SouthGobi Resources Ltd. (TSX:SGQ)(HKSE:1878), (the "Company" or "SouthGobi")
today announced its financial and operating results for the quarter and year
ended December 31, 2011. All figures are in US dollars unless otherwise stated.
HIGHLIGHTS
The Company's highlights for the year ended December 31, 2011 and subsequent
weeks are as follows:
-- Record annual coal sales of approximately 4.02 million tonnes (increase
of 58% from 2010);
-- Record annual gross profit of $51.7 million (increase of 424% from
2010);
-- Record annual revenue of $179.0 million (increase of 124% from 2010);
-- Coal production of 4.57 million tonnes compared to 2.79 million tonnes
in 2010, continuing to demonstrate the successful ramp-up of operations
at the Company's Ovoot Tolgoi Mine;
-- Average realized selling price of $54.03 per tonne (increase of 56%
compared to 2010);
-- On July 5, 2011, SouthGobi entered into an agreement with Ejinaqi Jinda
Coal Industry Co. Ltd ("Ejin Jinda") to wet wash coal from the Ovoot
Tolgoi Mine on a tolling arrangement;
-- On July 6, 2011, SouthGobi received a mining license pertaining to the
Soumber Deposit, subsequent exploration in 2011 has expanded its
resource base;
-- Awarded the tender to construct a paved highway from the Ovoot Tolgoi
Mine to the Shivee Khuren-Ceke crossing at the Mongolia-China border
("Shivee Khuren Border Crossing") with consortium partner NTB LLC;
-- On February 13, 2012, SouthGobi successfully commissioned its dry coal-
handling facility ("DCHF") at the Ovoot Tolgoi Mine;
-- On March 5, 2012, SouthGobi announced an agreement to sell the Tsagaan
Tolgoi Deposit to Modun Resources Limited ("Modun") for expected
consideration of $30.0 million; and
-- On March 19, 2012, SouthGobi announced updated NI 43-101 compliant
estimates of resources and reserves, which increased overall measured
plus indicated resources by 35% (from 363.6 million tonnes to 492.6
million tonnes total) and inferred resources by 42% (from 171.9 million
tonnes to 244.0 million tonnes total) and increased proven and probable
reserves for the Ovoot Tolgoi Mine by 65% (from 106.8 million tonnes to
175.7 million tonnes total).
REVIEW OF QUARTERLY OPERATING RESULTS
The Company's operating results for the previous eight quarters are summarized
in the table below:
2011
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QUARTER ENDED 31-Dec 30-Sep 30-Jun 31-Mar
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Volumes and prices
Raw semi-soft coking coal
Raw coal production (millions of
tonnes) 0.47 0.55 0.52 0.48
Coal sales (millions of tonnes) 0.53 0.66 0.60 0.34
Average realized sales price (per
tonne) $ 67.62 $ 66.83 $ 65.96 $ 56.50
Raw medium-ash coal
Raw coal production (millions of
tonnes) 0.37 0.20 - -
Coal sales (millions of tonnes) 0.37 0.20 - -
Average realized sales price (per
tonne) $ 48.59 $ 48.17 $ - $ -
Raw higher-ash coal
Raw coal production (millions of
tonnes) 0.50 0.50 0.35 0.63
Coal sales (millions of tonnes) 0.25 0.51 0.45 0.11
Average realized sales price (per
tonne) $ 40.30 $ 39.74 $ 38.32 $ 31.68
Total
Raw coal production (millions of
tonnes) 1.34 1.25 0.87 1.11
Coal sales (millions of tonnes) 1.15 1.37 1.05 0.45
Average realized sales price (per
tonne) $ 55.51 $ 54.01 $ 54.06 $ 50.29
Costs
Direct cash costs of product sold
(per tonne) (i) $ 22.14 $ 22.64 $ 26.77 $ 18.91
Total cash costs of product sold
(per tonne) (i) $ 23.09 $ 23.17 $ 27.61 $ 20.61
Waste movement and stripping ratio
Production waste material moved
(millions of bank cubic meters) 4.58 4.10 4.08 3.85
Strip ratio (bank cubic meters of
waste rock per tonne of coal
produced) 3.42 3.28 4.74 3.47
Pre-production waste material
moved (millions of bank cubic
meters) - 0.39 0.80 0.49
Other operating capacity
statistics
Capacity
Number of mining
shovels/excavators available at
period end 3 3 4 3
Total combined stated mining
shovel/excavator capacity at
period end
(cubic meters) 64 64 98 83
Number of haul trucks available
at period end 25 16 16 16
Total combined stated haul truck
capacity at period end (tonnes) 4,561 2,599 2,599 2,599
Employees and safety
Employees at period end 720 695 658 600
Lost time injury frequency rate
(ii) 1.2 0.9 0.6 0.7
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2010
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QUARTER ENDED 31-Dec 30-Sep 30-Jun 31-Mar
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Volumes and prices
Raw semi-soft coking coal
Raw coal production (millions of
tonnes) 0.41 0.18 0.39 0.21
Coal sales (millions of tonnes) 0.35 0.11 0.42 0.40
Average realized sales price (per
tonne) $ 47.08 $ 46.04 $ 44.10 $ 36.62
Raw medium-ash coal
Raw coal production (millions of
tonnes) - - - -
Coal sales (millions of tonnes) - - - -
Average realized sales price (per
tonne) $ - $ - $ - $ -
Raw higher-ash coal
Raw coal production (millions of
tonnes) 0.97 0.39 0.23 0.01
Coal sales (millions of tonnes) 1.12 0.08 0.03 0.03
Average realized sales price (per
tonne) $ 26.75 $ 25.34 $ 18.82 $ 21.24
Total
Raw coal production (millions of
tonnes) 1.38 0.57 0.62 0.22
Coal sales (millions of tonnes) 1.47 0.19 0.45 0.43
Average realized sales price (per
tonne) $ 31.56 $ 37.15 $ 42.63 $ 35.52
Costs
Direct cash costs of product sold
(per tonne) (i) $ 18.53 $ 18.59 $ 21.37 $ 22.25
Total cash costs of product sold
(per tonne) (i) $ 19.25 $ 22.04 $ 22.30 $ 23.32
Waste movement and stripping ratio
Production waste material moved
(millions of bank cubic meters) 3.56 2.90 1.73 1.50
Strip ratio (bank cubic meters of
waste rock per tonne of coal
produced) 2.58 5.09 2.79 6.79
Pre-production waste material
moved (millions of bank cubic
meters) 0.73 0.43 0.02 -
Other operating capacity
statistics
Capacity
Number of mining
shovels/excavators available at
period end 3 2 2 2
Total combined stated mining
shovel/excavator capacity at
period end
(cubic meters) 82 48 48 48
Number of haul trucks available
at period end 15 12 11 9
Total combined stated haul truck
capacity at period end (tonnes) 2,254 1,727 1,509 1,073
Employees and safety
Employees at period end 544 472 421 388
Lost time injury frequency rate
(ii) 0.8 0.9 1.0 0.6
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(i) A non-IFRS financial measure, see Non-IFRS Financial Measures section
(ii) Per 1,000,000 man hours
For the year ended December 31, 2011
For the year ended December 31, 2011, the Company produced 4.57 million tonnes
of raw coal with a strip ratio of 3.63 compared to production of 2.79 million
tonnes of raw coal with a strip ratio of 3.47 for the year ended December 31,
2010. Mining capacity increased in 2011 compared to 2010 due to the
commissioning of additional mining equipment. Mining activities also commenced
in the Sunrise Pit during the third quarter of 2011. In 2010, production was
negatively impacted by the Sunset Pit realignment in the first half of 2010.
Realigning the Sunset Pit impacted operations because the process required
substantial above-trend waste removal, which resulted in lower production
volumes.
For the year ended December 31, 2011, the Company sold 4.02 million tonnes of
coal at an average realized selling price of $54.03 per tonne. This compares to
2.54 million tonnes of coal sold for the year ended December 31, 2010 at an
average realized selling price of $34.61 per tonne. The average realized selling
price has increased due to increased prices of individual customer contracts in
2011. The Company continues to focus its marketing efforts on the expansion of
its customer base.
Direct cash costs of product sold (a non-IFRS financial measure, see Non-IFRS
Financial Measures section) were $23.15 per tonne for the year ended December
31, 2011 compared to $19.66 per tonne for the year ended December 31, 2010.
Direct cash costs have increased as a result of increased screening activities
of the Company's raw higher-ash coal, higher fuel prices and general economic
factors including the strengthening of the Mongolian Tugrik and the rate of
inflation in Mongolia.
Prices of diesel fuel (approximately 25% of the Company's direct cash costs)
were 55% higher per tonne of coal sold for the year ended December 31, 2011
compared to the year ended December 31, 2010. Significant fuel shortages in
Mongolia during the second quarter of 2011 forced the Company to pay a higher
price to secure diesel fuel supplies. Government of Mongolia sources have
advised SouthGobi that there is now an agreement to guarantee minimum monthly
fuel supplies from each of Russia and China. Furthermore, during 2011 the
Company completed construction of a new fuel storage facility at the Ovoot
Tolgoi Mine to increase onsite fuel storage capacity to 1.3 million liters.
On September 27, 2011, a fire occurred on the Company's Liebherr 996 hydraulic
shovel that was commissioned at the Ovoot Tolgoi Mine in December 2009
(previously included in the mining fleet). Safety protocols were followed and
there were no injuries. Following subsequent inspection and third-party reports,
the Company decommissioned the machine and currently believes it is unlikely it
will be repairable. Site inspections have been completed by the insurance
underwriter and the Company has been advised that the damage will be covered by
its insurance policy. As a result, the Company has derecognized the full
carrying amount of the machine and recognized a receivable in the amount equal
to the amount of the estimated net insurance proceeds.
For the three months ended December 31, 2011
For the three months ended December 31, 2011, the Company produced 1.34 million
tonnes of raw coal with a strip ratio of 3.42 compared to production of 1.25
million tonnes of raw coal with a strip ratio of 3.28 for the three months ended
September 30, 2011 and production of 1.38 million tonnes of raw coal with a
strip ratio of 2.58 for the three months ended December 31, 2010. Coal
production for the three months ended December 31, 2011 increased slightly
compared to the three months ended September 30, 2011, despite the loss of the
Liebherr 996 hydraulic shovel in September 2011. The Company's second Liebherr
R9250 hydraulic excavator, which was commissioned ahead of schedule in the
second quarter of 2011 and previously used to supplement mining capacity of the
Company's existing fleet, enabled the Company to meet its production targets for
the three months ended December 31, 2011. Coal production for the three months
ended December 31, 2011 decreased slightly compared to the three months ended
December 31, 2010. The slight decrease in production for the three months ended
December 31, 2011 was due to a higher strip ratio; however, this was offset by
an expanded mining fleet.
For the three months ended December 31, 2011, the Company sold 1.15 million
tonnes of coal at an average realized selling price of $55.51 per tonne. This
compares to 1.37 million tonnes of coal sold for the three months ended
September 30, 2011 at an average realized selling price of $54.01 per tonne and
1.47 million tonnes of coal sold for the three months ended December 31, 2010 at
an average realized selling price of $31.56 per tonne. Sales volume declined for
the three months ended December 31, 2011 due to some customers' preference to
purchase coal on a washed basis in 2012 in lieu of taking unwashed coal during
the fourth quarter of 2011 and management's decision to stockpile a manageable
amount of coal for processing in 2012.
Direct cash costs of product sold were $22.14 per tonne for the three months
ended December 31, 2011 compared to $22.64 per tonne for the three months ended
September 30, 2011 and $18.53 per tonne for the three months ended December 31,
2010. Direct cash costs per tonne sold increased in the fourth quarter of 2011
compared to the fourth quarter of 2010 primarily due to an increase in the strip
ratio partially offset by mining efficiencies.
REVIEW OF QUARTERLY FINANCIAL RESULTS
The Company's financial results for the previous eight quarters are summarized
in the table below:
($ in thousands, except for per share information, unless otherwise indicated)
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2011
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QUARTER ENDED 31-Dec 30-Sep 30-Jun 31-Mar
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Revenue $ 51,064 $ 60,491 $ 47,336 $ 20,158
Gross profit 16,637 17,635 9,744 7,690
Profit margin 33% 29% 21% 38%
Other operating
expenses (24,644) (138) (3,024) (1,383)
Administration expenses (8,612) (7,993) (6,808) (5,336)
Evaluation and
exploration expenses (14,513) (10,908) (4,356) (1,991)
Loss from operations (31,132) (1,404) (4,444) (1,020)
Net income / (loss) (18,897) 55,921 67,323 (46,602)
Basic income / (loss)
per share (0.10) 0.31 0.37 (0.25)
Diluted loss per share (0.14) (0.02) - (0.25)
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2011
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QUARTER ENDED 31-Dec 30-Sep 30-Jun 31-Mar
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Net income/(loss) $ (18,897) $ 55,921 $ 67,323 $ (46,602)
Income/(loss)
adjustments, net of
tax
Share-based
compensation 4,050 4,296 3,349 2,715
Net impairment
loss/(recovery)
on assets 23,818 (2,925) - -
Unrealized
foreign
exchange
losses/(gains) 34 103 263 (993)
Loss/(gain) on
value change of
embedded
derivatives in
CIC debenture (10,790) (62,058) (70,422) 36,780
Loss on partial
conversion of
CIC debenture - - - -
Loss/(gain) on
FVTPL
investments 155 2,449 (3,629) 4,116
Adjusted net loss (i) (1,630) (2,214) (3,116) (3,984)
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2010
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QUARTER ENDED 31-Dec 30-Sep 30-Jun 31-Mar
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Revenue $ 41,595 $ 6,597 $ 17,668 $ 13,917
Gross profit 3,950 336 4,400 1,187
Profit margin 9% 5% 25% 9%
Other operating
expenses (2,121) (7,586) (1,894) (1,042)
Administration expenses (6,599) (7,405) (6,442) (4,992)
Evaluation and
exploration expenses (4,144) (6,314) (6,659) (1,651)
Loss from operations (8,914) (20,969) (10,595) (6,498)
Net income / (loss) (28,720) 27,495 53,301 (168,271)
Basic income / (loss)
per share (0.16) 0.15 0.29 (1.09)
Diluted loss per share (0.16) (0.08) (0.07) (1.09)
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2010
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QUARTER ENDED 31-Dec 30-Sep 30-Jun 31-Mar
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Net income/(loss) $ (28,720) $ 27,495 $ 53,301 $ (168,271)
Income/(loss)
adjustments, net of
tax
Share-based
compensation 3,840 3,695 2,754 2,971
Net impairment
loss/(recovery)
on assets 574 7,010 - -
Unrealized
foreign
exchange
losses/(gains) (1,837) (1,116) (1,120) 370
Loss/(gain) on
value change of
embedded
derivatives in
CIC debenture 19,995 (49,772) (72,232) 1,372
Loss on partial
conversion of
CIC debenture - - - 151,353
Loss/(gain) on
FVTPL
investments (4,375) (1,735) 4,555 685
Adjusted net loss (i) (10,523) (14,423) (12,742) (11,520)
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(i) A non-IFRS financial measure, see Non-IFRS Financial Measures section
For the year ended December 31, 2011
The Company recorded net income for the year ended December 31, 2011 of $57.7
million compared to a net loss of $116.2 million for the year ended December 31,
2010. For the year ended December 31, 2010, a $151.4 million loss on partial
conversion of the CIC convertible debenture was recorded.
The Company incurred an operating loss for the year ended December 31, 2011 of
$38.0 million compared to $47.0 million for the year ended December 31, 2010.
The decrease in the operating loss is due to the factors discussed below:
Gross Profit:
The Company's gross profit is composed of revenue (net of royalties and selling
fees) and cost of sales and relates solely to the Mongolian Coal Division. For
the year ended December 31, 2011, the Company generated gross profit of $51.7
million compared to $9.9 million for the year ended December 31, 2010.
Revenue was $179.0 million for the year ended December 31, 2011, compared to
$79.8 million for the year ended December 31, 2010. Revenue has increased due to
both higher sales volumes and higher average realized sales prices which have
increased by 58% and 56%, respectively.
The Company is subject to a 5% royalty on all coal sold based on a set reference
price per tonne published monthly by the Government of Mongolia. Effective
January 1, 2011, the Company is also subject to a sliding scale additional
royalty of up to 5% based on the set reference price of coal. Based on the 2011
reference prices, the Company was subject to an average 8% royalty based on a
weighted average reference price of $98.97 per tonne. The Company's effective
royalty rate for 2011, based on the Company's average realized selling price of
$54.03 per tonne, was 15%.
Together with other Mongolian mining companies affected by the escalation of
effective royalty rates, a dialog was opened on this topic with the appropriate
Government of Mongolia authorities with a view to moving to a more equitable
process for setting reference prices. There has been a successful outcome in
that commencing February 2012 royalty reference prices are now based off prices
for coal products sold at the two main coal export border locations in Mongolia,
namely Shivee Khuren-Ceke and Gashuun Sukhait-Ganqimaodao. The dialog is
continuing, with the aim of having prices based off actual contract prices for
sales at these locations, excluding export fees and Chinese VAT (i.e. revenue
received for coal delivered to the Mongolia-China border prior to export).
Cost of sales was $127.3 million for the year ended December 31, 2011, which
includes the direct cash cost of products sold, mine administration cash costs
of product sold, equipment depreciation, depletion of mineral properties and
share-based compensation. Cost of sales was $69.9 million for the year ended
December 31, 2010. The increase in cost of sales for the year ended December 31,
2011 is due to the higher sales volumes and higher unit costs.
Other Operating Expenses:
Other operating expenses were $29.2 million for the year ended December 31, 2011
compared to $12.6 million for the year ended December 31, 2010. The increase
primarily relates to the impairment of property, plant and equipment and public
infrastructure costs. For the year ended December 31, 2011, the Company recorded
$16.6 million of impairment charges, net of insurance proceeds receivable, to
reduce various items of property, plant and equipment to their recoverable
amounts compared to $1.8 million for the year ended December 31, 2010. For the
year ended December 31, 2011, the Company recorded public infrastructure costs
of $8.1 million to maintain and upgrade public transportation infrastructure
used to transport coal from the Ovoot Tolgoi Mine to the Shivee Khuren Border
Crossing and to complete road and construction works on the Mongolian side of
the border to facilitate the future opening of the designated coal
transportation corridors at the Shivee Khuren Border Crossing compared to $6.0
million for the year ended December 31, 2010.
Administration Expenses:
Administration expenses were $28.7 million for the year ended December 31, 2011
compared to $25.4 million for the year ended December 31, 2010. The increase
primarily relates to increased share-based compensation expense and additional
staff to support the expansion of the Company's operations.
Evaluation and Exploration Expenses:
Evaluation and exploration expenses were $31.8 million for the year ended
December 31, 2011 compared to $18.8 million for the year ended December 31,
2010. SouthGobi conducted a record level of exploration activity in Mongolia for
the year ended December 31, 2011. Key exploration targets included additional
drilling at the Soumber Deposit and the fields surrounding the Soumber Deposit,
as well as additional areas within the Ovoot Tolgoi Complex mining licenses. In
addition, the 2011 exploration program included a more active water exploration
program.
Finance Income & Finance Costs:
The Company incurred finance costs for the year ended December 31, 2011 of $12.8
million compared to $175.9 million for the year ended December 31, 2010. Finance
costs for the year ended December 31, 2011 primarily consisted of $9.1 million
of interest expense on the CIC convertible debenture and a $3.1 million mark to
market loss on FVTPL investments, whereas finance costs for the year ended
December 31, 2010 primarily consisted of a $151.4 million loss on partial
conversion of the CIC convertible debenture and $24.3 million of interest
expense on the CIC convertible debenture.
The Company recorded finance income for the year ended December 31, 2011 of
$107.7 million compared to $103.9 million for the year ended December 31, 2010.
Finance income for the year ended December 31, 2011 consisted of a $106.5
million gain on the fair value change of the embedded derivatives in the CIC
convertible debenture and $1.2 million of interest income, whereas finance
income for the year ended December 31, 2010 primarily consisted of a $100.6
million gain on the fair value change of the embedded derivatives in the CIC
convertible debenture and $2.4 million of interest income.
The Company's investment in Aspire Mining Limited ("Aspire") continues to be
classified as an available-for-sale financial asset and for the year ended
December 31, 2011, the Company recorded an after-tax mark to market loss of
$11.2 million related to Aspire that has been recorded in other comprehensive
income.
For the three months ended December 31, 2011
The Company recorded a net loss for the three months ended December 31, 2011 of
$18.9 million compared to net income of $55.9 million for the three months ended
September 30, 2011 and a net loss of $28.7 million for the three months ended
December 31, 2010. The net loss in the fourth quarter of 2011 primarily relates
to gross profit less other operating expenses, administration costs and
exploration costs, partially offset by a $10.8 million gain on the fair value
change of the embedded derivatives in the CIC convertible debenture. The $10.8
million gain on the fair value change of the embedded derivatives in the CIC
convertible debenture in the fourth quarter of 2011 compares to a gain of $62.1
million in the third quarter of 2011 and a loss of $20.0 million in the fourth
quarter of 2010.
The Company incurred an operating loss for the three months ended December 31,
2011 of $31.1 million compared to a $1.4 million loss for the three months ended
September 30, 2011 and a $8.9 million loss for the three months ended December
31, 2010. The changes in the operating loss are due to the factors discussed
below:
Gross Profit:
The Company's gross profit is composed of revenue (net of royalties and selling
fees) and cost of sales and relates solely to the Mongolian Coal Division. For
the three months ended December 31, 2011, the Company generated gross profit of
$16.6 million compared to $17.6 million for the three months ended September 30,
2011 and $4.0 million for the three months ended December 31, 2010.
The Company recognized revenue of $51.1 million for the three months ended
December 31, 2011 compared to $60.5 million for the three months ended September
30, 2011 and $41.6 million for the three months ended December 31, 2010. Sales
volume declined in the fourth quarter of 2011 compared to the third quarter of
2011 due to some customers' preference to purchase coal on a washed basis in
2012 in lieu of taking unwashed coal during the fourth quarter of 2011 and
management's decision to stockpile a manageable amount of coal for processing in
2012.
Revenue continues to be negatively impacted by the current royalty regime. The
'effective royalty' rate increased from 16% in the third quarter of 2011 to 18%
in the fourth quarter of 2011 due to the methodology being applied to royalties
basing fees on reference price levels set arbitrarily by the Government of
Mongolia. The reference price levels applied to the Company's raw semi-soft
coking coal and raw medium-ash coal were identical, despite the lower realized
selling price for the Company's raw medium-ash coal.
Cost of sales was $34.4 million for the three months ended December 31, 2011
compared to $42.9 million for the three months ended September 30, 2011 and
$37.6 million for the three months ended December 31, 2010. Cost of sales
comprise the direct cash cost of products sold, mine administration cash costs
of product sold, equipment depreciation, depletion of mineral properties and
share-based compensation. Cost of sales decreased in the fourth quarter of 2011
compared to the third quarter of 2011 and the fourth quarter of 2010 due to
lower sales volumes. The lower sales volumes in the fourth quarter of 2011 were
partially offset by higher unit costs compared to the fourth quarter of 2010.
Other Operating Expenses
Other operating expenses were $24.6 million for the three months ended December
31, 2011 compared to $0.1 million for the three months ended September 30, 2011
and $2.1 million for the three months ended December 31, 2010. The increase
primarily relates to the impairment of property, plant and equipment. For the
three months December 31, 2011, the Company recorded $19.5 million of impairment
charges to reduce various items of property, plant and equipment to their
recoverable amounts compared to $0.6 million for the three months ended December
31, 2010.
Administration Expenses:
Administration expenses were $8.6 million for the three months ended December
31, 2011 compared to $8.0 million for the three months ended September 30, 2011
and $6.6 million for the three months ended December 31, 2010. Administration
costs increased in the fourth quarter of 2011 compared to the third quarter of
2011 as a result of employee bonuses. Administration costs increased in the
fourth quarter of 2011 compared to the fourth quarter of 2010 as a result of
increased share-based compensation expense and additional staff to support the
expanded operations.
Evaluation and Exploration Expenses:
Exploration expenses for the three months ended December 31, 2011 were $14.5
million compared to $10.9 million for the three months ended September 30, 2011
and $4.1 million for the three months ended December 31, 2010. Exploration
expenses will vary from quarter to quarter depending on the number of projects
and the related seasonality of the exploration programs. Exploration was still
in the process of mobilization during the second quarter of 2011 due to delays
in receiving required government approvals, resulting in a higher proportion of
costs being incurred in the third and fourth quarter of 2011. In addition, the
2011 exploration program included a more active water exploration program.
Finance Income & Finance Costs:
The Company incurred finance costs for the three months ended December 31, 2011
of $1.1 million compared to $24.9 million for the three months ended December
31, 2010. Finance costs for the three months ended December 31, 2011 primarily
consisted of $0.9 million of interest expense on the CIC convertible debenture,
whereas finance costs for the three months ended December 31, 2010 primarily
consisted of a $20.0 million loss on the fair value change of the embedded
derivatives in the CIC convertible debenture and $4.8 million of interest
expense on the CIC convertible debenture.
The Company recorded finance income for the three months ended December 31, 2011
of $11.0 million compared to $5.0 million for the three months ended December
31, 2010. Finance income for the three months ended December 31, 2011 primarily
consisted of a $10.8 million gain on the fair value change of the embedded
derivatives in the CIC convertible debenture and $0.2 million of interest
income, whereas finance income for the three months ended December 31, 2010
primarily consisted of a $4.4 million mark to market gain on FVTPL investments
and $0.6 million of interest income.
For the three months ended December 31, 2011, the Company recorded an after-tax
mark to market loss of $6.5 million related to Aspire that has been recorded in
other comprehensive income.
FINANCIAL POSITION AND LIQUIDITY
The Company's total assets at December 31, 2011 were $920.3 million compared
with $961.9 million at December 31, 2010.
At December 31, 2011, the Company had $123.6 million in cash and cash
equivalents and $45.0 million in money market investments for a total liquidity
of $168.6 million compared with $492.0 million in cash and cash equivalents and
$62.7 million in money market investments for a total liquidity of $554.7
million at December 31, 2010.
The Company's non-current liabilities at December 31, 2011 were $145.6 million
compared with $252.5 million at December 31, 2010. The decrease in non-current
liabilities primarily relates to the decrease in the fair value of the CIC
convertible debenture.
TOLL WASHING AGREEMENT
On July 5, 2011, the Company entered into an agreement with Ejin Jinda, a
subsidiary of China Mongolia Coal Co. Ltd ("CMC"), to wet wash coal from the
Ovoot Tolgoi Mine on a tolling arrangement. The agreement has a duration of 5
years from commencement and provides for an annual wet washing capacity of 3.5
million tonnes of input coal (i.e. sufficient capacity to wet wash medium and
higher-ash coals after DCHF processing).
Ejin Jinda's wet washing facility is located approximately 10 kilometers inside
China from the Shivee Khuren Border Crossing (i.e. approximately 50 kilometers
from the Ovoot Tolgoi Mine). Medium and higher-ash coals with only basic
processing through Ovoot Tolgoi's on-site DCHF will be transported from the
Ovoot Tolgoi Mine to the facility under a separate transport agreement. Based on
preliminary studies, the Company expects these coals can then be washed to
produce coals with ash in the range of 8% to 11% at a yield of 85% to 90%. Ejin
Jinda will charge the Company a single toll washing fee which will cover their
expenses, capital recovery and profit. Washed coal will generally meet semi-soft
coking coal specifications.
Construction of Ejin Jinda's wet washing facility is now complete and it has
been connected to utility supply. The equipment is currently undergoing testing,
including batch processing trials. Commissioning is expected to complete early
in the second quarter of 2012.
SOUMBER MINING LICENSE
On June 3, 2011, the Company announced it had successfully registered the
resource associated with the Soumber Deposit (at that time comprising the
Central Soumber, East Soumber and Biluut Fields) with the Mineral Resource
Authority of Mongolia ("MRAM"). Further, on July 6, 2011, the Company announced
that MRAM had issued the Company a mining license pertaining to the Soumber
Deposit. The new 10,993 hectare mining license was granted for an initial term
of 30 years with an option for two 20 year extensions.
A successful exploration program in the vicinity of the Soumber Deposit during
2011 has resulted in additional coal resources being identified. Resources
associated with the South Biluut and Jargalant Fields have been through the
resource registration process and the exploration licenses pertaining to
resources outside the mining license are subject to Pre-Mining Agreement ("PMA")
applications. Subsequent to the receipt of the PMA, the Company intends to
proceed through to the mining license application process.
REGIONAL INFRASTRUCTURE
On August 2, 2011, the State Property Committee of Mongolia awarded the tender
to construct a paved highway from the Ovoot Tolgoi Complex to the Shivee Khuren
Border Crossing to consortium partners NTB LLC and the Company's Mongolian
operating subsidiary, SouthGobi Sands LLC (together referred to as "RDCC"). On
October 26, 2011, RDCC signed the concession agreement with the State Property
Committee of Mongolia. RDCC now has the right to conclude a 15 year build,
operate and transfer agreement under the Mongolian Law on Concessions. RDCC has
completed the design of the road and plan to commence construction in the first
half of 2012. The paved highway will have an intended carrying capacity upon
completion in excess of 20 million tonnes of coal per year.
DRY COAL-HANDLING FACILITY
On February 13, 2012, the Company announced the successful commissioning of the
DCHF at the Ovoot Tolgoi Mine. The DCHF has capacity to process nine million
tonnes of run-of-mine ("ROM") coal per year. The DCHF includes a
300-tonne-capacity dump hopper, which receives ROM coal from the Ovoot Tolgoi
Mine and feeds a coal rotary breaker that sizes coal to a maximum of 50
millimeters and rejects oversize ash. Prior to the commissioning of the rotary
breaker, temporary screening operations were used at the Ovoot Tolgoi Mine to
process higher-ash coals. Screening performed a similar function to the rotary
breaker, namely rejecting oversize ash and sizing the coal to a maximum of 50
millimeters; however, the rotary breaker is anticipated to reduce screening
costs and improve yield recoveries.
During the course of 2012, the DCHF will be upgraded to include dry air
separation modules and covered load out conveyors with fan stackers to take
processed coals to stockpiles and enable more efficient blending.
SALE OF TSAGAAN TOLGOI DEPOSIT
On March 5, 2012, SouthGobi announced an agreement to sell the Tsagaan Tolgoi
Deposit to Modun, a company listed on the Australian Stock Exchange under the
symbol MOU. Under the transaction, SouthGobi expects to receive $30.0 million of
total consideration, comprising $7.5 million up-front in cash, $12.5 million
up-front in Modun shares and deferred consideration of an additional $10.0
million also payable in Modun shares.
As a result, SouthGobi will have a significant shareholding in Modun and it will
have the right to nominate one director to the board of Modun subject to
SouthGobi holding an equity interest in excess of 14.9%. The transaction is
subject to Modun shareholder approval, regulatory approvals under the laws of
Mongolia, Hong Kong and Singapore, and Australian Foreign Investment Review
Board approval. The transaction is expected to be completed by June 1, 2012.
COMMON SHARE REPURCHASE PROGRAM
On June 8, 2010, the Company announced that its Board of Directors authorized a
share repurchase program to purchase up to 2.5 million common shares of the
Company on each or either of the TSX and the HKEX, in aggregate representing up
to 5.0 million common shares of the Company. On June 8, 2011, the Company
announced the renewal of its share repurchase program. The share repurchase
program will remain in effect until June 14, 2012, or until the purchases are
complete or the program is terminated by the Company. For the year ended
December 31, 2011, the Company repurchased 1.3 million shares on the HKEX and
2.0 million shares on the TSX for a total of 3.3 million common shares. From
inception of the share repurchase program to March 19, 2012, the Company has
repurchased 1.6 million shares on the HKEX and 2.6 million shares on the TSX for
a total of 4.2 million common shares. The Company cancels all shares after they
are repurchased.
COMPLIANCE WITH THE CODE ON CORPORATE GOVERNANCE PRACTICES
The Company has complied with provisions on the Code on Corporate Governance
Practices, as set out in Appendix 14 of the rules governing the listing of the
securities on the Hong Kong Stock Exchange (the "Listing Rules") throughout the
year ended December 31, 2011.
COMPLIANCE WITH THE MODEL CODE FOR SECURITIES TRANSACTIONS BY DIRECTORS OF
LISTED COMPANIES
The Company has adopted policies in its Corporate Disclosure, Confidentiality
and Securities policy that has terms that are no less exacting than those set
out in Appendix 10 of the rules governing the listing of securities on the Hong
Kong Stock Exchange.
The Board confirms that all of the Directors have complied with the required
standard set out in the Model Code throughout the year ended December 31, 2011.
OUTLOOK
During 2011 SouthGobi succeeded in growing and improving the value of its coal.
Average gross selling price increased by $19.42 per tonne (56%) to $54.03 per
tonne, whilst total cash costs only increased by $3.31 per tonne to $24.01 per
tonne which was primarily due to the year over year increase in average fuel
costs of approximately 55% per tonne of product sold and increased screening
activities. Profitability generally improved during the course of the year and
the final quarter of 2011 saw a record spread of $32.42 between the average
selling price per tonne and total cash cost per tonne.
Much has been said by publicly-listed coking coal producers regarding weaker
current market conditions. North American and Australian coking coal producers
have mostly indicated that early 2012 will be characterized by lower prices and
lower physical demand in the seaborne coking coal arena. However, SouthGobi
believes its location in Southern Mongolia and closer nexus with the China
market provides it with a different market environment. China is absolutely the
key theme for internationally traded coking coal. From 2008 to 2011 China grew
its annual net coking coal imports by approximately 38.0(1) million tonnes,
whilst the rest of the world combined actually reduced net coking coal imports
by approximately 10.0(2) million tonnes. Mongolia, being a direct neighbor to
China and with scalable land-based infrastructure, has now become the dominant
supplier of China's coking coal import requirements. Mongolia provided
approximately 45%(1) of China's coking coal import needs in 2011, almost twice
the share of the next largest supplier, Australia.
China continues to grow its requirements for coking coal and the Chinese market
environment is more stable than the relatively smaller seaborne market. Since
peaking at the start of 2011, seaborne coking coal prices have fallen by up to
44%(2) whereas Chinese regional domestic coking coal prices have generally risen
in that period.
The first quarter of any year is generally the worst for border throughput
capacity owing to the extended closure of the Shivee Khuren Border Crossing for
the Chinese New Year and Mongolian Tsagaan Sar public holidays. This generally
impacts coal sales. For example, in 2011, first quarter sales represented only
approximately 11% of the total amount of coal sold for the year. SouthGobi
anticipates the border to be open 40-50% less time in the first quarter of 2012
than any typical second, third or fourth quarter. However, despite this, the
Company has contracted to sell 50-60% more coal than in the first quarter of
2011, which if achieved will put it ahead of plan for year over year sales
volume growth.
In terms of pricing, SouthGobi currently forecasts to set a new record level for
its gross average sales price in the first quarter of 2012. Contract pricing for
individual coal types has been set broadly constant with the fourth quarter of
2011 or moderately improved. The sales mix will improve due to the impact of the
DCHF, which has substantially reduced the quantity of higher-ash coal being
produced. Furthermore, the Company continues to stock-pile some higher-ash coal
in anticipation of completing the commissioning of the Ejin Jinda wet washing
facility.
----------------------------------------------------------------------------
(1) China Coal Resource (en.sxcoal.com)
(2) AME Group: Strategic Market Study - Metallurgical Coal 2011 Q4
The year ended December 31, 2011 was the most meaningful year of investment for
SouthGobi. Absent any change in external conditions, the Company anticipates its
rate of investment to slow in 2012 and its income from mining operations to
increase materially. At the end of 2011, SouthGobi's combined cash and cash
equivalents and money market investments were approximately $168.6 million. At
this stage, the Company believes these resources combined with anticipated
income from its mining operations will be sufficient to execute its strategy.
SouthGobi is uniquely positioned, with a number of key competitive strengths,
including:
-- Strategic location - SouthGobi is the closest major coking coal producer
in the world to China. Our Ovoot Tolgoi Mine is approximately 40
kilometers from China, which is approximately 190 kilometers closer than
Tavan Tolgoi coal producers in Mongolia and 7,000 to 10,000 kilometers
closer than Australian and North American coking coal producers. The
Company has an infrastructure advantage, being approximately 50
kilometers from existing railway infrastructure, which is approximately
one tenth the distance to rail of Tavan Tolgoi coal producers in
Mongolia.
-- Premium quality coals - Most of the Company's coal resources have coking
properties, including a mixture of semi-soft coking coals and hard
coking coals. SouthGobi is also completing its investment in processing
infrastructure to capture more of the value by selling 'clean' instead
of 'raw' coal products.
-- Sustainable volume growth - SouthGobi's coal sales volume grew by
approximately 58% from 2010 to 2011. 2012 will see continued growth at
the Ovoot Tolgoi Mine. Currently undeveloped resources at the Soumber
Deposit and the Zag Suuj Deposit will provide additional growth in the
future.
-- Expanding margins - 2011 gross profit per tonne of coal sold was more
than three times the amount realized in 2010. The Company believes,
subject to market conditions, it will continue expanding margins in the
near term through the benefits of coal processing and increasing
economies of scale.
-- Exploration as a core business competency - SouthGobi's resources in
Mongolia have been acquired through a long term in-house exploration
program. The Company continues to maintain an active exploration program
that provides additional resources of coal in a cost effective manner.
The $31.8 million exploration program in 2011 added 32.0 million tonnes
of measured coal resources, 97.0 million tonnes of indicated coal
resources and 72.1 million tonnes of inferred coal resources.
Objectives
The Company's objectives for 2012 are as follows:
-- Grow Ovoot Tolgoi Mine - The additional capacity of the new mining
fleets should support growth in coal availability and sales for 2012
over 2011.
-- Continue to develop regional infrastructure - The Company's immediate
priority centers on improving roads in the area around the Ovoot Tolgoi
Mine. SouthGobi is part of a consortium awarded the tender to construct
a paved highway from the Ovoot Tolgoi Complex to the Shivee Khuren
Border Crossing. The consortium intends to imminently commence
construction of the highway that is expected upon completion to have a
carrying capacity in excess of 20 million tonnes of coal per year.
-- Advancing the Soumber Deposit - SouthGobi intends to further advance the
feasibility, planning and preparation for a mine at Soumber.
-- Value-adding/upgrading coal - Ejin Jinda is close to completing the
commissioning of its wet washing facility to process some SouthGobi
coals close to the Shivee Khuren Border Crossing on a toll washing
arrangement.
-- Exploration - Exploration will take place to further define the
Company's existing deposits.
-- Operations - Continuing to focus on production safety, environmental
protection, operational excellence and community relations.
NON-IFRS FINANCIAL MEASURES
Cash Costs:
The Company uses cash costs to describe its cash production costs. Cash costs
incorporate all production costs, which include direct and indirect costs of
production. Non-cash adjustments include share-based compensation costs,
depreciation and depletion of mineral properties.
The Company uses this performance measure to monitor its operating cash costs
internally and believes this measure provides investors and analysts with useful
information about the Company's underlying cash costs of operations. The Company
believes that conventional measures of performance prepared in accordance with
IFRS do not fully illustrate the ability of its mining operations to generate
cash flows. The Company reports cash costs on a sales basis. This performance
measure is commonly utilized in the mining industry.
The cash costs of product sold presented may differ from cash costs of product
produced depending on the timing of stockpile inventory turnover.
Adjusted Net Income/(Loss):
Adjusted net income/(loss) excludes share-based compensation, net impairment
loss/(recovery) on assets, unrealized foreign exchange losses/(gains),
loss/(gain) on the fair value change of the embedded derivatives in the CIC
convertible debenture, loss on partial conversion of the CIC convertible
debenture and losses/(gains) on fair value through profit or loss ("FVTPL")
investments. The Company excludes these items from net income/(loss) to provide
a measure which allows the Company and investors to evaluate the results of the
underlying core operations of the Company and its profitability from operations.
The items excluded from the computation of adjusted net income/(loss), which are
otherwise included in the determination of net income/(loss) prepared in
accordance with IFRS, are items that the Company does not consider to be
meaningful in evaluating the Company's past financial performance or the future
prospects and may hinder a comparison of its period-to-period results.
CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------
Consolidated Statement of Comprehensive Income
(Expressed in thousands of U.S. Dollars, except for share
and per share amounts)
Year ended December 31,
--------------------------------------
Notes 2011 2010
---------------------------- ----------------
Revenue $ 179,049 $ 79,777
Cost of sales 3 (127,343) (69,904)
----------------------------------------------------------------------------
Gross profit 51,706 9,873
Other operating expenses 4 (29,189) (12,643)
Administration expenses 5 (28,749) (25,438)
Evaluation and exploration
expenses 6 (31,768) (18,769)
----------------------------------------------------------------------------
Loss from operations (38,000) (46,977)
Finance costs 7 (12,765) (175,855)
Finance income 7 107,732 103,948
----------------------------------------------------------------------------
Income/(loss) before tax 56,967 (118,884)
Current income tax expense 8 (7,340) (1,806)
Deferred income tax recovery 8 8,118 4,495
----------------------------------------------------------------------------
Net income/(loss)
attributable to equity
holders of the Company 57,745 (116,195)
----------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME
(Loss)/gain on available-
for-sale assets, net of tax (11,202) 27,761
----------------------------------------------------------------------------
Net comprehensive
income/(loss) attributable
to equity holders of the
Company $ 46,543 $ (88,434)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
BASIC INCOME/(LOSS) PER
SHARE 9 $ 0.32 $ (0.66)
DILUTED LOSS PER SHARE 9 $ (0.19) $ (0.66)
Consolidated Statement of
Financial Position
(Expressed in thousands of
U.S. Dollars)
As at December 31,
--------------------------------------
Notes 2011 2010
---------------------------- ----------------
ASSETS
Current assets
Cash and cash equivalents $ 123,567 $ 492,038
Trade and other receivables 10 80,285 30,246
Short term investments - 17,529
Inventories 52,443 26,160
Prepaid expenses and
deposits 38,308 10,264
----------------------------------------------------------------------------
Total current assets 294,603 576,237
Non-current assets
Prepaid expenses and
deposits 8,389 -
Property, plant and
equipment 498,533 266,771
Deferred income tax assets 8 19,560 11,442
Long term investments 99,238 107,416
----------------------------------------------------------------------------
Total non-current assets 625,720 385,629
----------------------------------------------------------------------------
Total assets $ 920,323 $ 961,866
----------------------------------------------------------------------------
----------------------------------------------------------------------------
EQUITY AND LIABILITIES
Current liabilities
Trade and other payables 11 $ 52,235 $ 24,137
Current portion of
convertible debenture 12 6,301 6,312
----------------------------------------------------------------------------
Total current liabilities 58,536 30,449
Non-current liabilities
Convertible debenture 12 139,085 245,498
Deferred income tax
liabilities 8 2,366 3,966
Decommissioning liability 4,156 3,063
----------------------------------------------------------------------------
Total non-current
liabilities 145,607 252,527
----------------------------------------------------------------------------
Total liabilities 204,143 282,976
Equity
Common shares 1,054,298 1,061,560
Share option reserve 44,143 32,360
Investment revaluation
reserve 16,559 27,761
Accumulated deficit 13 (398,820) (442,791)
----------------------------------------------------------------------------
Total equity 716,180 678,890
----------------------------------------------------------------------------
Total equity and liabilities $ 920,323 $ 961,866
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net current assets $ 236,067 $ 545,788
Total assets less current
liabilities $ 861,787 $ 931,417
SELECT INFORMATION FROM THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Additional information required by the Hong Kong Stock Exchange and not
disclosed elsewhere in this announcement is as follows. All amounts are
expressed in thousands of U.S. Dollars and shares in thousands, unless otherwise
indicated.
1. BASIS OF PREPARATION
1.1 Statement of compliance
The Company's consolidated financial statements, including comparatives, have
been prepared in accordance with and using accounting policies in full
compliance with the International Financial Reporting Standards ("IFRS") issued
by the International Accounting Standards Board ("IASB") and Interpretations of
the IFRS Interpretations Committee, effective for the Company's reporting for
the year ended December 31, 2011.
1.2 Basis of presentation
The Company's consolidated financial statements have been prepared on the
historical cost basis except for certain financial instruments.
1.3 Prior Period Reclassifications
Certain items within the Company's consolidated statement of comprehensive
income have been reclassified to better reflect the Company's increased mining
operations in the year ended December 31, 2011.
The reclassifications have resulted in the introduction of a new line item
entitled "other operating expenses". Expenses included in the other operating
expenses line item include operating items such as: gains, losses and impairment
charges on certain assets, public infrastructure expenses, sustainability and
community relations expenses and foreign exchange amounts.
For the year ended December 31, 2010, the reclassifications resulted in $7,584
from cost of sales and $5,059 from administration expenses being reclassified to
other operating expenses.
2. SEGMENTED INFORMATION
The Company's one reportable operating segment is its Mongolian Coal Division.
The Company's Corporate Division does not earn revenues and therefore does not
meet the definition of an operating segment.
The carrying amounts of the Company's assets, liabilities and reported income or
loss, revenues and impairments analyzed by operating segment are as follows:
Mongolian
Coal Unallocated Consolidated
Division (i) Total
------------------------------------------
Segment assets
As at December 31, 2011 $ 696,732 $ 223,591 $ 920,323
As at December 31, 2010 342,591 619,275 961,866
Segment liabilities
As at December 31, 2011 $ 51,256 $ 152,887 $ 204,143
As at December 31, 2010 25,408 257,568 282,976
Segment income/(loss)
For the year ended December 31,
2011 $ (14,043) $ 71,788 $ 57,745
For the year ended December 31,
2010 (20,022) (96,173) (116,195)
Segment revenues
For the year ended December 31,
2011 $ 179,049 $ - $ 179,049
For the year ended December 31,
2010 79,777 - 79,777
Impairment charge on assets (ii)
(iii)
For the year ended December 31,
2011 $ 20,893 $ - $ 20,893
For the year ended December 31,
2010 7,584 - 7,584
(i) The unallocated amount contains all amounts associated with the
Corporate Division.
(ii) The impairment charge on assets for the year ended December 31, 2011
relates to trade and other receivables, inventory and property,
plant and equipment.
(iii) The impairment charge on assets for the year ended December 31, 2010
relates to inventory and property, plant and equipment.
3. COST OF SALES
The Company's cost of sales consists of the following amounts:
Year ended December 31,
--------------------------------------
2011 2010
--------------------------------------
Operating expenses $ 97,671 $ 55,334
Share-based compensation expense 1,942 $ 1,516
Depreciation and depletion 27,730 13,054
----------------------------------------------------------------------------
Cost of sales $ 127,343 $ 69,904
----------------------------------------------------------------------------
----------------------------------------------------------------------------
4. OTHER OPERATING EXPENSES
The Company's other operating expenses consist of the following amounts:
Year ended December 31,
----------------------------------
2011 2010
----------------------------------
Public infrastructure $ 8,069 $ 5,952
Sustainability and community relations 1,017 718
Foreign exchange gain (790) (1,611)
Provision for doubtful trade and other
receivables 1,892 -
Impairment of inventories 2,396 5,751
Impairment of property, plant and
equipment 16,605 1,833
----------------------------------------------------------------------------
Other operating expenses $ 29,189 $ 12,643
----------------------------------------------------------------------------
----------------------------------------------------------------------------
5. ADMINISTRATION EXPENSES
The Company's administration expenses consist of the following amounts:
Year ended December 31,
--------------------------------
2011 2010
--------------------------------
Corporate administration $ 7,136 $ 6,020
Legal and professional fees 4,279 3,752
Salaries and benefits 5,538 4,728
Share-based compensation expense 11,474 10,820
Depreciation 322 118
----------------------------------------------------------------------------
Administration expenses $ 28,749 $ 25,438
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6. EVALUATION AND EXPLORATION EXPENSES
The Company's evaluation and exploration expenses consist of the following amounts:
Year ended December 31,
----------------------------
2011 2010
----------------------------
Assaying $ 756 $ 342
Drilling and trenching 21,842 11,705
Geological 1,314 876
Geophysics 1,485 1,697
License fees 1,085 1,223
Depreciation - 47
Salaries and benefits 161 127
Share-based compensation expense 994 924
Overhead and other 4,131 1,828
----------------------------------------------------------------------------
Evaluation and exploration expenses $ 31,768 $ 18,769
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7. FINANCE COSTS AND INCOME
The Company's finance costs consist of the following amounts:
Year ended December 31,
----------------------------
2011 2010
----------------------------
Loss on partial conversion of convertible
debenture $ - $ 151,353
Interest expense on convertible debenture 9,137 24,294
Mark to market loss on FVTPL investments 3,091 -
Interest expense on line of credit facility 351 131
Accretion of decommissioning liability 186 77
----------------------------------------------------------------------------
Finance costs $ 12,765 $ 175,855
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company's finance income consists of the following amounts:
Year ended December 31,
------------------------------
2011 2010
--------------- ------------
Fair value gain on embedded derivatives in
convertible debenture $ 106,489 $ 100,637
Mark to market gain on FVTPL investments - 870
Interest income 1,243 2,441
----------------------------------------------------------------------------
Finance income $ 107,732 $ 103,948
----------------------------------------------------------------------------
----------------------------------------------------------------------------
8. TAXES
8.1 Income tax recognized in profit or loss
The Company and its subsidiaries are subject to income or profits tax in the
jurisdictions in which the Company operates, including Canada, Hong Kong,
Singapore and Mongolia. Income or profits tax was not provided for the Company's
operations in Canada, Hong Kong or Singapore as the Company had no assessable
income or profit arising in or derived from these jurisdictions. The Company's
tax balances reflect income tax assessed on its Mongolian operations. A
reconciliation between the Company's tax recovery and the product of the
Company's income or loss from operations before tax multiplied by the Company's
domestic tax rate is as follows:
Year ended December 31,
------------------------------
2011 2010
------------------------------
(Income)/loss before tax $ (56,967) $ 118,884
Statutory tax rate 26.50% 28.50%
Income tax expense/(recovery) based on
combined
Canadian federal and provincial statutory
rates 15,096 (33,882)
Deduct:
Lower effective tax rate in foreign
jurisdictions 502 1,905
Tax effect of tax losses and temporary
differences not recognized 12,281 2,789
Non-taxable (income)/non-deductible expenses (28,657) 24,708
Effect of change in future tax rates - 1,791
----------------------------------------------------------------------------
Income tax recovery $ (778) $ (2,689)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
8.2 Income tax recognized in other comprehensive income
Year ended December 31,
--------------------------
2011 2010
--------------------------
Fair value remeasurement of available-for-sale
assets $ (1,600) $ 3,966
----------------------------------------------------------------------------
Deferred tax (recovery)/expense $ (1,600) $ 3,966
----------------------------------------------------------------------------
----------------------------------------------------------------------------
8.3 Deferred tax balances
The Company's deferred tax assets/(liabilities) consist of the following amounts:
As at December 31,
--------------------------------
2011 2010
--------------------------------
Property, plant and equipment $ 8,647 $ 2,880
Other assets 10,913 8,562
Available-for-sale financial assets (2,366) (3,966)
----------------------------------------------------------------------------
Total deferred tax balances $ 17,194 $ 7,476
----------------------------------------------------------------------------
----------------------------------------------------------------------------
8.4 Unrecognized deductible temporary differences and unused tax losses
The Company's deductible temporary differences and unused tax losses for which
no deferred tax asset is recognized consist of the following amounts:
As at December 31,
------------------------------
2011 2010
------------------------------
Non-capital losses $ 119,212 $ 77,076
Capital losses 63,649 25,075
Deductible temporary differences 107,997 28,928
----------------------------------------------------------------------------
Total unrecognized amounts $ 290,858 $ 131,079
----------------------------------------------------------------------------
----------------------------------------------------------------------------
8.5 Expiry dates
The expiry dates of the Company's unused tax losses are as follows:
As at December 31, 2011
------------------------------------------
Local U.S. Dollar Expiry
currency Equivalent dates
------------------------------------------
Non-capital losses
Canada Cdn$ 112,781 $ 110,602 2014 - 2031
Hong Kong HK$ 66,342 8,539 indefinite
Singapore SG$ 92 71 indefinite
---------------
$ 119,212
---------------
---------------
Capital losses
---------------
Canada Cdn$ 64,903 $ 63,649 indefinite
---------------
---------------
9. EARNINGS/(LOSS) PER SHARE
9.1 Basic earnings/(loss) per share
The calculation of basic earnings/(loss) per share is based on the following data:
Year ended December 31,
------------------------------
2011 2010
------------------------------
Net income/(loss) for the year $ 57,745 $ (116,195)
Weighted average number of shares 182,970 176,529
----------------------------------------------------------------------------
Basic income/(loss) per share $ 0.32 $ (0.66)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9.2 Diluted earnings/(loss) per share
The diluted earnings/(loss) per share reflects the potential dilution of common
share equivalents, such as outstanding stock options and convertible debt, in
the weighted average number of common shares outstanding during the period, if
dilutive.
The calculation of diluted earnings/(loss) per share is based on the following data:
Year ended December 31,
------------------------------
2011 2010
--------------- ------------
Income/(loss)
Net income/(loss) for the year $ 57,745 $ (116,195)
Interest on convertible debenture 9,137 - (i)
Fair value gain on convertible debenture (106,489) - (i)
----------------------------------------------------------------------------
Diluted loss for the year $ (39,607) $ (116,195)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Number of shares
Weighted average number of shares 182,970 176,529
Convertible debenture 20,931 - (i)
----------------------------------------------------------------------------
Diluted weighted average number of shares 203,901 176,529
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Diluted loss per share $ (0.19) $ (0.66)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) The convertible debenture was anti-dilutive for this period
Potentially dilutive items not included in the calculation of diluted
earnings/(loss) per share for the year ended December 31, 2011, were 10,768
stock options that were anti-dilutive.
10. TRADE AND OTHER RECEIVABLES
The Company's trade and other receivables consist of the following amounts:
As at December 31,
------------------------------
2011 2010
------------------------------
Trade receivables $ 64,051 $ 15,297
VAT/GST receivable 144 14,541
Insurance proceeds receivable 12,913 -
Other receivables 3,177 408
----------------------------------------------------------------------------
Total trade and other receivables $ 80,285 $ 30,246
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The aging of the Company's trade and other receivables is as follows:
As at December 31,
------------------------------
2011 2010
------------------------------
Less than 1 month $ 50,824 $ 15,604
1 to 3 months 3,337 1,869
3 to 6 months 23,699 2,600
Over 6 months 2,425 10,173
----------------------------------------------------------------------------
Total trade and other receivables $ 80,285 $ 30,246
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the year ended December 31, 2011, the Company recorded a $1,892 loss
provision on one uncollectible trade receivable (2010: $nil). The Company
anticipates full recovery of its remaining outstanding trade and other
receivables; therefore, no further loss provisions have been recorded in respect
of the Company's trade and other receivables.
11. TRADE AND OTHER PAYABLES
Trade and other payables of the Company consist of amounts outstanding for trade
purchases relating to coal mining, development and exploration activities and
mining royalties payable. The usual credit period taken for trade purchases is
between 30 to 90 days.
The aging of the Company's trade and other payables is as follows:
As at December 31,
------------------------------
2011 2010
------------------------------
Less than 1 month $ 52,032 $ 24,006
1 to 3 months 76 33
3 to 6 months 105 72
Over 6 months 22 26
----------------------------------------------------------------------------
Total trade and other payables $ 52,235 $ 24,137
----------------------------------------------------------------------------
----------------------------------------------------------------------------
12. CONVERTIBLE DEBENTURE
On November 19, 2009, the Company issued a convertible debenture to a wholly
owned subsidiary of the China Investment Corporation ("CIC") for $500,000.
The convertible debenture is presented as a liability since it contains no
equity components. The convertible debenture is a hybrid instrument, containing
a debt host component and three embedded derivatives - the investor's conversion
option, the issuer's conversion option and the equity based interest payment
provision (the 1.6% share interest payment) (the "embedded derivatives"). The
debt host component is classified as other-financial-liabilities and is measured
at amortized cost using the effective interest rate method and the embedded
derivatives are classified as FVTPL and all changes in fair value are recorded
in profit or loss. The difference between the debt host component and the
principal amount of the loan outstanding is accreted to profit or loss over the
expected life of the convertible debenture.
The embedded derivatives were valued upon initial measurement and subsequent
periods using a Monte Carlo simulation valuation model. A Monte Carlo simulation
model is a valuation model that relies on random sampling and is often used when
modeling systems with a large number of inputs and where there is significant
uncertainty in the future value of inputs and where the movement of the inputs
can be independent of each other. Some of the key inputs used by the Company in
its Monte Carlo simulation include: the floor and ceiling conversion prices, the
risk-free rate of return, expected volatility of the stock price, forward
foreign exchange rate curves (between the Cdn$ and U.S. Dollar) and spot foreign
exchange rates.
12.1 Partial conversion
Pursuant to the debenture conversion terms, the Company had the right to call
for the conversion of up to $250,000 of the debenture upon achieving a public
float of 25% of its common shares based on a conversion price of the lower of
Cdn$11.88 and the 50-day volume-weighted average price ("VWAP"). On March 29,
2010, the Company exercised this right and completed the conversion of $250,000
of the convertible debenture into 21,471 shares at a conversion price of $11.64
(Cdn$11.88). On March 29, 2010, the Company also settled the accrued interest
payable in shares on the converted $250,000 by issuing 90 shares for the $1,436
in accrued interest converted at the 50-day VWAP conversion price of $15.97
(Cdn$16.29). On April 1, 2010, the Company also settled the outstanding accrued
interest payable in cash on the converted debt of $250,000 with a cash payment
of $5,742. A loss of $151,353 was recognized in finance costs upon partial
conversion of the debt for the year ended December 31, 2010.
12.2 Presentation
Based on the Company's valuations as at December 31, 2011, the fair value of the
embedded derivatives decreased by $106,489 compared to December 31, 2010. This
decrease was recorded as finance income for the year ended December 31, 2011.
For the year ended December 31, 2011, the Company also recorded interest expense
of $20,076 (2010: $24,896) related to the convertible debenture of which $10,939
was capitalized as borrowing costs and the remaining $9,137 was recorded as
finance costs. The interest expense consists of the interest at the contract
rate and the accretion of the debt host component of the convertible debenture.
To calculate the interest expense, the Company uses the contract life of 30
years and an effective interest rate of 22.2%.
The movements of the amounts due under the convertible debenture are as follows:
Year ended December 31,
--------------------------------
2011 2010
--------------------------------
Balance, beginning of year $ 251,810 $ 547,063
Interest expense on convertible debenture 20,076 24,896
Decline in fair value of embedded
derivatives (106,489) (100,637)
Loss on conversion of convertible debenture - 151,353
Conversion of convertible debenture - (347,643)
Interest paid (20,011) (23,222)
----------------------------------------------------------------------------
Balance, end of year $ 145,386 $ 251,810
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The convertible debenture balance consists of the following amounts:
As at December 31,
------------------------------
2011 2010
------------------------------
Debt host $ 90,696 $ 90,621
Fair value of embedded derivatives 48,389 154,877
Interest payable 6,301 6,312
----------------------------------------------------------------------------
Convertible debenture $ 145,386 $ 251,810
----------------------------------------------------------------------------
----------------------------------------------------------------------------
13. ACCUMULATED DEFICIT AND DIVIDENDS
At December 31, 2011, the Company has accumulated a deficit of $398,820 (2010:
$442,791). No dividends have been paid or declared by the Company since
inception.
REVIEW OF RESULTS AND RELEASE OF AUDITED RESULTS
The consolidated financial statements for the Company for the year ended
December 31, 2011, were reviewed by the Audit Committee of the Company.
The figures in respect of the Company's consolidated statement of financial
position, consolidated statement of comprehensive income and the related notes
thereto for the year ended December 31, 2011, as set out in the 2011 Financial
and Operating Results have been agreed by the Company's auditor, Deloitte &
Touche LLP, to the amounts set out in the Company's audited consolidated
financial statements for the year. The work performed by Deloitte & Touche LLP
in this respect did not constitute an assurance engagement in accordance with
Hong Kong Standards on Auditing, Hong Kong Standards on Review Engagements or
Hong Kong Standards on Assurance Engagements issued by the Hong Kong Institute
of Certified Public Accountants and consequently no assurance has been expressed
by Deloitte & Touche LLP on the 2011 Financial and Operating Results
announcement.
SouthGobi's results for the year ended December 31, 2011, are contained in the
audited Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations, which will be
available on March 19, 2012 on the SEDAR website at www.sedar.com and SouthGobi
Resources website at www.southgobi.com. Copies of SouthGobi's 2011 Annual Report
containing the audited financial statements, and Management's Discussion and
Analysis of Financial Condition and Results of Operations (MD&A), and the Annual
Information Form will be available at www.southgobi.com under the corporate
page. Shareholders with registered addresses in Hong Kong who have elected to
receive a copy of SouthGobi's Annual Report will receive one. Other Shareholders
may request a hard copy of the Annual Report free of charge by contacting our
investor relations department by phone at +852 2156 7023 or +1 604 681 6799 or
by email at info@southgobi.com.
ABOUT SOUTHGOBI RESOURCES
SouthGobi Resources is focused on exploration and development of its Permian-age
metallurgical and thermal coal deposits in Mongolia's South Gobi Region. The
Company's flagship coal mine, Ovoot Tolgoi, is producing and selling coal to
customers in China. The Company plans to supply a wide range of coal products to
markets in Asia.
Disclosure of a scientific or technical nature in this release and the Company's
MD&A with respect to the Company's Mongolian Coal Division was prepared by, or
under the supervision of Dave Bartel, P.Eng., the Company's Senior Engineer. Mr.
Bartel is a "qualified person" for the purposes of National Instrument 43- 101
of the Canadian Securities Administrators ("NI 43-101").
Forward-Looking Statements: This document includes forward-looking statements.
Forward-looking statements include, but are not limited to: the border being
open 40-50% less in the first quarter of 2012 than any typical second, third or
fourth quarter; the effect of a 50-60% increase in quarterly contractual sales
compared to the first quarter of 2011 putting the Company ahead of its plan for
year over year sales volume growth; the forecasts to set a new record level for
gross average sales price in the first quarter of 2012; the improvement of the
sales mix due to the DCHF; the anticipated slow down in its rate of investment
in 2012 and the material increase in its income from mining operations; the
continued growth at the Ovoot Tolgoi Mine in 2012; the potential to convert any
undeveloped resources into reserves; the ability of the Company to expand
margins in the near term through the benefits of coal processing and increasing
economies of scale; the growth in coal availability and sales for 2012 due to
the additional capacity of the new mining fleets; the timing to commence
construction of the paved highway and the capacity in excess of 20 million
tonnes of coal per year; the intention to advance the feasibility, planning and
preparation for a mine at Soumber; and other statements that are not historical
facts. When used in this document, the words such as "plan," "estimate,"
"expect," "intend," "may," and similar expressions are forward-looking
statements. Although SouthGobi believes that the expectations reflected in these
forward- looking statements are reasonable, such statements involve risks and
uncertainties and no assurance can be given that actual results will be
consistent with these forward-looking statements. Important factors that could
cause actual results to differ from these forward-looking statements are
disclosed under the heading "Risk Factors" in SouthGobi's Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
year ended December 31, 2011 which are available at www.sedar.com.
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