SouthGobi Resources Ltd. (
Toronto Stock Exchange
(“
TSX”): SGQ,
Hong Kong Stock Exchange (“HKEX”):
1878) (the "Company" or “SouthGobi”) today announces its
financial and operating results for the quarter and the year ended
December 31, 2019. All figures are in U.S. dollars (“USD”) unless
otherwise stated.
Reference is made to the announcement of the
Company dated March 30, 2020 in relation to the unaudited financial
and operating results for the year ended December 31, 2019 (the
“Unaudited Annual Results Announcement”) and the announcements
dated April 27, 2020, May 17, 2020, June 30, 2020, July 24, 2020
and August 12, 2020 in relation to, among other things, the further
delay in publication of the audited annual results announcement and
the dispatch of the annual report for the year ended December 31,
2019 (collectively the “Announcements”). Unless otherwise defined,
capitalised terms used in this announcement shall have the same
meanings as those defined in the Unaudited Annual Results
Announcement and the Announcements.
The Board wish to inform that the Company’s
independent auditors, BDO Limited (“BDO”), have completed their
audit of the consolidated financial statements of the Company for
the year ended December 31, 2019 in accordance with Canadian
generally accepted auditing standards and would like to announce
the audited annual results of the Company for the year ended
December 31, 2019 together with the comparative figures for the
previous year and the respective notes in this announcement.
Significant Events and
Highlights
The Company’s significant events and highlights
for the year ended December 31, 2019 and the subsequent period to
November 26, 2020 are as follows:
- Operating Results
– The Company’s sales volume increased from 2.8 million tonnes in
2018 to 3.7 million tonnes in 2019. The average selling price of
coal decreased from $37.1 per tonne in 2018 to $34.9 per tonne in
2019. The decrease in the average selling price was principally
attributable to (i) a change of the Company’s product mix, as sales
of premium semi-soft coking coal represented a smaller proportion
of total sales in 2019; and (ii) a higher portion of sales made at
the mine gate instead of transporting the coal to the Company’s
Inner Mongolia subsidiary and selling to third party customers
within China.
- Financial Results
– The Company recorded a $29.8 million profit from operations in
2019 compared to a $10.5 million loss from operations in 2018. The
improvement in profit from operations was principally attributable
to (i) a lower provision for doubtful trade and other receivables
being made during the year ($0.5 million and $20.9 million for 2019
and 2018, respectively); and (ii) increased sales volume.
- Impact of
the Coronavirus Disease 2019
(“COVID-19”)
Pandemic – The Company was informed that effective
as of February 11, 2020, the Mongolian State Emergency Commission
closed Mongolia’s southern border with China in order to prevent
the spread of COVID-19. Accordingly, the Company suspended coal
exports to China beginning as of February 11, 2020 as a result of
the border closure.On March 28, 2020, the Mongolian-Chinese border
was re-opened for coal export on a trial basis, with a limit
imposed on the total volume of coal that was permitted to be
exported during this trial period. The Company has experienced a
continuous improvement in the volume of coal exported to China
since March 28, 2020. During the period between April to October
2020, an aggregate of 1.9 million tonnes of coal was exported by
the Company from Mongolia to China, as compared to an aggregate of
2.0 million tonnes of coal during the same period in the 2019
calendar year.The border closure has had an adverse impact on the
Company’s sales and cash flows in the first and second quarter of
2020. In order to mitigate the financial impact of the border
closures and preserve its working capital, the Company temporarily
ceased major mining operations (including coal mining), reduced
production to only coal-blending activities and placed
approximately half of its workforce on furlough effective as of
February 2020. Since August 2, 2020, the Company has resumed its
mining operations, which includes mining, blending and washing of
coal. As at October 31, 2020, SouthGobi Sands LLC (“SGS”), a
subsidiary of the Company, employed 208 employees at the Ovoot
Tolgoi Mine site (December 31, 2019: 383 employees). The Company
produced 1.1 million tonnes from August to October 2020, as
compared to 1.3 million tonnes from August to October 2019. There
were a few COVID-19 cases reported in Ulaanbaatar (being the
capital city of Mongolia) on November 11, 2020. As a result, the
Mongolian local authorities have taken certain precautionary steps
to minimize further transmission and announced a lockdown for the
city until December 2, 2020. Although the mining operations and the
export of coal from Mongolia to China continues as of the date
hereof, there can be no guarantee that the Company will be able to
continue exporting coal to China, or the border crossings would not
be the subject of additional closures as a result of COVID-19 in
the future. The Company will continue to closely monitor the
development of the COVID-19 pandemic and the impact it has on coal
exports to China and will react promptly to preserve the working
capital of the Company.Based on a preliminary review of the
information and operational data of the Company currently
available, the Company expects to record a net loss for the three
months ended March 31, 2020 and for the six months ended June 30,
2020. The anticipated net loss was principally attributable to
decreased sales volumes in the first quarter of 2020 as a result of
the closure of the Mongolian-Chinese border crossings which took
effect in February 2020 and therefore, the Company was unable to
export coal into China as a result. In the event that the Company’s
ability to export coal into the Chinese market becomes restricted
or limited again as a result of any future restrictions which may
be implemented at the Mongolian-Chinese border crossing, this is
expected to have a material adverse effect on the business and
operations of the Company and may negatively affect the price and
volatility of the Common Shares and any investment in such shares
could suffer a significant decline or total loss in value.
- China Investment
Corporation (together with its wholly-owned
subsidiaries and affiliates, “CIC”)
convertible debenture (“CIC Convertible
Debenture”) – On April 23, 2019, the
Company executed a deferral agreement (the “2019 Deferral
Agreement”) with CIC in relation to a deferral and revised
repayment schedule in respect of (i) $41.8 million of outstanding
cash and payment in kind interest (“PIK Interest”) and associated
costs due and payable to CIC on November 19, 2018 (the “Outstanding
Interest Payable”) under the CIC Convertible Debenture and a
deferral agreement executed with CIC on June 12, 2017 (the “June
2017 Deferral Agreement”); and (ii) $27.9 million of cash and PIK
Interest payments payable to CIC under the CIC Convertible
Debenture from April 23, 2019 to and including May 19, 2020 (the
“Deferral”). Pursuant to Section 501(c) of the TSX Company Manual,
the 2019 Deferral Agreement was approved at the Company’s adjourned
annual and special meeting of shareholders on June 13,
2019. The key repayment terms of the 2019 Deferral Agreement
are: (i) the Company agreed to pay a total of $14.3 million over
eight instalments from November 2019 to June 2020; (ii) the Company
agreed to pay the PIK Interest covered by the Deferral by way of
cash payments, rather than the issuance of Common Shares; and (iii)
the Company agreed to pay the remaining balance of $62.6 million on
June 20, 2020. The Company agreed to pay a deferral fee at a rate
of 6.4% per annum in consideration of the deferred amounts.As a
condition to agreeing to the Deferral, CIC required that the mutual
co-operation agreement (the “Cooperation Agreement”) dated November
19, 2019 between SGS and CIC, be amended and restated (the “Amended
and Restated Cooperation Agreement”) to clarify the manner in which
the service fee (the “Management Fee”) payable to CIC under the
Cooperation Agreement is calculated, with effect as of January 1,
2017. Specifically, the Management Fee under the Amended and
Restated Cooperation Agreement is determined based on the net
revenues realized by the Company and all of its subsidiaries
derived from sales into China (rather than the net revenues
realized by the Company and its Mongolian subsidiaries as currently
contemplated under the Cooperation Agreement). As consideration for
deferring payment of the additional Management Fee payable to CIC
as a result of the Amended and Restated Cooperation Agreement, the
Company agreed to pay to CIC a deferral fee at the rate of 2.5% on
the outstanding Management Fee. Pursuant to the Amended and
Restated Cooperation Agreement, the Company agreed to pay CIC the
total outstanding Management Fee and related accrued deferral fee
of $4.2 million over six instalments from June 2019 to November
2019. The Company executed the Amended and Restated Cooperation
Agreement with CIC on April 23, 2019.Pursuant to their terms, both
the 2019 Deferral Agreement and the Amended and Restated
Cooperation Agreement became effective on June 13, 2019, being the
date on which the 2019 Deferral Agreement was approved by
shareholders at the Company’s adjourned annual and special meeting
of shareholders.In connection with the 2019 Deferral Agreement, the
Company also announced that it intends to discuss a potential debt
restructuring plan with respect to amounts owing to CIC which is
mutually beneficial to the Company and CIC; and to form a special
committee comprised of independent directors to ensure that the
interests of its minority shareholders are fairly considered
in the negotiation and review of any such restructuring; however,
there can be no assurance that a favorable outcome will be reached.
As of the date hereof, there has not been any significant progress
in relations to the restructuring plan.On February 19, 2020, the
Company and CIC entered into an agreement (the “2020 February
Deferral Agreement”) pursuant to which CIC agreed to grant the
Company a deferral of: (i) deferred cash interest and deferral fees
of $1.3 million and $2.0 million which were due and payable to CIC
on January 19, 2020 and February 19, 2020, respectively, under the
2019 Deferral Agreement (collectively, the “2020 February Deferral
Amounts”); and (ii) approximately $0.7 million of the Management
Fee which was due and payable on February 14, 2020 to CIC under the
Amended and Restated Cooperation Agreement. The 2020 February
Deferral Agreement became effective on March 10, 2020, being the
date on which the Company obtained the requisite acceptance of the
2020 February Deferral Agreement from the TSX as required under
applicable TSX rules.The principal terms of the 2020 February
Deferral Agreement are as follows:• Payment of the 2020 February
Deferral Amounts will be deferred until June 20, 2020, while the
Management Fee will be deferred until they are repaid by the
Company.• As consideration for the deferral of these amounts,
the Company agreed to pay CIC: (i) a deferral fee equal to 6.4% per
annum on the 2020 February Deferral Amounts, commencing on the
date on which each such 2020 Deferral Amount would otherwise have
been due and payable under the 2019 Deferral Agreement; and (ii) a
deferral fee equal to 2.5% per annum on the Management Fee,
commencing on the date on which the Managements Fee would otherwise
have been due and payable under the Amended and Restated
Cooperation Agreement. • The Company agreed to provide CIC
with monthly updates regarding its operational and financial
affairs.• As the Company anticipates prior to agreeing to the
2020 February Deferral Agreement that a deferral was likely
required in respect of the monthly payments due and payable in the
period between April 2020 and June 2020 under the 2019 Deferral
Agreement and Amended and Restated Cooperation Agreement, the
Company and CIC agreed to discuss in good faith a deferral of these
payments on a monthly basis as they become due.• The Company
agreed to comply with all of its obligations under the 2019
Deferral Agreement and the Amended and Restated Cooperation
Agreement, as amended by the 2020 February Deferral Agreement.
• The Company and CIC agreed that nothing in the 2020 February
Deferral Agreement prejudices CIC’s rights to pursue any of its
remedies at any time pursuant to the 2019 Deferral Agreement and
Amended and Restated Cooperation Agreement, respectively.On March
10, 2020, the Company agreed with CIC (the “2020 March Deferral
Agreement”) that the $2.0 million of deferred cash interest and
deferral fees which were due and payable to CIC on March 19, 2020
under the 2019 Deferral Agreement (the “2020 March Deferral
Amount”) will be deferred until June 20, 2020. The terms of the
2020 March Deferral Agreement are substantially the same as the
terms of the 2020 February Deferral Agreement, including that the
Company agreed to pay CIC a deferral fee equal to 6.4% per annum on
the 2020 March Deferral Amount, commencing on March 19, 2020. The
2020 March Deferral Agreement became effective on March 25, 2020,
being the date on which the Company obtained the requisite
acceptance of the 2020 March Deferral Agreement from the TSX as
required under applicable TSX rules.On April 10, 2020, the Company
agreed with CIC (the “2020 April Deferral Agreement”) that the $2.0
million of deferred cash interest and deferral fees which were due
and payable to CIC on April 19, 2020 under the 2019 Deferral
Agreement (the “2020 April Deferral Amount”) will be deferred until
June 20, 2020. The terms of the 2020 April Deferral Agreement are
substantially the same as the terms of the 2020 February Deferral
Agreement, including that the Company agreed to pay CIC a deferral
fee equal to 6.4% per annum on the 2020 April Deferral Amount,
commencing on April 19, 2020. The 2020 April Deferral Agreement
became effective on April 29, 2020, being the date on which the
Company obtained the requisite acceptance of the 2020 April
Deferral Agreement from the TSX as required under applicable TSX
rules.On May 8, 2020, the Company agreed with CIC (the “2020 May
Deferral Agreement”) that the deferred cash interest and deferral
fees of $2.0 million which were due and payable to CIC on May 19,
2020 under the 2019 Deferral Agreement; and approximately $0.2
million of Management fees which were due and payable on May 15,
2020 to CIC under the Amended and Restated Cooperation Agreement
(collectively, the “2020 May Deferral Amount”) will be deferred
until June 20, 2020. The terms of the 2020 May Deferral Agreement
are substantially the same as the terms of the 2020 February
Deferral Agreement, including that the Company agreed to pay CIC a
deferral fee equal to 6.4% per annum on the deferred cash interest
and deferral fees commencing on May 19, 2020 and a deferral fee
equal to 2.5% per annum on the deferred Management fees commencing
on May 15, 2020. The 2020 May Deferral Agreement became effective
on June 8, 2020, being the date on which the Company obtained the
requisite acceptance of the 2020 May Deferral Agreement from the
TSX as required under applicable TSX rules.On June 19, 2020, the
Company agreed with CIC (the “2020 June Deferral Agreement”) that
the deferred cash interest and deferral fees in the aggregate
amount of approximately $74.0 million (the “2020 June Deferral
Amount”) which were due and payable to CIC on June 19, 2020 under
the 2019 Deferral Agreement and the prior deferral agreements
entered into during the period between February to May 2020 will be
deferred until September 14, 2020. The terms of the 2020 June
Deferral Agreement are substantially the same as the terms of the
2020 February Deferral Agreement, including that the Company agreed
to pay CIC a deferral fee equal to 6.4% per annum on the 2020 June
Deferral Amount commencing on June 19, 2020. The 2020 June Deferral
Agreement became effective on July 17, 2020, being the date on
which the Company obtained the requisite acceptance of the 2020
June Deferral Agreement from the TSX as required under applicable
TSX rules.On November 19, 2020, the Company and CIC entered into an
agreement (the “2020 November Deferral Agreement”) pursuant to
which CIC agreed to grant the Company a deferral of: (i) deferred
cash interest and deferral fees of approximately $75.2 million
which were due and payable to CIC on or before September 14, 2020,
under the 2020 June Deferral Agreement; (ii) semi-annual cash
interest payments in the aggregate amount of $16.0 million payable
to CIC on November 19, 2020 and May 19, 2021; (iii) $4.0 million
worth of PIK Interest shares (“2020 November PIK Interest”)
issuable to CIC on November 19, 2020 under the CIC Convertible
Debenture; and (iv) the Management Fees which payable to CIC on
November 14, 2020, February 14, 2021, May 15, 2021, August 14, 2021
and November 14, 2021 under the Amended and Restated Cooperation
Agreement. (collectively, the “2020 November Deferral Amounts”).
The effectiveness of the 2020 November Deferral Agreement and the
respective covenants, agreements and obligations of each party
under the 2020 November Deferral Agreement are subject to the
Company obtaining the requisite approval of the 2020 November
Deferral Agreement from Company shareholders in accordance with
applicable TSX rules. On October 29, 2020, the Company obtained an
order from the British Columbia Securities Commission (“BCSC”), the
Company’s principal securities regulator in Canada, which partially
revoked the CTO (as defined below) to, amongst other things, permit
the Company to execute the 2020 November Deferral Agreement.The
principal terms of the 2020 November Deferral Agreement are as
follows:• Payment of the 2020 November Deferral Amounts will
be deferred until August 31, 2023.CIC agreed to waive its rights
arising from any default or event default under the CIC Convertible
Debenture as a result of trading in the Common Shares being halted
on the TSX beginning as of June 19, 2020 and suspended on the HKEX
beginning as of August 17, 2020, in each case for a period of more
than five trading days.• As consideration for the deferral of
the 2020 November Deferral Amounts, the Company agreed to pay CIC:
(i) a deferral fee equal to 6.4% per annum on the 2020 November
Deferral Amounts payable under the CIC Convertible Debenture and
the 2020 June Deferral Agreement, commencing on the date on which
each such 2020 November Deferral Amount would otherwise have been
due and payable under the CIC Convertible Debenture or the June
2020 Deferral Agreement, as applicable; and (ii) a deferral fee
equal to 2.5% per annum on the 2020 November Deferral Amounts
payable under the Amended and Restated Cooperation Agreement,
commencing on the date on which the Management Fee would otherwise
have been due and payable under the Amended and Restated
Cooperation Agreement. • The 2020 November Deferral Agreement
does not contemplate a fixed repayment schedule for the 2020
November Deferral Amounts and related deferral fees. Instead, the
Company and CIC would agree to assess in good faith the Company’s
financial condition and working capital position on a monthly basis
and determine the amount, if any, of the 2020 November Deferral
Amounts and related deferral fees that the Company is able to repay
under the CIC Convertible Debenture, the June 2020 Deferral
Agreement or the Amended and Restated Cooperation Agreement, having
regard to the working capital requirements of the Company’s
operations and business at such time and with the view of ensuring
that the Company’s operations and business would not be materially
prejudiced as a result of any repayment.• Commencing as of
November 19, 2020 and until such time as the November 2020 PIK
Interest is fully repaid, CIC reserves the right to require the
Company to pay and satisfy the amount of the November 2020 PIK
Interest, either in full or in part, by way of issuing and
delivering PIK interest shares in accordance with the CIC
Convertible Debenture provided that, on the date of issuance of
such shares, the Common Shares are listed and trading on at least
one stock exchange.• If at any time before the 2020 November
Deferral Amounts and related deferral fees are fully repaid, the
Company proposes to appoint, replace or terminate one or more of
its Chief Executive Officer, its Chief Financial Officer or any
other senior executive(s) in charge of its principal business
function or its principal subsidiary, then the Company must first
consult with, and obtain written consent from CIC prior to
effecting such appointment, replacement or termination.
- Settlement with First
Concept Industrial Group Limited (“First
Concept”) – On June 7, 2020, SGS entered
into a settlement agreement with First Concept, pursuant to which
SGS agreed to pay to First Concept a settlement sum in the amount
of $8.0 million in full and final settlement of any and all claims
which First Concept may have against SGS in relation to Arbitration
Award (as defined below), the subject matter of the Arbitration
Award including any claims for interests and costs and the fees and
expenses of the Arbitration Award, and any and all enforcement
proceedings and applications in any jurisdictions, and in relation
to the deed of settlement with First Concept (the “Full Settlement
Sum”). The Full Settlement Sum was fully satisfied by the Company
in June 2020 and the outstanding payable to First Concept as of the
date hereof is $nil.
- Termination of
Soumber Deposit Mining Licenses –
On August 26, 2019, SGS received a letter (the “Notice Letter”)
from the Mineral Resources and Petroleum Authority of Mongolia
(“MRAM”) notifying that the Company’s three mining licenses
(MV-016869, MV-020436 and MV-020451) (the “Soumber Licenses”) for
the Soumber Deposit have been terminated by the Head of Cadastre
Division of MRAM effective as of August 21, 2019. According to the
Notice Letter, the Soumber Licenses have been terminated pursuant
to Clause 56.1.5 of Article 56 of the Minerals Law, Clauses 4.2.1
and 4.2.5 of Article 4 and Clause 28.1.1 of Article 28 of the
General Administrative Law and a decision order of a working group
established under an order of the Minister of Environment and
Tourism (Mongolia). According to this decision order, the working
group determined that SGS had violated its environmental
reclamation obligations with respect to the Soumber Deposit. The
Soumber Deposit is an undeveloped coal deposit covering
approximately 22,263 hectares located approximately 20 kilometers
east of the Company’s Ovoot Tolgoi coal mine in Mongolia. The
Company owned a 100% interest in the Soumber Deposit.The Company
believes the cancellation of the Soumber Licenses is without merit.
The Company is not aware of any failure on its part to fulfill its
environmental reclamation duties as they relate to the Soumber
Deposit. On October 4, 2019, SGS filed a claim against MRAM and the
Ministry of Environment and Tourism of Mongolia in the
Administration Court of the Capital City (the “Administration
Court”) seeking an order to restore the Soumber Licenses. The
Appeal Court issued the ruling in October 2020 and made an order to
accept SGS’s claim and restore the Soumber Licenses. The case was
transferred to the High Court of the Capital City (the “High
Court”) for final ruling. The Company anticipates that the High
Court will issue its ruling before the end of the first quarter of
2021. The Company will take all such actions, including additional
legal actions, as it considers necessary to reinstate the Soumber
Licenses. However, there can be no assurance that a favorable
outcome will be reached. The termination of the Soumber Licenses
does not have any impact on the Company’s current mining operations
at the Ovoot Tolgoi mine site.
- Key Findings of Formal
Investigation – Following the learning of certain
information relating to past conduct engaged in by former senior
executive officers and employees of the Company (“Former Management
and Employees”) which raised suspicions of serious fraud,
misappropriation of Company assets and other criminal acts by the
Former Management and Employees relating to prior transactions
(“Suspicious Transactions”) between 2016 and the first half of 2018
involving the Company, Inner Mongolia SouthGobi Energy Co. Ltd.
(“IMSGE”), a subsidiary of the Company and certain coal trading and
transportation companies, some of which are allegedly related to or
controlled by the Former Management and Employees or their related
persons, the Company’s board of directors (the “Board”) expanded
the mandate of its special committee of independent non-executive
directors (the “Special Committee”) to include a formal
investigation (the “Formal Investigation”) of the Suspicious
Transactions, the implicated Former Management and Employees, and
their impact, if any, on the business and affairs of the Company.
The Special Committee engaged Blake, Cassels & Graydon LLP as
independent Canadian legal counsel, and Ernst & Young (China)
Advisory Limited (the “Forensic Accountant”), as forensic
accountants, to assist in the Formal Investigation. The Special
Committee and the Forensic Accountant jointly engaged Zhong Lun Law
Firm, as independent Chinese legal counsel.On March 30, 2019, the
Company announced that the Special Committee concluded the Formal
Investigation and delivered a final report summarizing its key
findings to the Board, which was adopted and approved at a meeting
held on March 30, 2019. Please refer to the Company’s unaudited
Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”) for the three months ended March
31, 2019 for a summary of the key findings of the Formal
Investigation, a copy of which is available under the Company’s
profile on SEDAR at www.sedar.com.Based on the key findings of and
information obtained from the Formal Investigation, the Company
considered the resulting financial impact on its prior financial
statements and restated certain items in the Company’s financial
statements for the years ended December 31, 2016 and December 31,
2017 (the “Prior Restatement”), as disclosed in the Company’s
audited annual consolidated financial statements and related
MD&A for the year ended December 31, 2018, copies of which are
available under the Company’s profile on SEDAR at www.sedar.com.
The Prior Restatement reflects the impact of the misappropriation
of assets as well as the reclassification of certain balances of
assets in the prior years.
- Remedial Actions and
Preventative Measures – On April 30, 2019, the Company
announced that the Special Committee, with the assistance of the
Forensic Accountant, completed its assessment of the potential
remedial actions and preventative measures to improve and
strengthen the Company’s commitment to a culture of honesty,
integrity and accountability and compliance with the highest
standards of professional and ethical conduct. The Special
Committee delivered its report setting out a set of recommended
remedial actions and preventative measures (the “Remedial Actions
and Preventative Measures”) to the Board which was approved at a
meeting of the Board held on April 28, 2019. Please refer to the
Company’s MD&A for the three months ended March 31, 2019 for a
summary of the Remedial Actions and Preventative Measures which
were adopted and approved by the Board and the actions that the
Company has taken to implement the Remedial Actions and
Preventative Measures, a copy of which is available under the
Company’s profile on SEDAR at www.sedar.com.
- Resumption of Trading on
HKEX and TSX in May 2019 – On May
30, 2019, the Company announced that it had fulfilled the trading
resumption guidance to the satisfaction of the HKEX and the HKEX
and the TSX had accepted the Company’s trading resumption
application. Trading in the Common Shares on the TSX and the HKEX
resumed on May 30, 2019 and May 31, 2019, respectively.
- Cease Trade Order and Halt
Trading on TSX – On June 19, 2020, the BCSC issued a
general “failure to file” cease trade order (“CTO”), to prohibit
the trading by any person of any securities of the Company in
Canada. Trading in the Common Shares on the TSX was halted as a
result of the CTO. The CTO was issued as of result of the Company’s
failure to file: (i) its annual consolidated financial statements
for the year ended December 31, 2019 and the accompanying MD&A;
(ii) its Annual Information Form for the year ended December 31,
2019; and (iii) its interim consolidated financial statements for
the three-month period ended March 31, 2020 and accompanying
MD&A, in each case prior to the filing deadline of June 15,
2020.The CTO will remain in effect until such time as the Company
fully remedies its filing defaults under applicable Canadian
securities laws, including filing of its 2019 Annual Information
Form and its interim financial statements for the three month
periods ended March 31, 2020 and three and six-month period ended
June 30, 2020 and the accompanying MD&A, and makes a successful
application to the BCSC to have the CTO revoked. While the Company
is taking such actions as it considers necessary in order to remedy
its filing defaults as soon as possible, there can be no assurance
that the Company will have the CTO lifted in a timely manner or at
all. For so long as the CTO remains in effect, it will have a
significant adverse impact on the liquidity of the Common Shares
and shareholders may suffer a significant decline or total loss in
value of its investment in the Common Shares as a
result.
- Suspension of Trading on
HKEX – At the request of the Company, trading in the
shares of the Company on the HKEX was suspended with effect as of
August 17, 2020 pending the publication of the audited annual
results of the Company for the year ended December 31, 2019. On
September 2, 2020, the Company received a letter from the HKEX
setting out the following resumption guidance for the resumption of
trading in the Common Shares on the HKEX (the “Resumption
Guidance”): (i) publish all outstanding financial results and
address any audit modifications; (ii) inform the market of all
material information for the Company’s shareholders and investors
to appraise its position; and (iii) announce quarterly updates on
the Company’s developments under Rules 13.24A of the HKEX’s Listing
Rules, including, amongst other relevant matters, its business
operations, its resumption plan and the progress of
implementation.On September 30, 2020, the Company was notified by
the HKEX of the following additional condition which must be
satisfied in order for trading in the Common Shares on the HKEX to
resume: resolve issues arising from the CTO and/or the TSX
Delisting Review (as defined below), or take steps to the
satisfaction of the HKEX that the Company will be eligible for a
primary listing on the HKEX.If the Company fails to remedy the
issues causing its trading suspension, fully comply with the
Listing Rules to the HKEX’s satisfaction and resume trading in its
shares on the HKEX by February 16, 2022, the HKEX’s Listing
Division will recommend to the HKEX’s Listing Committee that it
proceed with the cancellation of the Company’s HKEX listing. Under
Rules 6.01 and 6.10 of the Listing Rules, the HKEX also has the
right to impose a shorter specific remedial period, where
appropriate.
- TSX Delisting
Review – On September 11, 2020, the TSX
notified the Company that it is reviewing the eligibility for
continued listing of the Common Shares on the TSX pursuant to the
TSX’s Remedial Review Process (“TSX Delisting Review”). The Company
has been granted until January 11, 2021 to remedy the following
delisting criteria, as well as any other delisting criteria that
become applicable during the Remedial Review Process: (i) financial
condition and/or operating results; (ii) adequate working capital
and appropriate capital structure; and (iii) disclosure issues
(collectively, the “Delisting Criteria”).The TSX Continued Listing
Committee has scheduled a meeting to be held on January 7, 2021 to
consider whether or not to suspend trading in and delist the Common
Shares on the TSX. If the Company fails to demonstrate to the TSX
that it has remedied the Delisting Criteria on or before January
11, 2021, the Common Shares will be delisted from the TSX 30 days
from such date, unless an extension is granted by the TSX prior to
the January 11, 2021 deadline.
- Changes in
Management and Directors
Ms. Lan Cheng: Ms. Cheng did not stand for
re-election at the Company’s annual and special meeting of
shareholders (the “AGM”) held on May 30, 2019 and ceased to be a
non-executive director following the conclusion of the
AGM.Mr. Ben Niu: On May 30, 2019,
Mr. Niu was elected as a non-executive director of the Company at
the AGM.Mr. Wen Yao: Mr. Yao resigned as a
non-executive director on March 11, 2020.Mr.
Jianmin Bao: On
March 18, 2020, Mr. Bao was appointed as a non-executive director
of the Company by CIC pursuant to a contractual nomination right
granted to CIC pursuant to a securityholders’ agreement by and
among the Company, CIC and Turquoise Hill Resources
Ltd.Mr. Shougao Wang: Mr. Wang
resigned as Chief Executive Officer and an executive director on
March 31, 2020.Mr. Dalanguerban: Mr. Dalanguerban
was appointed as Chief Executive Officer and an executive director
on March 31, 2020.Mr. Xiaoxiao
Li: Mr. Li resigned as non-executive director on
November 13, 2020.
- Going
Concern – Several adverse conditions and material
uncertainties relating to the Company cast significant doubt upon
the going concern assumption which includes the deficiencies in
assets and working capital. See section “Liquidity and Capital
Resources” for details.
OVERVIEW OF OPERATIONAL DATA
AND FINANCIAL RESULTS
Summary of Annual
Operational Data
| |
|
Year ended |
| |
|
December 31, |
|
|
|
2019 |
|
2018 |
| Sales Volumes, Prices
and Costs |
|
|
|
|
| |
|
|
|
|
| Premium semi-soft coking
coal |
|
|
|
|
|
Coal sales (millions of tonnes) |
|
0.67 |
|
0.59 |
|
Average realized selling price (per tonne) |
|
$ |
32.96 |
|
$ |
50.34 |
| Standard semi-soft coking
coal/ premium thermal coal |
|
|
|
|
|
Coal sales (millions of tonnes) |
|
2.35 |
|
1.26 |
|
Average realized selling price (per tonne) |
|
$ |
33.54 |
|
$ |
37.61 |
| Standard thermal coal |
|
|
|
|
|
Coal sales (millions of tonnes) |
|
0.09 |
|
0.78 |
|
Average realized selling price (per tonne) |
|
$ |
29.43 |
|
$ |
25.07 |
| Washed coal |
|
|
|
|
|
Coal sales (millions of tonnes) |
|
0.63 |
|
0.15 |
|
Average realized selling price (per tonne) |
|
$ |
43.05 |
|
$ |
44.02 |
| Total |
|
|
|
|
|
Coal sales (millions of tonnes) |
|
3.74 |
|
2.78 |
|
Average realized selling price (per tonne) |
|
$ |
34.88 |
|
$ |
37.12 |
| |
|
|
|
|
| Raw coal production (millions
of tonnes) |
|
5.05 |
|
4.34 |
| |
|
|
|
|
|
Cost of sales of product sold (per tonne) |
|
$ |
22.57 |
|
$ |
28.72 |
|
Direct cash costs of product sold (per tonne) (i) |
|
$ |
14.84 |
|
$ |
14.90 |
|
Mine administration cash costs of product sold (per tonne) (i) |
|
$ |
1.08 |
|
$ |
1.50 |
|
Total cash costs of product sold (per tonne) (i) |
|
$ |
15.92 |
|
$ |
16.40 |
| |
|
|
|
|
|
Other Operational Data |
|
|
|
|
| |
|
|
|
|
|
Production waste material moved (millions of bank cubic |
|
18.22 |
|
18.16 |
|
meters) |
|
|
|
|
|
Strip ratio (bank cubic meters of waste material per tonne of |
|
3.61 |
|
4.17 |
|
coal produced) |
|
|
|
|
|
Lost time injury frequency rate (ii) |
|
0.06 |
|
0.05 |
|
(i) |
A non-IFRS financial measure, see section “Non-IFRS financial
measures”. Cash costs of product sold exclude idled mine asset cash
costs. |
|
(ii) |
Per 200,000 man hours and calculated based on a rolling 12-month
average. |
| |
|
Overview of Annual Operational
Data
As at December 31, 2019, the Company had a lost
time injury frequency rate of 0.06 per 200,000 man hours based on a
rolling 12-month average.
The Company experienced a decrease in the
average selling price of coal from $37.1 per tonne in 2018 to $34.9
per tonne in 2019. The decrease in the average selling price was
principally attributable to (i) a change of the Company’s product
mix, as sales of premium semi-soft coking coal represented a
smaller proportion of total sales in 2019; and (ii) a higher
portion of sales made at the mine gate instead of transporting the
coal to the Company’s Inner Mongolia subsidiary and selling to
third party customers within China. The product mix for 2019
consisted of approximately 18% of premium semi-soft coking coal,
63% of standard semi-soft coking coal/premium thermal coal, 17% of
washed coal and 2% of standard thermal coal compared to
approximately 21% of premium semi-soft coking coal, 46% of standard
semi-soft coking coal/premium thermal coal, 5% of washed coal and
28% of standard thermal coal in 2018.
Sales volume increased from 2.8 million tonnes
in 2018 to 3.7 million tonnes in 2019. The Company’s production in
2019 was higher than that in 2018 as a result of a decrease in
strip ratio for 2019, yielding 5.1 million tonnes for 2019 as
compared to 4.3 million tonnes for 2018.
The Company’s unit cost of sales of product sold
decreased from $28.7 per tonne in 2018 to $22.6 per tonne in 2019.
The decrease was mainly driven by a higher amount of impairment of
coal stockpile inventories being recorded in 2018 (2018: impairment
of $5.4 million; 2019: reversal of impairment of $1.8 million).
Summary of Annual
Financial Results
| |
|
|
|
Year ended |
|
| |
|
|
|
December 31, |
|
| $ in thousands,
except per share information |
|
|
2019 |
|
2018 |
|
|
|
|
|
|
|
|
|
|
|
Revenue (i) |
|
|
$ |
129,712 |
|
|
$ |
|
103,804 |
|
|
Cost of sales (i) |
|
|
|
(84,400 |
) |
|
|
|
(79,835 |
) |
|
Gross profit excluding idled mine asset costs (ii) |
|
|
|
49,310 |
|
|
36,829 |
|
|
Gross profit |
|
|
|
45,312 |
|
|
23,969 |
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses |
|
|
|
(5,581 |
) |
|
|
|
(23,607 |
) |
|
Administration expenses |
|
|
|
(9,447 |
) |
|
|
|
(10,540 |
) |
|
Evaluation and exploration expenses |
|
|
|
(452 |
) |
|
|
|
(356 |
) |
| Profit/(loss) from
operations |
|
|
|
29,832 |
|
|
|
|
(10,534 |
) |
| |
|
|
|
|
|
|
|
| Finance costs |
|
|
|
(28,010 |
) |
|
|
|
(28,578 |
) |
| Finance
income |
|
|
|
4,417 |
|
|
184 |
|
| Share of earnings
of a joint venture |
|
|
|
1,329 |
|
|
1,631 |
|
| Income tax
expense |
|
|
|
(3,367 |
) |
|
|
|
(3,828 |
) |
| |
|
|
|
|
|
|
|
| Net profit/(loss)
attributable to equity holders of the Company |
|
|
|
4,201 |
|
|
|
|
(41,125 |
) |
| Basic and diluted
earnings/(loss) per share |
|
|
$ |
0.02 |
|
|
$ |
|
(0.15 |
) |
|
(i) |
Revenue and cost of sales related to the Company’s Ovoot Tolgoi
Mine within the Coal Division operating segment. Refer to note 4 of
the consolidated financial statements for further analysis
regarding the Company’s reportable operating segments. |
|
(ii) |
A non-IFRS financial measure, idled mine asset costs represents the
depreciation expense relates to the Company’s idled plant and
equipment. |
| |
|
Overview of
Annual Financial Results
The Company recorded a $29.8 million profit from
operations in 2019 compared to a $10.5 million loss from operations
in 2018. The improvement in profit from operations was principally
attributable to (i) the lower provision for doubtful trade and
other receivables being made during the year ($0.5 million and
$20.9 million for 2019 and 2018, respectively); and (ii) increased
sales volume.
Revenue was $129.7 million in 2019 compared to
$103.8 million in 2018. The Company’s effective royalty rate for
2019, based on the Company’s average realized selling price of
$34.9 per tonne, was 8.9% or $3.1 per tonne, compared to 7.9% or
$3.0 per tonne in 2018 (based on the average realized selling price
of $37.1 per tonne in 2018).
Royalty expenses were $11.6 million in 2019
compared to $8.2 million in 2018. The increase in royalty expenses
was mainly due to the new royalty regime introduced by the
Government of Mongolia in the third quarter of 2019.
Royalty regime in Mongolia
The royalty regime in Mongolia is evolving and
has been subject to change since 2012.
On February 1, 2016, the Government of Mongolia
issued a resolution in connection with the royalty regime. From
February 1, 2016 onwards, royalties are to be calculated based on
the actual contract price including transportation costs to the
Mongolia border. If such transportation costs have not been
included in the contract, the relevant transportation costs,
customs documentation fees, insurance and loading costs should be
estimated for the calculation of royalties. In the event that the
calculated sales price as described above differs from the contract
sales price of other entities in Mongolia (same quality of coal and
same border crossing) by more than 10%, the calculated sales price
will be deemed to be “non-market” under Mongolian tax law and the
royalty will then be calculated based on a reference price as
determined by the Government of Mongolia.
On September 4, 2019, the Government of Mongolia
issued a further resolution in connection with the royalty regime.
From September 1, 2019 onwards, in the event that the contract
sales price is less than the reference price as determined by the
Government of Mongolia by more than 30%, then the royalty payable
will be calculated based on the Mongolian government’s reference
price instead of the contract sales price.
Cost of sales was $84.4 million in 2019 compared
to $79.8 million in 2018. The increase in cost of sales in 2019 was
mainly due to the effect of (i) increased sales volume; and (ii) a
reversal of impairment of coal stockpile inventories of $1.8
million was recorded for 2019 as compared to $5.4 million of
impairment being recorded in 2018. Cost of sales consists of
operating expenses, share-based compensation expense, equipment
depreciation, depletion of mineral properties, royalties, coal
stockpile inventory impairment/(reversal of impairment) and idled
mine asset costs. Operating expenses in cost of sales reflect the
total cash costs of product sold (a Non-IFRS financial measure, see
section Non-IFRS financial measure for further analysis) during the
year.
| |
|
|
|
Year ended December 31, |
| $ in
thousands |
|
|
2019 |
|
2018 |
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
$ |
59,549 |
|
|
$ |
45,604 |
| Share-based
compensation expense |
|
|
|
9 |
|
|
4 |
| Depreciation and
depletion |
|
|
|
11,028 |
|
|
7,693 |
| Royalties |
|
|
|
11,639 |
|
|
8,237 |
|
Impairment/(reversal of impairment) of coal stockpile
inventories |
|
|
|
(1,823 |
) |
|
5,437 |
|
Cost of sales from mine operations |
|
|
|
80,402 |
|
|
66,975 |
|
Cost of sales related to idled mine assets |
|
|
|
3,998 |
|
|
12,860 |
|
Cost of sales |
|
|
$ |
84,400 |
|
|
$ |
79,835 |
| |
|
|
|
|
|
|
Operating expenses in cost of sales were $59.5
million in 2019 compared to $45.6 million in 2018. The overall
increase in operating expenses was primarily due to the combined
effect of: (i) increased sales volume from 2.8 million tonnes in
2018 to 3.7 million tonnes in 2019; and (ii) higher inventory
carrying costs given less deferred stripping cost was capitalized
in 2019.
Cost of sales in 2019 included a reversal of
impairment of coal stockpile inventories of $1.8 million, to
increase the carrying value of the Company’s coal stockpiles to the
lower of the cost and the net realizable value. The reversal of
impairment of coal stockpile inventories recorded in 2019 reflected
the enhancement in the wash plant capacity and its continuous
operation at the expected level. A coal stockpile impairment of
$5.4 million was recorded in 2018 to reduce the carrying value of
the Company’s stockpile to their net realizable value. The coal
stockpile impairments recorded primarily related to the Company’s
higher-ash content products.
Cost of sales related to idled mine assets in
2019 included $4.0 million related to depreciation expenses for
idled equipment (2018: $12.9 million).
Other operating expenses were $5.6 million in
2019 (2018: $23.6 million), as follows:
| |
|
|
Year ended December 31, |
| $ in thousands |
|
|
2019 |
|
|
2018 |
|
|
|
|
|
|
|
|
|
CIC management fee |
|
|
$ |
3,185 |
|
|
$ |
2,098 |
|
| Other taxes on foreign
payments |
|
|
1,881 |
|
|
|
599 |
|
| Provision for doubtful trade
and other receivables |
|
|
501 |
|
|
|
20,892 |
|
| Provision for commercial
arbitration |
|
|
485 |
|
|
|
124 |
|
| Impairment of prepaid
expenses |
|
|
253 |
|
|
|
134 |
|
| Loss on disposal of properties
for resale |
|
|
36 |
|
|
|
179 |
|
| Foreign exchange
loss/(gain) |
|
|
|
(706 |
) |
|
|
643 |
|
| Gain on disposal of property,
plant and equipment |
|
|
|
(29 |
) |
|
|
(994 |
) |
| Impairment of properties for
resale |
|
|
- |
|
|
|
2,239 |
|
| Penalty on late settlement of
trade payables |
|
|
- |
|
|
|
427 |
|
| Gain on settlement of trade
payables |
|
|
- |
|
|
|
(2,392 |
) |
| Net reversal of impairment of
items of property, plant and equipment |
|
|
- |
|
|
|
(346 |
) |
|
Others |
|
|
|
(25 |
) |
|
|
4 |
|
|
Other operating expenses |
|
|
$ |
5,581 |
|
|
$ |
23,607 |
|
The Company made a provision for doubtful trade
and other receivables of $0.5 million in 2019 (2018: $20.9 million)
for certain long aged receivables based on its expected credit loss
model.
Administration expenses were $9.4 million in
2019 as compared to $10.5 million in 2018, as follows:
| |
|
|
|
Year ended December 31, |
| $ in
thousands |
|
|
2019 |
|
2018 |
|
|
|
|
|
|
|
|
|
Corporate administration |
|
|
$ |
2,111 |
|
$ |
2,639 |
| Professional
fees |
|
|
3,076 |
|
2,685 |
| Salaries and
benefits |
|
|
3,522 |
|
5,004 |
| Share-based
compensation expense |
|
|
38 |
|
75 |
|
Depreciation |
|
|
700 |
|
137 |
|
Administration expenses |
|
|
$ |
9,447 |
|
$ |
10,540 |
Administration expenses were lower for 2019
compared to 2018 primarily due to lower salaries and benefits
incurred during the year.
Evaluation and exploration expenses were $0.5
million and $0.4 million in 2019 and 2018, respectively. The
Company continued to minimize evaluation and exploration
expenditures in 2019 in order to preserve the Company’s financial
resources. Evaluation and exploration activities and expenditures
in 2019 were limited to ensuring that the Company met the Mongolian
Minerals Law requirements in respect of its mining licenses.
Finance costs were $28.0 million and $28.6
million in 2019 and 2018, respectively, which primarily consisted
of interest expense on the $250.0 million CIC Convertible
Debenture.
Summary of Quarterly
Operational Data
| |
|
2019 |
|
2018 |
|
Quarter Ended |
31-Dec |
30-Sep |
30-Jun |
31-Mar |
|
31-Dec |
30-Sep |
30-Jun |
31-Mar |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Volumes, Prices and Costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Premium
semi-soft coking coal |
|
|
|
|
|
|
|
|
|
|
Coal sales (millions of tonnes) |
0.39 |
0.05 |
0.12 |
0.11 |
|
0.24 |
0.25 |
0.07 |
0.03 |
|
Average realized selling price (per tonne) |
$ |
29.18 |
$ |
31.49 |
$ |
32.72 |
$ |
47.34 |
|
$ |
47.37 |
$ |
48.15 |
$ |
59.98 |
$ |
67.94 |
| Standard
semi-soft coking coal/ premium thermal coal |
|
|
|
|
|
|
|
|
|
|
Coal sales (millions of tonnes) |
0.40 |
0.51 |
0.59 |
0.85 |
|
0.40 |
0.26 |
0.19 |
0.41 |
|
Average realized selling price (per tonne) |
$ |
31.88 |
$ |
31.67 |
$ |
35.67 |
$ |
33.34 |
|
$ |
32.60 |
$ |
34.40 |
$ |
33.80 |
$ |
46.34 |
| Standard
thermal coal |
|
|
|
|
|
|
|
|
|
|
Coal sales (millions of tonnes) |
- |
- |
- |
0.09 |
|
0.12 |
0.22 |
0.32 |
0.12 |
|
Average realized selling price (per tonne) |
$ |
- |
$ |
- |
$ |
- |
$ |
34.88 |
|
$ |
24.26 |
$ |
23.49 |
$ |
26.32 |
$ |
25.40 |
| Washed
coal |
|
|
|
|
|
|
|
|
|
|
Coal sales (millions of tonnes) |
0.20 |
0.25 |
0.17 |
0.01 |
|
0.15 |
- |
- |
- |
|
Average realized selling price (per tonne) |
$ |
42.95 |
$ |
42.37 |
$ |
44.20 |
$ |
45.07 |
|
$ |
44.02 |
$ |
- |
$ |
- |
$ |
- |
|
Total |
|
|
|
|
|
|
|
|
|
|
Coal sales (millions of tonnes) |
0.99 |
0.81 |
0.88 |
1.06 |
|
0.91 |
0.73 |
0.58 |
0.56 |
|
Average realized selling price (per tonne) |
$ |
33.04 |
$ |
34.98 |
$ |
36.80 |
$ |
34.91 |
|
$ |
37.32 |
$ |
35.77 |
$ |
32.81 |
$ |
43.02 |
|
|
|
|
|
|
|
|
|
|
|
|
| Raw coal
production (millions of tonnes) |
1.48 |
1.21 |
1.33 |
1.03 |
|
1.87 |
1.11 |
0.98 |
0.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales of product sold (per tonne) |
$ |
23.68 |
$ |
19.16 |
$ |
25.04 |
$ |
22.08 |
|
$ |
30.80 |
$ |
23.44 |
$ |
29.27 |
$ |
31.64 |
|
Direct cash costs of product sold (per tonne) (i) |
$ |
13.61 |
$ |
18.03 |
$ |
17.18 |
$ |
10.82 |
|
$ |
14.41 |
$ |
11.90 |
$ |
14.93 |
$ |
19.60 |
|
Mine administration cash costs of product sold (per tonne) (i) |
$ |
1.29 |
$ |
1.09 |
$ |
1.39 |
$ |
1.41 |
|
$ |
2.19 |
$ |
1.24 |
$ |
1.00 |
$ |
1.24 |
|
Total cash costs of product sold (per tonne) (i) |
$ |
14.90 |
$ |
19.12 |
$ |
18.57 |
$ |
12.23 |
|
$ |
16.60 |
$ |
13.14 |
$ |
15.93 |
$ |
20.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operational Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production waste material moved (millions of bank cubic
meters) |
3.61 |
4.36 |
5.34 |
4.91 |
|
5.54 |
4.56 |
5.18 |
2.88 |
|
Strip ratio (bank cubic meters of waste material per tonne
of coal produced) |
2.44 |
3.61 |
4.01 |
4.76 |
|
2.97 |
4.11 |
5.26 |
7.55 |
|
Lost time injury frequency rate (ii) |
0.08 |
0.08 |
0.06 |
0.00 |
|
0.00 |
0.00 |
0.06 |
0.13 |
|
(i) |
A non-IFRS financial measure, see section “Non-IFRS financial
measures”. Cash costs of product sold exclude idled mine asset cash
costs. |
|
(ii) |
Per 200,000 man hours and calculated based on a rolling 12-month
average. |
Overview of Quarterly Operational
Data
For the fourth quarter of 2019, the Company had
a lost time injury frequency rate of 0.08 per 200,000 man hours
based on a rolling 12-month average.
The Company experienced a decrease in the
average selling price of coal from $37.3 per tonne in the fourth
quarter of 2018 to $33.0 per tonne in the fourth quarter of 2019.
The product mix for the fourth quarter of 2019 consisted of
approximately 39% of premium semi-soft coking coal, 41% of standard
semi-soft coking coal/premium thermal coal and 20% of washed coal
compared to approximately 27% of premium semi-soft coking coal, 44%
of standard semi-soft coking coal/premium thermal coal, 16% of
washed coal and 13% of standard thermal coal in the fourth quarter
of 2018.
The Company sold 1.0 million tonnes for the
fourth quarter of 2019 as compared to 0.9 million tonnes for the
fourth quarter of 2018.
The Company’s production in the fourth quarter
of 2019 was lower than the fourth quarter of 2018 as a result of
management’s decision to pace production to meet expected sales,
yielding 1.5 million tonnes for the fourth quarter of 2019 as
compared to 1.9 million tonnes for the fourth quarter of 2018.
The Company’s unit cost of sales of product sold
decreased to $23.7 per tonne in the fourth quarter of 2019 from
$30.8 per tonne in the fourth quarter of 2018. The decrease was
mainly driven by a higher amount of impairment of coal stockpile
inventories being recorded in the fourth quarter of 2018 (fourth
quarter of 2018: $5.4 million; fourth quarter of 2019: $nil).
Summary of Quarterly Financial
Results
The Company’s annual financial statements are
reported under International Financial Reporting Standards (“IFRS”)
issued by the International Accounting Standards Board (the
“IASB”). The following table provides highlights, extracted from
the Company’s annual and interim financial statements, of quarterly
results for the past eight quarters:
| $ in thousands,
except per share information |
2019 |
|
2018 |
|
|
|
31-Dec |
30-Sep |
30-Jun |
31-Mar |
|
31-Dec |
30-Sep |
30-Jun |
31-Mar |
|
Quarter Ended |
|
|
|
|
|
|
(Restated) |
(Restated) |
(Restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Results |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue (i) |
$ |
32,113 |
$ |
28,309 |
$ |
32,479 |
$ |
36,811 |
|
$ |
33,814 |
$ |
26,277 |
$ |
19,278 |
$ |
24,435 |
| Cost of
sales (i) |
(23,446) |
(15,518) |
(22,031) |
(23,405) |
|
(28,027) |
(17,110) |
(16,979) |
(17,719) |
| Gross
profit excluding idled mine asset costs |
9,971 |
13,664 |
11,318 |
14,357 |
|
7,305 |
13,195 |
6,079 |
10,250 |
| Gross
profit including idled mine asset costs |
8,667 |
12,791 |
10,448 |
13,406 |
|
5,787 |
9,167 |
2,299 |
6,716 |
|
|
|
|
|
|
|
|
|
|
|
|
| Other
operating expenses |
(1,589) |
(1,245) |
(2,333) |
(414) |
|
(2,921) |
(3,417) |
(16,512) |
(757) |
|
Administration expenses |
(1,386) |
(2,074) |
(2,878) |
(3,109) |
|
(1,583) |
(2,724) |
(3,856) |
(2,377) |
|
Evaluation and exploration expenses |
(382) |
(22) |
(23) |
(25) |
|
(36) |
(40) |
(156) |
(124) |
|
Profit/(loss) from operations |
5,310 |
9,450 |
5,214 |
9,858 |
|
1,247 |
2,986 |
(18,225) |
3,458 |
|
|
|
|
|
|
|
|
|
|
|
|
| Finance
costs |
(7,095) |
(7,184) |
(7,001) |
(6,739) |
|
(10,899) |
(5,758) |
(5,958) |
(6,006) |
| Finance
income |
36 |
68 |
4,305 |
17 |
|
13 |
106 |
8 |
100 |
| Share of
earnings of a joint venture |
225 |
277 |
375 |
452 |
|
416 |
247 |
628 |
340 |
| Income
tax credit/(expense) |
(659) |
(468) |
(801) |
(1,439) |
|
(1,023) |
(267) |
(1,609) |
(929) |
|
|
|
|
|
|
|
|
|
|
|
|
| Net
profit/(loss) |
(2,183) |
2,143 |
2,092 |
2,149 |
|
(10,246) |
(2,686) |
(25,156) |
(3,037) |
|
Basic and diluted earnings/(loss) per share |
$ |
(0.01) |
$ |
0.01 |
$ |
0.01 |
$ |
0.01 |
|
$ |
(0.04) |
$ |
(0.01) |
$ |
(0.09) |
$ |
(0.01) |
|
(i) |
Revenue and cost of sales relate to the Company’s Ovoot Tolgoi Mine
within the Mongolian Coal Division operating segment. Refer to note
4 of the consolidated financial statements for further analysis
regarding the Company’s reportable operating segments. |
|
(ii) |
The financial results for the three months ended September 30,
2018, June 30, 2018 and March 31, 2018 were restated as a result of
the net effect of the Prior Restatement. Refer to section entitled
"Key Findings of Formal Investigation", as well as the press
release for the periods ended September 30, 2019, June 30, 2019 and
March 31, 2019 for details. |
|
|
|
Overview of Quarterly Financial
Results
The Company recorded a $5.3 million profit from
operations in the fourth quarter of 2019 compared to a $1.2 million
profit from operations in the fourth quarter of 2018. The
improvement in overall financial results was principally
attributable to the Company recognizing a lower amount of
impairment charges and provisions during the fourth quarter of 2019
as compared to the fourth quarter in 2018. In particular, during
the fourth quarter of 2018, an impairment charge of $5.4 million
was recorded on coal stockpile inventories (fourth quarter of 2019:
$nil).
Revenue was $32.1 million in the fourth quarter
of 2019 compared to $33.8 million in the fourth quarter of 2018.
The Company’s effective royalty rate for the fourth quarter of
2019, based on the Company’s average realized selling price of
$33.0 per tonne, was 14.7% or $4.8 per tonne, compared to 9.9% or
$3.7 per tonne in the fourth quarter of 2018 (based on the average
realized selling price of $37.3 per tonne in the fourth quarter of
2018). The increase was mainly attributed to the new Mongolian
royalty regime which became effective in September 2019. Please see
section Royalty Regime in Mongolia of this press release for
details.
Cost of sales was $23.4 million in the fourth
quarter of 2019 compared to $28.0 million in the fourth quarter of
2018. The decrease in cost of sales was mainly due to a lower
amount of impairment of coal stockpile inventories being made
during the fourth quarter of 2019 (fourth quarter of 2018: $5.4
million; fourth quarter of 2019: nil).
Cost of sales consists of operating expenses,
share-based compensation expense, equipment depreciation, depletion
of mineral properties, royalties, coal stockpile inventory
impairment and idled mine asset costs. Operating expenses in cost
of sales reflect the total cash costs of product sold (a Non-IFRS
financial measure, see section Non-IFRS financial measure for
further analysis) during the quarter.
| |
|
|
|
|
| |
|
|
|
Three months endedDecember 31, |
| $ in
thousands |
|
|
2019 |
|
2018 |
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
$ |
14,754 |
|
$ |
15,110 |
| Share-based
compensation expense |
|
|
2 |
|
3 |
| Depreciation and
depletion |
|
|
2,649 |
|
2,626 |
| Royalties |
|
|
4,737 |
|
3,333 |
|
Impairment of coal stockpile inventories |
|
|
- |
|
5,437 |
|
Cost of sales from mine operations |
|
|
22,142 |
|
26,509 |
|
Cost of sales related to idled mine assets |
|
|
1,304 |
|
1,518 |
|
Cost of sales |
|
|
$ |
23,446 |
|
$ |
28,027 |
Operating expenses in cost of sales were $14.8
million in the fourth quarter of 2019 compared to $15.1 million in
the fourth quarter of 2018, as the sales volume in both quarters
were at similar levels.
Cost of sales in the fourth quarter of 2018
included coal stockpile impairment of $5.4 million to reduce the
carrying value of the Company’s coal stockpiles to their net
realizable value. The coal stockpile impairment recorded in the
fourth quarter of 2018 primarily related to the Company’s
higher-ash content products.
Cost of sales related to idled mine assets in
the fourth quarter of 2019 included $1.3 million related to
depreciation expenses for idled equipment (fourth quarter of 2018:
$1.5 million).
Other operating expenses were $1.6 million in
the fourth quarter of 2019 (fourth quarter of 2018: $2.9
million).
| |
|
|
|
Three months endedDecember 31, |
| $ in
thousands |
|
|
2019 |
|
2018 |
|
|
|
|
|
|
|
|
|
|
Provision for doubtful trade and other receivables |
|
|
$ |
60 |
|
|
$ |
1,588 |
|
| Impairment of
properties for resale |
|
|
- |
|
|
|
866 |
|
| Impairment of
prepaid expenses |
|
|
- |
|
|
|
134 |
|
| CIC management
fee |
|
|
853 |
|
|
|
761 |
|
| Other taxes on
foreign payments |
|
|
858 |
|
|
|
599 |
|
| Foreign exchange
loss/(gain) |
|
|
(228 |
) |
|
|
1,373 |
|
| Loss/(gain) on
disposal of properties for resale |
|
|
(1 |
) |
|
|
179 |
|
| Gain on disposal
of property, plant and equipment |
|
|
- |
|
|
|
(2,167 |
) |
|
Provision/(reversal of provision) for commercial arbitration |
|
|
79 |
|
|
|
(562 |
) |
| Net reversal of
impairment of items of property, plant and equipment |
|
|
- |
|
|
|
(346 |
) |
| Adjustment on gain
on settlement of trade payables |
|
|
- |
|
|
|
564 |
|
| Others |
|
|
(32 |
) |
|
|
(68 |
) |
|
Other operating expenses |
|
|
$ |
1,589 |
|
|
$ |
2,921 |
|
Administration expenses were $1.4 million in the
fourth quarter of 2019 as compared to $1.6 million in the fourth
quarter of 2018. The decrease in salaries and benefits was mainly
due to the overprovision of staff bonus for past periods.
| |
|
|
|
Three months endedDecember 31, |
| $ in
thousands |
|
|
2019 |
|
2018 |
|
|
|
|
|
|
|
|
|
Corporate administration |
|
|
$ |
554 |
|
$ |
308 |
| Professional
fees |
|
|
408 |
|
52 |
| Salaries and
benefits |
|
|
208 |
|
1,184 |
| Share-based
compensation expense |
|
|
9 |
|
28 |
|
Depreciation |
|
|
207 |
|
11 |
|
Administration expenses |
|
|
$ |
1,386 |
|
$ |
1,583 |
Evaluation and exploration expenses were $0.4
million for the fourth quarter of 2019 (fourth quarter of 2018:
negligible). The Company continued to minimize evaluation and
exploration expenditures in 2019 in order to preserve the Company’s
financial resources. Evaluation and exploration activities and
expenditures in the fourth quarter of 2019 were limited to ensuring
that the Company met the Mongolian Minerals Law requirements in
respect of its mining licenses.
Finance costs were $7.1 million in the fourth
quarter of 2019 compared to $10.9 million in the fourth quarter of
2018, which primarily consisted of interest expense on the CIC
Convertible Debenture.
LIQUIDITY AND CAPITAL
RESOURCES
Liquidity and Capital
Management
The Company has in place a planning, budgeting
and forecasting process to help determine the funds required to
support the Company’s normal operations on an ongoing basis and its
expansionary plans.
Bank Loan
On May 15, 2018, SGS obtained a bank loan (the
“2018 Bank Loan”) in the principal amount of $2.8 million from a
Mongolian bank (the “Bank”) with the key commercial terms as
follows:
- Maturity date set at 24 months from
drawdown (subsequently extended for 12 months on May 18,
2020);
- Interest rate of 15% per annum and
interest is payable monthly; and
- Certain items of property, plant and
equipment were pledged as security for the 2018 Bank Loan. As at
December 31, 2019, the net carrying amount of the pledged items of
property, plant and equipment was $0.4 million (December 31, 2018:
$2.6 million).
As at December 31, 2019, the outstanding
principal balance of the 2018 Bank Loan was $2.8 million (December
31, 2018: $2.8 million) and the accrued interest owed by the
Company was negligible (December 31, 2018: negligible).
Costs reimbursable to
Turquoise Hill Resources Ltd (“Turquoise
Hill”)
Prior to the completion of a private placement
with Novel Sunrise Investments Limited (“Novel Sunrise”) on April
23, 2015, Rio Tinto plc (“Rio Tinto”) was the Company’s ultimate
parent company. In the past, Rio Tinto sought reimbursement from
the Company for the salaries and benefits of certain Rio Tinto
employees who were assigned by Rio Tinto to work for the Company,
as well as certain legal and professional fees incurred by Rio
Tinto in relation to the Company’s prior internal investigation and
Rio Tinto’s participation in the tripartite committee. Subsequently
Rio Tinto transferred and assigned to Turquoise Hill its right to
seek reimbursement for these costs and fees from the Company.
As at December 31, 2019, the amount of
reimbursable costs and fees claimed by Turquoise Hill (the “TRQ
Reimbursable Amount”) amounted to $8.1 million (such amount is
included in the aging profile of trade and other payables set out
below). On October 12, 2016, the Company received a letter from
Turquoise Hill, which proposed an arrangement for regular payments
of the outstanding TRQ Reimbursable Amount. On November 12, 2020,
the Company received communication from Turquoise Hill advising
that Turquoise Hill wishes to re-engage in discussions with the
Company regarding a repayment plan for the outstanding TRQ
Reimbursable Amount. No agreement on repayment has been reached
between the Company and Turquoise Hill as of the date of this press
release.
Going concern considerations
The Company’s consolidated financial statements
have been prepared on a going concern basis which assumes that the
Company will continue operating until at least December 31, 2020
and will be able to realize its assets and discharge its
liabilities in the normal course of operations as they come due.
However, in order to continue as a going concern, the Company must
generate sufficient operating cash flows, secure additional capital
or otherwise pursue a strategic restructuring, refinancing or other
transactions to provide it with sufficient liquidity.
Several adverse conditions and material
uncertainties cast significant doubt upon the Company’s ability to
continue as a going concern and the going concern assumption used
in the preparation of the Company’s consolidated financial
statements. The Company had a deficiency in assets of $49.2 million
as at December 31, 2019 compared to a deficiency in assets of $48.1
million as at December 31, 2018 while the working capital
deficiency (excess current liabilities over current assets) reached
$114.7 million as at December 31, 2019 compared to a working
capital deficiency of $203.1 million as at December 31, 2018.
Included in the working capital deficiency as at
December 31, 2019 are significant obligations, which include the
interest amounting to $67.1 million in relation to the 2019
Deferral Agreement, the 2020 February Deferral Agreement, the 2020
March Deferral Agreement, the 2020 April Deferral Agreement, the
2020 May Deferral Agreement, the 2020 June Deferral Agreement, and
the 2020 November Deferral Agreement.
In addition, the Common Shares have been
suspended from trading since June 19, 2020 on the TSX and August
17, 2020 on the HKEX. As of the date hereof, certain conditions of
the Resumption Guidance, including but not limited to the issuance
of the audited financial statements for the year ended December 31,
2019, have been fulfilled. However, if the Common Shares become
delisted from either the TSX or the HKEX, which would be an event
of default under the CIC Convertible Debenture, which could result
in the automatic termination of the deferral periods under the 2020
November Deferral Agreement and the acceleration of all principal,
interest and other amounts owing under the CIC Convertible
Debenture and the 2020 November Deferral Agreement becoming
immediately due and payable, in each case without the necessity of
any demand upon or notice to the Company by CIC.
The Company also has current liabilities,
including trade and other payables of $87.0 million, provision for
commercial arbitration of $5.6 million and interest payable under
the CIC Convertible Debenture of $67.1 million as at December 31,
2019. Out of trade and other payables, which require settlement in
the short-term, unpaid taxes of $31.8 million are repayable on
demand by SGS to the Mongolian Tax Authority (“MTA”).
The Company may not be able to settle all trade
and other payables on a timely basis, while continuing postponement
in settling certain trade payables owed to suppliers and creditors
may impact the mining operations of the Company and result in
potential lawsuits and/or bankruptcy proceedings being filed
against the Company. Except as disclosed elsewhere in this press
release, no such lawsuits or proceedings are pending as at November
26, 2020. However, there can be no assurance that no such lawsuits
or proceedings will be filed by the Company’s creditors in the
future and the Company’s suppliers and contractors will continue to
supply and provide services to the Company uninterrupted.
Further, the Company was informed that effective
as of February 11, 2020, the Mongolian State Emergency Commission
closed Mongolia’s southern border with China in order to prevent
the spread of COVID-19. Accordingly, the Company had suspended coal
exports to China since February 11, 2020 as a result of the border
closure and the closure remained in effect until March 27,
2020.
On March 28, 2020, the Mongolian-Chinese border
was re-opened for coal export on a trial basis, with a limit
imposed on the total volume of coal that was permitted to be
exported during this trial period. The Company has experienced a
continuous improvement in the volume of coal exported to China
since March 28, 2020. During the period between April to October
2020, an aggregate of 1.9 million tonnes of coal was exported by
the Company from Mongolia to China, as compared to an aggregate of
2.0 million tonnes of coal during the same period in the 2019
calendar year.
The border closure has had an adverse impact on
the Company’s sales and cash flows in the first and second quarter
of 2020. In order to mitigate the financial impact of the border
closures and preserve its working capital, the Company temporarily
ceased major mining operations (including coal mining), reduced
production to only coal-blending activities and placed
approximately half of its workforce on furlough from February 2020.
Since August 2, 2020, the Company has resumed its mining
operations, which includes mining, blending and washing of coal. As
at October 31, 2020, SGS employed 208 employees at the Ovoot Tolgoi
Mine site (December 31, 2019: 383 employees). The Company produced
1.1 million tonnes from August to October 2020, as compared to 1.3
million tonnes from August to October 2019. There were a few
COVID-19 cases reported in Ulaanbaatar (being the capital city of
Mongolia) on November 11, 2020. As a result, the Mongolian local
authorities have taken certain precautionary steps to minimize
further transmission and announced a lockdown for the city until
December 2, 2020. Although the mining operations and the export of
coal from Mongolia to China continues as of the date
hereof, there can be no guarantee that the Company will be
able to continue exporting coal to China, or the border crossings
would not be the subject of additional closures as a result of
COVID-19 in the future. The Company will continue to closely
monitor the development of the COVID-19 pandemic and the impact it
has on coal exports to China and will react promptly to preserve
the working capital of the Company.
There are significant uncertainties as to the
outcomes of the above events or conditions that may cast
significant doubt on the Company’s ability to continue as a going
concern and, therefore, the Company may be unable to realize its
assets and discharge its liabilities in the normal course of
business. Should the use of the going concern basis in preparation
of the consolidated financial statements be determined to be not
appropriate, adjustments would have to be made to write down the
carrying amounts of the Company’s assets to their realizable
values, to provide for any further liabilities which might arise
and to reclassify non-current assets and non-current liabilities as
current assets and current liabilities, respectively. The effects
of these adjustments have not been reflected in the consolidated
financial statements. If the Company is unable to continue as a
going concern, it may be forced to seek relief under applicable
bankruptcy and insolvency legislation.
Management of the Company has prepared a cash
flow projection covering a period of 12 months from December 31,
2019. The cash flow projection has taken into account the
anticipated cash flows to be generated from the Company’s business
during the period under projection including cost saving measures.
In particular, the Company has taken into account the following
measures for improvement of the Company’s liquidity and financial
position, which include: (i) entering into the 2020 November
Deferral Agreement with CIC for a deferral of the 2020 November
Deferral Amounts until August 31, 2023, subject to conditions
precedent therein; (ii) agreeing to deferral arrangements and
improved payment terms with certain vendors; (iii) SGS planned to
reduce the outstanding tax payable by monthly payments to MTA
starting from June 2020; (iv) reducing the inventory of low quality
coal by wet washing and coal blending; and (v) resuming coal mining
activities beginning as of August 2020 to enhance coal supply. In
addition, management of the Company assessed that the Company would
be able to issue all outstanding financial results, being one of
the conditions of the Resumption Guidance which must be satisfied
in order to avoid a delisting of the Common Shares from the HKEX,
which is in turn an event of default under the CIC Convertible
Debenture. After considering the above measures, and given the
re-opening of the Mongolian-Chinese border since March 28, 2020,
the Directors believe that there will be sufficient financial
resources to continue its operations and to meet its financial
obligations as and when they fall due in the next 12 months from
December 31, 2019 and therefore are satisfied that it is
appropriate to prepare the consolidated financial statements on a
going concern basis.
Factors that impact the Company’s liquidity are
being closely monitored and include, but are not limited to, impact
of the COVID-19 pandemic, Chinese economic growth, market prices of
coal, production levels, operating cash costs, capital costs,
exchange rates of currencies of countries where the Company
operates and exploration and discretionary expenditures.
As at December 31, 2019 and December 31, 2018,
the Company was not subject to any externally imposed capital
requirements.
Impact of the COVID-19
Pandemic
The Company was informed that effective as of
February 11, 2020, the Mongolian State Emergency Commission closed
Mongolia’s southern border with China in order to prevent the
spread of COVID-19. Accordingly, the Company suspended coal exports
to China beginning as of February 11, 2020 as a result of the
border closure.
On March 28, 2020, the Mongolian-Chinese border
was re-opened for coal export on a trial basis, with a limit
imposed on the total volume of coal that was permitted to be
exported during this trial period. The Company has experienced a
continuous improvement in the volume of coal exported to China
since March 28, 2020. During the period between April to October
2020, an aggregate of 1.9 million tonnes of coal was exported by
the Company from Mongolia to China, as compared to an aggregate of
2.0 million tonnes of coal during the same period in the 2019
calendar year.
The border closure has had an adverse impact on
the Company’s sales and cash flows in the first and second quarter
of 2020. In order to mitigate the financial impact of the border
closures and preserve its working capital, the Company temporarily
ceased major mining operations (including coal mining), reduced
production to only coal-blending activities and placed
approximately half of its workforce on furlough from February 2020.
Since August 2, 2020, the Company has resumed its mining
operations, which includes mining, blending and washing of coal. As
at October 31, 2020, SGS employed 208 employees at the Ovoot Tolgoi
Mine site (December 31, 2019: 383 employees). The Company produced
1.1 million tonnes from August to October 2020, as compared to 1.3
million tonnes from August to October 2019. There were a few
COVID-19 cases reported in Ulaanbaatar (being the capital city of
Mongolia) on November 11, 2020. As a result, the Mongolian local
authorities have taken certain precautionary steps to minimize
further transmission and announced a lockdown for the city until
December 2, 2020. Although the mining operations and the export of
coal from Mongolia to China continues as of the date
hereof, there can be no guarantee that the Company will be
able to continue exporting coal to China, or the border crossings
would not be the subject of additional closures as a result of
COVID-19 in the future. The Company will continue to closely
monitor the development of the COVID-19 pandemic and the impact it
has on coal exports to China and will react promptly to preserve
the working capital of the Company.
Based on a preliminary review of the information
and operational data of the Company currently available, the
Company expects to record a net loss for the three months ended
March 31, 2020 and for the six months ended June 30, 2020. The
anticipated net loss was principally attributable to decreased
sales volumes in the first quarter of 2020 as a result of the
closure of the Mongolian-Chinese border crossings which took effect
in February 2020 and therefore, the Company was unable to export
coal into China as a result. In the event that the Company’s
ability to export coal to the Chinese market becomes restricted or
limited again as a result of any future restrictions which may be
implemented at the Mongolian-Chinese border crossing, this is
expected to have a material adverse effect on the business and
operations of the Company and may negatively affect the price and
volatility of the Common Shares and any investment in such shares
could suffer a significant decline or total loss in value.
CIC Convertible Debenture
In November 2009, the Company entered into a
financing agreement with CIC for $500 million in the form of a
secured, convertible debenture bearing interest at 8.0% (6.4%
payable semi-annually in cash and 1.6% payable annually in the
Company’s shares) with a maximum term of 30 years. The CIC
Convertible Debenture is secured by a first ranking charge over the
Company’s assets and certain subsidiaries. The financing was used
primarily to support the accelerated investment program in Mongolia
and for working capital, repayment of debt, general and
administrative expenses and other general corporate purposes.
On March 29, 2010, the Company exercised its
right to call for the conversion of up to $250.0 million of the CIC
Convertible Debenture into approximately 21.5 million shares at a
conversion price of $11.64 (CAD$11.88). As at December 31, 2019,
CIC owned approximately 23.8% of the issued and outstanding Common
Shares.
On June 12, 2017, the Company executed the June
2017 Deferral Agreement with CIC for a revised repayment schedule
on the $22.3 million of cash interest and associated costs
originally due under the CIC Convertible Debenture on May 19, 2017.
The key repayment terms of the June 2017 Deferral Agreement are:
(i) the Company was required to repay on average $2.2 million of
the cash interest and associated costs monthly during the period
from May 2017 to October 2017; and (ii) the Company was required to
repay $9.7 million of cash interest and associated costs on
November 19, 2017.
On April 23, 2019, the Company executed the 2019
Deferral Agreement with CIC in relation to a deferral and revised
repayment schedule in respect of (i) $41.8 million of outstanding
cash and PIK Interest and associated costs due and payable to CIC
on November 19, 2018 under the CIC Convertible Debenture and the
June 2017 Deferral Agreement; and (ii) $27.9 million of cash and
PIK Interest payments payable to CIC under the CIC Convertible
Debenture from April 23, 2019 to and including May 19, 2020.
Pursuant to Section 501(c) of the TSX Company Manual, the 2019
Deferral Agreement was approved at the Company’s adjourned annual
and special meeting of shareholders on June 13, 2019.
The key repayment terms of the 2019 Deferral
Agreement are: (i) the Company agreed to pay a total of $14.3
million over eight instalments from November 2019 to June 2020;
(ii) the Company agreed to pay the PIK Interest covered by the
Deferral by way of cash payments, rather than the issuance of
Common Shares; and (iii) the Company agreed to pay the remaining
balance of $62.6 million on June 20, 2020. The Company agreed to
pay a deferral fee at a rate of 6.4% per annum in consideration of
the Deferral.
At any time before the payment under the terms
of the 2019 Deferral Agreement is fully repaid, the Company is
required to consult with and obtain written consent from CIC prior
to effecting a replacement or termination of either or both of its
Chief Executive Officer and its Chief Financial Officer, otherwise
this will constitute an event of default under the CIC Convertible
Debenture, but CIC shall not withhold its consent if the Board
proposes to replace either or both such officers with nominees
selected by the Board, provided that the Board acted honestly and
in good faith with a view to the best interests of the Company in
the selection of the applicable replacements.
As a condition to agreeing to the Deferral, CIC
required that the Cooperation Agreement dated November 19, 2009
between SGS and CIC, be amended and restated to clarify the manner
in which the service fee payable to CIC under the Cooperation
Agreement is calculated, with effect as of January 1, 2017.
Specifically, the Management Fee under the Amended and Restated
Cooperation Agreement is determined based on the net revenues
realized by the Company and all of its subsidiaries derived from
sales into China (rather than the net revenues realized by the
Company and its Mongolian subsidiaries as currently contemplated
under the Cooperation Agreement). As consideration for deferring
payment of the additional Management Fee payable to CIC as a result
of the Amended and Restated Cooperation Agreement, the Company
agreed to pay to CIC a deferral fee at the rate of 2.5% on the
outstanding Management Fee. Pursuant to the Amended and Restated
Cooperation Agreement, the Company agreed to pay CIC the total
outstanding Management Fee and related accrued deferral fee of $4.2
million over six instalments from June 2019 to November 2019. The
Company executed the Amended and Restated Cooperation Agreement
with CIC on April 23, 2019.
Pursuant to their terms, both the 2019 Deferral
Agreement and the Amended and Restated Cooperation Agreement became
effective on June 13, 2019, being the date on which the 2019
Deferral Agreement was approved by shareholders at the Company’s
adjourned annual and special meeting of shareholders.
In connection with the 2019 Deferral Agreement,
the Company also announced that it intends to discuss a potential
debt restructuring plan with respect to amounts owing to CIC which
is mutually beneficial to the Company and CIC; and to form a
special committee comprised of independent directors to ensure that
the interests of its minority shareholders are fairly
considered in the negotiation and review of any such restructuring;
however, there can be no assurance that a favorable outcome will be
reached. As of the date hereof, there has not been any significant
progress in relations to the restructuring plan.
On February 19, 2020, the Company and CIC
entered into the 2020 February Deferral Agreement pursuant to which
CIC agreed to grant the Company a deferral of: (i) the 2020
February Deferral Amounts; and (ii) approximately $0.7 million of
the Management Fee which was due and payable on February 14, 2020
to CIC under the Amended and Restated Cooperation Agreement. The
2020 February Deferral Agreement became effective on March 10,
2020, being the date on which the Company obtained the requisite
acceptance of the 2020 February Deferral Agreement from the TSX as
required under applicable TSX rules.
The principal terms of the 2020 February Deferral
Agreement are as follows:
- Payment of the 2020 February
Deferral Amounts will be deferred until June 20, 2020, while the
Management Fee will be deferred until they are repaid by the
Company.
- As consideration for the deferral
of these amounts, the Company agreed to pay CIC: (i) a deferral fee
equal to 6.4% per annum on the 2020 February Deferral Amounts,
commencing on the date on which each such 2020 Deferral Amount
would otherwise have been due and payable under the 2019 Deferral
Agreement; and (ii) a deferral fee equal to 2.5% per annum on the
Management Fee, commencing on the date on which the Managements Fee
would otherwise have been due and payable under the Amended and
Restated Cooperation Agreement.
- The Company agreed to provide CIC
with monthly updates regarding its operational and financial
affairs.
- As the Company anticipated prior to
agreeing to the 2020 February Deferral Agreement that a deferral
was likely required in respect of the monthly payments due and
payable in the period between April 2020 and June 2020 under the
2019 Deferral Agreement and Amended and Restated Cooperation
Agreement, the Company and CIC agreed to discuss in good faith a
deferral of these payments on a monthly basis as they become
due.
- The Company agreed to comply with
all of its obligations under the 2019 Deferral Agreement and the
Amended and Restated Cooperation Agreement, as amended by the 2020
February Deferral Agreement.
- The Company and CIC agreed that
nothing in the 2020 February Deferral Agreement prejudices CIC’s
rights to pursue any of its remedies at any time pursuant to the
2019 Deferral Agreement and Amended and Restated Cooperation
Agreement, respectively.
On March 10, 2020, the Company agreed with CIC
that the 2020 March Deferral Amount which were due and payable to
CIC on March 19, 2020 under the 2019 Deferral Agreement will be
deferred until June 20, 2020. The terms of the 2020 March Deferral
Agreement are substantially the same as the terms of the 2020
February Deferral Agreement, including that the Company agreed to
pay CIC a deferral fee equal to 6.4% per annum on the 2020 March
Deferral Amount, commencing on March 19, 2020. The 2020 March
Deferral Agreement became effective on March 25, 2020, being the
date on which the Company obtained the requisite acceptance of the
2020 March Deferral Agreement from the TSX as required under
applicable TSX rules.
On April 10, 2020, the Company agreed with CIC
that the 2020 April Deferral Amount which was due and payable to
CIC on April 19, 2020 under the 2019 Deferral Agreement will be
deferred until June 20, 2020. The terms of the 2020 April Deferral
Agreement are substantially the same as the terms of the 2020
February Deferral Agreement, including that the Company agreed to
pay CIC a deferral fee equal to 6.4% per annum on the 2020 April
Deferral Amount, commencing on April 19, 2020. The 2020 April
Deferral Agreement became effective on April 29, 2020, being the
date on which the Company obtained the requisite acceptance of the
2020 April Deferral Agreement from the TSX as required under
applicable TSX rules.
On May 8, 2020, the Company agreed with CIC that
the 2020 May Deferral Amount which was due and payable to CIC on
May 19, 2020 and May 15, 2020 under the 2019 Deferral Agreement and
the Amended and Restated Cooperation Agreement, respectively, will
be deferred until June 20, 2020. The terms of the 2020 May Deferral
Agreement are substantially the same as the terms of the 2020
February Deferral Agreement, including that the Company agreed to
pay CIC a deferral fee equal to 6.4% per annum on the deferred cash
interest and deferral fees commencing on May 19, 2020 and a
deferral fee equal to 2.5% per annum on the deferred Management
Fees commencing on May 15, 2020. The 2020 May Deferral Agreement
became effective on June 8, 2020, being the date on which the
Company obtained the requisite acceptance of the 2020 May Deferral
Agreement from the TSX as required under applicable TSX rules.
On June 19, 2020, the Company agreed with CIC
that the 2020 June Deferral Amount which was due and payable to CIC
on June 19, 2020 under the 2019 Deferral Agreement and the prior
deferral agreements entered into during the period between February
to May 2020 will be deferred until September 14, 2020. The terms of
the 2020 June Deferral Agreement are substantially the same as the
terms of the 2020 February Deferral Agreement, including that the
Company agreed to pay CIC a deferral fee equal to 6.4% per annum on
the 2020 June Deferral Amount commencing on June 19, 2020. The 2020
June Deferral Agreement became effective on July 17, 2020, being
the date on which the Company obtained the requisite acceptance of
the 2020 June Deferral Agreement from the TSX as required under
applicable TSX rules.
On November 19, 2020, the Company and CIC
entered into the 2020 November Deferral Agreement pursuant to which
CIC agreed to grant the Company a deferral of the 2020 November
Deferral Amounts. The effectiveness of the 2020 November Deferral
Agreement and the respective covenants, agreements and obligations
of each party under the 2020 November Deferral Agreement are
subject to the Company obtaining the requisite approval of the 2020
November Deferral Agreement from the Company’s shareholders in
accordance with applicable TSX rules. On October 29, 2020, the
Company obtained an order from the BCSC which partially revoked the
CTO to, amongst other things, permit the Company to execute the
2020 November Deferral Agreement.
The principal terms of the 2020 November Deferral
Agreement are as follows:
- Payment of the 2020 November
Deferral Amounts will be deferred until August 31, 2023.
- CIC agreed to waive its rights
arising from any default or event of default under the CIC
Convertible Debenture as a result of trading in the Common Shares
being halted on the TSX beginning as of June 19, 2020 and suspended
on the HKEX beginning as of August 17, 2020, in each case for a
period of more than five trading days.
- As consideration for the deferral
of the 2020 November Deferral Amounts, the Company agreed to pay
CIC: (i) a deferral fee equal to 6.4% per annum on the 2020
November Deferral Amounts payable under the CIC Convertible
Debenture and the 2020 June Deferral Agreement, commencing on the
date on which each such 2020 November Deferral Amount would
otherwise have been due and payable under the CIC Convertible
Debenture or the June 2020 Deferral Agreement, as applicable; and
(ii) a deferral fee equal to 2.5% per annum on the 2020 November
Deferral Amounts payable under the Amended and Restated Cooperation
Agreement, commencing on the date on which the Management Fee would
otherwise have been due and payable under the Amended and Restated
Cooperation Agreement.
- The 2020 November Deferral
Agreement does not contemplate a fixed repayment schedule for the
2020 November Deferral Amounts and related deferral fees. Instead,
the Company and CIC would agree to assess in good faith the
Company’s financial condition and working capital position on a
monthly basis and determine the amount, if any, of the 2020
November Deferral Amounts and related deferral fees that the
Company is able to repay under the CIC Convertible Debenture, the
June 2020 Deferral Agreement or the Amended and Restated
Cooperation Agreement, having regard to the working capital
requirements of the Company’s operations and business at such time
and with the view of ensuring that the Company’s operations and
business would not be materially prejudiced as a result of any
repayment.
- Commencing as of November 19, 2020
and until such time as the November 2020 PIK Interest is fully
repaid, CIC reserves the right to require the Company to pay and
satisfy the amount of the November 2020 PIK Interest, either in
full or in part, by way of issuing and delivering PIK interest
shares in accordance with the CIC Convertible Debenture provided
that, on the date of issuance of such shares, the Common Shares are
listed and trading on at least one stock exchange.
- If at any time before the 2020
November Deferral Amounts and related deferral fees are fully
repaid, the Company proposes to appoint, replace or terminate one
or more of its Chief Executive Officer, its Chief Financial Officer
or any other senior executive(s) in charge of its principal
business function or its principal subsidiary, then the Company
must first consult with, and obtain written consent from CIC prior
to effecting such appointment, replacement or termination.
Commercial Arbitration in Hong
Kong
On June 24, 2015, First Concept served a notice
of arbitration (the “Notice”) on SGS in respect of a coal supply
agreement dated May 19, 2014 as amended on June 27, 2014 (the "Coal
Supply Agreement") for a total consideration of $11.5 million.
On January 10, 2018, the Company received a
confidential partial ruling (final except as to costs) with respect
to the commercial arbitration (the “Arbitration Award”). Pursuant
to the Arbitration Award, SGS was ordered to repay the sum of $11.5
million (which SGS had received as a prepayment for the purchase of
coal) to First Concept, together with accrued interest at a simple
interest rate of 6% per annum from the date which the prepayment
was made until the date of the Arbitration Award, and then at a
simple interest rate of 8% per annum until full payment. The
Arbitration Award is final, except as to costs which were reserved
for a future award.
On November 14, 2018, the Company executed the
Settlement Deed with First Concept in respect of the Arbitration
Award. The Settlement Deed provides for the full and final
satisfaction of the Arbitration Award as well as the settlement of
the issue of costs relating to the Arbitration and any other
disputes arising out of the Coal Supply Agreement. Pursuant to the
Settlement Deed, which provides for the full and final satisfaction
of the Arbitration Award as well as the settlement of the issue of
costs relating to the Arbitration and any other disputes arising
out of the Coal Supply Agreement, SGS agreed to pay to First
Concept the sum of $13.9 million, together with simple interest
thereon at the rate of 6% per annum from November 1, 2018 until
full payment, in 12 monthly installments commencing in November
2018. Provided that SGS complies with the terms of the Settlement
Deed, First Concept agreed to waive its costs in connection with
the Arbitration and Arbitration Award and interest for the period
from January 4, 2018 to October 31, 2018 (the “Waived Costs”).
On October 16, 2019, SGS received a notice from
First Concept claiming that the Company is default under the
Settlement Deed and demanding payment of the full amount of the
Outstanding Settlement Deed Payments due under the Settlement Deed,
otherwise First Concept intends to commence legal action against
SGS pursuant to the Settlement Deed.
As at December 31, 2019, the outstanding amount
payable to First Concept amounted to $5.6 million (December 31,
2018: $12.5 million).
On February 7, 2020, SGS was informed by its
Mongolian banks that they received a request from the CDIA to
freeze the respective bank accounts of SGS in Mongolia in relation
to the enforcement of the Arbitration Award. Approximately $0.8
million in cash has been frozen by the banks as at February 7, 2020
and such amount was subsequently being transferred to the CDIA on
March 6, 2020.
On June 7, 2020, SGS entered into a settlement
agreement with First Concept, pursuant to which SGS agreed to pay
to First Concept the Full Settlement Sum of $8.0 million in full.
The Full Settlement Sum was fully satisfied by the Company in June
2020 and the outstanding payable to First Concept as of the date
hereof is $nil.
Ovoot Tolgoi
Mine Impairment Analysis
The Company determined that an indicator of
impairment existed for its Ovoot Tolgoi Mine cash generating unit
as at December 31, 2019. The impairment indicators were the
uncertainty of future coal prices in China and the lower than
budgeted production.
Therefore, the Company conducted an impairment
test whereby the carrying value of the Company’s Ovoot Tolgoi Mine
cash generating unit was compared to its “fair value less costs of
disposal” (“FVLCTD”) using a discounted future cash flow valuation
model. The Company’s cash flow valuation model takes into
consideration the latest available information to the Company,
including but not limited to, sales prices, sales volumes, coal
washing capacity, operating costs and life of mine coal production
estimates as at December 31, 2019. The carrying value of the cash
generating unit of the Company’s Ovoot Tolgoi Mine was $136.4
million.
Key estimates and assumptions incorporated in the
valuation model included the following:
- Coal resources and reserves as
estimated by an independent third party engineering firm;
- Sales price estimates from an
independent market consulting firm;
- Forecasted sales volumes in line
with production levels as reference to the mine plan;
- Life-of-mine coal production, strip
ratio, capital costs and operating costs; and
- A post-tax discount rate of 11%
based on an analysis of the market, country and asset specific
factors.
Key sensitivities in the valuation model are as
follows:
- For each 1% increase/(decrease) in
the long term price estimates, the calculated fair value of the
cash generating unit increases/(decreases) by approximately
$20.3/(20.2) million;
- For each 1% increase/(decrease) in
the post-tax discount rate, the calculated fair value of the cash
generating unit (decreases)/increases by approximately $(28.7)/31.4
million;
- For each 1% increase/(decrease) in
the cash mining cost estimates, the calculated fair value of the
cash generating unit (decreases)/increases by approximately
$(13.3)/13.4 million; and
- For each 1% increase/(decrease) in
Mongolian inflation rate, the calculated fair value of the cash
generating unit (decreases)/increases by approximately $(4.5)/4.5
million.
The impairment analysis did not result in the
identification of an impairment loss or an impairment reversal and
no charge or reversal was required as at December 31, 2019. A
decline of 19% in the long term price estimates, an increase of
more than 35% in the post-tax discount rate, an increase of 29% in
the cash mining cost estimates or an increase of 73% in Mongolian
inflation rate may trigger an impairment charge on the cash
generating unit. The Company believes that the estimates and
assumptions incorporated in the impairment analysis are reasonable;
however, the estimates and assumptions are subject to significant
uncertainties and judgments.REGULATORY ISSUES AND
CONTINGENCIES
Class Action Lawsuit
In January 2014, Siskinds LLP, a Canadian law
firm, filed a class action (the “Class Action”) against the
Company, certain of its former senior officers and directors, and
its former auditors (the “Former Auditors”), in the Ontario Court
in relation to the Company’s restatement of certain financial
statements previously disclosed in the Company’s public fillings
(the “Restatement”).
To commence and proceed with the Class Action,
the plaintiff was required to seek leave of the Court under the
Ontario Securities Act (“Leave Motion”) and certify the action as a
class proceeding under the Ontario Class Proceedings Act
(“Certification Motion”). The Ontario Court rendered its
decision on the Leave Motion on November 5, 2015, dismissing
the action against the former senior officers and directors and
allowing the action to proceed against the Company in respect of
alleged misrepresentation affecting trades in the secondary market
for the Company’s securities arising from the Restatement.
The action against the Former Auditors was settled by the
plaintiff on the eve of the Leave Motion.
Both the plaintiffs and the Company appealed the
Leave Motion decision to the Ontario Court of Appeal. On September
18, 2017, the Ontario Court of Appeal dismissed the Company’s
appeal of the Leave Motion to permit the plaintiff to commence and
proceed with the Class Action. Concurrently, the Ontario Court of
Appeal granted leave for the plaintiff to proceed with their action
against the former senior officers and directors in relation to the
Restatement.
The Company filed an application for leave to
appeal to the Supreme Court of Canada in November 2017, but the
leave to appeal to the Supreme Court of Canada was dismissed in
June 2018.
In December 2018, the parties agreed to a
consent Certification Order, whereby the action against the former
senior officers and directors was withdrawn and the Class Action
would only proceed against the Company.
Since December 2018, counsels for the parties
have proceeded with the action as follows: (1) two case
conferences before the motions judge; (2) production of certain
documents by the Company to the plaintiffs; (3) review of those
documents by plaintiffs’ counsel from May 2020 to November 2020;
and (4) setting down examinations for discovery for February and
March, 2021. The Company is urging an early trial.
The Company firmly believes that it has a strong
defense on the merits and will continue to vigorously defend itself
against the Class Action through independent Canadian litigation
counsel retained by the Company for this purpose. Due to the
inherent uncertainties of litigation, it is not possible to predict
the final outcome of the Class Action or determine the amount of
potential losses, if any. However, the Company has judged a
provision for this matter as at December 31, 2019 was not
required.
Toll Wash Plant Agreement with
Ejin Jinda
In 2011, the Company entered into an agreement
with Ejin Jinda, a subsidiary of China Mongolia Coal Co. Ltd. to
toll-wash coal from the Ovoot Tolgoi Mine. The agreement had a
duration of five years from commencement of the contract and
provided for an annual wet washing capacity of approximately 3.5
million tonnes of input coal.
Under the original agreement with Ejin Jinda,
which required the commercial operation of the wet washing facility
to commence on October 1, 2011, the additional fees payable by the
Company under the wet washing contract would have been $18.5
million. At each reporting date, the Company assesses the agreement
with Ejin Jinda and has determined it is not probable that this
$18.5 million will be required to be paid. Accordingly, the Company
has determined a provision for this matter at December 31, 2019 is
not required.
Special Needs Territory in
Umnugobi
On February 13, 2015, the entire Soumber mining
license and a portion of SGS’ exploration license 9443X (9443X was
converted to mining license MV-020436 in January 2016) (the
“License Areas”) were included into a special protected area (to be
further referred as Special Needs Territory, the “SNT”) newly set
up by the Umnugobi Aimag’s Civil Representatives Khural (the
“CRKh”) to establish a strict regime on the protection of natural
environment and prohibit mining activities in the territory of the
SNT.
On July 8, 2015, SGS and the Chairman of the
CRKh, in his capacity as the respondent’s representative, reached
an agreement (the “Amicable Resolution Agreement”) to exclude the
License Areas from the territory of the SNT in full, subject to
confirmation of the Amicable Resolution Agreement by the session of
the CRKh. The parties formally submitted the Amicable Resolution
Agreement to the appointed judge of the Administrative Court for
her approval and requested a dismissal of the case in accordance
with the Law of Mongolia on Administrative Court Procedure. On July
10, 2015, the judge issued her order approving the Amicable
Resolution Agreement and dismissing the case, while reaffirming the
obligation of CRKh to take necessary actions at its next session to
exclude the License Areas from the SNT and register the new map of
the SNT with the relevant authorities. Mining activities at the
Soumber property cannot proceed unless and until the Company
obtains a court order restoring the Soumber Licenses and until the
License Areas are removed from the SNT.
On June 29, 2016, the Mongolian Parliament and
CRKh election was held. As a result, the Company was aware that
additional action may be taken in respect of the SNT; however, the
Company has not yet received any indication on the timing of the
next session of the CRKh.
Termination of
Soumber Deposit Mining
Licenses
On August 26, 2019, SGS received the Notice
Letter from MRAM notifying that the Company’s three mining licenses
(MV-016869, MV-020436 and MV-020451) for the Soumber Deposit have
been terminated by the Head of Cadastre Division of MRAM effective
as of August 21, 2019.
According to the Notice Letter, the Soumber
Licenses have been terminated pursuant to Clause 56.1.5 of Article
56 of the Minerals Law, Clauses 4.2.1 and 4.2.5 of Article 4 and
Clause 28.1.1 of Article 28 of the General Administrative Law and a
decision order of a working group established under an order of the
Minister of Environment and Tourism (Mongolia). According to this
decision order, the working group determined that SGS had violated
its environmental reclamation obligations with respect to the
Soumber Deposit. The Soumber Deposit is an undeveloped coal deposit
covering approximately 22,263 hectares located approximately 20
kilometers east of the Company’s Ovoot Tolgoi coal mine in
Mongolia. The Company owned a 100% interest in the Soumber
Deposit.
The Company believes the cancellation of the
Soumber Licenses is without merit. The Company is not aware of any
failure on its part to fulfill its environmental reclamation duties
as they relate to the Soumber Deposit. On October 4, 2019, SGS
filed a claim against MRAM and the Ministry of Environment and
Tourism of Mongolia in the Administration Court seeking an order to
restore the Soumber Licenses. The Appeal Court issued the ruling in
October 2020 and made an order to accept SGS’s claim and restore
the Soumber Licenses. The case was transferred to the High Court
for final ruling. The Company anticipates that the High Court will
issue its ruling before the end of the first quarter of 2021. The
Company will take all such actions, including additional legal
actions, as it considers necessary to reinstate the Soumber
Licenses. However, there can be no assurance that a favorable
outcome will be reached. The termination of the Soumber Licenses
does not have any impact on the Company’s current mining operations
at the Ovoot Tolgoi mine site.
Mongolian royalties
During 2017, the Company was ordered by the
Mongolian tax authority to apply the “reference price” determined
by the Government of Mongolia, as opposed to calculated sales price
that is derived based on the actual contract price, in calculating
the royalties payable to the Government of Mongolia. Although no
official letter has been received by the Company in respect of this
matter as of the date hereof. , there can be no assurance that the
Government of Mongolia will not disagree with the methodology
employed by the Company in determining the calculated sales price
and deem such price “non-market” under Mongolian tax law.
Management believes that its interpretation of the relevant
legislation is appropriate and the Company’s positions related to
the royalty will be sustained.
On September 4, 2019, the Government of Mongolia
issued a further resolution in connection with the royalty regime.
From September 1, 2019 onwards, in the event that the contract
sales price is less than the reference price as determined by the
Government of Mongolia by more than 30%, then the royalty payable
will be calculated based on the Mongolian government’s reference
price instead of the contract sales price.
Restrictions on Importing F-Grade Coal into
China
As a result of import restrictions established
by Chinese authorities at the Ceke border, the Company has been
barred from transporting its F-grade coal products into China for
sale since December 15, 2018. The Company, together with other
Mongolian coal companies, have been in discussions with Chinese
authorities regarding a potential amendment or withdrawal of these
import restrictions to allow for the importation of F-grade coal
into China.; however, there can be no assurance that a favorable
outcome will be reached.
TRANSPORTATION INFRASTRUCTURE
On August 2, 2011, the State Property Committee
of Mongolia awarded the tender to construct a paved highway from
the Ovoot Tolgoi Mine to the Shivee Khuren Border Crossing (the
“Paved Highway”) to consortium partners NTB LLC and SGS (together
referred to as “RDCC LLC”) with an exclusive right of ownership of
the Paved Highway for 30 years. The Company has an indirect 40%
interest in RDCC LLC through its Mongolian subsidiary SGS. The toll
rate is MNT 1,500 per tonne.
The Paved Highway has a carrying capacity in
excess of 20 million tonnes of coal per year.
For the three months ended and the year ended
December 31, 2019, RDCC LLC recognized toll fee revenue of $1.4
million (2018: $1.9 million) and $6.8 million (2018: $ 7.3
million), respectively.
PLEDGE OF ASSETS
As at December 31, 2019, certain of the
Company’s property, plant and equipment of $0.4 million (December
31, 2018: $2.6 million) were pledged as security for a bank loan
granted to the Company.
PURCHASE, SALE OR REDEMPTION OF LISTED
SECURITIES OF THE COMPANY
The Company did not redeem its listed
securities, nor did the Company or any of its subsidiaries purchase
or sell such securities during the year ended December 31,
2019.
COMPLIANCE WITH CORPORATE
GOVERNANCE
The Company has, throughout the year ended
December 31, 2019, applied the principles and complied with the
requirements of its corporate governance practices as defined by
the Board and all applicable statutory, regulatory and stock
exchange listings standards, which include the code provisions set
out in the Corporate Governance Code (the “Corporate Governance
Code”) contained in Appendix 14 to the Rules Governing the Listing
of Securities on the Hong Kong Stock Exchange (the “Hong Kong
Listing Rules”), except for the following: Pursuant to
code provision A.2.7 of the Corporate Governance Code, the chairman
of the board should at least annually hold meetings with the
non-executive directors (including independent non-executive
directors) without the executive directors present. The Company
does not have a Chairman since the conclusion of the AGM held on
June 30, 2017. There were no meetings between the Independent Lead
Director, who is fulfilling the duties of the Chairman, and the
non-executive directors without the presence of other executive
directors during the year ended December 31, 2019. The opportunity
for such communication channel is offered at the end of each Board
meeting.
SECURITIES TRANSACTIONS BY
DIRECTORS
The Company has adopted policies regarding
Directors’ securities transactions in its Corporate Disclosure,
Confidentiality and Securities Trading Policy that have terms that
are no less exacting than those set out in the Model Code for
Securities Transactions by Directors of Listed Issuers contained in
Appendix 10 to the Hong Kong Listing Rules.
In response to a specific enquiry made by the
Company on each of the directors, all directors confirmed that they
had complied with the required standards as set out in the Model
Code and the Company’s Corporate Disclosure, Confidentiality and
Securities Trading Policy throughout the year ended December 31,
2019.
OUTLOOK
Looking forward, market conditions in China are
expected to be challenging for coal companies, as there are a
number prevailing uncertainties, including the risk that the
COVID-19 pandemic and its negative impact on the Chinese economy
becomes protracted, the possibility that the border crossings
between Mongolia and China become the subject of additional
closures and the continued restrictions on importing F-grade coal
into China. The Company will continue to closely monitor these
developments and the resulting impacts they have on coal exports to
China and will take all necessary action to mitigate the potential
operational and financial impacts on the Company.
In the long run, the Company remains cautiously
optimistic regarding the Chinese coal market as coal is still
considered to be the primary energy source which China will rely on
in the foreseeable future. The expected benefit from the reducing
supply of low quality coal and increasing capacity of railway
transportation capacity in China are anticipated to be offset by
the uncertain circumstances of the Chinese macroeconomic
environment.
The Company’s objectives for the medium term are as
follows:
- Enhance product
mix – The Company will focus on improving the product mix
and increase production of higher quality coal by: (i) washing
lower quality coal in the Company’s coal wash plant; (ii) blending
lower quality coal with higher quality coal; and (iii) improving
mining operations and employing enhanced mining technique and
equipment.
- Expand customer
base – The Company will endeavor to increase sales volume,
expand its sales network and diversify its customer base so as to
enhance the pricing competency of the Company.
- Optimize cost
structure – The Company will aim to reduce its production
costs and optimize its cost structure through innovation, training
and productivity enhancement.
- Operate in a socially
responsible manner – The Company will continue to maintain
the highest standards in health, safety and environmental
performance in a corporate socially responsible manner.
Going forward, the Company will continue to focus
on creating shareholders value by leveraging its key competitive
strengths, including:
- Strategic location
– The Ovoot Tolgoi Mine is located approximately 40km from China,
which represents the Company’s main coal market. The Company has an
infrastructure advantage, being approximately 50km from a major
Chinese coal distribution terminal with rail connections to key
coal markets in China.
- A large resources and
reserves base – The Ovoot Tolgoi Deposit has mineral
reserves of 114.1 million tonnes, while the aggregate coal
resources include measured and indicated mineral resources of 194.6
million tonnes and inferred resources of 32.1 million tonnes.
- Bridge
between Mongolia and China – The Company is well
positioned to capture the resulting business opportunities between
China and Mongolia under the Belt and Road Initiative. The Company
will seek potential strategic support from its two largest
shareholders (i.e., CIC and Cinda), which are both
state-owned-enterprises in China, and its strong operational record
for the past twelve years in Mongolia, being one of the largest
enterprises and taxpayers in Mongolia.
NON-IFRS FINANCIAL
MEASURES
Cash Costs
The Company uses cash costs to describe its cash
production and associated cash costs incurred in bringing the
inventories to their present locations and conditions. Cash costs
incorporate all production costs, which include direct and indirect
costs of production, with the exception of idled mine asset costs
and non-cash expenses which are excluded. Non-cash expenses include
share-based compensation expense, impairment of coal stockpile
inventories, depreciation and depletion of property, plant and
equipment and mineral properties. The Company uses this performance
measure to monitor its operating cash costs internally and believes
this measure provides investors and analysts with useful
information about the Company’s underlying cash costs of
operations. The Company believes that conventional measures of
performance prepared in accordance with IFRS do not fully
illustrate the ability of its mining operations to generate cash
flows. The Company reports cash costs on a sales basis. This
performance measure is commonly utilized in the mining
industry.
Consolidated Statement of
Comprehensive Income(Expressed in
thousands of USD, except for share and per share amounts)
| |
|
|
|
| |
|
|
Year ended December 31, |
|
|
|
|
2019 |
|
2018 |
|
|
|
|
|
|
|
|
Revenue |
|
$ |
129,712 |
|
$ |
103,804 |
| Cost of
sales |
|
(84,400) |
|
(79,835) |
| Gross
profit |
|
45,312 |
|
23,969 |
| |
|
|
|
|
|
| Other operating
expenses |
|
(5,581) |
|
(23,607) |
| Administration
expenses |
|
(9,447) |
|
(10,540) |
|
Evaluation and exploration expenses |
|
(452) |
|
(356) |
|
Profit/(loss) from operations |
|
29,832 |
|
(10,534) |
| |
|
|
|
|
|
| Finance costs |
|
(28,010) |
|
(28,578) |
| Finance
income |
|
4,417 |
|
184 |
| Share of earnings
of a joint venture |
|
1,329 |
|
1,631 |
|
Profit/(loss) before tax |
|
7,568 |
|
(37,297) |
| Current
income tax expense |
|
(3,367) |
|
(3,828) |
|
Net profit/(loss) attributable to equity holders of the
Company |
|
4,201 |
|
(41,125) |
| |
|
|
|
|
|
| Other
comprehensive loss to be reclassified to |
|
|
|
|
| |
profit or loss in
subsequent periods |
|
|
|
|
| Exchange
difference on translation of foreign operation |
|
(5,129) |
|
(13,020) |
|
Net comprehensive loss attributable to equity holders
of the Company |
|
$ |
(928) |
|
$ |
(54,145) |
| |
|
|
|
|
|
| Basic and
diluted earnings/(loss) per share |
|
$ |
0.02 |
|
$ |
(0.15) |
Consolidated Statement of Financial
Position (Expressed in thousands of USD)
|
|
|
|
|
|
|
| |
|
|
As at December 31, |
| |
|
|
2019 |
|
2018 |
|
Assets |
|
|
|
|
| |
|
|
|
|
|
| Current
assets |
|
|
|
|
|
Cash and cash equivalents |
|
$ |
7,164 |
|
$ |
6,959 |
| Restricted
cash |
|
862 |
|
872 |
| Trade and other
receivables |
|
1,778 |
|
5,046 |
| Notes
receivables |
|
- |
|
2,500 |
| Inventories |
|
52,237 |
|
47,109 |
| Prepaid
expenses |
|
2,312 |
|
3,295 |
|
Total current assets |
|
64,353 |
|
65,781 |
| |
|
|
|
|
|
|
Non-current assets |
|
|
|
|
| Property, plant
and equipment |
|
137,221 |
|
138,901 |
| Inventories |
|
9,332 |
|
- |
| Properties for
resale |
|
- |
|
4,093 |
| Investments in
joint ventures |
|
17,521 |
|
18,831 |
|
Total non-current assets |
|
164,074 |
|
161,825 |
| |
|
|
|
|
|
|
Total assets |
|
$ |
228,427 |
|
$ |
227,606 |
| |
|
|
|
|
|
| Equity and
liabilities |
|
|
|
|
| |
|
|
|
|
|
| Current
liabilities |
|
|
|
|
| Trade and other
payables |
|
$ |
87,013 |
|
$ |
99,576 |
| Provision for
commercial arbitration |
|
5,593 |
|
12,508 |
| Deferred
revenue |
|
16,057 |
|
12,658 |
| Interest-bearing
borrowings |
|
2,835 |
|
4,138 |
| Lease
liabilities |
|
460 |
|
83 |
| Current portion of
convertible debenture |
|
67,106 |
|
139,901 |
|
Total current liabilities |
|
179,064 |
|
268,864 |
| |
|
|
|
|
|
|
Non-current liabilities |
|
|
|
|
| Lease
liabilities |
|
108 |
|
30 |
| Convertible
debenture |
|
89,868 |
|
- |
| Decommissioning
liability |
|
8,605 |
|
6,852 |
|
Total non-current liabilities |
|
98,581 |
|
6,882 |
| |
|
|
|
|
|
|
Total liabilities |
|
277,645 |
|
275,746 |
| |
|
|
|
|
|
|
Equity |
|
|
|
|
| Common shares |
|
1,098,634 |
|
1,098,634 |
| Share option
reserve |
|
52,589 |
|
52,542 |
| Capital
reserve |
|
396 |
|
396 |
| Exchange
reserve |
|
(23,228) |
|
(18,099) |
| Accumulated
deficit |
|
(1,177,609) |
|
(1,181,613) |
|
Total deficiency in assets |
|
(49,218) |
|
(48,140) |
| |
|
|
|
|
|
|
Total equity and liabilities |
|
$ |
228,427 |
|
$ |
227,606 |
| |
|
|
|
|
|
| Net
current liabilities |
|
$ |
(114,711) |
. |
$ |
(203,083) |
| Total
assets less current liabilities |
|
$ |
49,363 |
|
$ |
(41,258) |
| |
|
|
|
|
|
|
SELECTED INFORMATION FROM THE NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
Additional information required by the HKEX and
not disclosed elsewhere in this press release is as follows. All
amounts are expressed in thousands of USD and shares and options in
thousands, unless otherwise indicated.
1. BASIS OF PREPARATION
1.1
Corporate information and
liquidityThe Company’s consolidated financial statements
have been prepared on a going concern basis which assumes that the
Company will continue operating until at least December 31, 2020
and will be able to realize its assets and discharge its
liabilities in the normal course of operations as they come due.
However, in order to continue as a going concern, the Company must
generate sufficient operating cash flows, secure additional capital
or otherwise pursue a strategic restructuring, refinancing or other
transactions to provide it with sufficient liquidity.
Several adverse conditions and material
uncertainties cast significant doubt upon the Company’s ability to
continue as a going concern and the going concern assumption used
in the preparation of the Company’s consolidated financial
statements. The Company had a deficiency in assets of $49,218 as at
December 31, 2019 compared to a deficiency in assets of $48,140 as
at December 31, 2018 while the working capital deficiency (excess
of current liabilities over current assets) reached $114,711 as at
December 31, 2019 compared to a working capital deficiency of
$203,083 as at December 31, 2018.
Included in the working capital deficiency as at
December 31, 2019 are significant obligations, which include the
interest amounting to $67,106 in relation to the CIC Convertible
Debenture under the 2019 Deferral Agreement, the 2020 February
Deferral Agreement, the 2020 March Deferral Agreement, the 2020
April Deferral Agreement, the 2020 May Deferral Agreement, the 2020
June Deferral Agreement and the 2020 November Deferral
Agreement.
In addition, the Common Shares have been
suspended from trading since June 19, 2020 on the TSX and August
17, 2020 on the HKEX. As of the date hereof, certain conditions of
the resumption guidance, including but not limited to the issuance
of the audited financial statements for the year ended December 31,
2019, have been fulfilled. However, if the Common Shares become
delisted from either the TSX or the HKEX, which would be an event
of default under the CIC Convertible Debenture, which could result
in the automatic termination of the deferral periods under the 2020
November Deferral Agreement and the acceleration of all principal,
interest and other amounts owing under the CIC Convertible
Debenture and the 2020 November Deferral Agreement becoming
immediately due and payable, in each case without the necessity of
any demand upon or notice to the Company by CIC.
The Company also has current liabilities,
including trade and other payables of $87,013, provision for
commercial arbitration of $5,593 and interest payable under the CIC
Convertible Debenture of $67,106 as at December 31, 2019. Out of
trade and other payables, which require settlement in the
short-term, unpaid taxes of $31,843 are repayable on demand by SGS
to the MTA.
The Company may not be able to settle all trade
and other payables on a timely basis, and as a result continuing
postponement in settling certain trade and other payables owed to
suppliers and creditors may impact the mining operations of the
Company and may result in potential lawsuits and/or bankruptcy
proceedings being filed against the Company. Except as disclosed
elsewhere in these consolidated financial statements, no such
lawsuits or proceedings were pending as at November 26, 2020.
Further, the Company was informed that effective
as of February 11, 2020, the Mongolian State Emergency Commission
closed Mongolia’s southern border with China in order to prevent
the spread of COVID-19. Accordingly, the Company had suspended coal
exports to China since February 11, 2020 as a result of the border
closure and the closure remained in effect until March 27,
2020.
On March 28, 2020, the Mongolian-Chinese border
was re-opened for coal export on a trial basis, with a limit
imposed on the total volume of coal that was permitted to be
exported during this trial period. The Company has experienced a
continuous improvement in the volume of coal exported to China
since March 28, 2020. During the period between April to October
2020 an aggregate of 1.9 million tonnes of coal was exported by the
Company from Mongolia to China, as compared to an aggregate of 2.0
million tonnes of coal during the same period in the 2019 calendar
year.
The border closure has had an adverse impact on
the Company’s sales and cash flows in the first and second quarter
of 2020. In order to mitigate the financial impact of the border
closures and preserve its working capital, the Company temporarily
ceased major mining operations (including coal mining), reduced
production to only coal-blending activities and placed
approximately half of its workforce on furlough from February 2020.
Since August 2, 2020, the Company has resumed its mining
operations, which includes mining, blending and washing of coal. As
at October 31, 2020, SGS employed 208 employees at the Ovoot Tolgoi
Mine site (December 31, 2019: 383 employees). The Company produced
1.1 million tonnes from August to October 2020, as compared to 1.3
million tonnes from August to October 2019. The Company will
continue to closely monitor the development of the COVID-19
pandemic and the impact it has on coal exports to China and will
react promptly to preserve the working capital of the Company.
There are significant uncertainties as to the
outcomes of the above events or conditions that may cast
significant doubt on the Company’s ability to continue as a going
concern and, therefore, the Company may be unable to realize its
assets and discharge its liabilities in the normal course of
business. Should the use of the going concern basis in preparation
of the consolidated financial statements be determined to be not
appropriate, adjustments would have to be made to write down the
carrying amounts of the Company’s assets to their realizable
values, to provide for any further liabilities which might arise
and to reclassify non-current assets and non-current liabilities as
current assets and current liabilities, respectively. The effects
of these adjustments have not been reflected in the consolidated
financial statements. If the Company is unable to continue as a
going concern, it may be forced to seek relief under applicable
bankruptcy and insolvency legislation.
Management of the Company has prepared a cash
flow projection covering a period of 12 months from December 31,
2019. The cash flow projection has taken into account the
anticipated cash flows to be generated from the Company’s business
during the period under projection including cost saving measures.
In particular, the Company has taken into account the following
measures for improvement of the Company’s liquidity and financial
position, which include: (i) entering into the 2020 November
Deferral Agreement with CIC for a deferral of the 2020 November
Deferral Amounts until August 31, 2023, subject to conditions
precedent therein; (ii) agreeing to deferral arrangements and
improved payment terms with certain vendors; (iii) SGS planned to
reduce the outstanding tax payable by monthly payments to MTA
starting from June 2020; (iv) reducing the inventory of low quality
coal by wet washing and coal blending; and (v) resuming coal mining
activities beginning as of August 2020 to enhance coal supply. In
addition, management of the Company assessed that the Company would
be able to issue all outstanding financial results, being one of
the conditions of the resumption guidance which must be satisfied
in order to avoid a delisting of the Common Shares from the HKEX,
which is in turn an event of default under the CIC Convertible
Debenture. After considering the above measures, and given the
re-opening of the Mongolian-Chinese border since March 28, 2020,
the Directors believe that there will be sufficient financial
resources to continue its operations and to meet its financial
obligations as and when they fall due in the next 12 months from
December 31, 2019 and therefore are satisfied that it is
appropriate to prepare the consolidated financial statements on a
going concern basis.
Factors that impact the Company’s liquidity are
being closely monitored and include, but are not limited to, impact
of COVID-19 pandemic, Chinese economic growth, market prices of
coal, production levels, operating cash costs, capital costs,
exchange rates of currencies of countries where the Company
operates and exploration and discretionary expenditures.
As at December 31, 2019 and December 31, 2018,
the Company was not subject to any externally imposed capital
requirements.
1.2 Statement
of compliance
The consolidated financial statements, including
comparatives, have been prepared in accordance with the IFRS issued
by the IASB.
The consolidated financial statements of the
Company for the year ended December 31, 2019 were approved and
authorized for issue by the Board of Directors of the Company on
November 26, 2020.
1.3 Basis of
presentation
The consolidated financial statements have been
prepared on a historical cost basis except for certain financial
assets and financial liabilities which are measured at fair
value.
1.4 Adoption
of new and revised standards and interpretations
The following new IFRS standards and
interpretations were adopted by the Company on January 1, 2019.
|
|
|
|
IFRS 16 |
Leases |
|
IFRIC 23 |
Uncertainty over Income Tax Treatments |
|
Amendments to IFRS 9 |
Prepayment Features and Negative Compensation |
|
Amendments to IAS 19 |
Plan Amendment, Curtailment or Settlement |
|
Amendments to IAS 28 |
Long-term Interests in Associates and Joint Ventures |
| Amendments to IFRS 3, IFRS 11,
IAS 12 and IAS 23 |
Annual Improvements to IFRSs 2015 - 2017 Cycle |
|
|
|
The Company has adopted IFRS 16 retrospectively
from January 1, 2019, but has not restated comparatives for the
2018 reporting period, as permitted under the specific transitional
provisions in the standard. The reclassifications and the
adjustments arising from the new leasing rules are therefore
recognized in the opening consolidated statement of financial
position on January 1, 2019.
There have been no other new IFRSs or IFRIC
interpretations that is not yet effective that would be expected to
have a material impact on the Company, except those disclosed in
the Company’s annual consolidated financial statements for the year
ended December 31, 2019.
Adjustments recognized on adoption of IFRS 16
On adoption of IFRS 16, the Company recognized
lease liabilities in relation to leases which had previously been
classified as ‘operating leases’ under the principles of IAS 17
Leases. These liabilities were measured at the present value of the
remaining lease payments, discounted using the lessee’s incremental
borrowing rate as of January 1, 2019. The weighted average lessee’s
incremental borrowing rate applied to the lease liabilities on
January 1, 2019 of 15%.
For leases previously classified as finance
leases, the Company recognized the carrying amount of the lease
asset and lease liability immediately before transition as the
carrying amount of the right-of-use asset and lease liability at
the date of initial application. The measurement principles of IFRS
16 are only applied after that date. The remeasurements to the
lease liabilities were recognized as adjustments to the related
right-of-use assets immediately after the date of initial
application.
|
Operating lease commitments disclosed as at December 31, 2018 |
|
|
$ |
1,393 |
|
|
|
|
|
|
|
Discounted using the lessee's incremental borrowing rate of at the
date of initial application |
|
|
$ |
1,118 |
|
Add: finance lease liabilities recognized as at December 31,
2018 |
|
|
113 |
|
Less: short-term leases recognized on a straight-line basis as
expense |
|
|
(20) |
|
Lease liability recognized as at January 1,
2019 |
|
|
$ |
1,211 |
|
Of which are: |
|
|
|
|
|
Current lease liabilities |
|
|
$ |
631 |
|
|
Non-current lease liabilities |
|
|
580 |
|
|
|
|
|
$ |
1,211 |
Other right-of-use assets were measured at the
amount equal to the lease liability, adjusted by the amount of any
prepaid or accrued lease payments relating to that lease recognized
in the consolidated statement of financial position as at December
31, 2018. There were no onerous lease contracts that would have
required an adjustment to the right-of-use assets at the date of
initial application.
The recognized right-of-use assets relate to the
buildings:
| |
|
As at |
|
|
|
December 31, |
|
January 1, |
| |
|
2019 |
|
2019 |
| |
|
|
|
|
|
Buildings |
$ |
605 |
|
$ |
1,159 |
|
Total right-of-use assets |
$ |
605 |
|
$ |
1,159 |
The change
in accounting policy affected the following items in the balance
sheet as at January 1, 2019:
- Property, plant and equipment –
increase by $1,159
- Trade and other payables – decrease by
$9
- Prepaid expenses – decrease by
$267
- Lease liabilities – increase by
$1,098
The net impact on accumulated deficit on January
1, 2019 was an increase of $197.
In applying IFRS 16 for the first time, the
Company has used the following practical expedients permitted by
the standard:
- The use of a single discount rate to a
portfolio of leases with reasonably similar characteristics;
- Reliance on previous assessments on
whether leases are onerous;
- The accounting for operating leases
with a remaining lease term of less than 12 months as at January 1,
2019 as short-term leases; and
- The use of hindsight in determining
the lease term where the contract contains options to extend or
terminate the lease.
The Company has also elected not to reassess
whether a contract is, or contains a lease at the date of initial
application. Instead, for contracts entered into before the
transition date the Company relied on its assessment made applying
IAS 17 and IFRIC 4 Determining whether an Arrangement contains a
Lease. The
Company’s leasing activities and how these are accounted for
The Company leases various office spaces and
premises. Rental contracts are typically made for fixed periods of
3 to 5 years but may have extension options as described below.
Lease terms are negotiated on an individual basis and contain a
wide range of different terms and conditions. The lease agreements
do not impose any covenants, but leased assets may not be used as
security for borrowing purposes.
Until the 2018 financial year, leases of
property, plant and equipment were classified as either finance or
operating leases. Payments made under operating leases (net of any
incentives received from the lessor) were charged to profit or loss
on a straight line basis over the period of the lease.
From January 1, 2019, leases are recognized as
right-of-use assets and corresponding liabilities at the date at
which the leased assets are available for use by the Company. Each
lease payment is allocated between the liability and finance cost.
The finance cost is charged to profit or loss over the lease period
so as to produce a constant periodic rate of interest on the
remaining balance of the liability for each period. The
right-of-use asset is depreciated over the shorter of the asset’s
useful life and the lease term on a straight-line basis.
Assets and liabilities arising from a lease are
initially measured on a present value basis. Lease liabilities
include the net present value of the following lease payments:
- Fixed payments (including
in-substance fixed payments), less any lease incentives
receivable;
- Variable lease payment that are
based on an index or a rate;
- Amounts expected to be payable by
the lessee under residual value guarantees;
- The exercise price of a purchase
option if the lessee is reasonably certain to exercise that option;
and
- Payments of penalties for
terminating the lease, if the lease term reflects the lessee
exercising that option.
The lease payments are discounted using the
interest rate implicit in the lease. If that rate cannot be
determined, the lessee’s incremental borrowing rate is used, being
the rate that the lessee would have to pay to borrow the funds
necessary to obtain an asset of similar value in a similar economic
environment with similar terms and conditions.
Right-of-use assets are measured at cost
comprising the following:
- The amount of the initial measurement
of lease liability;
- Any lease payments made at or before
the commencement date less any lease incentives received;
- Any initial direct costs; and
- Restoration costs.
Payments associated with short-term leases and
leases of low-value assets are recognized on a straight-line basis
as an expense in profit or loss. Short-term leases are leases with
a lease term of 12 months or less. There is no extension or
termination option included in the leases across the Company.
2. SEGMENTED INFORMATION
The Company’s one reportable operating segment
is its Coal Division. The Company’s Chief Executive Officer (chief
operating decision maker) reviews the Coal Division’s discrete
financial information in order to make decisions about resources to
be allocated to the segment and to assess its performance. The
division is principally engaged in coal mining, development and
exploration in Mongolia, and logistics and trading of coal in
Mongolia and China. The Company’s Corporate Division does not earn
revenues and therefore does not meet the definition of an operating
segment.
During the year ended December 31, 2019, the
Coal Division had 13 active customers with the largest customer
accounting for 42% of revenues, the second largest customer
accounting for 36% of revenues, the third largest customer
accounting for 9% of revenues, the fourth largest customer
accounting for 6% of revenues and the other customers accounting
for the remaining 7% of revenues. The Company’s disaggregation of
revenue from contracts with customers represented the sales of
coals which is recognized at a point in time during the years ended
December 31, 2019 and 2018.
The carrying amounts of the Company’s assets,
liabilities, reported income or loss and revenues analyzed by
operating segment are as follows:
|
|
|
Coal Division |
|
Total |
| Year ended
December 31, 2019 |
|
|
|
| |
|
|
|
|
|
Segment results |
$ |
35,350 |
|
$ |
35,350 |
|
Reconciliation: |
|
|
|
| Finance
income |
|
|
4,293 |
| Finance costs |
|
|
(23,858) |
| Corporate and
other unallocated expenses (i) |
|
|
(8,217) |
| Profit before
tax |
|
|
$ |
7,568 |
| |
|
|
|
|
| Segment
assets |
|
|
|
| Property, plant
and equipment |
$ |
136,371 |
|
$ |
136,371 |
| Investments in
joint ventures |
17,521 |
|
17,521 |
| Inventories |
61,569 |
|
61,569 |
| Other segment
assets (ii) |
11,599 |
|
11,599 |
|
Reconciliation: |
|
|
|
| Elimination of
intersegment receivables (iii) |
|
|
(599,479) |
| Corporate and
other unallocated assets (iii) |
|
|
600,846 |
| Total assets |
|
|
$ |
228,427 |
| |
|
|
|
|
| Segment
liabilities |
|
|
|
| Trade and other
payables |
$ |
74,344 |
|
$ |
74,344 |
| Deferred
revenue |
16,057 |
|
16,057 |
| Provision for
commercial arbitration |
5,593 |
|
5,593 |
| Interest-bearing
borrowings |
2,835 |
|
2,835 |
| Decommissioning
liability |
8,605 |
|
8,605 |
| Other segment
liabilities (iv) |
596,697 |
|
596,697 |
|
Reconciliation: |
|
|
|
| Elimination of
intersegment payables (iv) |
|
|
(599,479) |
| Corporate and
other unallocated liabilities (v) |
|
|
172,993 |
| Total
liabilities |
|
|
$ |
277,645 |
| |
|
|
|
|
| |
|
|
|
Coal Division |
| Year ended
December 31, 2019 |
|
|
|
| |
|
|
|
|
| Other
segment information |
|
|
|
| Segment
revenues |
|
|
$ |
129,712 |
| Reversal of
impairment on assets (vi) |
|
|
$ |
(1,069) |
| Depreciation and
amortization |
|
|
$ |
22,596 |
| Share of earnings
of a joint venture |
|
|
$ |
1,329 |
| Finance costs |
|
|
$ |
4,152 |
| Finance
income |
|
|
$ |
124 |
| Current income tax
charge |
|
|
$ |
3,367 |
| |
|
|
|
|
|
|
|
Coal Division |
|
Total |
| Year ended
December 31, 2018 |
|
|
|
|
Segment results |
$ |
(11,503) |
|
$ |
(11,503) |
|
Reconciliation: |
|
|
|
| Finance
income |
|
|
137 |
| Finance costs |
|
|
(22,209) |
| Corporate and
other unallocated expenses (i) |
|
|
(3,722) |
| Loss before
tax |
|
|
$ |
(37,297) |
| |
|
|
|
|
| Segment
assets |
|
|
|
| Property, plant
and equipment |
$ |
138,455 |
|
$ |
138,455 |
| Investments in
joint ventures |
18,831 |
|
18,831 |
| Inventories |
47,109 |
|
47,109 |
| Other segment
assets (ii) |
18,805 |
|
18,805 |
|
Reconciliation: |
|
|
|
| Elimination of
intersegment receivables (iii) |
|
|
(583,988) |
| Corporate and
other unallocated assets (iii) |
|
|
588,394 |
| Total assets |
|
|
$ |
227,606 |
| |
|
|
|
|
| Segment
liabilities |
|
|
|
| Trade and other
payables |
$ |
85,079 |
|
$ |
85,079 |
| Deferred
revenue |
12,658 |
|
12,658 |
| Provision for
commercial arbitration |
12,508 |
|
12,508 |
| Interest-bearing
borrowings |
4,138 |
|
4,138 |
| Decommissioning
liability |
6,852 |
|
6,852 |
| Other segment
liabilities (iv) |
586,982 |
|
586,982 |
|
Reconciliation: |
|
|
|
| Elimination of
intersegment payables (iv) |
|
|
(583,988) |
| Corporate and
other unallocated liabilities (v) |
|
|
151,517 |
| Total
liabilities |
|
|
$ |
275,746 |
| |
|
|
|
|
| |
|
|
|
Coal Division |
| Year ended
December 31, 2018 |
|
|
|
| |
|
|
|
|
| Other
segment information |
|
|
|
|
Segment revenues |
|
|
$ |
103,804 |
| Impairment charge
on assets (vi) |
|
|
$ |
28,356 |
| Depreciation and
amortization |
|
|
$ |
36,668 |
| Share of earnings
of a joint venture |
|
|
$ |
1,631 |
|
Finance costs |
|
|
$ |
6,369 |
|
Finance income |
|
|
$ |
47 |
| Current income tax
charge |
|
|
$ |
3,828 |
|
(i) |
The corporate and other unallocated expenses mainly included the
wages and salaries of $2,714 and $4,357, legal and professional
fees of $2,345 and $2,350 and corporate administration for the year
ended December 31, 2019 and December 31, 2018, respectively. An
insurance compensation of $4,850 in relation to the broken
machineries was credited to the corporate and other unallocated
expenses during the year ended December 31, 2018. |
|
(ii) |
Other segment assets mainly included cash and cash equivalents and
restricted cash of $7,924 and $5,448 and trade and other
receivables of $1,762 and $4,309 as at December 31, 2019 and
December 31, 2018, respectively. As at December 31, 2018, other
segment assets also included notes receivables of $2,500 and
properties for resale of $4,093. |
|
(iii) |
The corporate and other unallocated assets mainly included the
intersegment receivables which are intercompany in nature. |
|
(iv) |
Other segment liabilities mainly included the intersegment payables
which are financing in nature. |
|
(v) |
The corporate and other unallocated liabilities mainly included the
convertible debenture and trade and other payables of $12,669 and
$14,497 as at December 31, 2019 and December 31, 2018,
respectively. |
|
(vi) |
The impairment charge/(reversal of impairment) on assets for the
year ended December 31, 2019 relates to trade and other
receivables, inventories and prepaid expenses. The impairment
charge on assets for the year ended December 31, 2018 relates to
trade and other receivables, properties for resale, inventories,
prepaid expenses and property, plant and equipment. |
|
|
|
3. REVENUE
Revenue represents the value of goods sold which
arises from the trading of coal.
4. EXPENSES BY NATURE
The Company’s profit/(loss) before tax is arrived
at after charging/(crediting):
| |
|
|
|
Year ended December 31, |
|
|
|
|
|
2019 |
|
2018 |
| |
|
|
|
|
|
|
| Depreciation |
|
|
$ |
15,726 |
|
$ |
20,690 |
| Auditors'
remuneration |
|
|
764 |
|
493 |
| |
|
|
|
|
|
|
| Employee benefit
expense (including directors' remuneration) |
|
|
|
|
|
|
|
Wages and salaries |
|
|
$ |
9,790 |
|
$ |
9,838 |
| |
Equity-settled share option
expense |
|
|
47 |
|
79 |
| |
Pension scheme
contributions |
|
|
1,302 |
|
966 |
| |
|
|
|
$ |
11,139 |
|
$ |
10,883 |
| |
|
|
|
|
|
|
| Lease payments
under operating leases |
|
|
$ |
128 |
|
$ |
925 |
| Foreign exchange
loss/(gain) |
|
|
(706) |
|
643 |
| Impairment/(net
reversal of impairment) of coal stockpile inventories |
|
|
(1,823) |
|
5,437 |
| Royalties |
|
|
11,639 |
|
8,237 |
| CIC management
fee |
|
|
3,185 |
|
2,098 |
| Other taxes on
foreign payments |
|
|
1,881 |
|
599 |
| Provision of
commercial arbitration |
|
|
485 |
|
124 |
| Provision for
doubtful trade and other receivables |
|
|
501 |
|
20,892 |
| Impairment of
prepaid expenses |
|
|
253 |
|
134 |
| Loss on disposal
of properties for resale |
|
|
36 |
|
179 |
| Gain on disposal
of property, plant and equipment |
|
|
(29) |
|
(994) |
| Net reversal of
impairment of property, plant and equipment |
|
|
- |
|
(346) |
| Penalty on late
settlement of trade payables |
|
|
- |
|
427 |
| Gain on settlement
of trade payables |
|
|
- |
|
(2,392) |
| Impairment of
properties for resale |
|
|
- |
|
2,239 |
| Mine
operating costs and other |
|
|
56,701 |
|
44,070 |
|
Total operating expenses |
|
|
$ |
99,880 |
|
$ |
114,338 |
5. COST OF SALES
The Company’s cost of sales consists of the
following amounts:
| |
|
|
|
Year ended December 31, |
|
|
|
|
|
2019 |
|
2018 |
| |
|
|
|
|
|
|
|
Operating expenses |
|
|
$ |
59,549 |
|
$ |
45,604 |
| Share-based
compensation expense |
|
|
9 |
|
4 |
| Depreciation and
depletion |
|
|
11,028 |
|
7,693 |
| Royalties |
|
|
11,639 |
|
8,237 |
|
Impairment/(reversal of impairment) of coal stockpile
inventories |
|
|
(1,823) |
|
5,437 |
| Cost of sales from
mine operations |
|
|
80,402 |
|
66,975 |
| Cost of sales
related to idled mine assets (i) |
|
|
3,998 |
|
12,860 |
|
Cost of sales |
|
|
$ |
84,400 |
|
$ |
79,835 |
|
(i) |
Cost of sales related to idled mine assets for the year ended
December 31, 2019 includes $3,998 of depreciation expense (2018:
includes $12,860 of depreciation expense). The depreciation expense
relates to the Company’s idled plant and equipment. |
| |
|
Cost of inventories recognized as expense in cost
of sales for the year ended December 31, 2019 totaled $67,892
(2018: $48,204).
6. OTHER OPERATING EXPENSES
The Company’s other operating expenses consist of
the following amounts:
| |
|
|
|
Year ended December 31, |
|
|
|
|
|
2019 |
|
2018 |
| |
|
|
|
|
|
|
|
CIC management fee |
|
|
$ |
3,185 |
|
$ |
2,098 |
| Other taxes on
foreign payments |
|
|
1,881 |
|
599 |
| Provision for
doubtful trade and other receivables |
|
|
501 |
|
20,892 |
| Provision of
commercial arbitration |
|
|
485 |
|
124 |
| Impairment of
prepaid expenses |
|
|
253 |
|
134 |
| Loss on disposal
of properties for resale |
|
|
36 |
|
179 |
| Foreign exchange
loss/(gain) |
|
|
(706) |
|
643 |
| Gain on disposal
of property, plant and equipment |
|
|
(29) |
|
(994) |
| Impairment of
properties for resale |
|
|
- |
|
2,239 |
| Penalty on late
settlement of trade payables |
|
|
- |
|
427 |
| Gain on settlement
of trade payables |
|
|
- |
|
(2,392) |
| Net reversal of
impairment of items of property, plant and equipment |
|
|
- |
|
(346) |
| Others |
|
|
(25) |
|
4 |
|
Other operating expenses |
|
|
$ |
5,581 |
|
$ |
23,607 |
7. FINANCE COSTS AND
INCOME
The Company’s finance costs consist of the
following amounts:
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
2019 |
|
2018 |
|
|
|
|
|
|
|
|
|
Interest expense on convertible debenture |
|
|
$ |
23,751 |
|
$ |
22,195 |
| Interest expense
on borrowings |
|
|
742 |
|
2,788 |
| Value added tax on
interest from intercompany loan |
|
|
2,986 |
|
3,038 |
| Finance costs on
leased assets |
|
|
129 |
|
- |
| Loan arrangement
fee |
|
|
- |
|
21 |
| Accretion of
decommissioning liability |
|
|
402 |
|
536 |
|
Finance costs |
|
|
$ |
28,010 |
|
$ |
28,578 |
The Company’s finance income consists of the
following amounts:
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
2019 |
|
2018 |
|
|
|
|
|
|
|
|
|
Unrealized gain on embedded derivatives in convertible
debenture |
|
|
$ |
69 |
|
$ |
137 |
| Interest
income |
|
|
55 |
|
47 |
| IFRS 9 adjustment
on convertible debenture |
|
|
4,293 |
|
- |
|
Finance income |
|
|
$ |
4,417 |
|
$ |
184 |
8. TAXES
8.1
Income tax recognized in profit or
loss
The Canadian statutory tax rate was 27% (2018:
27%). A reconciliation between the Company’s tax expense and the
product of the Company’s profit/(loss) before tax multiplied by the
Company’s domestic tax rate is as follows:
| |
|
|
|
Year ended December 31, |
|
|
|
|
|
2019 |
|
2018 |
| |
|
|
|
|
|
|
|
Profit/(loss) before tax |
|
|
$ |
7,568 |
|
$ |
(37,297) |
| |
|
|
|
|
|
|
| Statutory tax
rate |
|
|
27% |
|
27% |
| Income tax
expense/(recovery) based on combined Canadian federal and |
|
|
2,044 |
|
(10,071) |
| |
provincial statutory
rates |
|
|
|
|
|
|
Lower effective tax rate in foreign jurisdictions |
|
|
186 |
|
1,222 |
|
Underprovision/(overprovision) in prior year |
|
|
(258) |
|
261 |
| Tax effect of tax
losses and temporary differences not recognized |
|
|
8,314 |
|
6,394 |
| Withholding tax on
intercompany interest |
|
|
2,881 |
|
3,038 |
| Profits or losses
attributable to joint venture |
|
|
332 |
|
408 |
| Income not subject
to tax |
|
|
(10,256) |
|
(7,774) |
| Non-deductible
expenses |
|
|
124 |
|
10,350 |
|
Income tax expenses |
|
|
$ |
3,367 |
|
$ |
3,828 |
8.2
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, |
|
|
|
|
|
2019 |
|
2018 |
| |
|
|
|
|
|
|
|
Non-capital losses |
|
|
$ |
163,632 |
|
$ |
191,307 |
| Capital
losses |
|
|
30,049 |
|
30,049 |
| Foreign exchange
and others |
|
|
487,102 |
|
477,656 |
|
Total unrecognized amounts |
|
|
$ |
680,783 |
|
$ |
699,012 |
8.3
Expiry dates
The expiry dates of the Company’s unused tax losses
are as follows:
| |
|
|
|
As at December 31, 2019 |
|
|
|
|
|
U.S. Dollar |
|
Expiry |
| |
|
|
|
Equivalent |
|
dates |
|
Non-capital losses |
|
|
|
|
|
| Canada |
|
|
$ |
159,892 |
|
2037 - 2039 |
| China |
|
|
3,740 |
|
2024 |
|
|
|
|
|
$ |
163,632 |
|
|
| Capital
losses |
|
|
|
|
|
| Canada |
|
|
$ |
30,049 |
|
indefinite |
| |
|
|
|
|
|
|
| |
As at December 31, 2018 |
| |
U.S. Dollar |
|
Expiry |
| |
Equivalent |
|
dates |
| Non-capital
losses |
|
|
|
|
Canada |
$ |
184,254 |
|
2036 - 2038 |
| Mongolia |
4,337 |
|
2021 |
| China |
2,715 |
|
2023 |
| |
$ |
191,306 |
|
|
| Capital
losses |
|
|
|
| Canada |
$ |
30,049 |
|
indefinite |
| |
|
|
|
|
9.
EARNINGS/(LOSS)
PER SHARE
The calculation of basic and diluted
earnings/(loss) per share is based on the following data:
| |
|
|
|
Year ended December 31, |
|
|
|
|
|
|
2019 |
|
|
2018 |
|
| |
|
|
|
|
|
|
|
Net profit/(loss) |
|
|
$ |
4,201 |
|
$ |
(41,125 |
) |
|
Weighted average number of shares |
|
|
|
272,703 |
|
|
272,661 |
|
|
Basic and diluted earnings/(loss) per share |
|
|
$ |
0.02 |
|
$ |
(0.15 |
) |
Potentially dilutive items not included in the
calculation of diluted earnings per share for the year ended
December 31, 2019 include the underlying shares comprised in the
convertible debenture and 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, |
|
|
|
|
|
2019 |
|
2018 |
| |
|
|
|
|
|
|
|
Trade receivables |
|
|
$ |
1,081 |
|
$ |
2,710 |
| Other
receivables |
|
|
697 |
|
2,336 |
|
Total trade and other receivables |
|
|
$ |
1,778 |
|
$ |
5,046 |
The aging of the Company’s trade and other
receivables, based on invoice date and net of provisions, is as
follows:
| |
|
|
|
As at December 31, |
|
|
|
|
|
2019 |
|
2018 |
| |
|
|
|
|
|
|
|
Less than 1 month |
|
|
$ |
1,623 |
|
$ |
4,952 |
| 1 to 3 months |
|
|
23 |
|
49 |
| 3 to 6 months |
|
|
132 |
|
45 |
| Over 6 months |
|
|
- |
|
- |
|
Total trade and other receivables |
|
|
$ |
1,778 |
|
$ |
5,046 |
Overdue balances are reviewed regularly by
senior management. The Company does not hold any collateral or
other credit enhancements over its trade and other receivable
balances.
The Company has determined that the loss
allowance on its trade and other receivables was $21,976 (December
31, 2018: $20,005) as at December 31, 2019, based upon an expected
loss rate of 10% for trade and other receivables 60 days past due
and 100% for trade and other receivables 180 days past due. A
specific provision of certain trade and other receivables of $1,814
was made due to the challenges in collecting the trade and other
receivables during the year ended December 31, 2018. The closing
allowances for trade and other receivables as at December 31, 2019
reconcile to the opening loss allowances as follows:
| |
|
|
|
| Loss
allowance for trade and other receivables |
|
|
|
|
Opening loss allowance as at January 1, 2019 |
|
|
$ |
20,005 |
|
|
Increase in loss allowance recognised in profit or loss during the
year |
|
|
501 |
|
|
Loss allowance included in specific provision made during the year
ended December 31, 2018 |
|
1,791 |
|
|
Exchange realignment |
|
|
(321) |
|
Loss allowance as at December 31, 2019 |
|
|
$ |
21,976 |
| |
|
|
|
|
|
Opening loss allowance as at January 1, 2018 |
|
|
$ |
1,278 |
|
|
Increase in loan allowance recognised in profit or loss during the
year |
|
|
19,119 |
|
|
Reversal of loan allowance |
|
|
(41) |
|
|
Exchange realignment |
|
|
(351) |
|
Loss allowance as at December 31, 2018 |
|
|
$ |
20,005 |
11. TRADE AND OTHER
PAYABLES
Trade and other payables of the Company
primarily 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, based on invoice date, was as follows:
| |
|
|
|
As at December 31, |
|
|
|
|
|
2019 |
|
2018 |
| |
|
|
|
|
|
|
|
Less than 1 month |
|
|
$ |
29,750 |
|
$ |
34,927 |
| 1 to 3 months |
|
|
13,165 |
|
16,336 |
| 3 to 6 months |
|
|
12,218 |
|
5,446 |
| Over 6 months |
|
|
31,880 |
|
42,867 |
|
Total trade and other payables |
|
|
$ |
87,013 |
|
$ |
99,576 |
12.
DEFERRED REVENUE
At December 31, 2019, the Company had deferred
revenue of $16,057, which represents cash prepayments from
customers for future coal sales (December 31, 2018: $12,658).
The movement of the Company’s deferred revenue is
as follows:
| |
|
|
Year ended December 31, |
|
|
|
|
2019 |
|
2018 |
|
Balance, beginning of year |
|
$ |
12,658 |
|
$ |
23,225 |
|
Revenue recognized that was included in the deferred revenue
balance at beginning of the year |
|
(12,385) |
|
(8,056) |
|
Derecognition of deferred revenue that was included in the balance
at beginning of the year due to contract cancellation |
- |
|
(13,509) |
|
Increase due to trade deposits received or receivable, excluding
amounts recognized as revenue during the year |
16,155 |
|
12,757 |
|
Exchange realignment |
|
(371) |
|
(1,759) |
|
Balance, end of year |
|
$ |
16,057 |
|
$ |
12,658 |
The performance obligation related to the
revenue from customers for contracts that are unsatisfied (or
partially unsatisfied) are expected to be recognized within one
year after the reporting dates. The Company applies the practical
expedient and does not disclose information about any remaining
performance obligation that is a part of contract that has original
expected duration of one year or less.
13. INTEREST-BEARING
BORROWINGS
The Company’s interest-bearing borrowings consist
of the following amounts:
| |
|
As at December 31, |
|
|
|
2019 |
|
2018 |
| |
|
|
|
|
|
Bank loan (i) |
|
$ |
2,835 |
|
$ |
3,543 |
| Turquoise Hill Loan
Facility |
|
- |
|
595 |
|
Total interest-bearing borrowings |
|
$ |
2,835 |
|
$ |
4,138 |
(i) Bank
Loan
On May 15, 2018, SGS obtained a bank loan (the
“2018 Bank Loan”) in the principal amount of $2,800 from a
Mongolian bank (the “Bank”) with the key commercial terms as
follows:
- Maturity date set at 24 months from
drawdown (subsequently extended for 12 months on May 18,
2020);
- Interest rate of 15% per annum and
interest is payable monthly; and
- Certain items of property, plant and
equipment were pledged as security for the 2018 Bank Loan. As at
December 31, 2019, the net book value of the pledged items of
property, plant and equipment was $439 (December 31, 2018:
$2,643).
As at December 31, 2019, the outstanding
principal balance for the 2018 Bank Loan was $2,800 (December 31,
2018: $2,800) and the Company owed accrued interest of $35
(December 31, 2018: $35). $700 outstanding principal balance of
another bank loan from the Bank, which was settled during the first
quarter of 2019, was included in the balance as at December 31,
2018.
14. LEASE LIABILITIES
The Company leases certain of its mobile
equipment and office premises for daily operations. These leases
have remaining lease terms ranging from 1 to 3 years.
At December 31, 2019, the total future minimum
lease payments and their present values were as follows:
| |
|
|
|
|
|
|
Present value of minimum lease payments |
| |
|
|
Minimum lease payments |
|
| |
|
|
As at December 31, |
|
As at December 31, |
|
|
|
|
2019 |
|
2018 |
|
2019 |
|
2018 |
| |
|
|
|
|
|
|
|
|
|
| Amounts
payable: |
|
|
|
|
|
|
|
|
|
|
Within one year |
|
$ |
509 |
|
$ |
90 |
|
$ |
460 |
|
$ |
83 |
| |
In the second year |
|
101 |
|
25 |
|
108 |
|
24 |
| |
In the third to fifth year,
inclusive |
|
- |
|
6 |
|
- |
|
6 |
| Total
minimum finance lease payments |
|
$ |
610 |
|
$ |
121 |
|
$ |
568 |
|
$ |
113 |
| Future
finance charges |
|
(42) |
|
(8) |
|
|
|
|
|
Total net lease finance payables |
|
$ |
568 |
|
$ |
113 |
|
|
|
|
|
Portion classified as current liabilities |
|
(460) |
|
(83) |
|
|
|
|
|
Non-current portion |
|
$ |
108 |
|
$ |
30 |
|
|
|
|
15. CONVERTIBLE
DEBENTURE
On November 19, 2009, the Company issued a
convertible debenture to a wholly owned subsidiary of CIC for
$500,000.
The convertible debenture is presented as a
liability since it contains no equity components. The convertible
debenture is a hybrid instrument, containing a debt host component
and three embedded derivatives - the investor’s conversion option,
the issuer’s conversion option and the equity based interest
payment provision (the 1.6% share interest payment) (the “embedded
derivatives”). The debt host component is classified as
other-financial-liabilities and is measured at amortized cost using
the effective interest rate method and the embedded derivatives are
classified as fair value through profit or loss and all changes in
fair value are recorded in profit or loss. The difference between
the debt host component and the principal amount of the loan
outstanding is accreted to profit or loss over the expected life of
the convertible debenture.
The embedded derivatives were valued upon
initial measurement and subsequent periods using a Monte Carlo
simulation valuation model. A Monte Carlo simulation model is a
valuation model that relies on random sampling and is often used
when modeling systems with a large number of inputs and where there
is significant uncertainty in the future value of inputs and where
the movement of the inputs can be independent of each other. Some
of the key inputs used by the Company in its Monte Carlo simulation
include: the floor and ceiling conversion prices, the Company’s
common share price, the risk-free rate of return, expected
volatility of the Company’s common share price, forward foreign
exchange rate curves (between the CAD$ and U.S. dollar) and spot
foreign exchange rates.
15.1
Partial conversion
On March 29, 2010, the Company exercised a right
within the debenture to call and convert $250,000 of the debenture
for 21,471 Common Shares.
15.2
Presentation
Based on the Company’s valuation as at December
31, 2019, the fair value of the embedded derivatives decreased by
$69 compared to December 31, 2018. The decrease was recorded as
finance income for the year ended December 31, 2019.
For the year ended December 31, 2019, the
Company recorded interest expense of $23,751 related to the
convertible debenture as a finance cost (2018: $22,195). The
interest expense consists of the interest at the contract rate and
the accretion of the debt host component of the convertible
debenture. To calculate the accretion expense, the Company uses the
contract life of 30 years and an effective interest rate of
22.2%.
The movements of the amounts due under the
convertible debenture are as follows:
| |
|
|
|
Year ended December 31, |
|
|
|
|
|
2019 |
|
2018 |
| |
|
|
|
|
|
|
|
Balance, beginning of year |
|
|
$ |
139,901 |
|
$ |
116,374 |
| Interest expense
on convertible debenture |
|
|
23,751 |
|
22,195 |
| Decrease in fair
value of embedded derivatives |
|
|
(69) |
|
(137) |
| Fair value
adjustment upon adoption of IFRS 9 |
|
|
(4,293) |
|
1,469 |
| Interest paid |
|
|
(2,316) |
|
- |
|
Balance, end of year |
|
|
$ |
156,974 |
|
$ |
139,901 |
The convertible debenture balance consists of the
following amounts:
| |
|
|
|
As at December 31, |
|
|
|
|
|
2019 |
|
2018 |
| |
|
|
|
|
|
|
| Current
convertible debenture |
|
|
|
|
|
|
|
Interest payable |
|
|
$ |
67,106 |
|
$ |
46,096 |
|
|
Debt host |
|
|
- |
|
93,540 |
|
|
Fair
value of embedded derivatives |
|
|
- |
|
265 |
|
|
|
|
|
67,106 |
|
139,901 |
|
|
|
|
|
|
|
|
|
Non-current convertible debenture |
|
|
|
|
|
| |
Debt host |
|
|
89,672 |
|
- |
|
|
Fair
value of embedded derivatives |
|
|
196 |
|
- |
| |
|
|
|
89,868 |
|
- |
|
Total convertible debenture |
|
|
$ |
156,974 |
|
$ |
139,901 |
16.
ACCUMULATED DEFICIT AND DIVIDENDS
At December 31, 2019, the Company has
accumulated a deficit of $1,177,609 (2018: $1,181,613). No dividend
has been paid or declared by the Company since inception.
The Board did not recommend the payment of any
final dividend for the year ended December 31, 2019 (2018:
nil).
EXTRACT OF INDEPENDENT AUDITOR’S
REPORT
BDO was engaged to audit the consolidated
financial statements of the Company. The section below sets out an
extract of the independent auditor’s report regarding the
consolidated financial statements of the Company for the year ended
December 31, 2019.
Basis for Opinion
We conducted our audit in accordance with
Canadian generally accepted auditing standards. Our
responsibilities under those standards are further described in the
“Auditor’s Responsibilities for the Audit of the Consolidated
Financial Statements” section of our auditor’s report. We are
independent of the Company in accordance with the ethical
requirements that are relevant to our audit of the consolidated
financial statements in Canada and we have fulfilled our other
ethical responsibilities in accordance with these requirements. We
believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
Material Uncertainty Related to Going
Concern
We draw attention to Note 1 to the consolidated
financial statements, which indicates that the Company’s current
liabilities exceeded its current assets by $114.7 million as at
December 31, 2019. This condition, along with other matters as set
forth in Note 1 to the consolidated financial statements, indicate
that a material uncertainty exists that may cast significant doubt
about the Company's ability to continue as a going concern. Our
opinion is not modified in respect of this matter.
REVIEW OF RESULTS AND
RELEASE OF AUDITED RESULTS
The annual results of the Company for the year
ended December 31, 2019 were reviewed by the Audit Committee of the
Company and approved and authorized for issue by the Board on
November 26, 2020.
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, 2019, as set out in this press release
have been agreed by the Company’s independent auditors, BDO, to the
amounts set out in the Company’s audited consolidated financial
statements for the year. The work performed by BDO 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 BDO on this press
release.
The Company’s results for the year ended
December 31, 2019 are contained in the audited consolidated
financial statements and MD&A, which will be available on
November 26, 2020 on the SEDAR website at www.sedar.com and the
Company’s website at www.southgobi.com. Copies of the Company’s
2019 Annual Report containing the audited consolidated financial
statements and the MD&A, and the Annual Information Form will
be available at www.southgobi.com. Shareholders with registered
addresses in Hong Kong who have elected to receive a copy of the
Company’s Annual Report will receive one. Other shareholders of the
Company may request a hard copy of the 2019 Annual Report free of
charge by contacting our Investor Relations department by email at
info@southgobi.com.
QUALIFIED PERSONS
Disclosure of a scientific or technical nature
in respect of the Company’s material mineral projects was prepared
by or under the supervision of the individuals set out in the table
below, each of whom is a “Qualified Person” as that term is defined
in National Instrument 43-101 – Standards of Disclosure for Mineral
Projects (“NI 43-101”) of the Canadian Securities
Administrators:
|
Property |
Qualified Persons |
Field of Expertise |
Relationship to Company |
|
Ovoot Tolgoi |
Dr. Weiliang Wang |
Resources |
Independent Consultant |
|
Ovoot Tolgoi |
Vincent Li |
Reserves |
Independent Consultant |
|
Zag Suuj |
Merryl Peterson |
Resources |
Independent Consultant |
Disclosure of a scientific or technical nature
relating to the Ovoot Tolgoi Mine is derived from the Ovoot Tolgoi
Technical Report prepared in accordance with NI 43-101 on the Ovoot
Tolgoi Mine dated May 15, 2017, prepared by Dr. Weiliang Wang, Mr.
Vincent Li and Mr. Larry Li of Dragon Mining Consulting Limited
(“DMCL”). A copy of the Ovoot Tolgoi Technical Report is available
under the Company’s profile on SEDAR at www.sedar.com. DMCL has not
reviewed or updated the Ovoot Tolgoi Technical Report since the
date of publishing.
Disclosure of a scientific or technical nature
relating to the Zag Suuj Deposit is derived from a technical report
(the "Zag Suuj Technical Report") prepared in accordance with NI
43-101 on the Zag Suuj Deposit dated March 25, 2013, prepared by
Minarco-MineConsult. A copy of the Zag Suuj Technical Report is
available under the Company’s profile on SEDAR at www.sedar.com.
The Zag Suuj Technical Report is effective as at March 25, 2013.
Minarco-MineConsult has not reviewed or updated the Zag Suuj
Technical Report since the date of publishing.
ABOUT SOUTHGOBI
SouthGobi, listed on the Toronto and Hong Kong
stock exchanges, owns and operates its flagship Ovoot Tolgoi coal
mine in Mongolia. It also holds the mining licences of its other
metallurgical and thermal coal deposits in South Gobi Region of
Mongolia. SouthGobi produces and sells coal to customers in
China.
Contact:
Investor Relations
| Kino Fu |
|
| Office: |
+852 2156 7030 (Hong Kong) |
| |
+1 604 762 6783 (Canada) |
| Email: kino.fu@southgobi.com |
| Website: www.southgobi.com |
Except for statements of fact relating to the
Company, certain information contained herein constitutes
forward-looking statements. Forward-looking statements are
frequently characterized by words such as “plan”, “expect”,
“project”, “intend”, “believe”, “anticipate”, "could", "should",
"seek", "likely", "estimate" and other similar words or statements
that certain events or conditions “may” or “will” occur.
Forward-looking statements relate to management’s future outlook
and anticipated events or results and are based on the opinions and
estimates of management at the time the statements are made.
Forward-looking statements in this press release include, but are
not limited to, statements regarding:
- the Company continuing as a going
concern and its ability to realize its assets and discharge its
liabilities in the normal course of operations as they become
due;
- adjustments to the amounts and
classifications of assets and liabilities in the Company's
consolidated financial statements and the impact thereof;
- the Company’s expectations of
sufficient liquidity and capital resources to meet its ongoing
obligations and future contractual commitments, including the
Company’s ability to settle its trade payables, to secure
additional funding and to meet its obligations under each of the
CIC Convertible Debenture, the 2020 June Deferral Agreement, the
2020 May Deferral Agreement, the 2020 April Deferral Agreement, the
2020 March Deferral Agreement, the 2020 February Deferral
Agreement, the 2020 November Deferral Agreement, the 2019 Deferral
Agreement, the Amended and Restated Cooperation Agreement and the
2018 Bank Loan, as the same become due;
- the Company's anticipated financing
needs, development plans and future production levels;
- the ability of the Company to
successfully apply for a revocation of the CTO;
- the possibility of the TSX granting
an extension to the deadline date for the Company to demonstrate
that it has remedied the Delisting Criteria;
- the resumption of trading in the
Common Shares on the TSX or HKEX;
- the Company entering into
discussions with CIC regarding a potential debt restructuring plan
with respect to the amounts owing to CIC;
- the results and impact of the
Ontario class action (as described under section Regulatory Issues
and Contingencies of this press release under the heading entitled
“Class Action Lawsuit");
- the estimates and assumptions
included in the Company’s impairment analysis and the possible
impact of changes thereof;
- the agreement with Ejin Jinda and
the payments thereunder (as described under section Regulatory
Issues and Contingencies of this press release under the heading
entitled “Toll Wash Plant Agreement with Ejin Jinda”);
- the ability of the Company to
successfully recover the balance of its doubtful trade and notes
receivables;
- the ability of the Company to
enhance the operational efficiency and output throughput of the
washing facilities at Ovoot Tolgoi;
- the ability to enhance the product
value by conducting coal processing and coal washing;
- the impact of the Company’s
activities on the environment and actions taken for the purpose of
mitigation of potential environmental impacts and planned focus on
health, safety and environmental performance;
- the impact of the delays in the
custom clearance process at the Ceke border on the Company’s
operations and the restrictions established by Chinese authorities
on the import of F-grade coal into China;
- the impact of the COVID-19 pandemic
and closure of Mongolia’s southern border with China on the
Company’s business, financial condition and operations;
- the ability of the Company to
successfully appeal MRAM’s decision to terminate the Soumber
Licenses and the anticipated timing of the High Court’s ruling on
the appeal;
- the ability of the Company to
successfully negotiate an extension of the agreement with the third
party contractor relating to the operation of the wash plant at the
Ovoot Tolgoi mine site;
- the ability of the Company to
successfully reinstate the Soumber Licenses;
- the future demand for coal in
China;
- future trends in the Chinese coal
industry;
- the Company’s outlook and
objectives for 2020 and beyond (as more particularly described
under Outlook of this press release); and
- other statements that are not
historical facts.
Forward-looking information is based on certain
factors and assumptions described below and elsewhere in this press
release, including, among other things: the current mine plan for
the Ovoot Tolgoi mine; mining, production, construction and
exploration activities at the Company’s mineral properties; the
costs relating to anticipated capital expenditures; the capacity
and future toll rate of the paved highway; plans for the progress
of mining license application processes; mining methods; the
Company's anticipated business activities, planned expenditures and
corporate strategies; management’s business outlook, including the
outlook for 2020 and beyond; currency exchange rates; operating,
labour and fuel costs; the ability of the Company to successfully
apply for a revocation of the CTO; the ability to remedy the
Delisting Criteria of the TSX and to satisfy the Resumption
Guidance of the HKEX; the ability of the Company to raise
additional financing; the anticipated royalties payable under
Mongolia’s royalty regime; the future coal market conditions in
China and the related impact on the Company’s margins and
liquidity; the anticipated impact of the COVID-19 pandemic; the
assumption that the border crossings with China will remain open
for coal exports; the anticipated demand for the Company’s coal
products; future coal prices, and the level of worldwide coal
production. While the Company considers these assumptions to be
reasonable based on the information currently available to it, they
may prove to be incorrect. Forward-looking statements are subject
to a variety of risks and uncertainties and other factors that
could cause actual events or results to differ materially from
those projected in the forward-looking statements. These risks and
uncertainties include, among other things: the uncertain nature of
mining activities, actual capital and operating costs exceeding
management’s estimates; variations in mineral resource and mineral
reserve estimates; failure of plant, equipment or processes to
operate as anticipated; the possible impacts of changes in mine
life, useful life or depreciation rates on depreciation expenses;
risks associated with, or changes to regulatory requirements
(including environmental regulations) and the ability to obtain all
necessary regulatory approvals; the potential expansion of the list
of licenses published by the Government of Mongolia covering areas
in which exploration and mining are purportedly prohibited on
certain of the Company's mining licenses; the Government of
Mongolia designating any one or more of the Company’s mineral
projects in Mongolia as a Mineral Deposit of Strategic Importance;
the risk that the Company is unable to successfully apply for a
revocation of the CTO; the risk that the TSX does not grant an
extension to the deadline date for the Company to demonstrate that
it has remedied the Delisting Criteria; the risk that the Company
is unable to remedy the Delisting Criteria within the deadline
established by the TSX and the Common Shares becoming delisted from
the TSX; the risk that the Company is unable to fulfill the
conditions of the Resumption Guidance and the Common Shares
becoming delisted from the HKEX; the risk of continued delays in
the custom clearance process at the Ceke border; the restrictions
established by Chinese authorities on the import of F-grade coal
into China; the risk that Mongolia’s southern borders with China
will be subject of further closures; the negative impact of the
COVID-19 pandemic on the demand for coal and the economy generally
in China; the risk that the outbreak of COVID-19 pandemic is not
effectively controlled in China and Mongolia; the risk that the
Company’s existing coal inventories are unable to sufficiently
satisfy expected sales demand; the possible impact of changes to
the inputs to the valuation model used to value the embedded
derivatives in the CIC Convertible Debenture; the risk of the
Company failing to successfully negotiate favorable repayment terms
on the TRQ Reimbursable Amount (as described under section
Liquidity and Capital Management of this press release under the
heading entitled “Costs Reimbursable to Turquoise Hill Resources
Ltd”); the risk of CIC accelerating all amounts outstanding under
the CIC Convertible Debenture and enforcing payment thereof; the
risk of the Company or its subsidiaries defaulting under its
existing debt obligations, including the 2020 June Deferral
Agreement, the 2020 May Deferral Agreement, the 2020 April Deferral
Agreement, the 2020 March Deferral Agreement, the 2020 February
Deferral Agreement, the 2020 November Deferral Agreement, the 2019
Deferral Agreement, the Amended and Restated Cooperation Agreement
and the 2018 Bank Loan; the impact of amendments to, or the
application of, the laws of Mongolia, China and other countries in
which the Company carries on business; modifications to existing
practices so as to comply with any future permit conditions that
may be imposed by regulators; delays in obtaining approvals and
lease renewals; the risk of fluctuations in coal prices and changes
in China and world economic conditions; the outcome of the Class
Action (as described under section Regulatory Issues and
Contingencies of this press release under the heading entitled
“Class Action Lawsuit") and any damages payable by the Company as a
result; the impact of the internal investigation conducted by the
Special Committee; the risk that the Company is unable to
successfully negotiate a debt restructuring plan with respect to
the amounts owing to CIC; the risk that the calculated sales price
determined by the Company for the purposes of determining the
amount of royalties payable to the Mongolian government is deemed
as being “non-market” under Mongolian tax law; customer credit
risk; cash flow and liquidity risks; risks relating to the
Company’s decision to suspend activities relating to the
development of the Ceke Logistics Park project, including the risk
that its investment partner may initiate legal action against the
Company for failing to comply with the underlying agreements
governing project development; risks relating to the ability of the
Company to enhance the operational efficiency and the output
throughput of the washing facilities at Ovoot Tolgoi; risks
relating to the Company’s ability to successfully appeal MRAM’s
decision to terminate the Soumber Licenses and delays in receiving
the High Court’s ruling on the appeal; the risk that the Company is
unable to successfully negotiate an extension of the agreement with
the third party contractor relating to the operation of the wash
plant at the Ovoot Tolgoi mine site and risks relating to the
Company’s ability to raise additional financing and to continue as
a going concern. This list is not exhaustive of the factors that
may affect any of the Company’s forward-looking statements.
Due to assumptions, risks and uncertainties,
including the assumptions, risks and uncertainties identified above
and elsewhere in this press release, actual events may differ
materially from current expectations. The Company uses
forward-looking statements because it believes such statements
provide useful information with respect to the currently expected
future operations and financial performance of the Company, and
cautions readers that the information may not be appropriate for
other purposes. Except as required by law, the Company undertakes
no obligation to update forward-looking statements if circumstances
or management’s estimates or opinions should change. The reader is
cautioned not to place undue reliance on the forward-looking
statements, which speak only as of the date of this press release;
they should not rely upon this information as of any other
date.
The English text of this press release shall
prevail over the Chinese text in case of inconsistencies.
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