SouthGobi Resources Ltd. (
Toronto Stock Exchange (“TSX”):
SGQ, Hong Kong Stock Exchange (“HKEX”): 1878) (the
"Company" or “SouthGobi”) today announces its financial and
operating results for the three and six months ended June 30, 2020.
All figures are in U.S. dollars (“USD”) unless otherwise stated.
Significant Events and
Highlights
The Company’s significant events and highlights
for the three months ended June 30, 2020 and the subsequent period
up to December 23, 2020 are as follows:
- Operating Results
– The Company suspended coal exports to China beginning as of
February 11, 2020 as a result of the closure of Mongolia’s southern
border with China in order to prevent the spread of Coronavirus
Disease 2019 (“COVID-19”). On March 28, 2020, the Mongolian-Chinese
border was re-opened for coal export on a trial basis, with a limit
imposed on the total volume of coal that was permitted to be
exported during this trial period. The Company resumed coal exports
to China gradually thereafter. As a result, the Company’s sales
volume decreased from 0.9 million tonnes for the second quarter of
2019 to 0.5 million tonnes for the second quarter of 2020.Despite
an improvement of the product mix, the average selling price of
coal decreased from $36.8 per tonne in the second quarter of 2019
to $31.7 per tonne in the second quarter of 2020 as a result of a
higher portion of sales made at the mine gate instead of
transporting the coal to the Company’s Inner Mongolia subsidiary
and selling to third party customers within China.
- Financial Results
– The Company recorded a $1.9 million loss from operations in the
second quarter of 2020 compared to a $5.2 million profit from
operations in the second quarter of 2019. The financial results
were impacted by (i) the decreased sales resulting from the export
volume limitation imposed following the reopening of the
Mongolian-Chinese border on a trial basis on March 28, 2020; and
(ii) the provision for commercial arbitration of $4.6 million
recorded in connection with the Company entering into a settlement
agreement with First Concept Industrial Group Limited (“First
Concept”) on June 7, 2020.
- Impact of
the COVID-19 Pandemic – The Company was informed that
effective as of February 11, 2020, the Mongolian State Emergency
Commission closed Mongolia’s southern border with China in order to
prevent the spread of COVID-19. Accordingly, the Company suspended
coal exports to China beginning as of February 11, 2020 as a result
of the border closure.On March 28, 2020, the Mongolian-Chinese
border was re-opened for coal export on a trial basis, with a limit
imposed on the total volume of coal that was permitted to be
exported during this trial period. The Company has experienced a
continuous improvement in the volume of coal exported to China
since March 28, 2020. During the period between April to October
2020, an aggregate of 1.9 million tonnes of coal was exported by
the Company from Mongolia to China, as compared to an aggregate of
2.0 million tonnes of coal during the same period in the 2019
calendar year.The border closure has had an adverse impact on the
Company’s sales and cash flows in the first and second quarter of
2020. In order to mitigate the financial impact of the border
closures and preserve its working capital, the Company temporarily
ceased major mining operations (including coal mining), reduced
production to only coal-blending activities and placed
approximately half of its workforce on furlough from February 2020.
Since August 2, 2020, the Company has resumed its mining
operations, which includes mining, blending and washing of coal. As
at October 31, 2020, SouthGobi Sands LLC (“SGS”), a subsidiary of
the Company, employed 208 employees at the Ovoot Tolgoi Mine site
(December 31, 2019: 383 employees). The Company produced 1.1
million tonnes from August to October 2020, as compared to 1.3
million tonnes from August to October 2019. There were a few
COVID-19 cases reported in Ulaanbaatar (being the capital city of
Mongolia) on November 11, 2020. As a result, the Mongolian local
authorities have taken certain precautionary steps to minimize
further transmission and announced a lockdown of Ulaanbaatar
effective as of November 12, 2020. Although the Company’s mining
operations and the export of coal from Mongolia to China continues
as of the date hereof, there can be no guarantee that the
Company will be able to continue exporting coal to China, or the
border crossings would not be the subject of additional closures as
a result of COVID-19 in the future. The Company will continue
to closely monitor the development of the COVID-19 pandemic and the
impact it has on coal exports to China and will react promptly to
preserve the working capital of the Company.In the event that the
Company’s ability to export coal into the Chinese market becomes
restricted or limited again as a result of any future restrictions
which may be implemented at the Mongolian-Chinese border crossing,
this is expected to have a material adverse effect on the business
and operations of the Company and may negatively affect the price
and volatility of the Common Shares and any investment in such
shares could suffer a significant decline or total loss in
value.
- China Investment
Corporation (“CIC”) Convertible Debenture (“CIC Convertible
Debenture”) – On April 23, 2019, the Company executed a
deferral agreement (the “2019 Deferral Agreement”) with CIC in
relation to a deferral and revised repayment schedule in respect of
(i) $41.8 million of outstanding cash and payment in kind interest
(“PIK Interest”) and associated costs due and payable to CIC on
November 19, 2018 (the “Outstanding Interest Payable”) under the
CIC Convertible Debenture and a deferral agreement executed with
CIC on June 12, 2017 (the “June 2017 Deferral Agreement”); and (ii)
$27.9 million of cash and PIK Interest payments payable to CIC
under the CIC Convertible Debenture from April 23, 2019 to and
including May 19, 2020 (the “Deferral”). Pursuant to Section 501(c)
of the TSX Company Manual, the 2019 Deferral Agreement was approved
at the Company’s adjourned annual and special meeting of
shareholders on June 13, 2019.The key repayment terms of the 2019
Deferral Agreement are: (i) the Company agreed to pay a total of
$14.3 million over eight instalments from November 2019 to June
2020; (ii) the Company agreed to pay the PIK Interest covered by
the Deferral by way of cash payments, rather than the issuance of
Common Shares; and (iii) the Company agreed to pay the remaining
balance of $62.6 million on June 20, 2020. The Company agreed to
pay a deferral fee at a rate of 6.4% per annum in consideration of
the deferred amounts.As a condition to agreeing to the Deferral,
CIC required that the mutual co-operation agreement (the
“Cooperation Agreement”) dated November 19, 2009 between SGS and
CIC, be amended and restated (the “Amended and Restated Cooperation
Agreement”) to clarify the manner in which the service fee (the
“Management Fee”) payable to CIC under the Cooperation Agreement is
calculated, with effect as of January 1, 2017. Specifically, the
Management Fee under the Amended and Restated Cooperation Agreement
is determined based on the net revenues realized by the Company and
all of its subsidiaries derived from sales into China (rather than
the net revenues realized by the Company and its Mongolian
subsidiaries as currently contemplated under the Cooperation
Agreement). As consideration for deferring payment of the
additional Management Fee payable to CIC as a result of the Amended
and Restated Cooperation Agreement, the Company agreed to pay to
CIC a deferral fee at the rate of 2.5% on the outstanding
Management Fee. Pursuant to the Amended and Restated Cooperation
Agreement, the Company agreed to pay CIC the total outstanding
Management Fee and related accrued deferral fee of $4.2 million
over six instalments from June 2019 to November 2019. The Company
executed the Amended and Restated Cooperation Agreement with CIC on
April 23, 2019.Pursuant to their terms, both the 2019 Deferral
Agreement and the Amended and Restated Cooperation Agreement became
effective on June 13, 2019, being the date on which the 2019
Deferral Agreement was approved by shareholders at the Company’s
adjourned annual and special meeting of shareholders.In connection
with the 2019 Deferral Agreement, the Company also announced that
it intends to discuss a potential debt restructuring plan with
respect to amounts owing to CIC which is mutually beneficial to the
Company and CIC; and to form a special committee comprised of
independent directors to ensure that the interests of its minority
shareholders are fairly considered in the negotiation and
review of any such restructuring; however, there can be no
assurance that a favorable outcome will be reached. As of the date
hereof, there has not been any significant progress in relations to
the restructuring plan.On February 19, 2020, the Company and CIC
entered into an agreement (the “2020 February Deferral Agreement”)
pursuant to which CIC agreed to grant the Company a deferral of:
(i) deferred cash interest and deferral fees of $1.3 million and
$2.0 million (collectively, the “2020 February Deferral Amounts”)
which were due and payable to CIC on January 19, 2020 and February
19, 2020, respectively, under the 2019 Deferral Agreement; and (ii)
approximately $0.7 million of the Management Fee which was due and
payable on February 14, 2020 to CIC under the Amended and Restated
Cooperation Agreement. The 2020 February Deferral Agreement became
effective on March 10, 2020, being the date on which the Company
obtained the requisite acceptance of the 2020 February Deferral
Agreement from the TSX as required under applicable TSX rules.The
principal terms of the 2020 February Deferral Agreement are as
follows:
- Payment of the 2020 February
Deferral Amounts will be deferred until June 20, 2020, while the
Management Fee will be deferred until they are repaid by the
Company.
- As consideration for the deferral
of these amounts, the Company agreed to pay CIC: (i) a deferral fee
equal to 6.4% per annum on the 2020 February Deferral Amounts,
commencing on the date on which each such 2020 February Deferral
Amount would otherwise have been due and payable under the 2019
Deferral Agreement; and (ii) a deferral fee equal to 2.5% per annum
on the Management Fee, commencing on the date on which the
Management Fee would otherwise have been due and payable under the
Amended and Restated Cooperation Agreement.
- The Company agreed to provide CIC
with monthly updates regarding its operational and financial
affairs.
- As the Company anticipated prior to
agreeing to the 2020 February Deferral Agreement that a deferral
was likely required in respect of the monthly payments due and
payable in the period between April 2020 and June 2020 under the
2019 Deferral Agreement and Amended and Restated Cooperation
Agreement, the Company and CIC agreed to discuss in good faith a
deferral of these payments on a monthly basis as they become
due.
- The Company agreed to comply with
all of its obligations under the 2019 Deferral Agreement and the
Amended and Restated Cooperation Agreement, as amended by the 2020
February Deferral Agreement.
- The Company and CIC agreed that
nothing in the 2020 February Deferral Agreement prejudices CIC’s
rights to pursue any of its remedies at any time pursuant to the
2019 Deferral Agreement and Amended and Restated Cooperation
Agreement, respectively.On March 10, 2020, the Company agreed with
CIC (the “2020 March Deferral Agreement”) that the $2.0 million of
deferred cash interest and deferral fees which were due and payable
to CIC on March 19, 2020 under the 2019 Deferral Agreement (the
“2020 March Deferral Amount”) will be deferred until June 20, 2020.
The terms of the 2020 March Deferral Agreement are substantially
the same as the terms of the 2020 February Deferral Agreement,
including that the Company agreed to pay CIC a deferral fee equal
to 6.4% per annum on the 2020 March Deferral Amount, commencing on
March 19, 2020. The 2020 March Deferral Agreement became effective
on March 25, 2020, being the date on which the Company obtained the
requisite acceptance of the 2020 March Deferral Agreement from the
TSX as required under applicable TSX rules.On April 10, 2020, the
Company agreed with CIC (the “2020 April Deferral Agreement”) that
the $2.0 million of deferred cash interest and deferral fees which
were due and payable to CIC on April 19, 2020 under the 2019
Deferral Agreement (the “2020 April Deferral Amount”) will be
deferred until June 20, 2020. The terms of the 2020 April Deferral
Agreement are substantially the same as the terms of the 2020
February Deferral Agreement, including that the Company agreed to
pay CIC a deferral fee equal to 6.4% per annum on the 2020 April
Deferral Amount, commencing on April 19, 2020. The 2020 April
Deferral Agreement became effective on April 29, 2020, being the
date on which the Company obtained the requisite acceptance of the
2020 April Deferral Agreement from the TSX as required under
applicable TSX rules.On May 8, 2020, the Company agreed with CIC
(the “2020 May Deferral Agreement”) that the deferred cash interest
and deferral fees of $2.0 million which were due and payable to CIC
on May 19, 2020 under the 2019 Deferral Agreement; and
approximately $0.2 million of Management Fee which were due and
payable on May 15, 2020 to CIC under the Amended and Restated
Cooperation Agreement (collectively, the “2020 May Deferral
Amount”) will be deferred until June 20, 2020. The terms of the
2020 May Deferral Agreement are substantially the same as the terms
of the 2020 February Deferral Agreement, including that the Company
agreed to pay CIC a deferral fee equal to 6.4% per annum on the
deferred cash interest and deferral fees commencing on May 19, 2020
and a deferral fee equal to 2.5% per annum on the deferred
Management Fee commencing on May 15, 2020. The 2020 May Deferral
Agreement became effective on June 8, 2020, being the date on which
the Company obtained the requisite acceptance of the 2020 May
Deferral Agreement from the TSX as required under applicable TSX
rules.On June 19, 2020, the Company agreed with CIC (the “2020 June
Deferral Agreement”) that the deferred cash interest and deferral
fees in the aggregate amount of approximately $74.0 million (the
“2020 June Deferral Amount”) which were due and payable to CIC on
June 19, 2020 under the 2019 Deferral Agreement and the prior
deferral agreements entered into during the period between February
to May 2020 will be deferred until September 14, 2020. The terms of
the 2020 June Deferral Agreement are substantially the same as the
terms of the 2020 February Deferral Agreement, including that the
Company agreed to pay CIC a deferral fee equal to 6.4% per annum on
the 2020 June Deferral Amount commencing on June 19, 2020. The 2020
June Deferral Agreement became effective on July 17, 2020, being
the date on which the Company obtained the requisite acceptance of
the 2020 June Deferral Agreement from the TSX as required under
applicable TSX rules.On November 19, 2020, the Company and CIC
entered into an agreement (the “2020 November Deferral Agreement”)
pursuant to which CIC agreed to grant the Company a deferral of:
(i) deferred cash interest and deferral fees of approximately $75.2
million which were due and payable to CIC on or before September
14, 2020, under the 2020 June Deferral Agreement; (ii) semi-annual
cash interest payments in the aggregate amount of $16.0 million
payable to CIC on November 19, 2020 and May 19, 2021; (iii) $4.0
million worth of PIK Interest shares (“2020 November PIK Interest”)
issuable to CIC on November 19, 2020 under the CIC Convertible
Debenture; and (iv) the Management Fee which payable to CIC on
November 14, 2020, February 14, 2021, May 15, 2021, August 14, 2021
and November 14, 2021 under the Amended and Restated Cooperation
Agreement (collectively, the “2020 November Deferral Amounts”). The
effectiveness of the 2020 November Deferral Agreement and the
respective covenants, agreements and obligations of each party
under the 2020 November Deferral Agreement are subject to the
Company obtaining the requisite approval of the 2020 November
Deferral Agreement from the Company’s shareholders in accordance
with applicable TSX rules. On October 29, 2020, the Company
obtained an order from the British Columbia Securities Commission
(“BCSC”), the Company’s principal securities regulator in Canada,
which partially revoked the CTO (as defined below) to, amongst
other things, permit the Company to execute the 2020 November
Deferral Agreement.The principal terms of the 2020 November
Deferral Agreement are as follows:
- Payment of the 2020 November
Deferral Amounts will be deferred until August 31, 2023.
- CIC agreed to waive its rights
arising from any default or event of default under the CIC
Convertible Debenture as a result of trading in the Common Shares
being halted on the TSX beginning as of June 19, 2020 and suspended
on the HKEX beginning as of August 17, 2020, in each case for a
period of more than five trading days.
- As consideration for the deferral
of the 2020 November Deferral Amounts, the Company agreed to pay
CIC: (i) a deferral fee equal to 6.4% per annum on the 2020
November Deferral Amounts payable under the CIC Convertible
Debenture and the 2020 June Deferral Agreement, commencing on the
date on which each such 2020 November Deferral Amount would
otherwise have been due and payable under the CIC Convertible
Debenture or the 2020 June Deferral Agreement, as applicable; and
(ii) a deferral fee equal to 2.5% per annum on the 2020 November
Deferral Amounts payable under the Amended and Restated Cooperation
Agreement, commencing on the date on which the Management Fee would
otherwise have been due and payable under the Amended and Restated
Cooperation Agreement.
- The 2020 November Deferral
Agreement does not contemplate a fixed repayment schedule for the
2020 November Deferral Amounts and related deferral fees. Instead,
the Company and CIC would agree to assess in good faith the
Company’s financial condition and working capital position on a
monthly basis and determine the amount, if any, of the 2020
November Deferral Amounts and related deferral fees that the
Company is able to repay under the CIC Convertible Debenture, the
2020 June Deferral Agreement or the Amended and Restated
Cooperation Agreement, having regard to the working capital
requirements of the Company’s operations and business at such time
and with the view of ensuring that the Company’s operations and
business would not be materially prejudiced as a result of any
repayment.
- Commencing as of November 19, 2020
and until such time as the November 2020 PIK Interest is fully
repaid, CIC reserves the right to require the Company to pay and
satisfy the amount of the November 2020 PIK Interest, either in
full or in part, by way of issuing and delivering PIK interest
shares in accordance with the CIC Convertible Debenture provided
that, on the date of issuance of such shares, the Common Shares are
listed and trading on at least one stock exchange.
- If at any time before the 2020
November Deferral Amounts and related deferral fees are fully
repaid, the Company proposes to appoint, replace or terminate one
or more of its Chief Executive Officer, its Chief Financial Officer
or any other senior executive(s) in charge of its principal
business function or its principal subsidiary, then the Company
must first consult with, and obtain written consent from CIC prior
to effecting such appointment, replacement or termination.Until
such time as the 2020 November Deferral Agreement is approved by
the Company’s shareholders and the deferral and waiver thereunder
in favour of the Company become effective, the Company remains in
default under the CIC Convertible Debenture and 2020 June Deferral
Agreement and CIC may declare the amounts owing thereunder
immediately due and payable, and may take steps to enforce payment
thereof, which would have a material adverse effect on the business
and operations of the Company and could negatively affect the price
and volatility of the Common Shares and any investment in such
shares could suffer a significant decline or total loss in
value.
- Settlement with First
Concept – On June 7, 2020, SGS entered into a settlement
agreement with First Concept, pursuant to which SGS agreed to pay
to First Concept a settlement sum in the amount of $8.0 million in
full and final settlement of any and all claims which First Concept
may have against SGS in relation to Arbitration Award (as defined
below), the subject matter of the Arbitration Award including any
claims for interests and costs and the fees and expenses of the
Arbitration Award, and any and all enforcement proceedings and
applications in any jurisdictions, and in relation to the deed of
settlement with First Concept (the “Full Settlement Sum”). The Full
Settlement Sum was fully satisfied by the Company in June 2020 and
the outstanding payable to First Concept as of the date hereof is
$nil.
- Cease Trade Order and Halt
Trading on TSX – On June 19, 2020, the BCSC issued a
general “failure to file” cease trade order (“CTO”), to prohibit
the trading by any person of any securities of the Company in
Canada. Trading in the Common Shares on the TSX was halted as a
result of the CTO. The CTO was issued as a result of the Company’s
failure to file: (i) its annual consolidated financial statements
for the year ended December 31, 2019 and the accompanying
Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”); (ii) its Annual Information
Form for the year ended December 31, 2019; and (iii) its interim
consolidated financial statements for the three-month period ended
March 31, 2020 and accompanying MD&A, in each case prior to the
filing deadline of June 15, 2020.The CTO will remain in effect
until such time as the Company fully remedies its filing defaults
under applicable Canadian securities laws, including filing of its
interim financial statements for the three and nine-month periods
ended September 30, 2020 and the accompanying MD&A, and makes a
successful application to the BCSC to have the CTO revoked. While
the Company is taking such actions as it considers necessary in
order to remedy its filing defaults as soon as possible, there can
be no assurance that the Company will have the CTO lifted in a
timely manner or at all. For so long as the CTO remains in effect,
it will have a significant adverse impact on the liquidity of the
Common Shares and shareholders may suffer a significant decline or
total loss in value of its investment in the Common Shares as a
result.
- Suspension of Trading on
HKEX – At the request of the Company, trading in the
shares of the Company on the HKEX was suspended with effect as of
August 17, 2020 pending the publication of the audited annual
results of the Company for the year ended December 31, 2019.On
September 2, 2020, the Company received a letter from the HKEX
setting out the following resumption guidance for the resumption of
trading in the Common Shares on the HKEX (the “Resumption
Guidance”): (i) publish all outstanding financial results and
address any audit modifications; (ii) inform the market of all
material information for the Company’s shareholders and investors
to appraise its position; and (iii) announce quarterly updates on
the Company’s developments under Rules 13.24A of the HKEX’s Listing
Rules, including, amongst other relevant matters, its business
operations, its resumption plan and the progress of
implementation.On September 30, 2020, the Company was notified by
the HKEX of the following additional condition which must be
satisfied in order for trading in the Common Shares on the HKEX to
resume: resolve issues arising from the CTO and/or the TSX
Delisting Review (as defined below), or take steps to the
satisfaction of the HKEX that the Company will be eligible for a
primary listing on the HKEX.On December 8, 2020, the Company was
notified by the HKEX of the following additional condition which
must be satisfied in order for trading in the Common Shares on the
HKEX to resume: demonstrate compliance with Rule 13.24 of the HKEX
listing rules which requires that an issuer carries out a business
with a sufficient level of operations and assets of sufficient
value to support its operations to warrant the continued listing of
the issuer's securities.If the Company fails to remedy the issues
causing its trading suspension, fully comply with the Listing Rules
to the HKEX’s satisfaction and resume trading in its shares on the
HKEX by February 16, 2022, the HKEX’s Listing Division will
recommend to the HKEX’s Listing Committee that it proceed with the
cancellation of the Company’s HKEX listing. Under Rules 6.01 and
6.10 of the Listing Rules, the HKEX also has the right to impose a
shorter specific remedial period, where appropriate.
- TSX Delisting
Review – On September 11, 2020, the TSX notified the
Company that it is reviewing the eligibility for continued listing
of the Common Shares on the TSX pursuant to the TSX’s Remedial
Review Process (“TSX Delisting Review”). On December 16, 2020, the
TSX accepted the Company’s request for a 60 day extension of the
TSX Delisting Review process and the Company has been granted until
February 16, 2021 to remedy the following delisting criteria, as
well as any other delisting criteria that become applicable during
the Remedial Review Process: (i) financial condition and/or
operating results; (ii) adequate working capital and appropriate
capital structure; and (iii) disclosure issues (collectively, the
“Delisting Criteria”).The TSX Continued Listing Committee has
scheduled a meeting to be held on February 11, 2021 to consider
whether or not to suspend trading in and delist the Common Shares
on the TSX. If the Company fails to demonstrate to the TSX that it
has remedied the Delisting Criteria on or before February 16, 2021,
the Common Shares will be delisted from the TSX 30 days from such
date.
- Changes in
DirectorsMr. Xiaoxiao Li: Mr. Li resigned
as a non-executive director on November 13, 2020.Ms. Ka Lee
Ku: Ms. Ku was appointed as a non-executive director on
December 9, 2020.
- Going Concern –
Several adverse conditions and material uncertainties relating to
the Company cast significant doubt upon the going concern
assumption which includes the deficiencies in assets and working
capital.See section “Liquidity and Capital Resources” of this press
release under the heading entitled “Liquidity and Capital
Resources” for details.
OVERVIEW OF OPERATIONAL DATA AND FINANCIAL
RESULTS
Summary of Operational Data
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Three months
ended |
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Six months
ended |
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June 30, |
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June 30, |
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2020 |
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2019 |
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2020 |
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2019 |
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Sales Volumes, Prices and Costs |
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Premium semi-soft coking coal |
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|
|
|
|
|
|
Coal sales (millions of tonnes) |
|
0.21 |
|
|
|
0.12 |
|
|
|
0.28 |
|
|
|
0.23 |
|
|
Average realized selling price (per tonne) |
$ |
28.69 |
|
|
$ |
32.72 |
|
|
$ |
28.63 |
|
|
$ |
39.72 |
|
|
Standard semi-soft coking coal/ premium thermal coal |
|
|
|
|
|
|
|
|
Coal sales (millions of tonnes) |
|
0.26 |
|
|
|
0.59 |
|
|
|
0.39 |
|
|
|
1.44 |
|
|
Average realized selling price (per tonne) |
$ |
33.12 |
|
|
$ |
35.67 |
|
|
$ |
32.98 |
|
|
$ |
34.29 |
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|
Standard thermal coal |
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|
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|
|
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Coal sales (millions of tonnes) |
|
- |
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|
|
- |
|
|
|
- |
|
|
|
0.09 |
|
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Average realized selling price (per tonne) |
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
33.92 |
|
|
Washed coal |
|
|
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|
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|
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Coal sales (millions of tonnes) |
|
0.02 |
|
|
|
0.17 |
|
|
|
0.02 |
|
|
|
0.18 |
|
|
Average realized selling price (per tonne) |
$ |
43.26 |
|
|
$ |
44.20 |
|
|
$ |
43.26 |
|
|
$ |
44.20 |
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Total |
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|
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|
|
|
Coal sales (millions of tonnes) |
|
0.49 |
|
|
|
0.88 |
|
|
|
0.69 |
|
|
|
1.94 |
|
|
Average realized selling price (per tonne) |
$ |
31.66 |
|
|
$ |
36.80 |
|
|
$ |
31.52 |
|
|
$ |
35.77 |
|
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Raw coal production (millions of tonnes) |
|
- |
|
|
|
1.33 |
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|
|
0.01 |
|
|
|
2.36 |
|
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Cost of sales of product sold (per tonne) |
$ |
21.16 |
|
|
$ |
25.04 |
|
|
$ |
23.82 |
|
|
$ |
23.42 |
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|
Direct cash costs of product sold (per tonne) (i) |
$ |
9.90 |
|
|
$ |
17.18 |
|
|
$ |
10.42 |
|
|
$ |
13.71 |
|
|
Mine administration cash costs of product sold (per tonne) (i) |
$ |
1.70 |
|
|
$ |
1.39 |
|
|
$ |
1.93 |
|
|
$ |
1.40 |
|
|
Total cash costs of product sold (per tonne) (i) |
$ |
11.60 |
|
|
$ |
18.57 |
|
|
$ |
12.35 |
|
|
$ |
15.11 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Other Operational Data |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Production waste material moved (millions of bank cubic |
|
- |
|
|
|
5.34 |
|
|
|
0.57 |
|
|
|
10.25 |
|
|
meters) |
|
|
|
|
|
|
|
|
Strip ratio (bank cubic meters of waste material per tonne of |
|
- |
|
|
|
4.01 |
|
|
|
85.08 |
|
|
|
4.34 |
|
|
coal produced) |
|
|
|
|
|
|
|
|
Lost time injury frequency rate (ii) |
|
0.04 |
|
|
|
0.06 |
|
|
|
0.06 |
|
|
|
0.03 |
|
| |
|
|
|
|
|
(i) |
|
A Non-International Financial Reporting Standards (“IFRS”)
financial measure, which does not have a standardized meaning
according to IFRS. See “Non-IFRS Financial Measures” section. Cash
costs of product sold exclude idled mine asset cash costs. |
|
|
(ii) |
|
Per 200,000 man hours and calculated based on a rolling 12 month
average. |
Overview of Operational
Data
For the three months ended June 30, 2020
As at June 30, 2020, the Company had a lost time
injury frequency rate of 0.04 per 200,000 man hours based on a
rolling 12-month average.
Despite an improvement of the product mix, the
average realized selling price decreased from $36.8 per tonne in
the second quarter of 2019 to $31.7 per tonne in the second quarter
of 2020 as a result of a higher portion of sales made at the mine
gate instead of transporting the coal to the Company’s Inner
Mongolia subsidiary and selling to third party customers within
China.
The product mix for the second quarter of 2020
consisted of approximately 43% of premium semi-soft coking coal,
53% of semi-soft coking coal/premium thermal coal and 4% of washed
coal compared to approximately 14% of premium semi-soft coking
coal, 67% of semi-soft coking coal/premium thermal coal and 19% of
washed coal in the second quarter of 2019.
The Company suspended coal exports to China
beginning as of February 11, 2020 as a result of the closure of
Mongolia’s southern border with China in order to prevent the
spread of COVID-19. On March 28, 2020, the Mongolian-Chinese border
was re-opened for coal export on a trial basis, with a limit
imposed on the total volume of coal that was permitted to be
exported during this trial period. The Company resumed coal exports
to China gradually thereafter. As a result, the Company’s sales
volume decreased from 0.9 million tonnes for the second quarter of
2019 to 0.5 million tonnes for the second quarter of 2020.
The Company’s production in the second quarter
of 2020 was much lower than the second quarter of 2019 as a result
of the temporary cessation of the Company’s major mining operations
(including coal mining) which took effect in February 2020 for the
purpose of mitigating the financial impact of the border closures
and preserving the Company’s working capital.
The Company’s unit cost of sales of product sold
decreased to $21.2 per tonne in the second quarter of 2020 from
$25.0 per tonne in the second quarter of 2019. The decrease was
mainly driven by a higher portion of sales made at the mine gate
instead of transporting the coal to the Company’s Inner Mongolia
subsidiary and selling to third party customers within China during
the quarter.
For the six months ended June 30, 2020
The Company sold 0.7 million tonnes for the
first six months of 2020 as compared to 1.9 million tonnes for the
first six months of 2019 due to suspension of coal exports to China
beginning as of February 11, 2020 as a result of the of the closure
of Mongolia’s southern border with China in order to prevent the
spread of COVID-19 and the subsequent export volume limitation
imposed following the reopening of the Mongolian-Chinese border on
a trial basis on March 28, 2020. The average selling price
decreased from $35.8 per tonne for the first six months of 2019 to
$31.5 per tonne for the first six months of 2020. The decrease was
mainly driven by a higher portion of sales made at the mine gate
instead of transporting the coal to the Company’s Inner Mongolia
subsidiary and selling to third party customers within China during
the first six months of the 2020.
The Company’s production in the first six months
of 2020 was much lower than the first six months of 2019 as a
result of the temporary cessation of the Company’s major mining
operations (including coal mining) which took effect in February
2020 for the purpose of mitigating the financial impact of the
border closures and preserving the Company’s working capital.
The Company’s unit cost of sales of product sold
for the first six months of 2020 was $23.8 per tonne, which is
similar to the first six months of 2019.
Summary of Financial
Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Three months
ended |
|
Six months
ended |
| |
|
|
|
June 30, |
|
June 30, |
|
$ in thousands, except per share information |
|
2020 |
|
|
|
2019 |
|
|
|
2020 |
|
|
|
2019 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Revenue (i) |
$ |
14,975 |
|
|
$ |
32,479 |
|
|
$ |
21,112 |
|
|
$ |
69,290 |
|
|
Cost of sales (i) |
|
(10,366 |
) |
|
|
(22,031 |
) |
|
|
(16,437 |
) |
|
|
(45,436 |
) |
|
Gross profit excluding idled mine asset costs (ii) |
|
6,286 |
|
|
|
11,318 |
|
|
|
7,748 |
|
|
|
25,675 |
|
|
Gross profit |
|
4,609 |
|
|
|
10,448 |
|
|
|
4,675 |
|
|
|
23,854 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses |
|
(5,150 |
) |
|
|
(2,333 |
) |
|
|
(4,680 |
) |
|
|
(2,747 |
) |
|
Administration expenses |
|
(1,291 |
) |
|
|
(2,878 |
) |
|
|
(3,062 |
) |
|
|
(5,987 |
) |
|
Evaluation and exploration expenses |
|
(52 |
) |
|
|
(23 |
) |
|
|
(108 |
) |
|
|
(48 |
) |
|
Profit/(loss) from operations |
|
(1,884 |
) |
|
|
5,214 |
|
|
|
(3,175 |
) |
|
|
15,072 |
|
| |
|
|
|
|
|
|
- |
|
|
|
|
|
|
Finance costs |
|
(7,258 |
) |
|
|
(7,001 |
) |
|
|
(14,365 |
) |
|
|
(13,740 |
) |
|
Finance income |
|
2 |
|
|
|
4,305 |
|
|
|
17 |
|
|
|
4,322 |
|
|
Share of earnings of a joint venture |
|
268 |
|
|
|
375 |
|
|
|
222 |
|
|
|
827 |
|
|
Income tax expense |
|
(900 |
) |
|
|
(801 |
) |
|
|
(1,632 |
) |
|
|
(2,240 |
) |
| |
|
|
|
|
|
|
- |
|
|
|
|
|
|
Net profit/(loss) attributable to equity holders of the
Company |
|
(9,772 |
) |
|
|
2,092 |
|
|
|
(18,933 |
) |
|
|
4,241 |
|
|
Basic and diluted earnings/(loss) per share |
$ |
(0.04 |
) |
|
$ |
0.01 |
|
|
$ |
(0.07 |
) |
|
$ |
0.02 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
(i) |
|
Revenue and cost of sales relate to the Company’s Ovoot Tolgoi Mine
within the Coal Division operating segment. Refer to note 3 of the
condensed consolidated interim financial statements for further
analysis regarding the Company’s reportable operating segments.
Royalties have been reclassified from revenue to cost of
sales. |
|
|
(ii) |
|
A non-IFRS financial measure, idled mine asset costs represents the
depreciation expense relates to the Company’s idled plant and
equipment. |
Overview of Financial Results
For the three months ended June 30, 2020
The Company recorded a $1.9 million loss from
operations in the second quarter of 2020 compared to a $5.2 million
profit from operations in the second quarter of 2019. The financial
results were impacted by (i) the decreased sales resulting from the
export volume limitation imposed following the reopening of the
Mongolian-Chinese border on a trial basis on March 28, 2020; and
(ii) the provision for commercial arbitration of $4.6 million
recorded in connection with the Company entering into a settlement
agreement with First Concept on June 7, 2020.
Revenue was $15.0 million in the second quarter
of 2020 compared to $32.5 million in the second quarter of 2019.
The Company’s effective royalty rate for the second quarter of
2020, based on the Company’s average realized selling price of
$31.7 per tonne, was 11.1% or $3.5 per tonne, compared to 7.2% or
$2.6 per tonne in the second quarter of 2019 (based on the average
realized selling price of $36.8 per tonne in the second quarter of
2019). The increase in effective royalty rate was mainly due to the
new royalty regime introduced by the Government of Mongolia in the
third quarter of 2019.
Royalty regime in Mongolia
The royalty regime in Mongolia is evolving and
has been subject to change since 2012.
On February 1, 2016, the Government of Mongolia
issued a resolution in connection with the royalty regime. From
February 1, 2016 onwards, royalties are to be calculated based on
the actual contract price including transportation costs to the
Mongolia border. If such transportation costs have not been
included in the contract, the relevant transportation costs,
customs documentation fees, insurance and loading costs should be
estimated for the calculation of royalties. In the event that the
calculated sales price as described above differs from the contract
sales price of other entities in Mongolia (same quality of coal and
same border crossing) by more than 10%, the calculated sales price
will be deemed to be “non-market” under Mongolian tax law and the
royalty will then be calculated based on a reference price as
determined by the Government of Mongolia.
On September 4, 2019, the Government of Mongolia
issued a further resolution in connection with the royalty regime.
From September 1, 2019 onwards, in the event that the contract
sales price is less than the reference price as determined by the
Government of Mongolia by more than 30%, then the royalty payable
will be calculated based on the Mongolian government’s reference
price instead of the contract sales price. See the section entitled
“Risk Factors - Company’s Projects in Mongolia” in the Company’s
MD&A for the year ended December 31, 2019, a copy of which is
available under the Company’s profile on SEDAR at
www.sedar.com.
Cost of sales was $10.4 million in the second
quarter of 2020 compared to $22.0 million in the second quarter of
2019. The decrease in cost of sales was mainly due to the decreased
sales during the quarter. Cost of sales consists of operating
expenses, share-based compensation expense, equipment depreciation,
depletion of mineral properties, royalties, coal stockpile
inventory impairment and idled mine asset costs. Operating expenses
in cost of sales reflect the total cash costs of product sold (a
Non-IFRS financial measure, see section “Non-IFRS financial
measure” for further analysis) during the quarter.
| |
|
|
|
Three months endedJune 30, |
|
$ in thousands |
|
|
|
2020 |
|
|
|
2019 |
|
| |
|
|
|
|
|
|
|
Operating expenses |
|
|
$ |
5,684 |
|
|
$ |
16,341 |
|
|
Share-based compensation expense |
|
|
|
17 |
|
|
|
3 |
|
|
Depreciation and depletion |
|
|
|
1,288 |
|
|
|
2,479 |
|
|
Royalties |
|
|
|
1,700 |
|
|
|
2,338 |
|
|
Cost of sales from mine operations |
|
|
|
8,689 |
|
|
|
21,161 |
|
|
Cost of sales related to idled mine assets |
|
|
|
1,677 |
|
|
|
870 |
|
|
Cost of sales |
|
|
$ |
10,366 |
|
|
$ |
22,031 |
|
| |
|
|
|
|
|
|
Operating expenses in cost of sales were $5.7
million in the second quarter of 2020 compared to $16.3 million in
the second quarter of 2019. The overall decrease in operating
expenses was primarily due to the decreased sales volume from 0.9
million tonnes in the second quarter of 2019 to 0.5 million tonnes
in the second quarter of 2020.
Cost of sales related to idled mine assets in
the second quarter of 2020 included $1.7 million related to
depreciation expenses for idled equipment (second quarter of 2019:
$0.9 million).
Other operating expenses was $5.2 million in the
second quarter of 2020 (second quarter of 2019: $2.3 million). The
increase was mainly due to the provision for commercial arbitration
of $4.6 million recorded in connection with the Company entering
into a settlement agreement with First Concept on June 7, 2020.
| |
|
|
|
Three months endedJune 30, |
|
$ in thousands |
|
|
|
2020 |
|
|
|
2019 |
|
| |
|
|
|
|
|
|
|
Provision for commercial arbitration |
|
|
$ |
(4,553 |
) |
|
$ |
(92 |
) |
|
CIC management fee |
|
|
|
(413 |
) |
|
|
(1,422 |
) |
|
Provision for doubtful trade and other receivables |
|
|
|
(144 |
) |
|
|
(46 |
) |
|
Foreign exchange loss |
|
|
|
(20 |
) |
|
|
(528 |
) |
|
Gain/(loss) on disposal of property, plant and equipment |
|
|
|
(20 |
) |
|
|
29 |
|
|
Provision for prepaid expenses and deposits |
|
|
|
- |
|
|
|
(260 |
) |
|
Loss on disposal of properties for resale |
|
|
|
- |
|
|
|
(14 |
) |
|
Other operating expenses |
|
|
$ |
(5,150 |
) |
|
$ |
(2,333 |
) |
Administration expenses were $1.3 million in the
second quarter of 2020 as compared to $2.9 million in the second
quarter of 2019, as follows:
| |
|
|
|
Three months endedJune 30, |
|
$ in thousands |
|
|
|
2020 |
|
|
|
2019 |
|
| |
|
|
|
|
|
|
|
Corporate administration |
|
|
$ |
143 |
|
|
$ |
677 |
|
|
Professional fees |
|
|
|
162 |
|
|
|
856 |
|
|
Salaries and benefits |
|
|
|
757 |
|
|
|
1,162 |
|
|
Share-based compensation expense |
|
|
|
57 |
|
|
|
11 |
|
|
Depreciation |
|
|
|
172 |
|
|
|
172 |
|
|
Administration expenses |
|
|
$ |
1,291 |
|
|
$ |
2,878 |
|
Administration expenses were lower for the
second quarter of 2020 compared to the second quarter of 2019
primarily due to decrease in professional fees incurred during the
quarter.
The Company continued to minimize evaluation and
exploration expenditures in the second quarter of 2020 in order to
preserve the Company’s financial resources. Evaluation and
exploration activities and expenditures in the second quarter of
2020 were limited to ensuring that the Company met the Mongolian
Minerals Law requirements in respect of its mining licenses.
Finance costs were $7.3 million and $7.0 million
in the second quarter of 2020 and 2019 respectively, which
primarily consisted of interest expense on the $250.0 million CIC
Convertible Debenture.
For the six months ended June 30, 2020
The Company recorded a $3.2 million loss from
operations in the first six months of 2020 compared to a $15.1
million profit from operations in the first six months of 2019. The
financial results were impacted by (i) the decreased sales
resulting from the suspension of coal exports to China beginning as
of February 11, 2020 as a result of the of the closure of
Mongolia’s southern border with China in order to prevent the
spread of COVID-19 and the subsequent export volume limitation
imposed following the reopening of the Mongolian-Chinese border on
a trial basis on March 28, 2020.; and (ii) the provision for
commercial arbitration of $4.6 million recorded in connection with
the Company entering into a settlement agreement with First Concept
on June 7, 2020.
Revenue was 21.1 million in the first six months
of 2020 compared to $69.3 million in the first six months of 2019.
The Company’s effective royalty rate for the first six months of
2020, based on the Company’s average realized selling price of
$31.5 per tonne, was 13.7% or $4.3 per tonne, compared to 6.6% or
$2.4 per tonne in the first six months of 2019 (based on the
average realized selling price of $35.8 per tonne in the first six
months of 2019). The increase in effective royalty rate was mainly
due to the new royalty regime introduced by the Government of
Mongolia in the third quarter of 2019.
Cost of sales was $16.4 million in the first six
months of 2020 compared to $45.4 million in the first six months of
2019 as follows:
| |
|
|
|
Six months endedJune 30, |
|
$ in thousands |
|
|
|
2020 |
|
|
|
2019 |
|
| |
|
|
|
|
|
|
|
Operating expenses |
|
|
$ |
8,522 |
|
|
$ |
29,309 |
|
|
Share-based compensation expense |
|
|
|
19 |
|
|
|
5 |
|
|
Depreciation and depletion |
|
|
|
1,866 |
|
|
|
6,258 |
|
|
Royalties |
|
|
|
2,957 |
|
|
|
4,577 |
|
|
Impairment of coal stockpile inventories |
|
|
|
- |
|
|
|
3,466 |
|
|
Cost of sales from mine operations |
|
|
|
13,364 |
|
|
|
43,615 |
|
|
Cost of sales related to idled mine assets |
|
|
|
3,073 |
|
|
|
1,821 |
|
|
Cost of sales |
|
|
$ |
16,437 |
|
|
$ |
45,436 |
|
Operating expenses in cost of sales were $8.5
million in the first six months of 2020 compared to $29.3 million
in the first six months of 2019. The overall decrease in operating
expenses was primarily due to the decreased sales volume from 1.9
million tonnes in the first six months of 2019 to 0.7 million
tonnes in the first six months of 2020.
Cost of sales related to idled mine assets in
the first six months of 2020 included $3.1 million related to
depreciation expenses for idled equipment (first six months of
2019: $1.8 million).
Other operating expenses was $4.7 million in the
first six months of 2020 (first six months of 2019: $2.7 million).
The increase was mainly due to the provision for commercial
arbitration of $4.6 million upon the entering of settlement
agreement with First Concept.
| |
|
|
|
Six months ended June 30, |
|
$ in thousands |
|
|
|
2020 |
|
|
|
2019 |
|
| |
|
|
|
|
|
|
|
Provision for commercial arbitration |
|
|
$ |
(4,634 |
) |
|
$ |
(226 |
) |
|
CIC management fee |
|
|
|
(535 |
) |
|
|
(2,180 |
) |
|
Provision for doubtful trade and other receivables |
|
|
|
(282 |
) |
|
|
(97 |
) |
|
Foreign exchange gain |
|
|
|
752 |
|
|
|
1 |
|
|
Gain on disposal of property, plant and equipment |
|
|
|
19 |
|
|
|
29 |
|
|
Provision for prepaid expenses and deposits |
|
|
|
- |
|
|
|
(260 |
) |
|
Loss on disposal of properties for resale |
|
|
|
- |
|
|
|
(14 |
) |
|
Other operating expenses |
|
|
$ |
(4,680 |
) |
|
$ |
(2,747 |
) |
Administration expenses were $3.1 million in the
first six months of 2020 compared to $6.0 million in the first six
months of 2019 as follows:
| |
|
|
|
Six months ended June 30, |
|
$ in thousands |
|
|
|
2020 |
|
|
|
2019 |
|
| |
|
|
|
|
|
|
|
Corporate administration |
|
|
$ |
448 |
|
|
$ |
1,098 |
|
|
Professional fees |
|
|
|
549 |
|
|
|
2,303 |
|
|
Salaries and benefits |
|
|
|
1,667 |
|
|
|
2,231 |
|
|
Share-based compensation expense |
|
|
|
69 |
|
|
|
23 |
|
|
Depreciation |
|
|
|
329 |
|
|
|
332 |
|
|
Administration expenses |
|
|
$ |
3,062 |
|
|
$ |
5,987 |
|
| |
|
|
|
|
|
|
Administration expenses were lower for the first
six months of 2020 compared to the first six months of 2019
primarily due to decrease in professional fees incurred.
The Company continued to minimize evaluation and
exploration expenditures in the first six months of 2020 in order
to preserve the Company’s financial resources. Evaluation and
exploration activities and expenditures in the first six months of
2020 were limited to ensuring that the Company met the Mongolian
Minerals Law requirements in respect of its mining licenses.
Finance costs were $14.4 million and $13.7
million in the first six months of 2020 and 2019 respectively,
which primarily consisted of interest expense on the $250.0 million
CIC Convertible Debenture.
Summary of Quarterly Operational
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
2020 |
|
|
|
2019 |
|
|
|
2018 |
|
|
Quarter Ended |
30-Jun |
31-Mar |
|
31-Dec |
30-Sep |
30-Jun |
31-Mar |
|
31-Dec |
30-Sep |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Volumes, Prices and Costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium semi-soft coking coal |
|
|
|
|
|
|
|
|
|
|
|
Coal sales (millions of tonnes) |
|
0.21 |
|
|
0.07 |
|
|
|
0.39 |
|
|
0.05 |
|
|
0.12 |
|
|
0.11 |
|
|
|
0.24 |
|
|
0.25 |
|
|
Average realized selling price (per tonne) |
$ |
28.69 |
|
$ |
28.46 |
|
|
$ |
29.18 |
|
$ |
31.49 |
|
$ |
32.72 |
|
$ |
47.34 |
|
|
$ |
47.37 |
|
$ |
48.15 |
|
|
Standard semi-soft coking coal/ premium thermal coal |
|
|
|
|
|
|
|
|
|
|
|
Coal sales (millions of tonnes) |
|
0.26 |
|
|
0.13 |
|
|
|
0.40 |
|
|
0.51 |
|
|
0.59 |
|
|
0.85 |
|
|
|
0.40 |
|
|
0.26 |
|
|
Average realized selling price (per tonne) |
$ |
33.12 |
|
$ |
32.71 |
|
|
$ |
31.88 |
|
$ |
31.67 |
|
$ |
35.67 |
|
$ |
33.34 |
|
|
$ |
32.60 |
|
$ |
34.40 |
|
|
Standard thermal coal |
|
|
|
|
|
|
|
|
|
|
|
Coal sales (millions of tonnes) |
|
- |
|
|
- |
|
|
|
- |
|
|
- |
|
|
- |
|
|
0.09 |
|
|
|
0.12 |
|
|
0.22 |
|
|
Average realized selling price (per tonne) |
$ |
- |
|
$ |
- |
|
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
34.88 |
|
|
$ |
24.26 |
|
$ |
23.49 |
|
|
Washed coal |
|
|
|
|
|
|
|
|
|
|
|
Coal sales (millions of tonnes) |
|
0.02 |
|
|
- |
|
|
|
0.20 |
|
|
0.25 |
|
|
0.17 |
|
|
0.01 |
|
|
|
0.15 |
|
|
- |
|
|
Average realized selling price (per tonne) |
$ |
43.26 |
|
$ |
- |
|
|
$ |
42.95 |
|
$ |
42.37 |
|
$ |
44.20 |
|
$ |
45.07 |
|
|
$ |
44.02 |
|
$ |
- |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
Coal sales (millions of tonnes) |
|
0.49 |
|
|
0.20 |
|
|
|
0.99 |
|
|
0.81 |
|
|
0.88 |
|
|
1.06 |
|
|
|
0.91 |
|
|
0.73 |
|
|
Average realized selling price (per tonne) |
$ |
31.66 |
|
$ |
31.18 |
|
|
$ |
33.04 |
|
$ |
34.98 |
|
$ |
36.80 |
|
$ |
34.91 |
|
|
$ |
37.32 |
|
$ |
35.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw coal production (millions of tonnes) |
|
- |
|
|
0.01 |
|
|
|
1.48 |
|
|
1.21 |
|
|
1.33 |
|
|
1.03 |
|
|
|
1.87 |
|
|
1.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales of product sold (per tonne) |
$ |
21.16 |
|
$ |
30.36 |
|
|
$ |
23.68 |
|
$ |
19.16 |
|
$ |
25.04 |
|
$ |
22.08 |
|
|
$ |
30.80 |
|
$ |
23.44 |
|
|
Direct cash costs of product sold (per tonne) (i) |
$ |
9.90 |
|
$ |
11.69 |
|
|
$ |
13.61 |
|
$ |
18.03 |
|
$ |
17.18 |
|
$ |
10.82 |
|
|
$ |
14.41 |
|
$ |
11.90 |
|
|
Mine administration cash costs of product sold (per tonne) (i) |
$ |
1.70 |
|
$ |
2.50 |
|
|
$ |
1.29 |
|
$ |
1.09 |
|
$ |
1.39 |
|
$ |
1.41 |
|
|
$ |
2.19 |
|
$ |
1.24 |
|
|
Total cash costs of product sold (per tonne) (i) |
$ |
11.60 |
|
$ |
14.19 |
|
|
$ |
14.90 |
|
$ |
19.12 |
|
$ |
18.57 |
|
$ |
12.23 |
|
|
$ |
16.60 |
|
$ |
13.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operational Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production waste material moved (millions of bank cubic
meters) |
|
- |
|
|
0.57 |
|
|
|
3.61 |
|
|
4.36 |
|
|
5.34 |
|
|
4.91 |
|
|
|
5.54 |
|
|
4.56 |
|
|
Strip ratio (bank cubic meters of waste material per tonne
of coal produced) |
|
- |
|
|
85.08 |
|
|
|
2.44 |
|
|
3.61 |
|
|
4.01 |
|
|
4.76 |
|
|
|
2.97 |
|
|
4.11 |
|
|
Lost time injury frequency rate (ii) |
|
0.04 |
|
|
0.09 |
|
|
|
0.08 |
|
|
0.08 |
|
|
0.06 |
|
|
0.00 |
|
|
|
0.00 |
|
|
0.00 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(i) |
|
A Non-IFRS financial measure. See “Non-IFRS Financial Measures”
section. Cash costs of product sold exclude idled mine asset cash
costs. |
| |
(ii) |
|
Per 200,000 man hours and calculated based on a rolling 12 month
average. |
Summary of Quarterly Financial Results
The Company’s consolidated financial statements
are reported under IFRS issued by the International Accounting
Standards Board (the “IASB”). The following table provides
highlights, extracted from the Company’s annual and interim
consolidated financial statements, of quarterly results for the
past eight quarters:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ in thousands, except per share information |
|
2020 |
|
|
|
2019 |
|
|
|
2018 |
|
| |
|
|
|
30-Jun |
31-Mar |
|
31-Dec |
30-Sep |
30-Jun |
31-Mar |
|
31-Dec |
30-Sep |
|
Quarter Ended |
|
|
|
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Results |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue (i) |
$ |
14,975 |
|
$ |
6,137 |
|
|
$ |
32,113 |
|
$ |
28,309 |
|
$ |
32,479 |
|
$ |
36,811 |
|
|
$ |
33,814 |
|
$ |
26,277 |
|
|
Cost of sales (i) |
|
(10,366 |
) |
|
(6,071 |
) |
|
|
(23,446 |
) |
|
(15,518 |
) |
|
(22,031 |
) |
|
(23,405 |
) |
|
|
(28,027 |
) |
|
(17,110 |
) |
|
Gross profit excluding idled mine asset costs |
|
6,286 |
|
|
1,462 |
|
|
|
9,971 |
|
|
13,664 |
|
|
11,318 |
|
|
14,357 |
|
|
|
7,305 |
|
|
13,195 |
|
|
Gross profit including idled mine asset costs |
|
4,609 |
|
|
66 |
|
|
|
8,667 |
|
|
12,791 |
|
|
10,448 |
|
|
13,406 |
|
|
|
5,787 |
|
|
9,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income/(expenses) |
|
(5,150 |
) |
|
470 |
|
|
|
(1,589 |
) |
|
(1,245 |
) |
|
(2,333 |
) |
|
(414 |
) |
|
|
(2,921 |
) |
|
(3,417 |
) |
|
Administration expenses |
|
(1,291 |
) |
|
(1,771 |
) |
|
|
(1,386 |
) |
|
(2,074 |
) |
|
(2,878 |
) |
|
(3,109 |
) |
|
|
(1,583 |
) |
|
(2,724 |
) |
|
Evaluation and exploration expenses |
|
(52 |
) |
|
(56 |
) |
|
|
(382 |
) |
|
(22 |
) |
|
(23 |
) |
|
(25 |
) |
|
|
(36 |
) |
|
(40 |
) |
|
Profit/(loss) from operations |
|
(1,884 |
) |
|
(1,291 |
) |
|
|
5,310 |
|
|
9,450 |
|
|
5,214 |
|
|
9,858 |
|
|
|
1,247 |
|
|
2,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance costs |
|
(7,258 |
) |
|
(7,135 |
) |
|
|
(7,095 |
) |
|
(7,184 |
) |
|
(7,001 |
) |
|
(6,739 |
) |
|
|
(10,899 |
) |
|
(5,758 |
) |
|
Finance income |
|
2 |
|
|
43 |
|
|
|
36 |
|
|
68 |
|
|
4,305 |
|
|
17 |
|
|
|
13 |
|
|
106 |
|
|
Share of earnings/(loss) of a joint venture |
|
268 |
|
|
(46 |
) |
|
|
225 |
|
|
277 |
|
|
375 |
|
|
452 |
|
|
|
416 |
|
|
247 |
|
|
Income tax expense |
|
(900 |
) |
|
(732 |
) |
|
|
(659 |
) |
|
(468 |
) |
|
(801 |
) |
|
(1,439 |
) |
|
|
(1,023 |
) |
|
(267 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profit/(loss) |
|
(9,772 |
) |
|
(9,161 |
) |
|
|
(2,183 |
) |
|
2,143 |
|
|
2,092 |
|
|
2,149 |
|
|
|
(10,246 |
) |
|
(2,686 |
) |
|
Basic and diluted earnings/(loss) per share |
$ |
(0.04 |
) |
$ |
(0.03 |
) |
|
$ |
(0.01 |
) |
$ |
0.01 |
|
$ |
0.01 |
|
$ |
0.01 |
|
|
$ |
(0.04 |
) |
$ |
(0.01 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(i) |
|
Revenue and cost of sales relate to the Company’s Ovoot Tolgoi Mine
within the Coal Division operating segment. Refer to note 3 of the
condensed consolidated interim financial statements for further
analysis regarding the Company’s reportable operating segments.
Royalties have been reclassified from revenue to cost of
sales. |
|
|
(ii) |
|
The financial results for the three month periods ended September
30, 2018 was restated as a result of the net effect of the Prior
Restatement. Refer to management discussion & analysis for the
period ended September 30, 2019, copies of which are available
under the Company’s profile on SEDAR at www.sedar.com. |
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital
Management
The Company has in place a planning, budgeting
and forecasting process to help determine the funds required to
support the Company’s normal operations on an ongoing basis and its
expansionary plans.
Bank Loan
On May 15, 2018, SGS obtained a bank loan (the
“2018 Bank Loan”) in the principal amount of $2.8 million from a
Mongolian bank (the “Bank”) with the key commercial terms as
follows:
- Maturity date set at 24 months from
drawdown (subsequently extended for 12 months on May 18,
2020);
- Interest rate of 15% per annum and
interest is payable monthly; and
- Certain items of property, plant
and equipment were pledged as security for the 2018 Bank Loan. As
at June 30, 2020, the net carrying amount of the pledged items of
property, plant and equipment was $0.1 million (December 31, 2019:
$0.4 million).
As at June 30, 2020, the outstanding principal
balance of the 2018 Bank Loan was $2.8 million (December 31, 2019:
$2.8 million) and the accrued interest owed by the Company was $0.1
million (December 31, 2019: negligible).
Costs reimbursable to Turquoise Hill
Resources Limited (“Turquoise Hill”)
Prior to the completion of a private placement
with Novel Sunrise Investments Limited (“Novel Sunrise”) on April
23, 2015, Rio Tinto plc (“Rio Tinto”) was the Company’s ultimate
parent company. In the past, Rio Tinto sought reimbursement from
the Company for the salaries and benefits of certain Rio Tinto
employees who were assigned by Rio Tinto to work for the Company,
as well as certain legal and professional fees incurred by Rio
Tinto in relation to the Company’s prior internal investigation and
Rio Tinto’s participation in the tripartite committee. Subsequently
Rio Tinto transferred and assigned to Turquoise Hill its right to
seek reimbursement for these costs and fees from the Company.
As at June 30, 2020, the amount of reimbursable
costs and fees claimed by Turquoise Hill (the “TRQ Reimbursable
Amount”) amounted to $8.1 million (such amount is included in the
trade and other payables). On October 12, 2016, the Company
received a letter from Turquoise Hill, which proposed an
arrangement for regular payments of the outstanding TRQ
Reimbursable Amount. On November 12, 2020, the Company received
communication from Turquoise Hill advising that Turquoise Hill
wishes to re-engage in discussions with the Company regarding a
repayment plan for the outstanding TRQ Reimbursable Amount. No
agreement on repayment has been reached between the Company and
Turquoise Hill as of the date of this press release.
Going concern considerations
The Company’s condensed consolidated interim
financial statements have been prepared on a going concern basis
which assumes that the Company will continue operating until at
least June 30, 2021 and will be able to realize its assets and
discharge its liabilities in the normal course of operations as
they come due. However, in order to continue as a going concern,
the Company must generate sufficient operating cash flow, secure
additional capital or otherwise pursue a strategic restructuring,
refinancing or other transactions to provide it with additional
liquidity.
Several adverse conditions and material
uncertainties cast significant doubt upon the Company’s ability to
continue as a going concern and the going concern assumption used
in the preparation of the Company’s consolidated financial
statements. The Company had a deficiency in assets of $72.9 million
as at June 30, 2020 compared to a deficiency in assets of $49.2
million as at December 31, 2019 while the working capital
deficiency (excess current liabilities over current assets) reached
$219.4 million as at June 30, 2020 compared to a working capital
deficiency of $114.7 million as at December 31, 2019.
Included in the working capital deficiency as at
June 30, 2020 are significant obligations, which include the
interest amounting to $78.5 million in relation to the 2019
Deferral Agreement, the 2020 February Deferral Agreement, the 2020
March Deferral Agreement, the 2020 April Deferral Agreement, the
2020 May Deferral Agreement, the 2020 June Deferral Agreement and
the 2020 November Deferral Agreement.
In addition, the Common Shares have been
suspended from trading since June 19, 2020 on the TSX and August
17, 2020 on the HKEX. As of the date hereof, certain conditions of
the Resumption Guidance, including but not limited to the issuance
of the audited financial statements for the year ended December 31,
2019, have been fulfilled. However, if the Common Shares become
delisted from either the TSX or the HKEX, this would be an event of
default under the CIC Convertible Debenture, which could result in
the automatic termination of the deferral periods under the 2020
November Deferral Agreement and the acceleration of all principal,
interest and other amounts owing under the CIC Convertible
Debenture and the 2020 November Deferral Agreement becoming
immediately due and payable, in each case without the necessity of
any demand upon or notice to the Company by CIC.
The Company also has other current liabilities,
including trade and other payables of $84.6 million and interest
payable under the CIC Convertible Debenture of $78.5 million as at
June 30, 2020. Out of trade and other payables, which require
settlement in the short-term, unpaid taxes of $32.1 million are
repayable on demand by SGS to the Mongolian Tax Authority
(“MTA”).
The Company may not be able to settle all trade
and other payables on a timely basis, while continuing postponement
in settling certain trade payables owed to suppliers and creditors
may impact the mining operations of the Company and result in
potential lawsuits and/or bankruptcy proceedings being filed
against the Company. Except as disclosed elsewhere in this press
release, no such lawsuits or proceedings are pending as at December
23, 2020.
Further, the Company was informed that effective
as of February 11, 2020, the Mongolian State Emergency Commission
closed Mongolia’s southern border with China in order to prevent
the spread of COVID-19. Accordingly, the Company had suspended coal
exports to China since February 11, 2020 as a result of the border
closure and the closure remained in effect until March 27,
2020.
On March 28, 2020, the Mongolian-Chinese border
was re-opened for coal export on a trial basis, with a limit
imposed on the total volume of coal that was permitted to be
exported during this trial period. The Company has experienced a
continuous improvement in the volume of coal exported to China
since March 28, 2020. During the period between April to October
2020, an aggregate of 1.9 million tonnes of coal was exported by
the Company from Mongolia to China, as compared to an aggregate of
2.0 million tonnes of coal during the same period in the 2019
calendar year.
The border closure has had an adverse impact on
the Company’s sales and cash flows in the first and second quarter
of 2020. In order to mitigate the financial impact of the border
closures and preserve its working capital, the Company temporarily
ceased major mining operations (including coal mining), reduced
production to only coal-blending activities and placed
approximately half of its workforce on furlough from February 2020.
Since August 2, 2020, the Company has resumed its mining
operations, which includes mining, blending and washing of coal. As
at October 31, 2020, SGS employed 208 employees at the Ovoot Tolgoi
Mine site (December 31, 2019: 383 employees). The Company produced
1.1 million tonnes from August to October 2020, as compared to 1.3
million tonnes from August to October 2019. There were a few
COVID-19 cases reported in Ulaanbaatar (being the capital city of
Mongolia) on November 11, 2020. As a result, the Mongolian local
authorities have taken certain precautionary steps to minimize
further transmissions and announced a lockdown of Ulaanbaatar
effective as of November 12, 2020. Although the Company’s mining
operations and the export of coal from Mongolia to China continues
as of the date hereof, there can be no guarantee that the
Company will be able to continue exporting coal to China, or the
border crossings would not be the subject of additional closures as
a result of COVID-19 in the future. The Company will continue
to closely monitor the development of the COVID-19 pandemic and the
impact it has on coal exports to China and will react promptly to
preserve the working capital of the Company.
There are significant uncertainties as to the
outcomes of the above events or conditions that may cast
significant doubt on the Company’s ability to continue as a going
concern and, therefore, the Company may be unable to realize its
assets and discharge its liabilities in the normal course of
business. Should the use of the going concern basis in preparation
of the consolidated financial statements be determined to be not
appropriate, adjustments would have to be made to write down the
carrying amounts of the Company’s assets to their realizable
values, to provide for any further liabilities which might arise
and to reclassify non-current assets and non-current liabilities as
current assets and current liabilities, respectively. The effects
of these adjustments have not been reflected in the consolidated
financial statements. If the Company is unable to continue as a
going concern, it may be forced to seek relief under applicable
bankruptcy and insolvency legislation.
Management of the Company has prepared a cash
flow projection covering a period of 12 months from June 30, 2020.
The cash flow projection has taken into account the anticipated
cash flow to be generated from the Company’s business during the
period under projection including cost saving measures. In
particular, the Company has taken into account the following
measures for improvement of the Company’s liquidity and financial
position, which include: (i) entering into the 2020 November
Deferral Agreement with CIC for a deferral of the 2020 November
Deferral Amounts until August 31, 2023, subject to conditions
precedent therein (as disclosed in section “Liquidity and Capital
Resources” of this press release); (ii) agreeing to deferral
arrangements and improved payment terms with certain vendors; (iii)
SGS planned to reduce the outstanding tax payable by monthly
payments to MTA starting from June 2020; (iv) reducing the
inventory of low quality coal by wet washing and coal blending; and
(v) resuming coal mining activities beginning as of August 2020 to
enhance coal supply. In addition, management of the Company
assessed that the Company would be able to issue all outstanding
financial results, being one of the conditions of the Resumption
Guidance which must be satisfied in order to avoid a delisting of
the Common Shares from the HKEX, which is in turn an event of
default under the CIC Convertible Debenture. After considering the
above measures, and given the re-opening of the Mongolian-Chinese
border since March 28, 2020, the Directors believe that there will
be sufficient financial resources to continue its operations and to
meet its financial obligations as and when they fall due in the
next 12 months from June 30, 2020 and therefore are satisfied that
it is appropriate to prepare the condensed consolidated interim
financial statements on a going concern basis.
Factors that impact the Company’s liquidity are
being closely monitored and include, but are not limited to, impact
of the COVID-19 pandemic, Chinese economic growth, market prices of
coal, production levels, operating cash costs, capital costs,
exchange rates of currencies of countries where the Company
operates and exploration and discretionary expenditures.
As at June 30, 2020 and December 31, 2019, the
Company was not subject to any externally imposed capital
requirements.
Impact of the COVID-19
Pandemic
The Company was informed that effective as of
February 11, 2020, the Mongolian State Emergency Commission closed
Mongolia’s southern border with China in order to prevent the
spread of COVID-19. Accordingly, the Company suspended coal exports
to China beginning as of February 11, 2020 as a result of the
border closure.
On March 28, 2020, the Mongolian-Chinese border
was re-opened for coal export on a trial basis, with a limit
imposed on the total volume of coal that was permitted to be
exported during this trial period. The Company has experienced a
continuous improvement in the volume of coal exported to China
since March 28, 2020. During the period between April to October
2020, an aggregate of 1.9 million tonnes of coal was exported by
the Company from Mongolia to China, as compared to an aggregate of
2.0 million tonnes of coal during the same period in the 2019
calendar year.
The border closure has had an adverse impact on
the Company’s sales and cash flows in the first and second quarter
of 2020. In order to mitigate the financial impact of the border
closures and preserve its working capital, the Company temporarily
ceased major mining operations (including coal mining), reduced
production to only coal-blending activities and placed
approximately half of its workforce on furlough from February 2020.
Since August 2, 2020, the Company has resumed its mining
operations, which includes mining, blending and washing of coal. As
at October 31, 2020, SGS employed 208 employees at the Ovoot Tolgoi
Mine site (December 31, 2019: 383 employees). The Company produced
1.1 million tonnes from August to October 2020, as compared to 1.3
million tonnes from August to October 2019. There were a few
COVID-19 cases reported in Ulaanbaatar (being the capital city of
Mongolia) on November 11, 2020. As a result, the Mongolian local
authorities have taken precautionary steps to minimize further
transmission and announced a lockdown of Ulaanbaatar effective as
of November 12, 2020. Although the mining operations and the export
of coal from Mongolia to China continues, there can be no
guarantee that the Company will be able to continue exporting coal
to China, or the border crossings would not be the subject of
additional closures as a result of COVID-19 in the future. The
Company will continue to closely monitor the development of the
COVID-19 pandemic and the impact it has on coal exports to China
and will reach promptly to preserve the working capital of the
Company.
In the event that the Company’s ability to
export coal into the Chinese market becomes restricted or limited
again as a result of any future restrictions which may be
implemented at the Mongolian-Chinese border crossing, this is
expected to have a material adverse effect on the business and
operations of the Company and may negatively affect the price and
volatility of the Common Shares and any investment in such shares
could suffer a significant decline or total loss in value.
CIC Convertible Debenture
In November 2009, the Company entered into a
financing agreement with CIC for $500 million in the form of a
secured, convertible debenture bearing interest at 8.0% (6.4%
payable semi-annually in cash and 1.6% payable annually in the
Company’s shares) with a maximum term of 30 years. The CIC
Convertible Debenture is secured by a first ranking charge over the
Company’s assets and certain subsidiaries. The financing was used
primarily to support the accelerated investment program in Mongolia
and for working capital, repayment of debt, general and
administrative expenses and other general corporate purposes.
On March 29, 2010, the Company exercised its
right to call for the conversion of up to $250.0 million of the CIC
Convertible Debenture into approximately 21.5 million shares at a
conversion price of $11.64 (CAD$11.88). As at June 30, 2020, CIC
owned approximately 23.8% of the issued and outstanding Common
Shares of the Company.
On June 12, 2017, the Company executed the June
2017 Deferral Agreement with CIC for a revised repayment schedule
on the $22.3 million of cash interest and associated costs
originally due under the CIC Convertible Debenture on May 19, 2017.
The key repayment terms of the June 2017 Deferral Agreement are:
(i) the Company was required to repay on average $2.2 million of
the cash interest and associated costs monthly during the period
from May 2017 to October 2017; and (ii) the Company was required to
repay $9.7 million of cash interest and associated costs on
November 19, 2017.
On April 23, 2019, the Company executed the 2019
Deferral Agreement with CIC in relation to a deferral and revised
repayment schedule in respect of (i) $41.8 million of outstanding
cash and PIK Interest and associated costs due and payable to CIC
on November 19, 2018 under the CIC Convertible Debenture and the
June 2017 Deferral Agreement; and (ii) $27.9 million of cash and
PIK Interest payments payable to CIC under the CIC Convertible
Debenture from April 23, 2019 to and including May 19, 2020.
Pursuant to Section 501(c) of the TSX Company Manual, the 2019
Deferral Agreement was approved at the Company’s adjourned annual
and special meeting of shareholders on June 13, 2019.
The key repayment terms of the 2019 Deferral
Agreement are: (i) the Company agreed to pay a total of $14.3
million over eight instalments from November 2019 to June 2020;
(ii) the Company agreed to pay the PIK Interest covered by the
Deferral by way of cash payments, rather than the issuance of
Common Shares; and (iii) the Company agreed to pay the remaining
balance of $62.6 million on June 20, 2020. The Company agreed to
pay a deferral fee at a rate of 6.4% per annum in consideration of
the Deferral.
At any time before the payment under the terms
of the 2019 Deferral Agreement is fully repaid, the Company is
required to consult with and obtain written consent from CIC prior
to effecting a replacement or termination of either or both of its
Chief Executive Officer and its Chief Financial Officer, otherwise
this will constitute an event of default under the CIC Convertible
Debenture, but CIC shall not withhold its consent if the Board of
Directors (the “Board”) proposes to replace either or both such
officers with nominees selected by the Board, provided that the
Board acted honestly and in good faith with a view to the best
interests of the Company in the selection of the applicable
replacements.
As a condition to agreeing to the Deferral, CIC
required that the Cooperation Agreement dated November 19, 2009
between SGS and CIC, be amended and restated to clarify the manner
in which the service fee payable to CIC under the Cooperation
Agreement is calculated, with effect as of January 1, 2017.
Specifically, the Management Fee under the Amended and Restated
Cooperation Agreement is determined based on the net revenues
realized by the Company and all of its subsidiaries derived from
sales into China (rather than the net revenues realized by the
Company and its Mongolian subsidiaries as currently contemplated
under the Cooperation Agreement). As consideration for deferring
payment of the additional Management Fee payable to CIC as a result
of the Amended and Restated Cooperation Agreement, the Company
agreed to pay to CIC a deferral fee at the rate of 2.5% on the
outstanding Management Fee. Pursuant to the Amended and Restated
Cooperation Agreement, the Company agreed to pay CIC the total
outstanding Management Fee and related accrued deferral fee of $4.2
million over six instalments from June 2019 to November 2019. The
Company executed the Amended and Restated Cooperation Agreement
with CIC on April 23, 2019.
Pursuant to their terms, both the 2019 Deferral
Agreement and the Amended and Restated Cooperation Agreement became
effective on June 13, 2019, being the date on which the 2019
Deferral Agreement was approved by shareholders at the Company’s
adjourned annual and special meeting of shareholders.
In connection with the 2019 Deferral Agreement,
the Company also announced that it intends to discuss a potential
debt restructuring plan with respect to amounts owing to CIC which
is mutually beneficial to the Company and CIC; and to form a
special committee comprised of independent directors to ensure that
the interests of its minority shareholders are fairly
considered in the negotiation and review of any such restructuring;
however, there can be no assurance that a favorable outcome will be
reached. As of the date hereof, there has not been any significant
progress in relations to the restructuring plan.
On February 19, 2020, the Company and CIC
entered into the 2020 February Deferral Agreement pursuant to which
CIC agreed to grant the Company a deferral of: (i) the 2020
February Deferral Amounts; and (ii) approximately $0.7 million of
the Management Fee which was due and payable on February 14, 2020
to CIC under the Amended and Restated Cooperation Agreement. The
2020 February Deferral Agreement became effective on March 10,
2020, being the date on which the Company obtained the requisite
acceptance of the 2020 February Deferral Agreement from the TSX as
required under applicable TSX rules.
The principal terms of the 2020 February
Deferral Agreement are as follows:
- Payment of the 2020 February
Deferral Amounts will be deferred until June 20, 2020, while the
Management Fee will be deferred until they are repaid by the
Company.
- As consideration for the deferral
of these amounts, the Company agreed to pay CIC: (i) a deferral fee
equal to 6.4% per annum on the 2020 February Deferral Amounts,
commencing on the date on which each such 2020 February Deferral
Amounts would otherwise have been due and payable under the 2019
Deferral Agreement; and (ii) a deferral fee equal to 2.5% per annum
on the Management Fee, commencing on the date on which the
Management Fee would otherwise have been due and payable under the
Amended and Restated Cooperation Agreement.
- The Company agreed to provide CIC
with monthly updates regarding its operational and financial
affairs.
- As the Company anticipated prior to
agreeing to the 2020 February Deferral Agreement that a deferral
was likely required in respect of the monthly payments due and
payable in the period between April 2020 and June 2020 under the
2019 Deferral Agreement and Amended and Restated Cooperation
Agreement, the Company and CIC have agreed to discuss in good faith
a deferral of these payments on a monthly basis as they become due.
There can be no assurance, however, that a favorable outcome will
be reached either at all or on favorable terms.
- The Company agreed to comply with
all of its obligations under the 2019 Deferral Agreement and the
Amended and Restated Cooperation Agreement, as amended by the 2020
February Deferral Agreement.
- The Company and CIC agreed that
nothing in the 2020 February Deferral Agreement prejudices CIC’s
rights to pursue any of its remedies at any time pursuant to the
2019 Deferral Agreement and Amended and Restated Cooperation
Agreement, respectively.
On March 10, 2020, the Company agreed with CIC
that the 2020 March Deferral Amount which were due and payable to
CIC on March 19, 2020 under the 2019 Deferral Agreement will be
deferred until June 20, 2020. The terms of the 2020 March Deferral
Agreement are substantially the same as the terms of the 2020
February Deferral Agreement, including that the Company agreed to
pay CIC a deferral fee equal to 6.4% per annum on the 2020 March
Deferral Amount, commencing on March 19, 2020. The 2020 March
Deferral Agreement became effective on March 25, 2020, being the
date on which the Company obtained the requisite acceptance of the
2020 March Deferral Agreement from the TSX as required under
applicable TSX rules.
On April 10, 2020, the Company agreed with CIC
that the 2020 April Deferral Amount which was due and payable to
CIC on April 19, 2020 under the 2019 Deferral Agreement will be
deferred until June 20, 2020. The terms of the 2020 April Deferral
Agreement are substantially the same as the terms of the 2020
February Deferral Agreement, including that the Company agreed to
pay CIC a deferral fee equal to 6.4% per annum on the 2020 April
Deferral Amount, commencing on April 19, 2020. The 2020 April
Deferral Agreement became effective on April 29, 2020, being the
date on which the Company obtained the requisite acceptance of the
2020 April Deferral Agreement from the TSX as required under
applicable TSX rules.
On May 8, 2020, the Company agreed with CIC that
the 2020 May Deferral Amount which was due and payable to CIC on
May 19, 2020 and May 15, 2020 under the 2019 Deferral Agreement and
the Amended and Restated Cooperation Agreement, respectively, will
be deferred until June 20, 2020. The terms of the 2020 May Deferral
Agreement are substantially the same as the terms of the 2020
February Deferral Agreement, including that the Company agreed to
pay CIC a deferral fee equal to 6.4% per annum on the deferred cash
interest and deferral fees commencing on May 19, 2020 and a
deferral fee equal to 2.5% per annum on the deferred Management Fee
commencing on May 15, 2020. The 2020 May Deferral Agreement became
effective on June 8, 2020, being the date on which the Company
obtained the requisite acceptance of the 2020 May Deferral
Agreement from the TSX as required under applicable TSX rules.
On June 19, 2020, the Company agreed with CIC
that the 2020 June Deferral Amount which was due and payable to CIC
on June 19, 2020 under the 2019 Deferral Agreement and the prior
deferral agreements entered into during the period between February
to May 2020 will be deferred until September 14, 2020. The terms of
the 2020 June Deferral Agreement are substantially the same as the
terms of the 2020 February Deferral Agreement, including that the
Company agreed to pay CIC a deferral fee equal to 6.4% per annum on
the 2020 June Deferral Amount commencing on June 19, 2020. The 2020
June Deferral Agreement became effective on July 17, 2020, being
the date on which the Company obtained the requisite acceptance of
the 2020 June Deferral Agreement from the TSX as required under
applicable TSX rules.
On November 19, 2020, the Company and CIC
entered into the 2020 November Deferral Agreement pursuant to which
CIC agreed to grant the Company a deferral of the 2020 November
Deferral Amounts. The effectiveness of the 2020 November Deferral
Agreement and the respective covenants, agreements and obligations
of each party under the 2020 November Deferral Agreement are
subject to the Company obtaining the requisite approval of the 2020
November Deferral Agreement from the Company’s shareholders in
accordance with applicable TSX rules. On October 29, 2020, the
Company obtained an order from the BCSC which partially revoked the
CTO to, amongst other things, permit the Company to execute the
2020 November Deferral Agreement.
The principal terms of the 2020 November
Deferral Agreement are as follows:
- Payment of the 2020 November Deferral Amounts will be deferred
until August 31, 2023.
- CIC agreed to waive its rights
arising from any default or event of default under the CIC
Convertible Debenture as a result of trading in the Common Shares
being halted on the TSX beginning as of June 19, 2020 and suspended
on the HKEX beginning as of August 17, 2020, in each case for a
period of more than five trading days.
- As consideration for the deferral
of the 2020 November Deferral Amounts, the Company agreed to pay
CIC: (i) a deferral fee equal to 6.4% per annum on the 2020
November Deferral Amounts payable under the CIC Convertible
Debenture and the 2020 June Deferral Agreement, commencing on the
date on which each such 2020 November Deferral Amount would
otherwise have been due and payable under the CIC Convertible
Debenture or the 2020 June Deferral Agreement, as applicable; and
(ii) a deferral fee equal to 2.5% per annum on the 2020 November
Deferral Amounts payable under the Amended and Restated Cooperation
Agreement, commencing on the date on which the Management Fee would
otherwise have been due and payable under the Amended and Restated
Cooperation Agreement.
- The 2020 November Deferral
Agreement does not contemplate a fixed repayment schedule for the
2020 November Deferral Amounts and related deferral fees. Instead,
the Company and CIC would agree to assess in good faith the
Company’s financial condition and working capital position on a
monthly basis and determine the amount, if any, of the 2020
November Deferral Amounts and related deferral fees that the
Company is able to repay under the CIC Convertible Debenture, the
2020 June Deferral Agreement or the Amended and Restated
Cooperation Agreement, having regard to the working capital
requirements of the Company’s operations and business at such time
and with the view of ensuring that the Company’s operations and
business would not be materially prejudiced as a result of any
repayment.
- Commencing as of November 19, 2020
and until such time as the November 2020 PIK Interest is fully
repaid, CIC reserves the right to require the Company to pay and
satisfy the amount of the November 2020 PIK Interest, either in
full or in part, by way of issuing and delivering PIK interest
shares in accordance with the CIC Convertible Debenture provided
that, on the date of issuance of such shares, the Common Shares are
listed and trading on at least one stock exchange.
- If at any time before the 2020
November Deferral Amounts and related deferral fees are fully
repaid, the Company proposes to appoint, replace or terminate one
or more of its Chief Executive Officer, its Chief Financial Officer
or any other senior executive(s) in charge of its principal
business function or its principal subsidiary, then the Company
must first consult with, and obtain written consent from CIC prior
to effecting such appointment, replacement or termination.
Until such time as the 2020 November Deferral
Agreement is approved by the Company’s shareholders and the
deferral and waiver thereunder in favour of the Company become
effective, the Company remains in default under the CIC Convertible
Debenture and 2020 June Deferral Agreement and CIC may declare the
amounts owing thereunder immediately due and payable, and may take
steps to enforce payment thereof, which would have a material
adverse effect on the business and operations of the Company and
could negatively affect the price and volatility of the Common
Shares and any investment in such shares could suffer a significant
decline or total loss in value.
A deferral of the 2020 June Deferral Amount was
not in effect as at June 30, 2020. Furthermore, the trading in the
Common Shares on the TSX was halted for a period of more than five
trading days since June 19, 2020, which represents another event of
default under the CIC Convertible Debenture. Subsequently, pursuant
to the 2020 November Deferral Agreement, CIC agreed to (i) a
deferral of the 2020 June Deferral Amount; and (ii) waive its
rights arising from any default or event of default under the CIC
Convertible Debenture as a result of trading in the Common Shares
being halted on the TSX beginning as of June 19, 2020 and suspended
on the HKEX beginning as of August 17, 2020, in each case for a
period of more than five trading days. However, the effectiveness
of the deferral and waiver under the 2020 November Deferral
Agreement is subject to the Company obtaining the requisite
approval of the 2020 November Deferral Agreement from the Company’s
shareholders in accordance with applicable TSX rules. Accordingly,
the Company remains default under the CIC Convertible Debenture and
2020 June Deferral Agreement as of the date hereof. International
Accounting Standard (“IAS”) 1 requires the Company to classify the
entire balance of the CIC Convertible Debenture as a current
liability as at June 30, 2020.
Commercial Arbitration in Hong
Kong
On June 24, 2015, First Concept served a notice
of arbitration (the “Notice”) on SGS in respect of a coal supply
agreement dated May 19, 2014 as amended on June 27, 2014 (the "Coal
Supply Agreement") for a total consideration of $11.5 million.
On January 10, 2018, the Company received a
confidential partial ruling (final except as to costs) with respect
to the commercial arbitration (the “Arbitration Award”). Pursuant
to the Arbitration Award, SGS was ordered to repay the sum of $11.5
million (which SGS had received as a prepayment for the purchase of
coal) to First Concept, together with accrued interest at a simple
interest rate of 6% per annum from the date which the prepayment
was made until the date of the Arbitration Award, and then at a
simple interest rate of 8% per annum until full payment. The
Arbitration Award is final, except as to costs which were reserved
for a future award.
On November 14, 2018, the Company executed the
Settlement Deed with First Concept in respect of the Arbitration
Award. The Settlement Deed provides for the full and final
satisfaction of the Arbitration Award as well as the settlement of
the issue of costs relating to the Arbitration and any other
disputes arising out of the Coal Supply Agreement. Pursuant to the
Settlement Deed, which provides for the full and final satisfaction
of the Arbitration Award as well as the settlement of the issue of
costs relating to the Arbitration and any other disputes arising
out of the Coal Supply Agreement, SGS agreed to pay to First
Concept the sum of $13.9 million, together with simple interest
thereon at the rate of 6% per annum from November 1, 2018 until
full payment, in 12 monthly instalments commencing in November
2018. Provided that SGS complies with the terms of the Settlement
Deed, First Concept agreed to waive its costs in connection with
the Arbitration and Arbitration Award and interest for the period
from January 4, 2018 to October 31, 2018 (the “Waived Costs”).
On October 16, 2019, SGS received a notice from
First Concept claiming that the Company is in default under the
Settlement Deed and demanding payment of the full amount of the
Outstanding Settlement Deed Payments due under the Settlement Deed,
otherwise First Concept intends to commence legal action against
SGS pursuant to the Settlement Deed.
On February 7, 2020, SGS was informed by its
Mongolian banks that they received a request from the Court
Decision Implementing Agency of Mongolia (the “CDIA”) to freeze the
respective bank accounts of SGS in Mongolia in relation to the
enforcement of the Arbitration Award. Approximately $0.8 million in
cash has been frozen by the banks as at February 7, 2020 and such
amount was subsequently transferred to the CDIA on March 6,
2020.
On June 7, 2020, SGS entered into a settlement
agreement with First Concept, pursuant to which SGS agreed to pay
to First Concept the Full Settlement Sum of $8.0 million in full.
The Full Settlement Sum was fully satisfied by the Company in June
2020 and the outstanding payable to First Concept as of the date
hereof is $nil.
REGULATORY ISSUES AND
CONTINGENCIES
Class Action Lawsuit
In January 2014, Siskinds LLP, a Canadian law
firm, filed a class action (the “Class Action”) against the
Company, certain of its former senior officers and directors, and
its former auditors (the “Former Auditors”), in the Ontario Court
in relation to the Company’s restatement of certain financial
statements previously disclosed in the Company’s public fillings
(the “Restatement”).
To commence and proceed with the Class Action,
the plaintiff was required to seek leave of the Court under the
Ontario Securities Act (“Leave Motion”) and certify the action as a
class proceeding under the Ontario Class Proceedings Act
(“Certification Motion”). The Ontario Court rendered its
decision on the Leave Motion on November 5, 2015, dismissing
the action against the former senior officers and directors and
allowing the action to proceed against the Company in respect of
alleged misrepresentation affecting trades in the secondary market
for the Company’s securities arising from the Restatement.
The action against the Former Auditors was settled by the
plaintiff on the eve of the Leave Motion.
Both the plaintiffs and the Company appealed the
Leave Motion decision to the Ontario Court of Appeal. On September
18, 2017, the Ontario Court of Appeal dismissed the Company’s
appeal of the Leave Motion to permit the plaintiff to commence and
proceed with the Class Action. Concurrently, the Ontario Court of
Appeal granted leave for the plaintiff to proceed with their action
against the former senior officers and directors in relation to the
Restatement.
The Company filed an application for leave to
appeal to the Supreme Court of Canada in November 2017, but the
leave to appeal to the Supreme Court of Canada was dismissed in
June 2018.
In December 2018, the parties agreed to a
consent Certification Order, whereby the action against the former
senior officers and directors was withdrawn and the Class Action
would only proceed against the Company.
Since December 2018, counsels for the parties
have proceeded with the action as follows: (1) two case
conferences before the motions judge; (2) production of certain
documents by the Company to the plaintiffs; (3) review of those
documents by plaintiffs’ counsel from May 2020 to November 2020;
and (4) setting down examinations for discovery for February and
March 2021. The Company is urging an early trial.
The Company firmly believes that it has a strong
defense on the merits and will continue to vigorously defend itself
against the Class Action through independent Canadian litigation
counsel retained by the Company for this purpose. Due to the
inherent uncertainties of litigation, it is not possible to predict
the final outcome of the Class Action or determine the amount of
potential losses, if any. However, the Company has judged a
provision for this matter as at June 30, 2020 was not
required.
Toll Wash Plant Agreement with Ejin
Jinda
In 2011, the Company entered into an agreement
with Ejin Jinda, a subsidiary of China Mongolia Coal Co. Ltd., to
toll-wash coal from the Ovoot Tolgoi Mine. The agreement had a
duration of five years from commencement of the contract and
provided for an annual wet washing capacity of approximately 3.5
million tonnes of input coal.
Under the original agreement with Ejin Jinda,
which required the commercial operation of the wet washing facility
to commence on October 1, 2011, the additional fees payable by the
Company under the wet washing contract would have been $18.5
million. At each reporting date, the Company assesses the agreement
with Ejin Jinda and has determined it is not probable that this
$18.5 million will be required to be paid. Accordingly, the Company
has determined a provision for this matter at June 30, 2020 is not
required.
Special Needs Territory in
Umnugobi
On February 13, 2015, the entire Soumber mining
license and a portion of SGS’ exploration license 9443X (9443X was
converted to mining license MV-020436 in January 2016) (the
“License Areas”) were included into a special protected area (to be
further referred as Special Needs Territory, the “SNT”) newly set
up by the Umnugobi Aimag’s Civil Representatives Khural (the
“CRKh”) to establish a strict regime on the protection of natural
environment and prohibit mining activities in the territory of the
SNT.
On July 8, 2015, SGS and the Chairman of the
CRKh, in his capacity as the respondent’s representative, reached
an agreement (the “Amicable Resolution Agreement”) to exclude the
License Areas from the territory of the SNT in full, subject to
confirmation of the Amicable Resolution Agreement by the session of
the CRKh. The parties formally submitted the Amicable Resolution
Agreement to the appointed judge of the Administrative Court for
her approval and requested a dismissal of the case in accordance
with the Law of Mongolia on Administrative Court Procedure. On July
10, 2015, the judge issued her order approving the Amicable
Resolution Agreement and dismissing the case, while reaffirming the
obligation of CRKh to take necessary actions at its next session to
exclude the License Areas from the SNT and register the new map of
the SNT with the relevant authorities. Mining activities at the
Soumber property cannot proceed unless and until the Company
obtains a court order restoring the Soumber Licenses (as defined
below) and until the License Areas are removed from the SNT.
On June 29, 2016, the Mongolian Parliament and
CRKh election was held. As a result, the Company was aware that
additional action may be taken in respect of the SNT; however, the
Company has not yet received any indication on the timing of the
next session of the CRKh.
Termination of Soumber Deposit Mining
Licenses
On August 26, 2019, SGS received the Notice
Letter from Mineral Resources and Petroleum Authority of Mongolia
(“MRAM”) notifying that the Company’s three mining licenses
(MV-016869, MV-020436 and MV-020451) (the “Soumber Licenses”) for
the Soumber Deposit have been terminated by the Head of Cadastre
Division of MRAM effective as of August 21, 2019.
According to the Notice Letter, the Soumber
Licenses have been terminated pursuant to Clause 56.1.5 of Article
56 of the Minerals Law, Clauses 4.2.1 and 4.2.5 of Article 4 and
Clause 28.1.1 of Article 28 of the General Administrative Law and a
decision order of a working group established under an order of the
Minister of Environment and Tourism (Mongolia). According to this
decision order, the working group determined that SGS had violated
its environmental reclamation obligations with respect to the
Soumber Deposit. The Soumber Deposit is an undeveloped coal deposit
covering approximately 22,263 hectares located approximately 20
kilometers east of the Company’s Ovoot Tolgoi coal mine in
Mongolia. The Company owned a 100% interest in the Soumber
Deposit.
The Company believes the cancellation of the
Soumber Licenses is without merit. The Company is not aware of any
failure on its part to fulfill its environmental reclamation duties
as they relate to the Soumber Deposit. On October 4, 2019, SGS
filed a claim against MRAM and the Ministry of Environment and
Tourism of Mongolia in the Administration Court seeking an order to
restore the Soumber Licenses. The Appeal Court issued the ruling in
October 2020 and made an order to accept SGS’s claim and restore
the Soumber Licenses. The case was transferred to the High Court of
the Capital City (“High Court”) for final ruling. The Company
anticipates that the High Court will issue its ruling before the
end of the first quarter of 2021. The Company will take all such
actions, including additional legal actions, as it considers
necessary to reinstate the Soumber Licenses. However, there can be
no assurance that a favorable outcome will be reached. The
termination of the Soumber Licenses does not have any impact on the
Company’s current mining operations at the Ovoot Tolgoi mine
site.
Mongolian Royalties
During 2017, the Company was ordered by the
Mongolian tax authority to apply the “reference price” determined
by the Government of Mongolia, as opposed to calculated sales price
that is derived based on the actual contract price, in calculating
the royalties payable to the Government of Mongolia. Although no
official letter has been received by the Company in respect of this
matter as of the date hereof, there can be no assurance that the
Government of Mongolia will not disagree with the methodology
employed by the Company in determining the calculated sales price
and deem such price “non-market” under Mongolian tax law.
Management believes that its interpretation of the relevant
legislation is appropriate and the Company’s positions related to
the royalty will be sustained.
On September 4, 2019, the Government of Mongolia
issued a further resolution in connection with the royalty regime.
From September 1, 2019 onwards, in the event that the contract
sales price is less than the reference price as determined by the
Government of Mongolia by more than 30%, then the royalty payable
will be calculated based on the Mongolian government’s reference
price instead of the contract sales price.
Restrictions on Importing F-Grade Coal
into China
As a result of import restrictions established
by Chinese authorities at the Ceke border, the Company has been
barred from transporting its F-grade coal products into China for
sale since December 15, 2018. The Company, together with other
Mongolian coal companies, have been in discussion with the Chinese
authorities regarding a potential amendment or withdrawal of these
import restrictions to allow for the importation of F-grade coal
into China; however, there can be no assurance that a favorable
outcome will be reached.
TRANSPORTATION
INFRASTRUCTURE
On August 2, 2011, the State Property Committee
of Mongolia awarded the tender to construct a paved highway from
the Ovoot Tolgoi Mine to the Shivee Khuren Border Crossing (the
“Paved Highway”) to consortium partners NTB LLC and SGS (together
referred to as “RDCC LLC”) with an exclusive right of ownership of
the Paved Highway for 30 years. The Company has an indirect 40%
interest in RDCC LLC through its Mongolian subsidiary SGS. The toll
rate is MNT 1,500 per tonne.
The Paved Highway has a carrying capacity in
excess of 20 million tonnes of coal per year.
For the three and six months ended June 30,
2020, RDCC LLC recognized toll fee revenue of $1.2 million (2019:
$1.8 million) and $1.6 million (2019: $3.7 million),
respectively.
PLEDGE OF ASSETS
As at June 30, 2020, certain of the Company’s
property, plant and equipment of $0.1 million (December 31, 2019:
$0.4 million) were pledged as security for a bank loan granted to
the Company.
PURCHASE, SALE OR REDEMPTION OF LISTED
SECURITIES OF THE COMPANY
The Company did not redeem its listed
securities, nor did the Company or any of its subsidiaries purchase
or sell such securities during the six months ended June 30,
2020.
COMPLIANCE WITH CORPORATE
GOVERNANCE
The Company has, throughout the six months ended
June 30, 2020, applied the principles and complied with the
requirements of its corporate governance practices as defined by
the Board and all applicable statutory, regulatory and stock
exchange listings standards, which include the code provisions set
out in the Corporate Governance Code (the “Corporate Governance
Code”) contained in Appendix 14 to the Rules Governing the Listing
of Securities on the Hong Kong Stock Exchange (the “Hong Kong
Listing Rules”), except for the following: Pursuant to
code provision A.2.7 of the Corporate Governance Code, the chairman
of the Board should at least annually hold meetings with the
non-executive directors (including independent non-executive
directors) without the executive directors present. The Company
does not have a Chairman since the conclusion of the AGM held on
June 30, 2017. During the period of January 1, 2020 to June 30,
2020 there were two meetings between the Independent Lead Director,
who is fulfilling the duties of the Chairman, and the non-executive
directors without the presence of other executive directors. The
opportunity for such communication channel is offered at the end of
each Board meeting.
SECURITIES TRANSACTIONS BY
DIRECTORS
The Company has adopted policies regarding
Directors’ securities transactions in its Corporate Disclosure,
Confidentiality and Securities Trading Policy that have terms that
are no less exacting than those set out in the Model Code for
Securities Transactions by Directors of Listed Issuers contained in
Appendix 10 to the Hong Kong Listing Rules.
In response to a specific enquiry made by the
Company on each of the directors, all directors confirmed that they
had complied with the required standards as set out in the Model
Code and the Company’s Corporate Disclosure, Confidentiality and
Securities Trading Policy throughout the six months ended June 30,
2020.
OUTLOOK
Looking forward, market conditions in China are
expected to be challenging for coal companies, as there are a
number prevailing uncertainties, including the risk that the
COVID-19 pandemic and its negative impact on the Chinese economy,
becomes protracted, the possibility that the border crossings
between Mongolia and China become the subject of additional
closures and the continued restrictions on importing F-grade coal
into China. The Company will continue to closely monitor these
developments and the resulting impacts they have on coal exports to
China and will take all necessary actions to mitigate the potential
operational and financial impacts on the Company.
In the long run, the Company remains cautiously
optimistic regarding the Chinese coal market as coal is still
considered to be the primary energy source which China will rely on
in the foreseeable future. The expected benefit from the reducing
supply of low quality coal is anticipated to be offset by the
uncertain circumstances of the Chinese macroeconomic
environment.
The Company’s objectives for the medium term are
as follows:
- Enhance product
mix – The Company will focus on improving the product mix
and increase production of higher quality coal by: (i) improving
mining operations and employing enhanced mining techniques and
equipment; (ii) washing lower quality coal in the Company’s coal
wash plant; (iii) blending lower quality coal with higher quality
coal; and (iv) adopting other processing options available to the
Company.
- Expand customer
base – The Company will endeavor to increase sales volume,
expand its sales network and diversify its customer base so as to
enhance the pricing competency of the Company.
- Optimize cost
structure – The Company will aim to reduce its production
costs and optimize its cost structure through innovation, ongoing
training, productivity enhancement and engaging third party
contract mining companies.
- Operate in a socially
responsible manner – The Company will continue to maintain
the highest standards in health, safety and environmental
performance in a corporate socially responsible manner.
Going forward, the Company will continue to
focus on creating shareholders value by leveraging its key
competitive strengths, including:
- Strategic location
– The Ovoot Tolgoi Mine is located approximately 40km from China,
which represents the Company’s main coal market. The Company has an
infrastructure advantage, being approximately 50km from a major
Chinese coal distribution terminal with rail connections to key
coal markets in China.
- A large resources and
reserves base – The Ovoot Tolgoi Deposit has mineral
reserves of 114.1 million tonnes, while the aggregate coal
resources include measured and indicated mineral resources of 194.6
million tonnes and inferred resources of 32.1 million tonnes.
- Bridge
between Mongolia and China – The Company is well
positioned to capture the resulting business opportunities between
China and Mongolia under the Belt and Road Initiative. The Company
will seek potential strategic support from its two largest
shareholders (i.e., CIC and Cinda), which are both
state-owned-enterprises in China, and its strong operational record
for the past twelve years in Mongolia, being one of the largest
enterprises and taxpayers in Mongolia.
NON-IFRS FINANCIAL MEASURES
Cash Costs
The Company uses cash costs to describe its cash
production and associated cash costs incurred in bringing the
inventories to their present locations and conditions. Cash costs
incorporate all production costs, which include direct and indirect
costs of production, with the exception of idled mine asset costs
and non-cash expenses which are excluded. Non-cash expenses include
share-based compensation expense, impairments of coal stockpile
inventories, depreciation and depletion of property, plant and
equipment and 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.
Summarized Comprehensive Income
Information (Expressed in thousands of USD, except for
share and per share amounts)
| |
|
|
Three months
ended |
|
Six months
ended |
| |
|
|
June 30, |
|
June 30, |
|
|
|
|
|
2020 |
|
|
|
2019 |
|
|
|
2020 |
|
|
|
2019 |
|
| |
|
|
|
|
|
|
|
|
|
| Revenue |
|
|
$ |
14,975 |
|
|
$ |
32,479 |
|
|
$ |
21,112 |
|
|
$ |
69,290 |
|
|
Cost of sales |
|
|
|
(10,366 |
) |
|
|
(22,031 |
) |
|
|
(16,437 |
) |
|
|
(45,436 |
) |
|
Gross profit |
|
|
|
4,609 |
|
|
|
10,448 |
|
|
|
4,675 |
|
|
|
23,854 |
|
| |
|
|
|
|
|
|
|
|
|
| Other
operating expenses |
|
|
|
(5,150 |
) |
|
|
(2,333 |
) |
|
|
(4,680 |
) |
|
|
(2,747 |
) |
|
Administration expenses |
|
|
|
(1,291 |
) |
|
|
(2,878 |
) |
|
|
(3,062 |
) |
|
|
(5,987 |
) |
|
Evaluation and exploration expenses |
|
|
|
(52 |
) |
|
|
(23 |
) |
|
|
(108 |
) |
|
|
(48 |
) |
|
Profit/(loss) from operations |
|
|
|
(1,884 |
) |
|
|
5,214 |
|
|
|
(3,175 |
) |
|
|
15,072 |
|
| |
|
|
|
|
|
|
|
|
|
| Finance
costs |
|
|
|
(7,258 |
) |
|
|
(7,001 |
) |
|
|
(14,365 |
) |
|
|
(13,740 |
) |
| Finance
income |
|
|
|
2 |
|
|
|
4,305 |
|
|
|
17 |
|
|
|
4,322 |
|
| Share of
earnings of a joint venture |
|
|
|
268 |
|
|
|
375 |
|
|
|
222 |
|
|
|
827 |
|
|
Profit/(loss) before tax |
|
|
|
(8,872 |
) |
|
|
2,893 |
|
|
|
(17,301 |
) |
|
|
6,481 |
|
|
Current income tax expense |
|
|
|
(900 |
) |
|
|
(801 |
) |
|
|
(1,632 |
) |
|
|
(2,240 |
) |
|
Net profit/(loss) attributable to equity holders of the
Company |
|
|
|
(9,772 |
) |
|
|
2,092 |
|
|
|
(18,933 |
) |
|
|
4,241 |
|
| |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income to be reclassified
to profit or loss in subsequent periods |
|
|
|
|
|
|
|
|
|
| Exchange
difference on translation of foreign operation |
|
|
|
(2,352 |
) |
|
|
(852 |
) |
|
|
(4,789 |
) |
|
|
(779 |
) |
|
Net comprehensive income/(loss) attributable to equity
holders of the Company |
|
|
$ |
(12,124 |
) |
|
$ |
1,240 |
|
|
$ |
(23,722 |
) |
|
$ |
3,462 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings/(loss) per share |
|
|
$ |
(0.04 |
) |
|
$ |
0.01 |
|
|
$ |
(0.07 |
) |
|
$ |
0.02 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Summarized Financial Position
Information(Expressed in thousands of USD)
| |
|
|
As at |
| |
|
|
June
30, |
|
December
31, |
| |
|
|
|
2020 |
|
|
|
2019 |
|
|
Assets |
|
|
|
|
| |
|
|
|
|
|
|
Current assets |
|
|
|
|
|
Cash and cash equivalents |
|
$ |
3,598 |
|
|
$ |
7,164 |
|
|
Restricted cash |
|
|
566 |
|
|
|
862 |
|
|
Trade and other receivables |
|
|
809 |
|
|
|
1,778 |
|
|
Inventories |
|
|
47,369 |
|
|
|
52,237 |
|
|
Prepaid expenses and deposits |
|
|
1,648 |
|
|
|
2,312 |
|
|
Total current assets |
|
|
53,990 |
|
|
|
64,353 |
|
| |
|
|
|
|
|
|
Non-current assets |
|
|
|
|
|
Property, plant and equipment |
|
$ |
134,402 |
|
|
$ |
137,221 |
|
|
Inventories |
|
|
3,956 |
|
|
|
9,332 |
|
|
Investment in joint venture |
|
|
16,883 |
|
|
|
17,521 |
|
|
Total non-current assets |
|
|
155,241 |
|
|
|
164,074 |
|
| |
|
|
|
|
|
|
Total assets |
|
$ |
209,231 |
|
|
$ |
228,427 |
|
| |
|
|
|
|
|
|
Equity and liabilities |
|
|
|
|
| |
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
Trade and other payables |
|
$ |
84,554 |
|
|
$ |
87,013 |
|
|
Provision for commercial arbitration |
|
|
- |
|
|
|
5,593 |
|
|
Deferred revenue |
|
|
16,964 |
|
|
|
16,057 |
|
|
Interest-bearing borrowings |
|
|
2,912 |
|
|
|
2,835 |
|
|
Lease liabilities |
|
|
310 |
|
|
|
460 |
|
|
Current portion of convertible debenture |
|
|
168,622 |
|
|
|
67,106 |
|
|
Total current liabilities |
|
|
273,362 |
|
|
|
179,064 |
|
| |
|
|
|
|
|
|
Non-current liabilities |
|
|
|
|
|
Lease liabilities |
|
|
- |
|
|
|
108 |
|
|
Convertible debenture |
|
|
- |
|
|
|
89,868 |
|
|
Decommissioning liability |
|
|
8,721 |
|
|
|
8,605 |
|
|
Total non-current liabilities |
|
|
8,721 |
|
|
|
98,581 |
|
| |
|
|
|
|
|
|
Total liabilities |
|
|
282,083 |
|
|
|
277,645 |
|
| |
|
|
|
|
|
|
Equity |
|
|
|
|
|
Common shares |
|
|
1,098,634 |
|
|
|
1,098,634 |
|
|
Share option reserve |
|
|
52,677 |
|
|
|
52,589 |
|
|
Capital reserve |
|
|
396 |
|
|
|
396 |
|
|
Exchange reserve |
|
|
(28,017 |
) |
|
|
(23,228 |
) |
|
Accumulated deficit |
|
|
(1,196,542 |
) |
|
|
(1,177,609 |
) |
|
Total deficiency in assets |
|
|
(72,852 |
) |
|
|
(49,218 |
) |
| |
|
|
|
|
|
|
Total equity and liabilities |
|
$ |
209,231 |
|
|
$ |
228,427 |
|
| |
|
|
|
|
|
|
Net current liabilities |
|
$ |
(215,416 |
) |
. |
$ |
(114,711 |
) |
|
Total assets less current liabilities |
|
$ |
(64,131 |
) |
|
$ |
49,363 |
|
| |
|
|
|
|
|
| |
|
|
|
|
|
SELECTED INFORMATION FROM THE NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Additional information required by the HKEX and
not disclosed elsewhere in this press release is as follows. All
amounts are expressed in thousands of USD and shares in thousands,
unless otherwise indicated.
1. BASIS OF PREPARATION
1.1 Corporate
information and going concern
The Company’s condensed consolidated interim
financial statements have been prepared on a going concern basis
which assumes that the Company will continue operating until at
least June 30, 2021 and will be able to realize its assets and
discharge its liabilities in the normal course of operations as
they come due. However, in order to continue as a going concern,
the Company must generate sufficient operating cash flow, secure
additional capital or otherwise pursue a strategic restructuring,
refinancing or other transactions to provide it with additional
liquidity.
Several adverse conditions and material
uncertainties cast significant doubt upon the Company’s ability to
continue as a going concern and the going concern assumption used
in the preparation of the Company’s consolidated financial
statements. The Company had a deficiency in assets of $[72,852] as
at June 30, 2020 compared to a deficiency in assets of $49,218 as
at December 31, 2019 while the working capital deficiency (excess
current liabilities over current assets) reached $[219,372] as at
June 30, 2020 compared to a working capital deficiency of $114,711
as at December 31, 2019.
Included in the working capital deficiency as at
June 30, 2020 are significant obligations, which include the
interest amounting to $78,515 in relation to the CIC Convertible
Debenture under the 2019 Deferral Agreement, the 2020 February
Deferral Agreement, the 2020 March Deferral Agreement, the 2020
April Deferral Agreement, the 2020 May Deferral Agreement, the 2020
June Deferral Agreement and the 2020 November Deferral
Agreement.
In addition, the Common Shares have been
suspended from trading since June 19, 2020 on the TSX and August
17, 2020 on the HKEX. As of the date hereof, certain conditions of
the Resumption Guidance, including but not limited to the issuance
of the audited financial statements for the year ended December 31,
2019, have been fulfilled. However, if the Common Shares become
delisted from either the TSX or the HKEX, this would be an event of
default under the CIC Convertible Debenture, which could result in
the automatic termination of the deferral periods under the 2020
November Deferral Agreement and the acceleration of all principal,
interest and other amounts owing under the CIC Convertible
Debenture and the 2020 November Deferral Agreement becoming
immediately due and payable, in each case without the necessity of
any demand upon or notice to the Company by CIC.
The Company also has current liabilities,
including trade and other payables of $84,554 and interest payable
under the CIC Convertible Debenture of $78,515 as at June 30, 2020.
Out of trade and other payables, which require settlement in the
short-term, unpaid taxes of $32,069 are repayable on demand by SGS
to the MTA.
The Company may not be able to settle all trade
and other payables on a timely basis, and as a result continuing
postponement in settling certain trade and other payables owed to
suppliers and creditors may impact the mining operations of the
Company and may result in potential lawsuits and/or bankruptcy
proceedings being filed against the Company. Except as disclosed
elsewhere in these consolidated financial statements, no such
lawsuits or proceedings were pending as at December 23, 2020.
Further, the closure of the Mongolian-Chinese
border during the period between February 11, 2020 to March 27,
2020 and the limitations imposed on the total volume of coal
exports subsequent to the re-opening of the border on a trial basis
effective as of March 28, 2020 have had an adverse impact on the
Company’s sales and cash flows in the first and second quarter of
2020. In order to mitigate the financial impact of the border
closures and preserve its working capital, the Company temporarily
ceased major mining operations (including coal mining), reduced
production to only coal-blending activities and placed
approximately half of its workforce on furlough from February 2020.
Since August 2, 2020, the Company has resumed its mining
operations, which includes mining, blending and washing of coal. As
at October 31, 2020, SGS employed 208 employees at the Ovoot Tolgoi
Mine site (December 31, 2019: 383 employees). The Company produced
1.1 million tonnes from August to October 2020, as compared to 1.3
million tonnes from August to October 2019. The Company will
continue to closely monitor the development of the COVID-19
pandemic and the impact it has on coal exports to China and will
react promptly to preserve the working capital of the Company.
There are significant uncertainties as to the
outcomes of the above events or conditions that may cast
significant doubt on the Company’s ability to continue as a going
concern and, therefore, the Company may be unable to realize its
assets and discharge its liabilities in the normal course of
business. Should the use of the going concern basis in preparation
of the consolidated financial statements be determined to be not
appropriate, adjustments would have to be made to write down the
carrying amounts of the Company’s assets to their realizable
values, to provide for any further liabilities which might arise
and to reclassify non-current assets and non-current liabilities as
current assets and current liabilities, respectively. The effects
of these adjustments have not been reflected in the consolidated
financial statements. If the Company is unable to continue as a
going concern, it may be forced to seek relief under applicable
bankruptcy and insolvency legislation.
Management of the Company has prepared a cash
flow projection covering a period of 12 months from June 30, 2020.
The cash flow projection has taken into account the anticipated
cash flow to be generated from the Company’s business during the
period under projection including cost saving measures. In
particular, the Company has taken into account the following
measures for improvement of the Company’s liquidity and financial
position, which include: (i) entering into the 2020 November
Deferral Agreement with CIC, subject to conditions precedent
therein, for a deferral of the 2020 November Deferral Amounts until
August 31, 2023; (ii) agreeing to deferral arrangements and
improved payment terms with certain vendors; (iii) SGS planned to
reduce the outstanding tax payable by monthly payments to MTA
starting from June 2020; (iv) reducing the inventory of low quality
coal by wet washing and coal blending; and (v) resuming coal mining
activities beginning as of August 2020 to enhance coal supply. In
addition, management of the Company assessed that the Company would
be able to issue all outstanding financial results, being one of
the conditions of the Resumption Guidance which must be satisfied
in order to avoid a delisting of the Common Shares from the HKEX,
which is in turn an event of default under the CIC Convertible
Debenture. After considering the above measures, and given the
re-opening of the Mongolian-Chinese border since March 28, 2020,
the Directors believe that there will be sufficient financial
resources to continue its operations and to meet its financial
obligations as and when they fall due in the next 12 months from
June 30, 2020 and therefore are satisfied that it is appropriate to
prepare the consolidated financial statements on a going concern
basis.
Factors that impact the Company’s liquidity are
being closely monitored and include, but are not limited to, impact
of COVID-19 pandemic, Chinese economic growth, market prices of
coal, production levels, operating cash costs, capital costs,
exchange rates of currencies of countries where the Company
operates and exploration and discretionary expenditures.
As at June 30, 2020 and December 31, 2019, the
Company was not subject to any externally imposed capital
requirements.
1.2 Statement
of compliance
These condensed consolidated interim financial
statements, including comparatives, have been prepared in
accordance with IAS 34 - “Interim Financial Reporting” using
accounting policies in compliance with the IFRS issued by the IASB
and Interpretations of the IFRS Interpretations Committee
(“IFRIC”).
The condensed consolidated interim financial
statements of the Company for the six months ended June 30, 2020
were approved and authorized for issue by the Board of Directors of
the Company on December 23, 2020.
1.3
Basis
of presentation
These condensed consolidated interim financial
statements have been prepared using accounting policies and methods
of computation consistent with those applied in the Company’s
December 31, 2019 consolidated annual financial statements, except
as disclosed below. These condensed consolidated interim financial
statements do not include all the information and note disclosures
required by IFRS for annual financial statements and therefore
should be read in conjunction with the Company’s annual
consolidated financial statements for the year ended December 31,
2019.
1.4 Adoption
of new and revised standards and interpretations
There have been no other new IFRSs or IFRIC
interpretations that is not yet effective that would be expected to
have a material impact on the Company, except those disclosed in
the Company’s annual consolidated financial statements for the year
ended December 31, 2019.2. SEGMENTED
INFORMATION
The Company’s Chief Executive Officer (chief
operating decision maker) reviews the financial information in
order to make decisions about resources to be allocated to the
segment and to assess its performance. No operating segment
identified by the Board of Directors has been aggregated in
arriving at the reporting segments of the Company. For management’s
purpose, the Company has only one reportable operating segment,
which is the coal division. The division is principally engaged in
coal mining, development and exploration in Mongolia, and logistics
and trading of coal in Mongolia and China for the six months ended
June 30, 2020 and 2019.
Since this is the only reportable and operating
segment of the Company, no further analysis thereof is presented.
All the revenue of the Company is generated from trading of coal
for the six months ended June 30, 2020 and 2019.
2.1 Information
about major customers
During the six months ended June 30, 2020, the
Coal Division had seven active customers. Five customers with
respective revenues contributed over 10% of the total revenue
during the six months ended June 30, 2020, with the largest
customer accounting for 25% of revenues, the second largest
customer accounting for 23% of revenues, the third largest customer
accounting for 16% of revenues, the fourth largest customer
accounting for 13% of revenues and the fifth largest customer
accounting for 11% of revenues. Two customers with respective
revenues contributed over 10% of the total revenue during six
months ended June 30, 2019, with the largest customer accounting
for 51% of revenues and the second largest customer accounting for
33% of revenues.
2.2 Geographical
information
The operations of the Company are primarily
located in Mongolia, Hong Kong and China.
| |
Mongolia |
|
Hong Kong |
|
China |
|
Consolidated Total |
|
Revenue (i) |
|
|
|
|
|
|
|
|
For the three months ended June 30, 2020 |
$ |
- |
|
$ |
- |
|
$ |
14,975 |
|
$ |
14,975 |
|
For the three months ended June 30, 2019 |
|
- |
|
|
- |
|
|
32,479 |
|
|
32,479 |
|
For the six months ended June 30, 2020 |
$ |
- |
|
$ |
- |
|
$ |
21,112 |
|
$ |
21,112 |
|
For the six months ended June 30, 2019 |
|
- |
|
|
- |
|
|
69,290 |
|
|
69,290 |
| |
|
|
|
|
|
|
|
|
Non-current assets |
|
|
|
|
|
|
|
|
As at June 30, 2020 |
$ |
154,455 |
|
$ |
229 |
|
$ |
557 |
|
$ |
155,241 |
|
As at December 31, 2019 |
|
162,865 |
|
|
390 |
|
|
819 |
|
|
164,074 |
| |
| (i) The revenue
information above is based on the locations of the customers. |
| |
3. REVENUE
Revenue represents the net invoiced value of goods
sold which arises from the trading of coal.
4. EXPENSES BY NATURE
The Company’s operating expenses by nature are
summarized as follows:
| |
Three months
ended |
|
Six months
ended |
| |
June 30, |
|
June 30, |
| |
|
2020 |
|
|
2019 |
|
|
|
2020 |
|
|
|
2019 |
|
| |
|
|
|
|
|
|
|
|
Depreciation |
$ |
3,137 |
|
$ |
3,521 |
|
|
$ |
5,268 |
|
|
$ |
8,411 |
|
|
Auditors' remuneration |
|
138 |
|
|
597 |
|
|
|
383 |
|
|
|
870 |
|
| |
|
|
|
|
|
|
|
|
Employee benefit expense (including directors' remuneration) |
|
|
|
|
|
|
|
|
Wages and salaries |
$ |
1,612 |
|
$ |
2,762 |
|
|
$ |
3,904 |
|
|
$ |
5,356 |
|
|
Equity-settled share option expense |
|
73 |
|
|
14 |
|
|
|
88 |
|
|
|
28 |
|
|
Pension scheme contributions |
|
75 |
|
|
384 |
|
|
|
323 |
|
|
|
691 |
|
| |
$ |
1,760 |
|
$ |
3,160 |
|
|
$ |
4,315 |
|
|
$ |
6,075 |
|
| |
|
|
|
|
|
|
|
|
Lease payments under operating leases |
$ |
17 |
|
$ |
19 |
|
|
$ |
42 |
|
|
$ |
78 |
|
|
Foreign exchange loss/(gain) |
|
20 |
|
|
528 |
|
|
|
(752 |
) |
|
|
(1 |
) |
|
Impairment of coal stockpile inventories |
|
- |
|
|
- |
|
|
|
- |
|
|
|
3,466 |
|
|
CIC management fee |
|
413 |
|
|
1,422 |
|
|
|
535 |
|
|
|
2,180 |
|
|
Royalties |
|
1,700 |
|
|
2,338 |
|
|
|
2,957 |
|
|
|
4,577 |
|
|
Provision for doubtful trade and and other receivables |
|
144 |
|
|
46 |
|
|
|
282 |
|
|
|
97 |
|
|
Provision for prepaid expenses and deposits |
|
- |
|
|
260 |
|
|
|
- |
|
|
|
260 |
|
|
Loss/(gain) on disposal of property, plant and equipment |
|
20 |
|
|
(29 |
) |
|
|
(19 |
) |
|
|
(29 |
) |
|
Provision for commercial arbitration |
|
4,553 |
|
|
92 |
|
|
|
4,634 |
|
|
|
226 |
|
|
Loss on disposal of properties for resale |
|
- |
|
|
14 |
|
|
|
- |
|
|
|
14 |
|
|
Mine operating costs and other |
|
4,957 |
|
|
15,297 |
|
|
|
6,642 |
|
|
|
27,994 |
|
|
Total operating expenses |
$ |
16,859 |
|
$ |
27,265 |
|
|
$ |
24,287 |
|
|
$ |
54,218 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. COST OF SALES
The Company’s cost of sales consists of the
following amounts:
| |
|
|
|
Three months
ended |
|
Six months
ended |
| |
|
|
|
June 30, |
|
June 30, |
| |
|
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
| |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
$ |
5,684 |
|
$ |
16,341 |
|
$ |
8,522 |
|
$ |
29,309 |
|
Share-based compensation expense |
|
17 |
|
|
3 |
|
|
19 |
|
|
5 |
|
Depreciation and depletion |
|
1,288 |
|
|
2,479 |
|
|
1,866 |
|
|
6,258 |
|
Royalties |
|
1,700 |
|
|
2,338 |
|
|
2,957 |
|
|
4,577 |
|
Impairment of coal stockpile inventories |
|
- |
|
|
- |
|
|
- |
|
|
3,466 |
|
Cost of sales from mine operations |
|
8,689 |
|
|
21,161 |
|
|
13,364 |
|
|
43,615 |
|
Cost of sales related to idled mine assets (i) |
|
1,677 |
|
|
870 |
|
|
3,073 |
|
|
1,821 |
|
Cost of sales |
$ |
10,366 |
|
$ |
22,031 |
|
$ |
16,437 |
|
$ |
45,436 |
| |
|
|
|
|
|
|
|
|
|
|
| |
(i) |
|
Cost of sales
related to idled mine assets were all related to the depreciation
expense for the Company’s idled plant and
equipment. |
Cost of inventories recognized as expense in
cost of sales for the three months ended June 30, 2020 totaled
$7,228 (2019: $18,200). Cost of inventories recognized as expense
in cost of sales for the six months ended June 30, 2020 totaled
$9,822 (2019: $34,366).
6. OTHER OPERATING EXPENSES
The Company’s other operating expenses consist of
the following amounts:
| |
|
Three months
ended |
|
Six months
ended |
| |
|
June 30, |
|
June 30, |
| |
|
|
2020 |
|
|
|
2019 |
|
|
|
2020 |
|
|
|
2019 |
|
| |
|
|
|
|
|
|
|
|
|
Provision for doubtful trade and other receivables |
$ |
(144 |
) |
|
$ |
(46 |
) |
|
$ |
(282 |
) |
|
$ |
(97 |
) |
|
Foreign exchange gain/(loss) |
|
(20 |
) |
|
|
(528 |
) |
|
|
752 |
|
|
|
1 |
|
|
CIC management fee |
|
(413 |
) |
|
|
(1,422 |
) |
|
|
(535 |
) |
|
|
(2,180 |
) |
|
Provision for commercial arbitration |
|
(4,553 |
) |
|
|
(92 |
) |
|
|
(4,634 |
) |
|
|
(226 |
) |
|
Provision for prepaid expenses and deposits |
|
- |
|
|
|
(260 |
) |
|
|
- |
|
|
|
(260 |
) |
|
Loss on disposal of properties for resale |
|
- |
|
|
|
(14 |
) |
|
|
- |
|
|
|
(14 |
) |
|
Gain/(loss) on disposal of property, plant and equipment |
|
(20 |
) |
|
|
29 |
|
|
|
19 |
|
|
|
29 |
|
|
Other operating expenses |
$ |
(5,150 |
) |
|
$ |
(2,333 |
) |
|
$ |
(4,680 |
) |
|
$ |
(2,747 |
) |
| |
|
|
|
|
|
|
|
|
7. FINANCE COSTS AND INCOME
The Company’s finance costs consist of the
following amounts:
| |
|
Three months
ended, |
|
Six months
ended, |
| |
|
June 30, |
|
June 30, |
| |
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
| |
|
|
|
|
|
|
|
|
|
Interest expense on convertible debenture |
$ |
6,228 |
|
$ |
5,824 |
|
$ |
12,357 |
|
$ |
11,521 |
|
Unrealized loss on embedded derivatives in convertible
debenture |
|
28 |
|
|
8 |
|
|
- |
|
|
9 |
|
Value added tax on interest from intercompany loan |
|
719 |
|
|
798 |
|
|
1,437 |
|
|
1,596 |
|
Interest expense on borrowings |
|
93 |
|
|
247 |
|
|
198 |
|
|
425 |
|
Finance costs on leased assets |
|
13 |
|
|
32 |
|
|
32 |
|
|
75 |
|
Accretion of decommissioning liability |
|
177 |
|
|
92 |
|
|
341 |
|
|
114 |
|
Finance costs |
$ |
7,258 |
|
$ |
7,001 |
|
$ |
14,365 |
|
$ |
13,740 |
The Company’s finance income consists of the following
amounts:
| |
|
Three months
ended, |
|
Six months
ended, |
| |
|
June 30, |
|
June 30, |
|
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
| |
|
|
|
|
|
|
|
|
|
Unrealized gain on embedded derivatives in convertible
debenture |
$ |
- |
|
$ |
- |
|
$ |
9 |
|
$ |
- |
|
Interest income |
|
2 |
|
|
12 |
|
|
8 |
|
|
29 |
|
IFRS 9 adjustment on convertible debenture |
|
- |
|
|
4,293 |
|
|
- |
|
|
4,293 |
|
Finance income |
$ |
2 |
|
$ |
4,305 |
|
$ |
17 |
|
$ |
4,322 |
| |
|
|
|
|
|
|
|
|
8. TAXES
The Canadian statutory tax rate was 27% (2019:
27%) on the estimated assessable profits arising in Canada during
the period. Taxes on profits assessable elsewhere have been
calculated at the rates of tax prevailing in the
countries/jurisdictions in which the Company operates.
| |
Three months
ended, |
|
Six months
ended, |
| |
June 30, |
|
June 30, |
| |
|
2020 |
|
|
2019 |
|
|
|
2020 |
|
|
2019 |
| |
|
|
|
|
|
|
|
|
Current - Canada |
|
|
|
|
|
|
|
|
Charge for the period |
$ |
- |
|
$ |
- |
|
|
$ |
- |
|
$ |
- |
|
Current - elsewhere |
|
|
|
|
|
|
|
|
Charge for the period |
|
736 |
|
|
1,128 |
|
|
|
1,468 |
|
|
2,240 |
|
Underprovision/(overprovision) in prior periods |
|
164 |
|
|
(327 |
) |
|
|
164 |
|
|
- |
|
Total tax charge for the period |
$ |
900 |
|
$ |
801 |
|
|
$ |
1,632 |
|
$ |
2,240 |
| |
|
|
|
|
|
|
|
9. EARNINGS/(LOSS) PER SHARE
The calculation of basic earnings/(loss) and
diluted earnings/(loss) per share is based on the following
data:
| |
|
Three months
ended |
|
Six months
ended |
| |
|
June 30, |
|
June 30, |
| |
|
|
2020 |
|
|
|
2019 |
|
|
2020 |
|
|
|
2019 |
| |
|
|
|
|
|
|
|
|
|
Net profit/(loss) |
$ |
(9,772 |
) |
|
$ |
2,092 |
|
$ |
(18,933 |
) |
|
$ |
4,241 |
|
Weighted average number of shares |
|
272,703 |
|
|
|
272,703 |
|
|
272,703 |
|
|
|
272,703 |
|
Basic and diluted earnings/(loss) per share |
$ |
(0.04 |
) |
|
$ |
0.01 |
|
$ |
(0.07 |
) |
|
$ |
0.02 |
| |
|
|
|
|
|
|
|
|
10. TRADE AND OTHER
RECEIVABLES
The Company’s trade and other receivables
consist of the following amounts:
| |
|
|
|
As at |
| |
|
|
|
June
30, |
|
December
31, |
| |
|
|
|
2020 |
|
2019 |
| |
|
|
|
|
|
|
|
Trade receivables |
|
|
$ |
- |
|
$ |
1,081 |
|
Other receivables |
|
|
|
809 |
|
|
697 |
|
Total trade and other receivables |
|
|
$ |
809 |
|
$ |
1,778 |
| |
|
|
|
|
|
|
The aging of the Company’s trade and other receivables, based on
invoice date and net of provisions, is as follows:
| |
|
|
|
As at |
| |
|
|
|
June
30, |
|
December
31, |
| |
|
|
|
2020 |
|
2019 |
| |
|
|
|
|
|
|
|
Less than 1 month |
|
|
$ |
736 |
|
$ |
1,623 |
|
1 to 3 months |
|
|
|
40 |
|
|
23 |
|
3 to 6 months |
|
|
|
33 |
|
|
132 |
|
Over 6 months |
|
|
|
- |
|
|
- |
|
Total trade and other receivables |
|
|
$ |
809 |
|
$ |
1,778 |
| |
|
|
|
|
|
|
Overdue balances are reviewed regularly by senior management.
The Company does not hold any collateral or other credit
enhancements over its trade and other receivable balances.
The Company has determined that the loss
allowance on its trade and other receivables was $21,933 as at June
30, 2020 (December 31, 2019: $21,976), based upon an expected loss
rate of 10% for trade and other receivables 60 days past due and
100% for trade and other receivables 180 days past due. The closing
allowances for trade and other receivables as at June 30, 2020
reconcile to the opening loss allowances as follows:
|
Loss allowance for trade and other
receivables |
|
|
|
|
Opening loss allowance as at January 1, 2020 |
|
|
$ |
21,976 |
|
|
Increase in loss allowance recognised in profit or loss during the
period |
|
|
|
282 |
|
|
Exchange realignment |
|
|
|
(325 |
) |
|
Loss allowance as at June 30, 2020 |
|
|
$ |
21,933 |
|
| |
|
|
|
|
Opening loss allowance as at January 1, 2019 |
|
|
$ |
20,005 |
|
|
Increase in loan allowance recognised in profit or loss during the
period |
|
|
|
97 |
|
|
Loss allowance included in specific provision made during the year
ended December 31, 2018 |
|
|
|
1,379 |
|
|
Exchange realignment |
|
|
|
(69 |
) |
|
Loss allowance as at June 30, 2019 |
|
|
$ |
21,412 |
|
|
|
|
|
|
|
|
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, based on the invoice date, was as follows:
| |
|
|
|
As at |
| |
|
|
|
June
30, |
|
December
31, |
| |
|
|
|
2020 |
|
2019 |
| |
|
|
|
|
|
|
|
Less than 1 month |
|
|
$ |
26,160 |
|
$ |
29,750 |
|
1 to 3 months |
|
|
|
1,324 |
|
|
13,165 |
|
3 to 6 months |
|
|
|
1,745 |
|
|
12,218 |
|
Over 6 months |
|
|
|
55,325 |
|
|
31,880 |
|
Total trade and other payables |
|
|
$ |
84,554 |
|
$ |
87,013 |
| |
|
|
|
|
|
|
12. ACCUMULATED DEFICIT AND DIVIDENDS
At June 30, 2020, the Company has accumulated a
deficit of $1,196,542 (December 31, 2019: $1,177,609). No dividends
have been paid or declared by the Company since inception.
REVIEW OF INTERIM RESULTS
The condensed consolidated interim financial
statements of the Company for the three and six months ended June
30, 2020, which are unaudited but have been reviewed by the
Company’s independent auditor and the Audit Committee of the
Company and they have been prepared in compliance with the IFRS,
the Hong Kong Listing Rules, TSX Company Manual and other
applicable legal requirements.
The Company’s results for the three and six
months ended June 30, 2020 are contained in the unaudited condensed
consolidated interim financial statements and MD&A, available
on the SEDAR website at www.sedar.com and the Company’s
website at www.southgobi.com.
ABOUT SOUTHGOBI
SouthGobi, listed on the Toronto and Hong Kong
stock exchanges, owns and operates its flagship Ovoot Tolgoi coal
mine in Mongolia. It also holds the mining licences of its other
metallurgical and thermal coal deposits in South Gobi Region of
Mongolia. SouthGobi produces and sells coal to customers in
China.
Contact:
| Investor Relations |
| Kino Fu |
| Office: |
+852 2156 7030
(Hong Kong) |
| |
+1 604 762 6783 (Canada) |
| Email: |
kino.fu@southgobi.com |
| Website: |
www.southgobi.com |
Except for statements of fact relating to the
Company, certain information contained herein constitutes
forward-looking statements. Forward-looking statements are
frequently characterized by words such as “plan”, “expect”,
“project”, “intend”, “believe”, “anticipate”, "could", "should",
"seek", "likely", "estimate" and other similar words or statements
that certain events or conditions “may” or “will” occur.
Forward-looking statements relate to management’s future outlook
and anticipated events or results and are based on the opinions and
estimates of management at the time the statements are made.
Forward-looking statements in this press release include, but are
not limited to, statements regarding:
- the Company continuing as a going
concern and its ability to realize its assets and discharge its
liabilities in the normal course of operations as they become
due;
- adjustments to the amounts and
classifications of assets and liabilities in the Company's
consolidated financial statements and the impact thereof;
- the Company’s expectations of
sufficient liquidity and capital resources to meet its ongoing
obligations and future contractual commitments, including the
Company’s ability to settle its trade payables, to secure
additional funding and to meet its obligations under each of the
CIC Convertible Debenture, the 2020 June Deferral Agreement, the
2020 May Deferral Agreement, the 2020 April Deferral Agreement, the
2020 March Deferral Agreement, the 2020 February Deferral
Agreement, the 2020 November Deferral Agreement, the 2019 Deferral
Agreement, the Amended and Restated Cooperation Agreement and the
2018 Bank Loan, as the same become due;
- the Company's anticipated financing
needs, development plans and future production levels;
- the ability of the Company to
successfully apply for a revocation of the CTO;
- the resumption of trading in the
Common Shares on the TSX or HKEX;
- the Company entering into
discussions with CIC regarding a potential debt restructuring plan
with respect to the amounts owing to CIC;
- the results and impact of the
Ontario class action (as described under section “Regulatory Issues
and Contingencies” of this press release under the heading entitled
"Class Action Lawsuit");
- the estimates and assumptions
included in the Company’s impairment analysis and the possible
impact of changes thereof;
- the agreement with Ejin Jinda and
the payments thereunder (as described under section “Regulatory
Issues and Contingencies” of this press release under the heading
entitled "Toll Wash Plant Agreement with Ejin Jinda”);
- the ability of the Company to
successfully recover the balance of its doubtful trade and notes
receivables;
- the ability of the Company to
enhance the operational efficiency and output throughput of the
washing facilities at Ovoot Tolgoi;
- the ability to enhance the product
value by conducting coal processing and coal washing;
- the impact of the Company’s
activities on the environment and actions taken for the purpose of
mitigation of potential environmental impacts and planned focus on
health, safety and environmental performance;
- the impact of the delays in the
custom clearance process at the Ceke border on the Company’s
operations and the restrictions established by Chinese authorities
on the import of F-grade coal into China;
- the impact of the COVID-19 pandemic
and closure of Mongolia’s southern border with China on the
Company’s business, financial condition and operations;
- the ability of the Company to
successfully appeal the decision of MRAM to terminate the Soumber
Licenses and the anticipated timing of the High Court’s ruling on
the appeal;
- the ability of the Company to
successfully negotiate an extension of the agreement with the third
party contractor relating to the operation of the wash plant at the
Ovoot Tolgoi mine site;
- the ability of the Company to
successfully reinstate the Soumber Licenses;
- the future demand for coal in
China;
- future trends in the Chinese coal
industry;
- the Company’s outlook and
objectives for 2020 and beyond (as more particularly described
under section “Outlook” of this press release); and
- other statements that are not
historical facts.
Forward-looking information is based on certain
factors and assumptions described below and elsewhere in this press
release, including, among other things: the current mine plan for
the Ovoot Tolgoi mine; mining, production, construction and
exploration activities at the Company’s mineral properties; the
costs relating to anticipated capital expenditures; the capacity
and future toll rate of the paved highway; plans for the progress
of mining license application processes; mining methods; the
Company's anticipated business activities, planned expenditures and
corporate strategies; management’s business outlook, including the
outlook for 2020 and beyond; currency exchange rates; operating,
labour and fuel costs; the ability of the Company to successfully
apply for a revocation of the CTO; the ability to remedy the
Delisting Criteria of the TSX and to satisfy the Resumption
Guidance of the HKEX; the ability of the Company to raise
additional financing; the anticipated royalties payable under
Mongolia’s royalty regime; the future coal market conditions in
China and the related impact on the Company’s margins and
liquidity; the anticipated impact of the COVID-19 pandemic; the
assumption that the border crossings with China will remain open
for coal exports; the anticipated demand for the Company’s coal
products; future coal prices, and the level of worldwide coal
production. While the Company considers these assumptions to be
reasonable based on the information currently available to it, they
may prove to be incorrect. Forward-looking statements are subject
to a variety of risks and uncertainties and other factors that
could cause actual events or results to differ materially from
those projected in the forward-looking statements. These risks and
uncertainties include, among other things: the uncertain nature of
mining activities, actual capital and operating costs exceeding
management’s estimates; variations in mineral resource and mineral
reserve estimates; failure of plant, equipment or processes to
operate as anticipated; the possible impacts of changes in mine
life, useful life or depreciation rates on depreciation expenses;
risks associated with, or changes to regulatory requirements
(including environmental regulations) and the ability to obtain all
necessary regulatory approvals; the potential expansion of the list
of licenses published by the Government of Mongolia covering areas
in which exploration and mining are purportedly prohibited on
certain of the Company's mining licenses; the Government of
Mongolia designating any one or more of the Company’s mineral
projects in Mongolia as a Mineral Deposit of Strategic Importance;
the risk that the Company is unable to successfully apply for a
revocation of the CTO; the risk that the Company is unable to
remedy the Delisting Criteria within the deadline established by
the TSX and the Common Shares becoming delisted from the TSX; the
risk that the Company is unable to fulfill the conditions of the
Resumption Guidance and the Common Shares becoming delisted from
the HKEX; the risk of continued delays in the custom clearance
process at the Ceke border; the restrictions established by Chinese
authorities on the import of F-grade coal into China; the risk that
Mongolia’s southern borders with China will be the subject of
further closures; the negative impact of the COVID-19 pandemic on
the demand for coal and the economy generally in China; the risk
that the COVID-19 pandemic is not effectively controlled in China
and Mongolia; the risk that the Company’s existing coal inventories
are unable to sufficiently satisfy expected sales demand; the
possible impact of changes to the inputs to the valuation model
used to value the embedded derivatives in the CIC Convertible
Debenture; the risk of the Company failing to successfully
negotiate favorable repayment terms on the TRQ Reimbursable Amount
(as described under section “Liquidity and Capital Resources” of
this press release under the heading entitled “Liquidity and
Capital Management – Costs Reimbursable to Turquoise Hill Resources
Ltd”); the risk of CIC accelerating all amounts outstanding under
the CIC Convertible Debenture and enforcing payment thereof; the
risk of the Company or its subsidiaries defaulting under its
existing debt obligations, including the 2020 June Deferral
Agreement, the 2020 May Deferral Agreement, the 2020 April Deferral
Agreement, the 2020 March Deferral Agreement, the 2020 February
Deferral Agreement, the 2020 November Deferral Agreement, the 2019
Deferral Agreement, the Amended and Restated Cooperation Agreement
and the 2018 Bank Loan; the impact of amendments to, or the
application of, the laws of Mongolia, China and other countries in
which the Company carries on business; modifications to existing
practices so as to comply with any future permit conditions that
may be imposed by regulators; delays in obtaining approvals and
lease renewals; the risk of fluctuations in coal prices and changes
in China and world economic conditions; the outcome of the Class
Action (as described under section “Regulatory Issues and
Contingencies” of this press release under the heading entitled
"Class Action Lawsuit") and any damages payable by the Company as a
result; the impact of the internal investigation conducted by the
Special Committee; the risk that the Company is unable to
successfully negotiate a debt restructuring plan with respect to
the amounts owing to CIC; the risk that the calculated sales price
determined by the Company for the purposes of determining the
amount of royalties payable to the Mongolian government is deemed
as being “non-market” under Mongolian tax law; customer credit
risk; cash flow and liquidity risks; risks relating to the
Company’s decision to suspend activities relating to the
development of the Ceke Logistics Park project, including the risk
that its investment partner may initiate legal action against the
Company for failing to comply with the underlying agreements
governing project development; risks relating to the ability of the
Company to enhance the operational efficiency and the output
throughput of the washing facilities at Ovoot Tolgoi; risks
relating to the Company’s ability to successfully appeal MRAM’s
decision to terminate the Soumber Licenses and delays in receiving
the High Court’s ruling on the appeal; the risk that the Company is
unable to successfully negotiate an extension of the agreement with
the third party contractor relating to the operation of the wash
plant at the Ovoot Tolgoi mine site and risks relating to the
Company’s ability to raise additional financing and to continue as
a going concern. This list is not exhaustive of the factors that
may affect any of the Company’s forward-looking statements.
Due to assumptions, risks and uncertainties,
including the assumptions, risks and uncertainties identified above
and elsewhere in this press release, actual events may differ
materially from current expectations. The Company uses
forward-looking statements because it believes such statements
provide useful information with respect to the currently expected
future operations and financial performance of the Company, and
cautions readers that the information may not be appropriate for
other purposes. Except as required by law, the Company undertakes
no obligation to update forward-looking statements if circumstances
or management’s estimates or opinions should change. The reader is
cautioned not to place undue reliance on the forward-looking
statements, which speak only as of the date of this press release;
they should not rely upon this information as of any other
date.
The English text of this press release shall
prevail over the Chinese text in case of inconsistencies.
SouthGobi Resources (TSX:SGQ)
Gráfica de Acción Histórica
De Dic 2024 a Ene 2025
SouthGobi Resources (TSX:SGQ)
Gráfica de Acción Histórica
De Ene 2024 a Ene 2025
