SouthGobi Resources Ltd. (TSX:SGQ)(HK:1878), (the "Company" or "SouthGobi")
today announced its financial and operating results for the three months ended
March 31, 2012. All figures are in U.S. dollars unless otherwise stated.
HIGHLIGHTS
The Company's highlights for the quarter ended March 31, 2012 and subsequent
weeks are as follows:
-- Record first quarter coal sales of 0.84 million tonnes (increase of 84%
from the first quarter of 2011);
-- Record first quarter revenue of $40.2 million (increase of 99% from the
first quarter of 2011);
-- Record quarterly average selling price of $56.79 per tonne (increase of
13% from the first quarter of 2011);
-- Record quarterly gross profit of $22.7 million resulting in a record
quarterly profit margin of 56% compared to gross profit of $7.7 million
in the first quarter of 2011 resulting in a profit margin of 38%;
-- Commissioned dry coal-handling facility ("DCHF") at the Ovoot Tolgoi
Mine;
-- Announced an agreement to sell the Tsagaan Tolgoi Deposit to Modun
Resources Limited ("Modun") for expected consideration of $30.0 million;
-- Updated NI 43-101 compliant resource and reserve estimates, which
increased overall measured plus indicated resources by 35% (from 363.6
million tonnes to 492.6 million tonnes) and inferred resources by 42%
(from 171.9 million tonnes to 244.0 million tonnes) and increased proven
and probable reserves for the Ovoot Tolgoi Mine by 65% (from 106.8
million tonnes to 175.7 million tonnes); and
-- Announced the signing of a Cooperation Agreement with the Aluminum
Corporation of China Limited ("CHALCO") and received official
notification of CHALCO's intention to make a proportional takeover bid
for up to 60% of the issued and outstanding common shares of SouthGobi
at Cdn$8.48 per share.
REVIEW OF QUARTERLY OPERATING RESULTS
The Company's operating results for the previous eight quarters are summarized
in the table below:
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2012 2011 2010
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QUARTER
ENDED 31-Mar 31-Dec 30-Sep 30-Jun 31-Mar 31-Dec 30-Sep 30-Jun
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Volumes and
prices
Raw semi-
soft
coking
coal
Raw coal
production
(millions
of tonnes) 0.28 0.47 0.55 0.52 0.48 0.41 0.18 0.39
Coal
sales
(millions
of tonnes) 0.31 0.53 0.66 0.60 0.34 0.35 0.11 0.42
Average
realized
selling
price
(per
tonne) $ 67.59 $ 67.62 $ 66.83 $ 65.96 $ 56.50 $ 47.08 $ 46.04 $ 44.10
Raw
medium-
ash coal
Raw coal
production
(millions
of tonnes) 0.64 0.37 0.20 - - - - -
Coal
sales
(millions
of tonnes) 0.53 0.37 0.20 - - - - -
Average
realized
selling
price
(per
tonne) $ 50.40 $ 48.59 $ 48.17 $ - $ - $ - $ - $ -
Raw
higher-
ash coal
Raw coal
production
(millions
of tonnes) 0.15 0.50 0.50 0.35 0.63 0.97 0.39 0.23
Coal
sales
(millions
of tonnes) - 0.25 0.51 0.45 0.11 1.12 0.08 0.03
Average
realized
selling
price
(per
tonne) $ - $ 40.30 $ 39.74 $ 38.32 $ 31.68 $ 26.75 $ 25.34 $ 18.82
Total
Raw coal
production
(millions
of tonnes) 1.07 1.34 1.25 0.87 1.11 1.38 0.57 0.62
Coal
sales
(millions
of tonnes) 0.84 1.15 1.37 1.05 0.45 1.47 0.19 0.45
Average
realized
selling
price
(per
tonne) $ 56.79 $ 55.51 $ 54.01 $ 54.06 $ 50.29 $ 31.56 $ 37.15 $ 42.63
Costs
Direct
cash
costs of
product
sold (per
tonne)(i) $ 10.80 $ 22.14 $ 22.64 $ 26.77 $ 18.91 $ 18.53 $ 18.59 $ 21.37
Total cash
costs of
product
sold (per
tonne)(i) $ 15.04 $ 23.09 $ 23.17 $ 27.61 $ 20.61 $ 19.25 $ 22.04 $ 22.30
Waste
movement
and
stripping
ratio
Production
waste
material
moved
(millions
of bank
cubic
meters) 2.20 4.58 4.10 4.08 3.85 3.56 2.90 1.73
Strip
ratio
(bank
cubic
meters of
waste
rock per
tonne of
coal
produced) 2.07 3.42 3.28 4.74 3.47 2.58 5.09 2.79
Pre-
production
waste
material
moved
(millions
of bank
cubic
meters) - - 0.39 0.80 0.49 0.73 0.43 0.02
Other
operating
capacity
statistics
Capacity
Number of
mining
shovels/
excavators
available
at period
end 3 3 3 4 3 3 2 2
Total
combined
stated
mining
shovel/
excavator
capacity
at period
end
(cubic
meters) 64 64 64 98 83 82 48 48
Number of
haul
trucks
available
at period
end 27 25 16 16 16 15 12 11
Total
combined
stated
haul
truck
capacity
at period
end
(tonnes) 4,743 4,561 2,599 2,599 2,599 2,254 1,727 1,509
Employees
and
safety
Employees
at period
end 720 720 695 658 600 544 472 421
Lost time
injury
frequency
rate (ii) 1.4 1.2 0.9 0.6 0.7 0.8 0.9 1.0
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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 three months ended March 31, 2012, the Company produced 1.07 million
tonnes of raw coal with a strip ratio of 2.07 compared to production of 1.11
million tonnes of raw coal for the three months ended March 31, 2011 with a
strip ratio of 3.47. The below-trend strip ratio for the three months ended
March 31, 2012 is a function of the mine plan and will be normalized over the
life-of-mine.
For the three months ended March 31, 2012, the Company sold 0.84 million tonnes
of coal at an average realized selling price of $56.79 per tonne compared to
sales of 0.45 million tonnes of coal at an average realized selling price of
$50.29 per tonne for the three months ended March 31, 2011. Coal sales in the
first quarter of 2012 represent a record for any given first quarter and the
average realized selling price represents the highest quarterly average since
the commencement of mining operations.
Direct cash costs of product sold (a non-IFRS financial measure, see Non-IFRS
Financial Measures section) were $10.80 per tonne for the three months ended
March 31, 2012 compared to $18.91 per tonne for the three months ended March 31,
2011. Direct cash costs have primarily decreased as a result of a lower strip
ratio.
REVIEW OF QUARTERLY FINANCIAL RESULTS
The Company's financial results for the previous eight quarters are summarized
in the table below:
($ in thousands, except for per share information, unless otherwise indicated)
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2012 2011
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QUARTER ENDED 31-Mar 31-Dec 30-Sep 30-Jun 31-Mar
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Revenue $ 40,153 $ 51,064 $ 60,491 $ 47,336 $ 20,158
Gross profit 22,674 16,637 17,635 9,744 7,690
Gross profit margin 56% 33% 29% 21% 38%
Other operating (2,578) (24,644) (138) (3,024) (1,383)
expenses
Administration (5,882) (8,612) (7,993) (6,808) (5,336)
expenses
Evaluation and (5,033) (14,513) (10,908) (4,356) (1,991)
exploration expenses
Income/(loss) from 9,181 (31,132) (1,404) (4,444) (1,020)
operations
Net income/(loss) 3,126 (18,897) 55,921 67,323 (46,602)
Basic income/(loss) 0.02 (0.10) 0.31 0.37 (0.25)
per share
Diluted income/(loss) 0.02 (0.14) (0.02) - (0.25)
per share
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2012 2011
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QUARTER ENDED 31-Mar 31-Dec 30-Sep 30-Jun 31-Mar
----------------------------------------------------------------------------
Net income/(loss) $ 3,126 $ (18,897) $ 55,921 $ 67,323 $ (46,602)
Income/(loss)
adjustments, net of
tax
Share-based 3,799 4,050 4,296 3,349 2,715
compensation
Net impairment - 23,818 (2,925) - -
loss/(recovery) on
assets
Unrealized foreign (950) 34 103 263 (993)
exchange
losses/(gains)
Unrealized 776 (10,790) (62,058) (70,422) 36,780
loss/(gain) on
embedded
derivatives in CIC
debenture
Realized gain on (85) - - - -
disposal of FVTPL
investments (i)
Unrealized 339 155 2,449 (3,629) 4,116
loss/(gain) on
FVTPL investments
Adjusted net 7,005 (1,630) (2,214) (3,116) (3,984)
income/(loss) (ii)
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---------------------------------
2010
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QUARTER ENDED 31-Dec 30-Sep 30-Jun
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Revenue $ 41,595 $ 6,597 $ 17,668
Gross profit 3,950 336 4,400
Gross profit margin 9% 5% 25%
Other operating (2,121) (7,586) (1,894)
expenses
Administration (6,599) (7,405) (6,442)
expenses
Evaluation and (4,144) (6,314) (6,659)
exploration expenses
Income/(loss) from (8,914) (20,969) (10,595)
operations
Net income/(loss) (28,720) 27,495 53,301
Basic income/(loss) (0.16) 0.15 0.29
per share
Diluted income/(loss) (0.16) (0.08) (0.07)
per share
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---------------------------------
2010
------------------------------------------------------
QUARTER ENDED 31-Dec 30-Sep 30-Jun
------------------------------------------------------
Net income/(loss) $ (28,720) $ 27,495 $ 53,301
Income/(loss)
adjustments, net of
tax
Share-based 3,840 3,695 2,754
compensation
Net impairment 574 7,010 -
loss/(recovery) on
assets
Unrealized foreign (1,837) (1,116) (1,120)
exchange
losses/(gains)
Unrealized 19,995 (49,772) (72,232)
loss/(gain) on
embedded
derivatives in CIC
debenture
Realized gain on - - -
disposal of FVTPL
investments (i)
Unrealized (4,375) (1,735) 4,555
loss/(gain) on
FVTPL investments
Adjusted net (10,523) (14,423) (12,742)
income/(loss) (ii)
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i. FVTPL is defined as "fair value through profit or loss"
ii. A non-IFRS financial measure, see Non-IFRS Financial Measures section
The Company recorded net income of $3.1 million for the three months ended March
31, 2012 compared to a net loss of $18.9 million for the three months ended
December 31, 2011 and a net loss of $46.6 million for the three months ended
March 31, 2011.
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 March 31, 2012, the Company generated gross profit of
$22.7 million compared to $16.6 million for the three months ended December 31,
2011 and $7.7 million for the three months March 31, 2011.
The Company recognized revenue of $40.2 million for the three months ended March
31, 2012 compared to $51.1 million for the three months ended December 31, 2011
and $20.2 million for the three months ended March 31, 2011. The decrease in
revenue from the fourth quarter of 2011 can be attributed to decreased sales
volume, partially offset by the reduced effective royalty rate. Sales volume
declined in the first quarter of 2012 compared to the fourth quarter of 2011 due
to the extended closure of the Shivee Khuren-Ceke crossing at the Mongolia-China
border ("Shivee Khuren Border Crossing") for the Chinese New Year and Mongolian
Tsagaan Sar public holidays, some customers' preference to purchase coal on a
washed basis later in 2012 in lieu of taking unwashed coal during the first
quarter of 2012 and management's decision to stockpile a manageable amount of
coal for processing. The significant increase in revenue from the first quarter
of 2011 can be attributed to increased sales volumes, an improved product mix
and increased selling prices for individual coal types. Sales volume increased
in the first quarter of 2012 compared to the first quarter of 2011 due to the
expansion of the Company's customer base.
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
reference prices for the first quarter of 2012, the Company was subject to an
average 8% royalty based on a weighted average reference price of $95.00 per
tonne. The Company's effective royalty rate for the first quarter of 2012, based
on the Company's average realized selling price of $56.79 per tonne, was 13%.
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 and
commencing February 2012 royalty reference prices are now based on 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 on 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 $17.5 million for the three months ended March 31, 2012
compared to $34.4 million for the three months ended December 31, 2011 and $12.5
million for the three months ended March 31, 2011. Cost of sales comprise the
direct cash costs of product sold, mine administration cash costs of product
sold, equipment depreciation, depletion of mineral properties and share-based
compensation. Cost of sales decreased in the first quarter of 2012 compared to
the fourth quarter of 2011 due to lower sales volumes and lower unit costs. Cost
of sales in the first quarter of 2012 increased compared to the first quarter of
2011 due to higher sales volumes, which were partially offset by lower unit
costs.
Other Operating Expenses:
Other operating expenses decreased to $2.6 million for the three months ended
March 31, 2012 compared to $24.6 million for the three months ended December 31,
2011. In the fourth quarter of 2011, $19.5 million and $2.4 million of
impairment charges were recorded to reduce the carrying amount of property,
plant and equipment and materials and supplies inventory, respectively. In
addition, a $1.9 million loss provision was recorded for one uncollectible trade
receivable. Other operating expenses increased from $1.4 million for the three
months ended March 31, 2011 to $2.6 million for the three months ended March 31,
2012. The increase primarily relates to increased foreign exchange losses,
partially offset by reduced public infrastructure costs.
Administration Expenses:
Administration expenses for the three months ended March 31, 2012 were $5.9
million compared to $8.6 million for the three months ended December 31, 2011
and $5.3 million for the three months ended March 31, 2011. The decreased
administration expenses in the first quarter of 2012 compared to the fourth
quarter of 2011 primarily relate to decreased salaries and benefits, employee
bonuses were paid in the fourth quarter of 2011, and decreased legal and
professional fees. The increased administration expenses in the first quarter of
2012 compared to the first quarter of 2011 primarily relates to increased
share-based compensation expense and additional staff to support the expansion
of the Company's operations, partially offset by decreased corporate
administration and legal and professional fees.
Evaluation and Exploration Expenses:
Exploration expenses for the three months ended March 31, 2012 were $5.0 million
compared to $14.5 million for the three months ended December 31, 2011 and $2.0
million for the three months ended March 31, 2011. Exploration expenses will
vary from quarter to quarter depending on the number of projects and the related
seasonality of the exploration programs. In the fourth quarter of 2011 a higher
proportion of exploration expenses were incurred due to delays in receiving
required government approvals in the first half of 2011. In the first quarter of
2012, exploration expenses primarily consisted of drilling and trenching and
overheads. The majority of these costs related to water exploration activities.
Finance Income & Finance Costs:
The Company incurred finance costs for the three months ended March 31, 2012 of
$1.5 million compared to $45.6 million for the three months ended March 31,
2011. Finance costs for the three months ended March 31, 2012 primarily
consisted of a $0.8 million unrealized loss on the fair value change of the
embedded derivatives in the China Investment Corporation ("CIC") convertible
debenture, $0.3 million of interest expense on the CIC convertible debenture and
a $0.3 million unrealized loss on FVTPL investments, whereas finance costs for
the three months ended March 31, 2011 primarily consisted of a $36.8 million
unrealized loss on the fair value change of the embedded derivatives in the CIC
convertible debenture, $4.5 million of interest expense on the CIC convertible
debenture and a $4.1 million unrealized loss on FVTPL investments.
The Company recorded finance income for the three months ended March 31, 2012 of
$0.2 million compared to $0.4 million for the three months ended March 31, 2011.
In the first quarter of 2012, finance income consisted of interest income and a
realized gain on the disposal of FVTPL investments; whereas, in the first
quarter of 2011, finance income consisted entirely 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 three months
ended March 31, 2012, the Company recorded an after-tax mark to market loss of
$5.4 million related to Aspire that has been recorded in other comprehensive
income.
Taxes:
For the three months ended March 31, 2012, the Company recorded current income
tax expense of $4.9 million related to its Mongolian operations compared to $1.8
million for the three months ended March 31, 2011. The Company has recorded a
deferred income tax recovery related to deductible temporary differences of $0.1
million for the three months ended March 31, 2012 compared to $1.3 million for
the three months ended March 31, 2011.
FINANCIAL POSITION AND LIQUIDITY
The Company's total assets as at March 31, 2012 were $910.2 million compared
with $920.3 million as at December 31, 2011.
As at March 31, 2012, the Company had $125.1 million in cash and cash
equivalents and $30.0 million in money market investments for a total liquidity
of $155.1 million compared with $123.6 million in cash and cash equivalents and
$45.0 million in money market investments for a total liquidity of $168.6
million as at December 31, 2011.
The Company's non-current liabilities as at March 31, 2012 were $143.6 million
compared with $145.6 million as at December 31, 2011.
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 Company will continue to upgrade the DCHF to
include dry air separation modules and covered load out conveyors with fan
stackers to take processed coals to stockpiles and enable more efficient
blending.
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 December 31,
2012.
PROPOSED TRANSACTION
On April 2, 2012, SouthGobi announced a Cooperation Agreement with CHALCO and
received official notification of CHALCO's intention to make a proportional
takeover bid for up to 60% of the issued and outstanding common shares of
SouthGobi at Cdn$8.48 per share ("Proportional Offer"). SouthGobi has also been
informed by its 58% major shareholder, Ivanhoe Mines Ltd. ("Ivanhoe"), that
Ivanhoe has signed a lock-up agreement with CHALCO, committing to tender all of
its shares held or thereafter acquired by it during the offer period of CHALCO
into the Proportional Offer. The Proportional Offer will be made by way of a
takeover bid circular under British Columbia law and will be made to all
SouthGobi shareholders. If shareholders tender more than 60% of the outstanding
common shares of SouthGobi to the takeover bid, a proportional amount of shares
will be taken up from each shareholder. SouthGobi has not received any formal
documentation relating to the Proportional Offer.
On April 25, 2012, CHALCO and Ivanhoe announced that in the event of new foreign
investment legislation being implemented by the Government of Mongolia prior to
the completion of the Proportional Offer, CHALCO and Ivanhoe will cooperate with
the Government of Mongolia to ensure any requirements under such legislation are
satisfied.
Subsequent to the announcement by CHALCO and Ivanhoe it has been reported in the
media that draft legislation regarding foreign investment in Mongolia has now
been introduced in the Parliament and is currently under review.
In conjunction with the Proportional Offer, CHALCO and SouthGobi have entered
into a Cooperation Agreement. CHALCO's obligations under the Cooperation
Agreement will become effective upon CHALCO acquiring a shareholding in
SouthGobi.
Key benefits under the Cooperation Agreement between SouthGobi and CHALCO include:
-- Coal off-take by CHALCO - SouthGobi will have the right to offer up to
100% of its salable coal to CHALCO and CHALCO will have the obligation
to purchase the coal at market prices for a period of 24 months.
-- Infrastructure support - CHALCO will assist SouthGobi to procure
electricity for its Mongolian business operations either through a
direct connection to grid power, or through development of a
conveniently located power plant. CHALCO will also provide support to
SouthGobi's coal-haul highway project.
SouthGobi has also been notified that CHALCO has entered into consultancy
agreements with nine key senior executives, officers and staff to assist CHALCO
with the integration and transition following CHALCO's acquisition of a
shareholding in SouthGobi. Services would be retained for 12 months from the
termination of their employment or for a period of 12-months less the notice
period actually served by them on their resignation, after CHALCO becomes a
shareholder of SouthGobi. Following arm's length negotiation between CHALCO and
the relevant individuals, it has been agreed that fees totaling $9 million would
be paid by CHALCO for the consulting services. Consultancy agreements have been
entered into with the President and Chief Executive Officer, Chief Operating
Officer, Chief Financial Officer, and key Vice Presidents, officers and staff.
CHALCO has stated that it expects to mail the takeover bid circular in
connection with the Proportional Offer on or about July 5, 2012.
MRAM REQUEST TO SUSPEND EXPLORATION AND MINING LICENSES
On April 16, 2012, SouthGobi announced that the Mineral Resource Authority of
Mongolia ("MRAM") held a press conference announcing a request to suspend
exploration and mining activity on certain licenses owned by SouthGobi Sands
LLC, a wholly-owned subsidiary of SouthGobi Resources Ltd. The request for
suspension includes the mining license pertaining to SouthGobi's Ovoot Tolgoi
Mine.
Advice to the Company suggests that the action has been taken under the broad
national security powers of the Government of Mongolia. MRAM stated that the
move is in connection to the proposed proportional takeover bid by CHALCO, and
the agreement by Ivanhoe to tender its controlling interest in SouthGobi to such
a takeover. The suspension would be initiated to allow the Government of
Mongolia to review the proposed change of ownership.
As at May 14, 2012, the Company has not received any official notification and
has no reason to believe SouthGobi's licenses are not in good standing. However,
the Company cautions at this time that any official notification received will
require a suspension of operations.
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. As at May 14, 2012, the
Company had repurchased 1.6 million shares on the HKEX and 2.8 million shares on
the TSX for a total of 4.4 million common shares. The Company cancels all shares
after they are repurchased.
OUTLOOK
The announcement by CHALCO that it intends to make a proportional takeover bid
for up to 60% of the issued and outstanding common shares of SouthGobi has
created significant uncertainty for the Company's business. Further uncertainly
results from the MRAM press conference announcing a request to suspend
exploration and mining activity on certain licenses owned by SouthGobi Sands
LLC. Advice to the Company suggests that the action has been taken under the
broad national security powers of the Government of Mongolia. MRAM stated that
the move is in connection to the proposed proportional takeover bid by CHALCO,
and the agreement by Ivanhoe to tender its controlling interest in SouthGobi to
such a takeover. The suspension would be initiated to allow the Government of
Mongolia to review the proposed change of ownership. Although the Company has
not received any official notification and has no reason to believe SouthGobi's
licenses are not in good standing, the Company cautions at this time that any
official notification received will require a suspension of operations.
The announcement regarding potential license suspension has created significant
uncertainty among the Company's customers. Concern over whether SouthGobi will
be able to deliver contracted volumes in the second quarter of 2012 has in some
cases led customers to reduce their coal purchase requirements.
In addition to the aforementioned issues surrounding the Proportional Offer by
CHALCO, the State Standards Inspection Authority of Mongolia inspected the
existing gravel road used to transport coal from the Ovoot Tolgoi Complex and
neighboring mines to China in early April and requested certain upgrades. During
the period the upgrade work was performed, the road was inoperable. The works
have been completed and the road has re-opened. However, the Company cautions
that any future extended road closure would impact the ability for customers to
collect coal.
Due to the uncertainty surrounding SouthGobi's business, the Company is unable
to provide any guidance for the second quarter of 2012.
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. The Ovoot Tolgoi Mine is approximately 40
kilometers ("km") from China, which is approximately 190km closer than
Tavan Tolgoi coal producers in Mongolia and 7,000 to 10,000km closer
than Australian and North American coking coal producers. The Company
has an infrastructure advantage, being approximately 50km from existing
railway infrastructure, which is approximately one tenth the distance to
rail of Tavan Tolgoi coal producers in Mongolia.
-- Premium quality coals - Most of the Company's coal resources have coking
properties, including a mixture of semi-soft coking coals and hard
coking coals. SouthGobi is also completing its investment in processing
infrastructure to capture more of the value by selling 'clean' instead
of 'raw' coal products.
-- Sustainable volume growth - 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 - The Company believes, subject to market conditions,
it will continue expanding margins 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.
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 has engaged a contractor and commenced
construction of the paved 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, depreciation
and depletion of mineral properties.
The Company uses this performance measure to monitor its operating cash costs
internally and believes this measure provides investors and analysts with useful
information about the Company's underlying cash costs of operations. The Company
believes that conventional measures of performance prepared in accordance with
IFRS do not fully illustrate the ability of its mining operations to generate
cash flows. The Company reports cash costs on a sales basis. This performance
measure is commonly utilized in the mining industry.
The cash costs of product sold may differ from cash costs of product produced
depending on the timing of stockpile inventory turnover.
Adjusted Net Income/(Loss):
Adjusted net income/(loss) excludes share-based compensation, net impairment
loss/ (recovery) on assets, unrealized foreign exchange losses/(gains),
unrealized loss/(gain) on the fair value change of the embedded derivatives in
the CIC convertible debenture, realized gains on the disposal of FVTPL
investments and unrealized losses/(gains) on FVTPL investments. The Company
excludes these items from net income/(loss) to provide a measure which allows
the Company and investors to evaluate the results of the underlying core
operations of the Company and its profitability from operations. The items
excluded from the computation of adjusted net income/(loss), which are otherwise
included in the determination of net income/(loss) prepared in accordance with
IFRS, are items that the Company does not consider to be meaningful in
evaluating the Company's past financial performance or the future prospects and
may hinder a comparison of its period-to-period results.
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Condensed Consolidated Interim Statement of Comprehensive Income
(Unaudited)
(Expressed in thousands of U.S. Dollars, except for share and per share amounts)
Three months ended
March 31,
------------------------
2012 2011
------------------------
Revenue $ 40,153 $ 20,158
Cost of sales (17,479) (12,468)
----------------------------------------------------------------------------
Gross profit 22,674 7,690
Other operating expenses (2,578) (1,383)
Administration expenses (5,882) (5,336)
Evaluation and exploration expenses (5,033) (1,991)
----------------------------------------------------------------------------
Income/(loss) from operations 9,181 (1,020)
Finance costs (1,497) (45,574)
Finance income 236 427
----------------------------------------------------------------------------
Income/(loss) before tax 7,920 (46,167)
Current income tax expense (4,874) (1,753)
Deferred income tax recovery 80 1,318
----------------------------------------------------------------------------
Net income/(loss) attributable to equity holders of 3,126 (46,602)
the Company
----------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME
(Loss)/gain on available-for-sale assets, net of tax (5,422) 50,748
----------------------------------------------------------------------------
Net comprehensive income/(loss) attributable to (2,296) 4,146
equity holders of the Company $ $
----------------------------------------------------------------------------
----------------------------------------------------------------------------
BASIC INCOME/(LOSS) PER SHARE $ 0.02 $ (0.25)
DILUTED INCOME/(LOSS) PER SHARE $ 0.02 $ (0.25)
Condensed Consolidated Interim Statement of Financial Position
(Unaudited)
(Expressed in thousands of U.S. Dollars)
As at
--------------------------------
March 31, December 31,
2012 2011
--------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 125,122 $ 123,567
Trade and other receivables 72,447 80,285
Inventories 56,345 52,443
Prepaid expenses and deposits 32,303 38,308
----------------------------------------------------------------------------
Total current assets 286,217 294,603
Non-current assets
Prepaid expenses and deposits 8,389 8,389
Property, plant and equipment 520,690 498,533
Deferred income tax assets 19,639 19,560
Long term investments 75,268 99,238
----------------------------------------------------------------------------
Total non-current assets 623,986 625,720
----------------------------------------------------------------------------
Total assets $ 910,203 $ 920,323
----------------------------------------------------------------------------
EQUITY AND LIABILITIES
Current liabilities
Trade and other payables $ 38,486 $ 52,235
Current portion of convertible debenture 7,274 6,301
----------------------------------------------------------------------------
Total current liabilities 45,760 58,536
Non-current liabilities
Convertible debenture 139,882 139,085
Deferred income tax liabilities - 2,366
Decommissioning liability 3,734 4,156
----------------------------------------------------------------------------
Total non-current liabilities 143,616 145,607
----------------------------------------------------------------------------
Total liabilities 189,376 204,143
Equity
Common shares 1,057,537 1,054,298
Share option reserve 47,942 44,143
Investment revaluation reserve 11,137 16,559
Accumulated deficit (395,789) (398,820)
----------------------------------------------------------------------------
Total equity 720,827 716,180
----------------------------------------------------------------------------
Total equity and liabilities $ 910,203 $ 920,323
----------------------------------------------------------------------------
Net current assets $ 240,457 $ 236,067
Total assets less current liabilities $ 864,443 $ 861,787
REVIEW OF INTERIM RESULTS
The condensed consolidated interim financial statements for the Company for the
three months ended March 31, 2012, were reviewed by the Audit Committee of the
Company.
SouthGobi's results for the quarter ended March 31, 2012 are contained in the
unaudited Condensed Consolidated Interim Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A"), available on the SEDAR website at www.sedar.com and SouthGobi
Resources website at www.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 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 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 capacity of the paved highway 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 and the three months ended March 31, 2012 which are
available at www.sedar.com.
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