program was suspended in the second quarter of 2012 in order to
preserve the Company's financial resources while mining operations at the Ovoot
Tolgoi Mine were curtailed, with the exception of certain water exploration
activities and minimum exploration activities required on exploration licenses
held by the Company.
Finance Income & Finance Costs:
The Company incurred finance costs for the year ended December 31, 2012 of $15.4
million compared to $12.8 million for the year ended December 31, 2011. Finance
costs for the year ended December 31, 2012 primarily consisted of $10.5 million
of interest expense on the China Investment Corporation ("CIC") convertible
debenture and a $4.5 million unrealized loss on FVTPL investments; whereas,
finance costs for the year ended December 31, 2011 primarily consisted of $9.1
million of interest expense on the CIC convertible debenture and a $3.1 million
unrealized loss on FVTPL investments.
The Company recorded finance income for the year ended December 31, 2012 of
$39.9 million compared to $107.7 million for the year ended December 31, 2011.
For the year ended December 31, 2012, finance income primarily consisted of a
$39.5 million unrealized gain on the fair value change of the embedded
derivatives in the CIC convertible debenture; whereas, in the year ended
December 31, 2011, finance income primarily consisted of a $106.5 million
unrealized gain on the fair value change of the embedded derivatives in the CIC
convertible debenture.
The Company's investment in Aspire continues to be classified as an
available-for-sale financial asset. In the third quarter of 2012, the Company
determined that objective evidence of impairment in the Company's investment in
Aspire existed. Therefore, an impairment loss of $19.2 million was recognized in
other operating expenses. Other comprehensive income for the year ended December
31, 2011 consists of an unrealized loss (net of tax) of $11.2 million related to
the Company's investment in Aspire.
Taxes:
For the year ended December 31, 2012, the Company recorded a current income tax
expense of $0.4 million related to its Mongolian operations compared to a
current income tax expense of $7.3 million for the year ended December 31, 2011.
The Company has recorded a deferred income tax recovery related to deductible
temporary differences of $3.7 million for the year ended December 31, 2012
compared to a deferred income tax recovery of $8.1 million for the year ended
December 31, 2011.
For the three months ended December 31, 2012
The Company recorded a net loss of $51.8 million for the three months ended
December 31, 2012 compared to a net loss of $18.9 million for the three months
ended December 31, 2011.
Gross Profit/(Loss):
The Company's gross profit/(loss) is composed of revenue (net of royalties and
selling fees) and cost of sales and relates solely to the Mongolian Coal
Division. For the three months ended December 31, 2012, gross profit was
negatively impacted by $18.4 million of idled mine costs, contributing to a
gross loss of $25.3 million. The Company recorded a gross loss excluding idled
mine costs of $6.9 million in the fourth quarter of 2012 compared to a gross
profit of $16.6 million in the fourth quarter of 2011. Gross profit will vary by
quarter depending on sales volumes, sales prices and unit costs.
The Company recognized revenue of $1.2 million in the fourth quarter of 2012
compared $51.1 million in the fourth quarter of 2011. The significant decrease
in revenue for the three months ended December 31, 2012 compared to the three
months ended December 31, 2011 can be attributed to decreased sales volume and a
reduction in the Company's average realized selling price. In the fourth quarter
of 2012, the Company's sales volumes and average realized selling price
continued to be negatively impacted by the softening of the inland China coking
coal markets closest to SouthGobi's operations. However, subsequent to year-end,
the Company signed contracts with a number of customers to sell the majority of
its remaining coal stockpiles.
SouthGobi's effective royalty rate in the fourth quarter of 2012 was 6%, a
significant reduction from prior quarters in 2012. Effective October 1, 2012
(for a six month trial period) the royalty rate is determined using the
contracted sales price per tonne, not the reference price per tonne published by
the Government of Mongolia. SouthGobi, together with other Mongolian mining
companies, have continued their dialog with the appropriate Government of
Mongolia authorities with the goal of extending the trial period until the end
of 2013.
Cost of sales was $26.5 million for the three months ended December 31, 2012
compared to $34.4 million for the three months ended December 31, 2011. Cost of
sales comprise the direct cash costs of product sold, mine administration cash
costs of product sold, idled mine costs, inventory impairments, equipment
depreciation, depletion of mineral properties and share-based compensation
expense. Of the $26.5 million recorded as cost of sales for the three months
ended December 31, 2012, $8.1 million related to mine operations and $18.4
million related to idled mine costs. Cost of sales related to mine operations
decreased for the three months ended December 31, 2012 compared to the three
months ended December 31, 2011 primarily due to lower sales volumes, partially
offset by higher unit cost and coal stockpile impairments totaling $7.0 million.
For the three months ended December 31, 2012, the Company recorded a coal
stockpile impairment of $7.0 million to reduce the carrying value to its net
realizable value.
Other Operating Expenses:
Other operating expenses for the three months ended December 31, 2012 decreased
to $18.7 million compared to $24.6 million for the three months ended December
31, 2011. The decrease in other operating expenses compared to the three months
ended December 31, 2011 primarily relates to recognizing a smaller impairment of
property, plant and equipment.
For the three months ended December 31, 2012, the Company recorded $20.8 million
of provisions and impairments in other operating expenses related to the
following:
-- Trade and other receivables - the Company recorded a loss provision of
$4.7 million related to provisions for certain uncollectible trade
receivables of $3.7 million and a reduction in the expected insurance
proceeds of $1.0 million. The Company anticipates full recovery of its
remaining outstanding trade and other receivables.
-- Available-for-sale financial asset - in the third quarter of 2012, the
Company determined that objective evidence of impairment in the
Company's investment in Aspire existed.
Therefore, a further impairment loss of $3.1 million was recognized in
other operating expenses.
-- Property, plant and equipment - the Company recorded $13.0 million of
impairment charges to reduce non-refundable prepayments made on
cancelled mobile equipment orders to their recoverable amounts. The
mobile equipment orders were cancelled to preserve the Company's
financial resources.
Administration Expenses:
Administration expenses for the three months ended December 31, 2012 were $6.1
million compared to $8.6 million for the three months ended December 31, 2011.
Administration expenses decreased for the three months ended December 31, 2012
compared to the three months ended December 31, 2011 primarily due to decreased
salaries and benefits and share-based compensation expenses, partially offset by
increased legal and professional fees.
Evaluation and Exploration Expenses:
Exploration expenses for the three months ended December 31, 2012 were $0.5
million compared to $14.5 million for the three months ended December 31, 2011.
Exploration expenses will vary from quarter to quarter depending on the number
of projects and the related seasonality of the exploration programs. The Company
curtailed exploration activities in the fourth and third quarters of 2012 to
preserve financial resources. The majority of the exploration activities in the
fourth quarter of 2012 related to water exploration activities. Exploration
expenses in the fourth quarter of 2011 included a higher proportion of the 2011
exploration program expenses due to delays in receiving required government
approvals in the first half of 2011.
Finance Income & Finance Costs:
Finance costs for the three months ended December 31, 2012 were $5.6 million
compared to $1.1 million for the three months ended December 31, 2011. Finance
costs for the three months ended December 31, 2012 primarily consisted of $4.8
million of interest expense on the CIC convertible debenture and a $0.7 million
unrealized loss on FVTPL investments; whereas, finance costs for the three
months ended December 31, 2011 primarily consisted of $0.9 million of interest
expense on the CIC convertible debenture.
Finance income for the three months ended December 31, 2012 was $0.7 million
compared to $11.0 million for the three months ended December 31, 2011. For the
three months ended December 31, 2012, finance income primarily consisted of a
$0.7 million unrealized gain on the fair value change of the embedded
derivatives in the CIC convertible debenture; whereas, for the three months
ended December 31, 2011, finance income primarily consisted of a $10.8 million
unrealized gain on the fair value change of the embedded derivatives in the CIC
convertible debenture.
The Company's investment in Aspire continues to be classified as an
available-for-sale financial asset. In the third quarter of 2012, the Company
determined that objective evidence of impairment in the Company's investment in
Aspire existed. Therefore, in the fourth quarter of 2012, a further impairment
loss of $3.1 million was recognized in other operating expenses. Other
comprehensive income for the three months ended December 31, 2011 consists of an
unrealized loss (net of tax) of $6.5 million related to the Company's investment
in Aspire.
Taxes:
For the three months ended December 31, 2012, the Company recorded a current
income tax expense of $0.1 million related to its Mongolian operations compared
to a current income tax recovery of $0.4 million for the three months ended
December 31, 2011. The Company has recorded a deferred income tax recovery
related to deductible temporary differences of $3.5 million for the three months
ended December 31, 2012 compared to a deferred income tax recovery of $2.0
million for the three months ended December 31, 2011.
FINANCIAL POSITION AND LIQUIDITY
Cash Position and Liquidity
As at December 31, 2012, the Company had cash of $19.7 million and short term
money market investments of $15.0 million for a total of $34.7 million in cash
and money market investments compared to cash of $123.6 million and long term
money market investments of $45.0 million for a total of $168.6 million in cash
and money market investments as at December 31, 2011. Working capital (excess
current assets over current liabilities) was $127.2 million as at December 31,
2012 compared to $236.1 million as at December 31, 2011.
The Company's total assets as at December 31, 2012 were $729.4 million compared
with $920.3 million as at December 31, 2011. The Company's non-current
liabilities as at December 31, 2012 were $103.8 million compared with $145.6
million as at December 31, 2011.
Consistent with the Company's capital risk management strategy, the Company
expects to have sufficient liquidity and capital resources to meet its ongoing
obligations and future contractual commitments for at least twelve months from
the end of the December 31, 2012 reporting period. The Company expects its
liquidity to remain sufficient based on existing capital resources and income
from mining operations. Liquidity beyond the twelve month period is dependent on
the success of the recommencement of operations and ongoing demand and prices in
the coal market. On March 22, 2013, the Company recommenced mining activities at
the Ovoot Tolgoi Mine. The Company continues to minimize uncommitted capital
expenditures and exploration expenditures in order to preserve the Company's
financial resources.
Subsequent to December 31, 2012, the IAAC informed the Company that orders,
placing restrictions on certain of its Mongolian assets, had been imposed in
connection with its continuing investigation (refer to Regulatory Issues
section).
The orders placing restrictions on certain of the Company's Mongolia assets
could ultimately result in an event of default of the Company's convertible
debenture. This matter remains under review by the Company and its advisers but
to date, it is the Company's view that this would not result in an event of
default as defined under the convertible debenture terms. However, in the event
that the orders result in an event of default of the Company's convertible
debenture 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.
Impairment Analysis
As at December 31, 2012, the Company determined that the decline in the
Company's common share price and continued curtailment of mining activities at
the Ovoot Tolgoi Mine constituted impairment indicators. Therefore, the Company
conducted an impairment test whereby the carrying values of the Company's
property, plant and equipment, including mineral properties, related to the
Ovoot Tolgoi Mine were compared to their "value-in-use" using a discounted
future cash flow valuation model as at December 31, 2012. The Company's
property, plant and equipment, including mineral properties, totaled $521.5
million as at December 31, 2012.
Key estimates and assumptions incorporated in the valuation model included the
following:
-- Inland Chinese coking coal market coal prices;
-- Life-of-mine coal production and operating costs; and
-- A discount rate based on an analysis of market, country and company
specific factors
The impairment analysis did not result in the identification of an impairment
loss and no charge was required as at December 31, 2012. 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.
DRY COAL-HANDLING FACILITY
On February 13, 2012, the Company announced the successful commissioning of the
DCHF at the Ovoot Tolgoi Mine. The DCHF has capacity to process nine million
tonnes of run-of-mine ("ROM") coal per year. The DCHF includes a
300-tonne-capacity dump hopper, which receives ROM coal from the Ovoot Tolgoi
Mine and feeds a coal rotary breaker that sizes coal to a maximum of 50
millimeters ("mm") and rejects oversize ash. Prior to the commissioning of the
rotary breaker, temporary screening operations were used at the Ovoot Tolgoi
Mine to process higher-ash coals. Screening performed a similar function to the
rotary breaker, namely rejecting oversize ash and sizing the coal to a maximum
of 50mm; however, the rotary breaker is anticipated to reduce screening costs
and improve yield recoveries.
The Company has received all permits to operate the DCHF. However, the 2013 mine
plan considers only limited utilization of the DCHF at the latter end of 2013
due to higher quality coals being mined that likely will not require processing
through the DCHF and can be sold raw or processed directly through the wet
washing facility. The 2013 mine plan assumes a conservative resumption of
operations, designed to achieve a cost effective approach that will allow
operations to continue on a sustainable basis.
The Company has delayed construction to upgrade the DCHF to include dry air
separation modules and covered load out conveyors with fan stackers to take
processed coals to stockpiles and enable more efficient blending. Uncommitted
capital expenditures have been minimized to preserve the Company's financial
resources.
REGIONAL INFRASTRUCTURE
In July 2009, Chinese and Mongolian authorities agreed to create designated coal
transportation corridors at the Shivee Khuren Border Crossing. In 2011,
SouthGobi, together with other companies, completed the road and construction
works required on the Mongolian side of the border to match the existing Chinese
infrastructure.
Further, on May 28, 2012, the expanded border crossing infrastructure,
consisting of eight new border gates exclusively for coal transportation, opened
at the Shivee Khuren Border Crossing. The expanded border crossing
infrastructure eliminated the previous bottleneck at the Shivee Khuren Border
Crossing and is expected to increase capacity to approximately 20 million tonnes
or more of coal per year.
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"). SouthGobi Sands LLC holds a 40% interest in RDCC. On
October 26, 2011, RDCC signed a concession agreement with the State Property
Committee of Mongolia. RDCC now has the right to conclude a 17 year build,
operate and transfer agreement under the Mongolian Law on Concessions. RDCC has
engaged a contractor and construction on the paved highway has commenced;
however, as planned, the contractor has demobilized until the second quarter of
2013 due to winter weather conditions. Completion of the paved highway is
expected late 2013. The paved highway will have an intended carrying capacity
upon completion in excess of 20 million tonnes of coal per year.
TSAGAAN TOLGOI DEPOSIT
On March 5, 2012, SouthGobi announced an agreement to sell the Tsagaan Tolgoi
Deposit to Modun Resources Limited ("Modun"), a company listed on the Australian
Stock Exchange under the symbol MOU. Under the transaction, SouthGobi expected
to receive $30.0 million of total consideration, comprising $7.5 million
up-front in cash, $12.5 million up-front in Modun shares and deferred
consideration of an additional $10.0 million also payable in Modun shares.
Subsequently, on August 29, 2012, SouthGobi announced that the proposed sale of
the Tsagaan Tolgoi Deposit to Modun had been cancelled by mutual agreement of
both parties.
PROPOSED TRANSACTION
On April 2, 2012, SouthGobi announced a cooperation agreement with CHALCO and
received official notification of CHALCO's intention to make a proportional
takeover bid for up to 60% of the issued and outstanding common shares of
SouthGobi at Cdn$8.48 per share ("Proportional Offer"). SouthGobi was also
informed by its 58% major shareholder, Turquoise Hill Resources Ltd. ("Turquoise
Hill"), that Turquoise Hill had signed a lock-up agreement with CHALCO,
committing to tender all of its shares held or thereafter acquired by it during
the offer period of CHALCO into the Proportional Offer. The Proportional Offer
was to be made by way of a takeover bid circular under British Columbia law and
would be made to all SouthGobi shareholders. If shareholders tendered more than
60% of the outstanding common shares of SouthGobi to the takeover bid, a
proportional amount of shares were to be taken up from each shareholder.
In conjunction with the Proportional Offer, CHALCO and SouthGobi entered into a
cooperation agreement. CHALCO's obligations under the cooperation agreement were
to become effective upon CHALCO acquiring a shareholding in SouthGobi.
SouthGobi had also been notified that CHALCO entered into consultancy agreements
with nine key senior executives, officers and staff to assist CHALCO with the
integration and transition following CHALCO's acquisition of a shareholding in
SouthGobi.
CHALCO stated that it expected to mail the takeover bid circular in connection
with the Proportional Offer on or about July 5, 2012. On July 3, 2012, CHALCO
and Turquoise Hill announced a 30 day extension for CHALCO to mail the takeover
bid circular. Subsequently, on August 2, 2012, an additional 30 day extension
was announced by CHALCO and Turquoise Hill. Finally, on September 3, 2012,
SouthGobi was notified that CHALCO's Proportional Offer had been terminated,
which also resulted in the termination of the cooperation agreement and the
consultancy agreements.
REGULATORY ISSUES
Status of Mining and Exploration Licenses
On April 16, 2012, SouthGobi announced that MRAM held a press conference
announcing a request to suspend exploration and mining activity on certain
licenses owned by SouthGobi Sands LLC. The request for suspension included the
mining license pertaining to the Ovoot Tolgoi Mine.
The Company believed that the action was taken under the broad national security
powers of the Government of Mongolia. MRAM stated that the move was in
connection with the proposed proportional takeover bid by CHALCO and the
agreement by Turquoise Hill to tender its controlling interest in SouthGobi to
such a takeover. On September 3, 2012, the proposed proportional takeover bid by
CHALCO was terminated (refer to Proposed Transaction section).
Subsequently, on September 6, 2012, the Company received official notification
from MRAM confirming that as of September 4, 2012 all exploration and mining
licenses held by the Company were in good standing. The Notice of Investment
Dispute filed by the Company pertaining to its valid PMA applications remains
ongoing (refer to Notice of Investment Dispute section).
Governmental, Regulatory and Internal Investigations
The Company is subject to continuing investigations by the Mongolian Independent
Authority Against Corruption (the "IAAC") and other governmental and regulatory
authorities in the Republic of Mongolia regarding allegations against SouthGobi
and some of its employees involving possible breaches of Mongolian laws,
including anti-corruption and taxation laws. Certain of those allegations
(including allegations of bribery, money laundering and tax evasion) have been
the subject of public statements and Mongolian media reports, both prior to and
in connection with the recent trial and conviction of the former Chairman and
the former director of the Geology, Mining and Cadastral Department of the MRAM,
and others. SouthGobi was not a party to that case. The Company understands that
the court's decision is the subject of an appeal.
A number of the media reports referred to above suggest that, in its decision,
the court in the above- mentioned case referred to two matters specifically
involving SouthGobi Sands LLC.
In respect of the first matter, being an alleged failure to meet minimum
expenditure requirements under the Mongolian Minerals Law in relation to four
exploration licenses, the Company is investigating these allegations, but
advises that three of the four licenses were considered to be non-material and
allowed to lapse between November 2009 and December 2011. Activities
historically carried out on the fourth (and the only currently-held) license
include drilling, trenching and geological reconnaissance. The Company has no
immovable assets located on this license and it does not contain any of
SouthGobi's NI 43-101 reserves or resources. This license does not relate to the
Company's Ovoot Tolgoi Mine and SouthGobi does not consider this license to be
material to its business.
The second matter referred to by the court was an alleged impropriety in the
transfer of License 5261X by SouthGobi Sands LLC to a third party in March 2010
in violation of Mongolian anti-corruption laws. The Company understands, based
on media reports, that the court has invalidated the transfer of this license,
and so the license's current status is unclear.
In addition, the IAAC has advised the Company that it is investigating other
alleged improprieties by SouthGobi Sands LLC as described above. Neither
SouthGobi nor any of its employees have been charged in connection with the
IAAC's investigation, but certain current and former employees have been advised
that they are suspects. The IAAC has imposed orders placing a travel ban on
those employees, and administrative restrictions on certain of the Company's
Mongolian assets, including local bank accounts, in connection with its
continuing investigation of those allegations. While the orders restrict the use
of in country funds pending the outcome of the investigation, they are not
expected to have a material impact on the Company's activities in the short
term, although they could create operational difficulties for the Company in the
medium to long term. SouthGobi is taking and intends to take all necessary steps
to protect its ability to continue to conduct its business activities in the
ordinary course.
Through its Audit Committee (comprised solely of independent directors),
SouthGobi is conducting an internal investigation into possible breaches of law,
internal corporate policies and codes of conduct arising from the allegations
that have been raised. The Audit Committee has the assistance of independent
legal counsel in connection with its investigation. The Chair of the Audit
Committee is also participating in a tripartite committee, comprised of the
Audit Committee Chairs of the Company and Turquoise Hill and a representative of
Rio Tinto, which is focused on the investigation of those allegations, including
possible violations of anti-corruption laws. Independent legal counsel and
forensic accountants have been engaged by this committee to assist it with its
investigation. All of these investigations are ongoing but are not yet complete.
Information that has been provided to the IAAC by the Company has also been
provided by the tripartite committee to Canadian and United States regulatory
authorities that are monitoring the Mongolian investigations. The Company
continues to cooperate with all relevant regulatory agencies in respect of the
ongoing investigations.
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.
Pending the completion of the investigations, the Company, through its Board of
Directors and new management, has taken a number of steps to focus ongoing
compliance by employees with all applicable laws, internal corporate policies
and codes of conduct, and with the Company's disclosure controls and procedures
and internal controls over financial reporting.
NOTICE OF INVESTMENT DISPUTE
On July 11, 2012, SouthGobi announced that SGQ Coal Investment Pte. Ltd., a
wholly-owned subsidiary of SouthGobi Resources Ltd. that owns 100% of the
Company's Mongolian operating subsidiary SouthGobi Sands LLC, filed a Notice of
Investment Dispute on the Government of Mongolia pursuant to the Bilateral
Investment Treaty between Singapore and Mongolia. The Company filed the Notice
of Investment Dispute following a determination by management that they had
exhausted all other possible means to resolve an ongoing investment dispute
between SouthGobi Sands LLC and the Mongolian authorities.
The Notice of Investment Dispute consists of, but is not limited to, the failure
by MRAM to execute the PMAs associated with certain exploration licenses of the
Company pursuant to which valid PMA applications had been lodged in 2011. The
areas covered by the valid PMA applications include the Zag Suuj Deposit and
certain areas associated with the Soumber Deposit outside the existing mining
license.
The Notice of Investment Dispute triggers the dispute resolution process under
the Bilateral Investment Treaty whereby the Government of Mongolia has a
six-month cure period from the date of receipt of the notice to satisfactorily
resolve the dispute through negotiations. If the negotiations are not
successful, the Company will be entitled to commence conciliation/arbitration
proceedings under the auspices of the International Centre for Settlement of
Investment Disputes ("ICSID") pursuant to the Bilateral Investment Treaty.
However, in the event that the Government of Mongolia fails to negotiate, ICSID
arbitration proceedings may be accelerated before the six months have expired.
The Company continues to have the right to commence conciliation/arbitration
proceedings under the auspices of the ICSID pursuant to the Bilateral Investment
Treaty. On January 18, 2013, MRAM issued the Company a PMA pertaining to the
Soumber Deposit; however, four valid PMA applications remain outstanding.
Activities historically carried out on the exploration licenses with valid PMA
applications include drilling, trenching and geological reconnaissance. The
Company has no immovable assets located on these licenses and the loss of any or
all of these licenses would not materially and adversely affect the existing
operations.
BOARD OF DIRECTORS AND SENIOR MANAGEMENT
On September 4, 2012, SouthGobi announced changes to its Board of Directors,
accepting the resignations of Mr. Edward Flood, the Honourable Robert Hanson and
Mr. Peter Meredith (Chairman) and subsequently appointing Ms. Kay Priestly
(Chairman), Mr. Sean Hinton (Deputy Chairman), Mr. Lindsay Dove, Mr. Brett Salt
and Mr. Kelly Sanders. On September 17, 2012, Mr. Alexander Molyneux tendered
his resignation as a director of the Company. Further, on November 8, 2012, Mr.
Ross Tromans was appointed as an Executive Director.
In the third and fourth quarters of 2012, the Company also announced senior
management changes with the departures of Mr. Alexander Molyneux, former
President and Chief Executive Officer, Mr. Curtis Church, former Chief Operating
Officer and Mr. Matthew O'Kane, former Chief Financial Officer. Mr. Tromans was
appointed as President and Chief Executive Officer. Mr. Tromans also assumed the
duties formerly handled by the Chief Operating Officer. The Company is in the
process of identifying a candidate for the Chief Financial Officer role. In the
interim, Mr. Tromans has acted as the Company's principal financial officer.
COMMON SHARE REPURCHASE PROGRAM
On June 8, 2010, the Company announced that its Board of Directors authorized a
share repurchase program to purchase up to 2.5 million common shares of the
Company on each or either of the Toronto Stock Exchange ("TSX") and the Hong
Kong Stock Exchange ("HKEX"), in aggregate representing up to 5.0 million common
shares of the Company. On June 8, 2011, the Company announced the renewal of its
share repurchase program. The share repurchase program concluded on June 14,
2012. As at June 14, 2012, the Company had repurchased 1.6 million shares on the
HKEX and 2.8 million shares on the TSX for a total of 4.4 million common shares.
The Company cancelled all repurchased shares.
COMPLIANCE WITH THE CODE ON CORPORATE GOVERNANCE PRACTICES
The Company has, throughout the year ended December 31, 2012, applied the
principles and complied with the requirements of its corporate governance
practices as defined by the Board of Directors and all applicable statutory,
regulatory and stock exchange listings standards (old Corporate Governance Code
from January 1, 2012 to March 31, 2012 and new Corporate Governance Code from
April 1, 2012 to December 31, 2012).
COMPLIANCE WITH THE MODEL CODE FOR SECURITIES TRANSACTIONS BY DIRECTORS OF
LISTED COMPANIES
The Company has adopted policies regarding directors' securities transactions in
its Corporate Disclosure, Confidentiality and Securities Trading policy that has
terms that are no less exacting than those set out in the Model Code of Appendix
10 of the rules governing the listing of securities on the Hong Kong Stock
Exchange.
The Board of Directors confirms that all of the Directors of the Company have
complied with the required policies in the Company's Corporate Disclosure,
Confidentiality and Securities Trading policy throughout the year ended December
31, 2012.
OUTLOOK
The year ended December 31, 2012 has been a tumultuous year for the Company with
full curtailment of production from the end of June 2012 with the position
unchanged at year end, the announcement of a proportional takeover bid by CHALCO
and subsequent termination of the bid, ongoing investigations by the Mongolian
authorities and claims of wrongdoing and involvement in investigations against
Mongolian public figures. In addition, there were significant changes at the
board and senior management level within the organization and the year
culminated in the necessity to reduce the Company's overall workforce by nearly
one third. The subsequent net loss of $103.0 million recorded by the Company in
2012 reflects these conditions.
The curtailment of production necessitated taking actions to suspend uncommitted
capital expenditure and reduce spending in other areas in order to preserve the
Company's financial resources whilst at the same time protecting the Company's
existing assets. Exploration expenditure was reduced to the level required to
protect the Company's rights under existing licenses and moneys were spent in
defending the Company from ongoing investigations.
The outlook for 2013 still has a number of uncertainties that need to be
overcome but the position going forward is much more positive. The Mongolian
coal industry is quite dependent on the Chinese market and this market has been
waiting for the conclusion of the Chinese Lunar New Year to get some direction
as to what economic changes are likely to occur in China. Generally, most
commentators' view is that the coking coal market is improving with demand in
China to increase at levels which will support better market conditions for the
producer. The strength of the potential supply response to this demand is likely
to cap price increases and lead to less volatility in pricing and market
conditions throughout 2013.
In March 2013, the Company recommenced mining activities at the Ovoot Tolgoi
Mine; however, the production levels will reflect both market conditions and the
Company's capability to produce. Production is forecast to be 3.2 million tonnes
in 2013. The capability to begin supplying a washed semi-soft product in the
second half of the year is another important step in improving both the
Company's market position and access to end customers. Once toll washing
commences, it will enable SouthGobi to develop a predominantly two product
strategy of a premium and standard semi-soft coal product from the Ovoot Tolgoi
Mine. The premium product will be washed and the standard product will be
predominantly unwashed product. Although production has recommenced, the Company
continues to minimize uncommitted capital expenditures and exploration
expenditures in order to preserve the Company's financial resources. The
Company's liquidity beyond December 31, 2013 is dependent on the success of the
recommencement of operations and ongoing demand and prices in the coal market.
Longer term, SouthGobi remains well positioned, with a number of key competitive
strengths, including:
-- Strategic location - SouthGobi is the closest major coking coal producer
in the world to China. The Ovoot Tolgoi Mine is approximately 40km from
China, which is approximately 190km closer than Tavan Tolgoi coal
producers in Mongolia and 7,000 to 10,000km closer than Australian and
North American coking coal producers. The Company has an infrastructure
advantage, being approximately 50km from existing railway
infrastructure, which is approximately one tenth the distance to rail of
Tavan Tolgoi coal producers in Mongolia.
-- Premium quality coals - Most of the Company's coal resources have coking
properties, including a mixture of semi-soft coking coals and hard
coking coals. SouthGobi is also completing its investment in
infrastructure to capture more of the value from the products it sells.
-- Favorable cost structure - The long-term cost structure of SouthGobi
provides a strong base for sustainable growth when access to end-user
markets is obtained even though competition from other Chinese and
Mongolian semi-soft coals indicate that capturing margins relative to
other international coals is difficult.
-- Substantial resource base - The Company's aggregate coal resources
(including reserves) include measured and indicated resources of 533
million tonnes and inferred resources of 302 million tonnes.
Objectives
SouthGobi's objectives for 2012 were impacted by the external conditions faced
by the Company. SouthGobi has attempted to mitigate the issues by reducing
capital expenditures, operating costs and exploration to preserve the Company's
financial resources.
The Company's objectives for 2013 are as follows:
-- Resume production at the Ovoot Tolgoi Mine - The Company has reviewed
the overall structure of its workforce and market conditions and has
recommenced mining activities at the Ovoot Tolgoi Mine in March 2013
with the capacity to produce 3.2 million tonnes in 2013. The focus is to
do this in a safe manner that provides a sustainable long-term operating
base.
-- Continue to develop regional infrastructure - The Company's priority is
to complete the construction of the paved highway from Ovoot Tolgoi to
the Shivee Khuren Border Crossing as part of the existing consortium
that was awarded the tender by the end of 2013.
-- Advance the Soumber Deposit - The Company intends to substantially
advance the feasibility, planning and physical preparation for a mine at
Soumber by 2014.
-- Value-adding/upgrading coal - Implement an effective and profitable
utilization of the wet washing facility contracted with Ejin Jinda to
toll-wash coal from the Ovoot Tolgoi Mine and further develop the
Company's marketing plans on product mix and seek to expand the
Company's customer base.
-- Re-establish the Company's reputation - The Company's vision is to be a
respected and profitable Mongolian coal company. This will require re-
establishing good working relationships with all our external
stakeholders.
-- Operations - Continuing to focus on production safety, environmental
protection, operational excellence and community relations.
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 costs which are excluded. Non-cash
adjustments include share-based compensation expense, inventory impairments,
depreciation and depletion of mineral properties.
The Company uses this performance measure to monitor its operating cash costs
internally and believes this measure provides investors and analysts with useful
information about the Company's underlying cash costs of operations. The Company
believes that conventional measures of performance prepared in accordance with
IFRS do not fully illustrate the ability of its mining operations to generate
cash flows. The Company reports cash costs on a sales basis. This performance
measure is commonly utilized in the mining industry.
The cash costs of product sold may differ from cash costs of product produced
depending on the timing of stockpile inventory turnover.
Adjusted Net Income/(Loss):
Adjusted net income/(loss) excludes idled mine costs, share-based compensation
expense, net impairment loss/(recovery) on assets, unrealized foreign exchange
losses/(gains), unrealized loss/(gain) on the fair value change of the embedded
derivatives in the CIC convertible debenture, realized losses/(gains) on the
disposal of FVTPL investments and unrealized losses/(gains) on FVTPL
investments. The Company excludes these items from net income/(loss) to provide
a measure which allows the Company and investors to evaluate the results of the
underlying core operations of the Company and its profitability from operations.
The items excluded from the computation of adjusted net income/(loss), which are
otherwise included in the determination of net income/(loss) prepared in
accordance with IFRS, are items that the Company does not consider to be
meaningful in evaluating the Company's past financial performance or the future
prospects and may hinder a comparison of its period-to-period results.
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Comprehensive Income
(Expressed in thousands of U.S. Dollars,
except for share and per share amounts)
Year ended December 31,
-----------------------------
Notes 2012 2011
------ -------------- --------------
Revenue $ 53,116 $ 179,049
Cost of sales 3 (97,118) (127,343)
--------------------------------------------- -------------- --------------
Gross profit/(loss) (44,002) 51,706
--------------------------------------------- -------------- --------------
Other operating expenses 4 (54,345) (29,189)
Administration expenses 5 (24,637) (28,749)
Evaluation and exploration expenses 6 (8,598) (31,768)
--------------------------------------------- -------------- --------------
Loss from operations (131,582) (38,000)
--------------------------------------------- -------------- --------------
Finance costs 7 (15,385) (12,765)
Finance income 7 39,942 107,732
Share of earnings of joint venture 635 -
--------------------------------------------- -------------- --------------
Income/(loss) before tax (106,390) 56,967
Current income tax expense 8 (354) (7,340)
Deferred income tax recovery 8 3,725 8,118
--------------------------------------------- -------------- --------------
Net income/(loss) attributable to
equity holders of the Company (103,019) 57,745
--------------------------------------------- -------------- --------------
OTHER COMPREHENSIVE INCOME/(LOSS)
Loss on available-for-sale financial
asset, net of tax - (11,202)
Reclassification of gain on available-
for-sale financial asset, net of tax (16,559) -
------------------------------------------------------------ --------------
Net comprehensive income/(loss)
attributable to equity holders of the
Company $ (119,578) $ 46,543
---------------------------------------------------------------------------
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BASIC INCOME/(LOSS) PER SHARE 9 $ (0.57) $ 0.32
DILUTED LOSS PER SHARE 9 $ (0.63) $ (0.19)
Consolidated Statements of Financial Position
(Expressed in thousands of U.S. Dollars)
As at December 31,
--------------------------
Notes 2012 2011
------ ---------- ----------
ASSETS
Current assets
Cash $ 19,674 $ 123,567
Trade and other receivables 10 17,430 80,285
Short term investments 15,000 -
Inventories 53,661 52,443
Prepaid expenses and deposits 37,982 38,308
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Total current assets 143,747 294,603
Non-current assets
Prepaid expenses and deposits 16,778 8,389
Property, plant and equipment 521,473 498,533
Long term investments 24,084 99,238
Deferred income tax assets 8 23,285 19,560
----------------------------------------------------------------------------
Total non-current assets 585,620 625,720
----------------------------------------------------------------------------
Total assets $ 729,367 $ 920,323
----------------------------------------------------------------------------
EQUITY AND LIABILITIES
Current liabilities
Trade and other payables 11 $ 10,216 $ 52,235
Current portion of convertible debenture 12 6,301 6,301
----------------------------------------------------------------------------
Total current liabilities 16,517 58,536
Non-current liabilities
Convertible debenture 12 99,667 139,085
Deferred income tax liabilities 8 - 2,366
Decommissioning liability 4,104 4,156
----------------------------------------------------------------------------
Total non-current liabilities 103,771 145,607
----------------------------------------------------------------------------
Total liabilities 120,288 204,143
Equity
Common shares 1,059,710 1,054,298
Share option reserve 51,303 44,143
Investment revaluation reserve - 16,559
Accumulated deficit 13 (501,934) (398,820)
----------------------------------------------------------------------------
Total equity 609,079 716,180
----------------------------------------------------------------------------
Total equity and liabilities $ 729,367 $ 920,323
----------------------------------------------------------------------------
Net current assets $ 127,230 $ 236,067
Total assets less current liabilities $ 712,850 $ 861,787
SELECT INFORMATION FROM THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Additional information required by the Hong Kong Stock Exchange and not
disclosed elsewhere in this announcement is as follows. All amounts are
expressed in thousands of U.S. Dollars and shares in thousands, unless otherwise
indicated.
1. BASIS OF PREPARATION
1.1 Corporate information and liquidity
The Company curtailed its mining activities at the Ovoot Tolgoi Mine during the
three months ended June 30, 2012 to varying degrees to manage coal inventories
and to maintain efficient working capital levels. As at June 30, 2012, mining
activities had been fully curtailed. The Company's mining activities remained
fully curtailed during the remainder of the year ended December 31, 2012.
The Company had cash and short term investments of $34,674 and working capital
of $127,230 at December 31, 2012. These consolidated financial statements have
been prepared on a going concern basis which assumes that the Company will
continue operating for the foreseeable future and will be able to realize its
assets and discharge its liabilities in the normal course of operations as they
come due. 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. The Company expects to have
sufficient liquidity and capital resources to meet its ongoing obligations and
future contractual commitments for at least twelve months from the end of the
December 31, 2012 reporting period. The Company expects its liquidity to remain
sufficient based on existing capital resources and income from mining
operations. Liquidity beyond the twelve month period is dependent on the success
of the recommencement of operations and ongoing demand and prices in the coal
market. On March 22, 2013, the Company recommenced mining activities at the
Ovoot Tolgoi Mine. The Company continues to minimize uncommitted capital
expenditures and exploration expenditures in order to preserve the Company's
financial resources.
1.2 Statement of compliance
The Company's consolidated financial statements, including comparatives, have
been prepared in accordance with and using accounting policies in full
compliance with the International Financial Reporting Standards ("IFRS") issued
by the International Accounting Standards Board ("IASB") and Interpretations of
the IFRS Interpretations Committee.
1.3 Basis of presentation
The consolidated financial statements have been prepared on a historical cost
basis except for certain financial assets and financial liabilities which are
measured at fair value. The Company's reporting currency and the functional
currency of all of its operations is the U.S. Dollar as this is the principal
currency of the economic environment in which the Company operates.
2. SEGMENTED INFORMATION
The Company's one reportable operating segment is its Mongolian Coal Division.
The Company's Corporate Division does not earn revenues and therefore does not
meet the definition of an operating segment.
The carrying amounts of the Company's assets, liabilities, reported income or
loss and revenues analyzed by operating segment are as follows:
Mongolian Unallocated Consolidated
Coal Division (i) Total
-------------- -------------- --------------
Segment assets
As at December 31, 2012 $ 673,896 $ 55,471 $ 729,367
As at December 31, 2011 696,732 223,591 920,323
Segment liabilities
As at December 31, 2012 $ 11,315 $ 108,973 $ 120,288
As at December 31, 2011 51,256 152,887 204,143
Segment income/(loss)
For the year ended December
31, 2012 $ (90,509) $ (12,510) $ (103,019)
For the year ended December
31, 2011 (14,043) 71,788 57,745
Segment revenues
For the year ended December
31, 2012 $ 53,116 $ - $ 53,116
For the year ended December
31, 2011 179,049 - 179,049
Impairment charge on assets
(ii), (iii)
For the year ended December
31, 2012 $ 47,871 $ 19,184 $ 67,055
For the year ended December
31, 2011 20,893 - 20,893
(i) The unallocated amount contains all amounts associated with the
Corporate Division
(ii) The impairment charge on assets for the year ended December 31, 2012
relates to trade and other receivables, investments, inventories and
property, plant and equipment
(iii) The impairment charge on assets for the year ended December 31, 2011
relates to trade and other receivables, inventories and property,
plant and equipment
3. COST OF SALES
The Company's cost of sales consists of the following amounts:
Year ended December 31,
------------------------------
2012 2011
--------------- -----------
Operating expenses $ 22,277 $ 97,671
Share-based compensation expense 1,205 1,942
Depreciation and depletion 6,482 27,730
Impairment of inventories 14,196 -
----------------------------------------------------------------------------
Cost of sales during mine operations 44,160 127,343
Cost of sales during idled mine period (i) 52,958 -
----------------------------------------------------------------------------
Cost of sales $ 97,118 $ 127,343
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) Cost of sales during idled mine period for the year ended December 31,
2012 includes $33,358 of depreciation expense and other non-cash costs
and $942 of share-based compensation expense. The depreciation expense
relates to the Company's idled plant and equipment.
4. OTHER OPERATING EXPENSES
The Company's other operating expenses consist of the following amounts:
Year ended December 31,
-------------------------
2012 2011
---------- ----------
Public infrastructure $ 1,273 $ 8,069
Sustainability and community relations 894 1,017
Foreign exchange (gain)/loss 2,729 (790)
Provision for doubtful trade and other 18,430 1,892
receivables
Impairment loss on available-for-sale 19,184 -
financial asset
Impairment of inventories - 2,396
Impairment of property, plant and equipment 15,245 16,605
Other (3,410) -
----------------------------------------------------------------------------
Other operating expenses $ 54,345 $ 29,189
----------------------------------------------------------------------------
----------------------------------------------------------------------------
5. ADMINISTRATION EXPENSES
The Company's administration expenses consist of the following amounts:
Year ended December 31,
---------------------------
2012 2011
------------- -------------
Corporate administration $ 5,525 $ 7,136
Legal and professional fees 7,293 4,279
Salaries and benefits 5,556 5,538
Share-based compensation expense 6,048 11,474
Depreciation 215 322
----------------------------------------------------------------------------
Administration expenses $ 24,637 $ 28,749
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6. EVALUATION AND EXPLORATION EXPENSES
The Company's evaluation and exploration expenses consist of the following amounts:
Year ended December 31,
-----------------------------
2012 2011
-------------- --------------
Drilling and trenching $ 3,708 $ 21,842
Other direct expenses 1,428 4,801
Share-based compensation expense 333 994
Overhead and other 3,129 4,131
----------------------------------------------------------------------------
Evaluation and exploration expenses $ 8,598 $ 31,768
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7. FINANCE COSTS AND INCOME
The Company's finance costs consist of the following amounts:
Year ended December 31,
---------------------------
2012 2011
------------- -------------
Interest expense on convertible debenture $ 10,466 $ 9,137
Unrealized loss on FVTPL investments 4,482 3,091
Interest expense on line of credit facility 322 351
Accretion of decommissioning liability 115 186
----------------------------------------------------------------------------
Finance costs $ 15,385 $ 12,765
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company's finance income consists of the following amounts:
Year ended December 31,
---------------------------
2012 2011
------------- -------------
Unrealized gain on embedded derivatives in
convertible debenture $ 39,512 $ 106,489
Interest income 406 1,243
Realized gain on disposal of FVTPL investments 24 -
----------------------------------------------------------------------------
Finance income $ 39,942 $ 107,732
----------------------------------------------------------------------------
----------------------------------------------------------------------------
8. TAXES
8.1 Income tax recognized in profit or loss
The Company and its subsidiaries are subject to income or profits tax in the
jurisdictions in which the Company operates, including Canada, Hong Kong,
Singapore and Mongolia. Income or profits tax was not provided for the Company's
operations in Canada, Hong Kong or Singapore as the Company had no assessable
income or profit arising in or derived from these jurisdictions. The Company's
tax balances reflect income tax assessed on its Mongolian operations. A
reconciliation between the Company's tax recovery and the product of the
Company's income or loss from operations before tax multiplied by the Company's
domestic tax rate is as follows:
Year ended December 31,
---------------------------
2012 2011
------------- -------------
(Income)/loss before tax $ 106,390 $ (56,967)
Statutory tax rate 25.00% 26.50%
Income tax (recovery)/expense based on combined
Canadian federal and provincial statutory rates (26,598) 15,096
Deduct:
Lower effective tax rate in foreign jurisdictions 323 502
Tax effect of tax losses and temporary
differences not recognized 15,564 12,281
Non-taxable (income)/non-deductible expenses 7,340 (28,657)
----------------------------------------------------------------------------
Income tax recovery $ (3,371) $ (778)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
8.2 Income tax recognized in other comprehensive income
Year ended December 31,
-----------------------------
2012 2011
-------------- --------------
Fair value remeasurement of available-for-sale
financial asset $ (2,366) $ (1,600)
----------------------------------------------------------------------------
Deferred tax recovery $ (2,366) $ (1,600)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
8.3 Deferred tax balances
The Company's deferred tax assets/(liabilities) consist of the following
amounts:
As at December 31,
---------------------------
2012 2011
------------- -------------
Tax loss carryforwards $ 8,473 $ -
Property, plant and equipment 5,048 8,647
Other assets 9,764 10,913
Available-for-sale financial assets - (2,366)
----------------------------------------------------------------------------
Total deferred tax balances $ 23,285 $ 17,194
8.4 Unrecognized deductible temporary differences and unused tax losses
The Company's deductible temporary differences and unused tax losses for which
no deferred tax asset is recognized consist of the following amounts:
As at December 31,
---------------------------
2012 2011
------------- -------------
Non-capital losses $ 46,130 $ 119,212
Capital losses - 63,649
Deductible temporary differences 110,945 107,997
----------------------------------------------------------------------------
Total unrecognized amounts $ 157,075 $ 290,858
----------------------------------------------------------------------------
----------------------------------------------------------------------------
8.5 Expiry dates
The expiry dates of the Company's unused tax losses are as follows:
As at December 31, 2012
-------------------------------
U.S. Dollar Expiry
Equivalent dates
---------------- -------------
Non-capital losses
Canada $ 33,715 2032
Mongolia 33,892 2016
Hong Kong 12,302 indefinite
Singapore 113 indefinite
----------------
$ 80,022
----------------
----------------
9. EARNINGS/(LOSS) PER SHARE
The calculation of basic earnings/(loss) and diluted loss per share is based on
the following data:
Year ended December 31,
-----------------------------
2012 2011
-------------- --------------
Net income/(loss) $ (103,019) $ 57,745
Weighted average number of shares 181,859 182,970
---------------------------------------------------------------------------
Basic income/(loss) per share $ (0.57) $ 0.32
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Income/(loss)
Net income/(loss) $ (103,019) $ 57,745
Interest expense on convertible debenture 10,466 9,137
Unrealized gain on embedded derivatives
in convertible debenture (39,512) (106,489)
---------------------------------------------------------------------------
Diluted net loss $ (132,065) $ (39,607)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Number of shares
Weighted average number of shares 181,859 182,970
Convertible debenture 28,406 20,931
---------------------------------------------------------------------------
Diluted weighted average number of shares 210,265 203,901
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Diluted loss per share $ (0.63) $ (0.19)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Potentially dilutive items not included in the calculation of diluted
earnings/(loss) per share for the year ended December 31, 2012 were 7,507 stock
options that were anti-dilutive.
10. TRADE AND OTHER RECEIVABLES
The Company's trade and other receivables consist of the following amounts:
As at December 31,
----------------------------
2012 2011
------------- -------------
Trade receivables $ 15,577 $ 64,051
VAT/HST receivable 86 144
Insurance proceeds receivable 500 12,913
Other receivables 1,267 3,177
----------------------------------------------------------------------------
Total trade and other receivables $ 17,430 $ 80,285
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The aging of the Company's trade and other receivables is as follows:
As at December 31,
---------------------------
2012 2011
------------- -------------
Less than 1 month $ 2,136 $ 50,824
1 to 3 months 95 3,337
3 to 6 months 159 23,699
Over 6 months 15,040 2,425
----------------------------------------------------------------------------
Total trade and other receivables $ 17,430 $ 80,285
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the year ended December 31, 2012, the Company recorded a $18,430 loss
provision on its trade and other receivables (2011: $1,892). The loss provision
relates to provisions for certain uncollectible trade receivables of $17,419 and
a reduction in the expected insurance proceeds of $1,011. The Company
anticipates full recovery of its remaining outstanding trade and other
receivables; therefore, no further loss provisions have been recorded in respect
of the Company's trade and other receivables.
11. TRADE AND OTHER PAYABLES
Trade and other payables of the Company primarily consists of amounts
outstanding for trade purchases relating to coal mining, development and
exploration activities and mining royalties payable. The usual credit period
taken for trade purchases is between 30 to 90 days.
The aging of the Company's trade and other payables is as follows:
As at December 31,
-----------------------------
2012 2011
-------------- --------------
Less than 1 month $ 8,999 $ 52,032
1 to 3 months 176 76
3 to 6 months - 105
Over 6 months 1,041 22
----------------------------------------------------------------------------
Total trade and other payables $ 10,216 $ 52,235
----------------------------------------------------------------------------
----------------------------------------------------------------------------
12. CONVERTIBLE DEBENTURE
On November 19, 2009, the Company issued a convertible debenture to a wholly
owned subsidiary of the China Investment Corporation for $500,000.
The convertible debenture is presented as a liability since it contains no
equity components. The convertible debenture is a hybrid instrument, containing
a debt host component and three embedded derivatives - the investor's conversion
option, the issuer's conversion option and the equity based interest payment
provision (the 1.6% share interest payment) (the "embedded derivatives"). The
debt host component is classified as other-financial-liabilities and is measured
at amortized cost using the effective interest rate method and the embedded
derivatives are classified as FVTPL and all changes in fair value are recorded
in profit or loss. The difference between the debt host component and the
principal amount of the loan outstanding is accreted to profit or loss over the
expected life of the convertible debenture.
The embedded derivatives were valued upon initial measurement and subsequent
periods using a Monte Carlo simulation valuation model. A Monte Carlo simulation
model is a valuation model that relies on random sampling and is often used when
modeling systems with a large number of inputs and where there is significant
uncertainty in the future value of inputs and where the movement of the inputs
can be independent of each other. Some of the key inputs used by the Company in
its Monte Carlo simulation include: the floor and ceiling conversion prices, the
Company's common share price, the risk-free rate of return, expected volatility
of the stock price, forward foreign exchange rate curves (between the Cdn$ and
U.S. Dollar) and spot foreign exchange rates.
12.1 Partial conversion
On March 29, 2010, pursuant to the convertible debenture conversion terms, the
Company exercised its conversion right and completed the conversion of $250,000
of the convertible debenture into 21,471 shares at a conversion price of $11.64
(Cdn$11.88).
12.2 Presentation
Based on the Company's valuations as at December 31, 2012, the fair values of
the embedded derivatives decreased by $39,512 compared to December 31, 2011. The
decrease was recorded as finance income for the year ended December 31, 2012.
For the year ended December 31, 2012, the Company recorded interest expense of
$20,094 (2011: $20,076) related to the convertible debenture of which $9,628 was
capitalized as borrowing costs and the remaining $10,466 was recorded as a
finance cost. The interest expense consists of the interest at the contract rate
and the accretion of the debt host component of the convertible debenture. To
calculate the accretion expense, the Company uses the contract life of 30 years
and an effective interest rate of 22.2%.
The movements of the amounts due under the convertible debenture are as follows:
Year ended December 31,
------------------------------
2012 2011
-------------- --------------
Balance, beginning of year $ 145,386 $ 251,810
Interest expense on convertible debenture 20,094 20,076
Decrease in fair value of embedded
derivatives (39,512) (106,489)
Interest paid (20,000) (20,011)
---------------------------------------------------------------------------
Balance, end of year $ 105,968 $ 145,386
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The convertible debenture balance consists of the following amounts:
As at December 31,
---------------------------
2012 2011
------------- -------------
Debt host $ 90,791 $ 90,696
Fair value of embedded derivatives 8,876 48,389
Interest payable 6,301 6,301
----------------------------------------------------------------------------
Convertible debenture $ 105,968 $ 145,386
----------------------------------------------------------------------------
----------------------------------------------------------------------------
12.3 Convertible debenture share interest payment and application of Mongolian
Foreign Investment Law
On May 17, 2012, the Parliament of Mongolia approved a Foreign Investment Law
that regulates foreign direct investment into a number of key sectors of
strategic importance, which includes mineral resources. If foreign shareholding
exceeds 49% of an asset and the amount of the investment at the time is to
exceed 100 billion Mongolian Tugriks (approximately $71,500), then parliamentary
approval is required. In the case of state owned entities there is no minimum
threshold and all proposed investments from state owned entities require
parliamentary approval. In addition, if a foreign entity wants to acquire one
third or more of the shares in an investment in a strategic sector, then the 100
billion Mongolian Tugrik threshold is not applicable and cabinet approval for
the investment is required regardless of the value.
The terms of the convertible debenture provide for the 1.6% share interest
payment of $4,000 to be paid annually in common shares of the Company. As a
result of the Foreign Investment Law, the Company expected it would require
parliamentary approval for the shares to be issued for the November 19, 2012
share interest payment. Subsequent to December 31, 2012, the Company settled
the 1.6% share interest payment of $4,000 in cash.
13. ACCUMULATED DEFICIT AND DIVIDENDS
At December 31, 2011, the Company has accumulated a deficit of $501,934 (2011:
$398,820). No dividends have been paid or declared by the Company since
inception.
REVIEW OF RESULTS AND RELEASE OF AUDITED RESULTS
The consolidated financial statements for the Company for the year ended
December 31, 2012, were reviewed by the Audit Committee of the Company.
The figures in respect of the Company's consolidated statement of financial
position, consolidated statement of comprehensive income and the related notes
thereto for the year ended December 31, 2012, as set out in the Fourth Quarter
and Full Year 2012 Financial and Operating Results have been agreed by the
Company's auditor, PricewaterhouseCoopers LLP ("PwC"), to the amounts set out in
the Company's audited consolidated financial statements for the year. The work
performed by PwC in this respect did not constitute an assurance engagement in
accordance with Hong Kong Standards on Auditing, Hong Kong Standards on Review
Engagements or Hong Kong Standards on Assurance Engagements issued by the Hong
Kong Institute of Certified Public Accountants and consequently no assurance has
been expressed by PwC on the Fourth Quarter and Full Year 2012 Financial and
Operating Results announcement.
SouthGobi's results for the year ended December 31, 2012, are contained in the
audited Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations ("MD&A"), which will
be available on March 25, 2013 on the SEDAR website at www.sedar.com and
SouthGobi's website at www.southgobi.com. Copies of SouthGobi's 2012 Annual
Report, containing the audited financial statements and MD&A, and the Annual
Information Form ("AIF") will be available at www.southgobi.com under the
corporate page. Shareholders with registered addresses in Hong Kong who have
elected to receive a copy of SouthGobi's Annual Report will receive one. Other
shareholders may request a hard copy of the Annual Report free of charge by
contacting our investor relations department by phone at +852 2156 7022 or +1
604 681 6799 or by email at info@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 58% 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.
Disclosure of a scientific or technical nature in this release and the Company's
MD&A with respect to the Company's Mongolian Coal Division was prepared by, or
under the supervision of RungePincockMinarco ("RPM"). The professionals at RPM
meet the definition of a "qualified person" for the purposes of National
Instrument 43-101 of the Canadian Securities Administrators.
Forward-Looking Statements: This document includes forward-looking statements.
Forward-looking statements include, but are not limited to: the statement that
gross profit will vary by year depending on sales volume, sales price and unit
costs; statements relating to the determination of the royalty rate on coal
sales exported out of Mongolia; statements regarding future variances in
exploration expenses; the statement that the Company anticipates full recovery
of its remaining outstanding trade and other receivables; the statement that the
Company expects to have sufficient liquidity and capital resources to meet its
ongoing obligations and future contractual commitments for at least twelve
months from the end of the December 31, 2012 reporting period; the statement
that the Company expects its liquidity to remain sufficient based on existing
capital resources and income from mining operations; statements regarding the
estimates and assumptions incorporated into the impairment analysis on the
carrying values of certain assets related to the Ovoot Tolgoi Mine; the
statement that completion of the paved highway is expected late 2013; the
statement that the capacity of the paved highway in excess of 20 million tonnes
of coal per year; statements regarding the Company's entitlement to conciliation
or arbitration proceedings under ICSID; statements regarding the outlook for
2013; statements regarding the supply and demand of the coking coal market;
statements regarding the production forecast for the Ovoot Tolgoi mine;
statements regarding the Company's objectives for 2013 (including the production
of the Ovoot Tolgoi Mine, plans to continue to develop regional infrastructure
from Ovoot Tolgoi to the Shivee Khuren Border Crossing, plans regarding the
implementation of the wet washing facility to toll-wash coal from the Ovoot
Tolgoi mine, plans to re-establish the Company's reputation and plans regarding
operations); the assumption that the Company will continue to operate for the
foreseeable future and will be able to realize its assets and discharge its
liabilities in the normal course of operations as they come due; and other
statements that are not historical facts. When used in this document, the words
such as "plan", "estimate", "expect", "intend", "may", and similar expressions
are forward-looking statements. Although SouthGobi believes that the
expectations reflected in these forward-looking statements are reasonable, such
statements involve risks and uncertainties and no assurance can be given that
actual results will be consistent with these forward- looking statements.
Important factors that could cause actual results to differ from these
forward-looking statements are disclosed under the heading "Risk Factors" in
SouthGobi's Management's Discussion and Analysis of Financial Condition and
Results of Operations for the year ended December 31, 2012 which are available
at www.sedar.com.
FOR FURTHER INFORMATION PLEASE CONTACT:
Mongolia:
SouthGobi Sands LLC (Mongolia)
Altanbagana Bayarsaikhan
+976 9910 7589
Altanbagana.Bayarsaikhan@southgobi.com
Hong Kong:
Brunswick Group (Hong Kong)
Joseph Lo
+852 9850 5033
Hong Kong:
Brunswick Group (Hong Kong)
Joanna Donne
+852 9221 3930
southgobi@brunswickgroup.com
www.southgobi.com