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, 2020. All figures are in U.S. dollars (“USD”) unless
otherwise stated.
The Board of Directors (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, 2020 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, 2020 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, 2020 and the subsequent period to
March 30, 2021 are as follows:
- Operating Results
– The Company’s sales volume decreased from 3.7 million tonnes in
2019 to 2.6 million tonnes in 2020 due to the impact of the
Coronavirus Disease 2019 (“COVID-19”) pandemic. The average selling
price of coal decreased from $34.9 per tonne in 2019 to $33.0 per
tonne in 2020. The decrease in the average selling price was
principally attributable to 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 $15.3 million profit from operations in
2020 compared to a $29.8 million profit in 2019. The financial
results were impacted by (i) the closure of the Mongolia-China
border beginning as of February 11, 2020 which resulted in the
Company being unable to export its coal products to China during
the first quarter of 2020; (ii) the export volume limitation
imposed following the reopening of the Mongolia-China border on a
trial basis on March 28, 2020; and (iii) the provision for
commercial arbitration of $4.6 million recorded in connection with
the Company entering into a settlement agreement with First Concept
Industrial Group Limited (“First Concept”) on June 7, 2020.
- Impact of
the COVID-19 Pandemic – The Company was informed that
effective as of February 11, 2020, the Mongolian State Emergency
Commission closed Mongolia’s southern border with China in order to
prevent the spread of COVID-19. Accordingly, the Company suspended
coal exports to China beginning as of February 11, 2020 as a result
of the border closure.On March 28, 2020, the Mongolia-China 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.The border closure 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
closure 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 in February 2020.
On August 2, 2020, the Company resumed its mining operations.
Although 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 closure as a
result of COVID-19 or any variants thereof in the future. The
Company will continue to closely monitor the development of the
COVID-19 pandemic and the impact it has on coal exports to China
and will react promptly to preserve the working capital of the
Company.In the event that the Company’s ability to export coal into
the Chinese market becomes restricted or limited again as a result
of any future restrictions which may be implemented at the
Mongolia-China 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 February 19, 2020, the Company and CIC
entered into an agreement (the “2020 February Deferral Agreement”)
pursuant to which CIC agreed to grant the Company a deferral of:
(i) deferred cash interest and deferral fees of $1.3 million and
$2.0 million (collectively, the “2020 February Deferral Amounts”)
which were due and payable to CIC on January 19, 2020 and February
19, 2020, respectively, under the deferral agreement signed on
April 23, 2019 (the “2019 Deferral Agreement”); and (ii)
approximately $0.7 million of fees (the “Management Fee”) which was
due and payable on February 14, 2020 to CIC under the amended and
restated mutual cooperation agreement dated November 19, 2009 (the
“Amended and Restated Cooperation Agreement”). The 2020 February
Deferral Agreement became effective on March 10, 2020, being the
date on which the Company obtained the requisite acceptance of the
2020 February Deferral Agreement from the TSX as required under
applicable TSX rules.The principal terms of the 2020 February
Deferral Agreement are as follows:
• Payment of the 2020
February Deferral Amounts will be deferred until June 20, 2020,
while the Management Fee will be deferred until they are repaid by
the Company.• As consideration for the deferral of these
amounts, the Company agreed to pay CIC: (i) a deferral fee equal to
6.4% per annum on the 2020 February Deferral Amounts, commencing on
the date on which each such 2020 February Deferral Amounts would
otherwise have been due and payable under the 2019 Deferral
Agreement; and (ii) a deferral fee equal to 2.5% per annum on the
Management Fee, commencing on the date on which the Management Fee
would otherwise have been due and payable under the Amended and
Restated Cooperation Agreement.• The Company agreed to provide
CIC with monthly updates regarding its operational and financial
affairs.• As the Company anticipated prior to agreeing to the
2020 February Deferral Agreement that a deferral was likely
required in respect of the monthly payments due and payable in the
period between April 2020 and June 2020 under the 2019 Deferral
Agreement and Amended and Restated Cooperation Agreement, the
Company and CIC agreed to discuss in good faith a deferral of these
payments on a monthly basis as they become due.• The Company
agreed to comply with all of its obligations under the 2019
Deferral Agreement and the Amended and Restated Cooperation
Agreement, as amended by the 2020 February Deferral
Agreement.• The Company and CIC agreed that nothing in the
2020 February Deferral Agreement prejudices CIC’s rights to pursue
any of its remedies at any time pursuant to the 2019 Deferral
Agreement and Amended and Restated Cooperation Agreement,
respectively.
On March 10, 2020,
the Company agreed with CIC (the “2020 March Deferral Agreement”)
that the $2.0 million of deferred cash interest and deferral fees
which were due and payable to CIC on March 19, 2020 under the 2019
Deferral Agreement (the “2020 March Deferral Amount”) will be
deferred until June 20, 2020. The terms of the 2020 March Deferral
Agreement are substantially the same as the terms of the 2020
February Deferral Agreement, including that the Company agreed to
pay CIC a deferral fee equal to 6.4% per annum on the 2020 March
Deferral Amount, commencing on March 19, 2020. The 2020 March
Deferral Agreement became effective on March 25, 2020, being the
date on which the Company obtained the requisite acceptance of the
2020 March Deferral Agreement from the TSX as required under
applicable TSX rules.On April 10, 2020, the Company agreed with CIC
(the “2020 April Deferral Agreement”) that the $2.0 million of
deferred cash interest and deferral fees which were due and payable
to CIC on April 19, 2020 under the 2019 Deferral Agreement (the
“2020 April Deferral Amount”) will be deferred until June 20, 2020.
The terms of the 2020 April Deferral Agreement are substantially
the same as the terms of the 2020 February Deferral Agreement,
including that the Company agreed to pay CIC a deferral fee equal
to 6.4% per annum on the 2020 April Deferral Amount, commencing on
April 19, 2020. The 2020 April Deferral Agreement became effective
on April 29, 2020, being the date on which the Company obtained the
requisite acceptance of the 2020 April Deferral Agreement from the
TSX as required under applicable TSX rules.On May 8, 2020, the
Company agreed with CIC (the “2020 May Deferral Agreement”) that
the deferred cash interest and deferral fees of $2.0 million which
were due and payable to CIC on May 19, 2020 under the 2019 Deferral
Agreement; and approximately $0.2 million of Management Fee which
were due and payable on May 15, 2020 to CIC under the Amended and
Restated Cooperation Agreement (collectively, the “2020 May
Deferral Amount”) will be deferred until June 20, 2020. The terms
of the 2020 May Deferral Agreement are substantially the same as
the terms of the 2020 February Deferral Agreement, including that
the Company agreed to pay CIC a deferral fee equal to 6.4% per
annum on the deferred cash interest and deferral fees commencing on
May 19, 2020 and a deferral fee equal to 2.5% per annum on the
deferred Management Fee commencing on May 15, 2020. The 2020 May
Deferral Agreement became effective on June 8, 2020, being the date
on which the Company obtained the requisite acceptance of the 2020
May Deferral Agreement from the TSX as required under applicable
TSX rules.On June 19, 2020, the Company agreed with CIC (the “2020
June Deferral Agreement”) that the deferred cash interest and
deferral fees in the aggregate amount of approximately $74.0
million (the “2020 June Deferral Amount”) which were due and
payable to CIC on June 19, 2020 under the 2019 Deferral Agreement
and the prior deferral agreements entered into during the period
between February and 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
payment in kind interest (“PIK Interest”) shares (“2020 November
PIK Interest”) issuable to CIC on November 19, 2020 under the CIC
Convertible Debenture; and (iv) the Management Fee which payable to
CIC on November 14, 2020, February 14, 2021, May 15, 2021, August
14, 2021 and November 14, 2021 under the Amended and Restated
Cooperation Agreement (collectively, the “2020 November Deferral
Amounts”).On October 29, 2020, the Company obtained an order from
the British Columbia Securities Commission (the “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
2020 November Deferral Agreement became effective on January 21,
2021, being the date on which the 2020 November Deferral Agreement
was approved by shareholders at the Company’s annual and special
meeting of shareholders. As a consequence of the Company not
entering into a deferral agreement with CIC as at December 31,
2020, International Accounting Standard (“IAS”) 1 requires the
Company to classify the entire balance of the CIC Convertible
Debenture as a current liability as at December 31, 2020.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 Amounts 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 – On June 7, 2020, SouthGobi Sands LLC (“SGS”), a
subsidiary of the Company, entered into a settlement agreement with
First Concept, pursuant to which SGS agreed to pay to First Concept
a settlement sum in the amount of $8.0 million in full and final
settlement of any and all claims which First Concept may have
against SGS in relation to Arbitration Award (as defined below),
the subject matter of the Arbitration Award including any claims
for interests and costs and the fees and expenses of the
Arbitration Award, and any and all enforcement proceedings and
applications in any jurisdictions, and in relation to the deed of
settlement with First Concept (the “Full Settlement Sum”). The Full
Settlement Sum was fully satisfied by the Company in June 2020 and
the outstanding payable to First Concept as of the date hereof is
$nil.
- Cease Trade Order and Halt
Trading on TSX – On June 19, 2020, the BCSC issued a
general “failure to file” cease trade order (“CTO”), to prohibit
the trading by any person of any securities of the Company in
Canada. Trading in the Common Shares on the TSX was halted as a
result of the CTO. The CTO was issued as a result of the Company’s
failure to file: (i) its annual consolidated financial statements
for the year ended December 31, 2019 and the accompanying
Management’s Discussion and Analysis of Financial Condition and
Result of Operations (“MD&A”); (ii) its Annual Information Form
for the year ended December 31, 2019; and (iii) its condensed
consolidated interim 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.On February 5, 2021,
the BCSC and the Ontario Securities Commission granted a full
revocation of the CTO. Trading in the Common Shares resumed on the
TSX on February 8, 2021.
- Suspension of Trading on
HKEX – At the request of the Company, trading in the
Common Shares 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 February 9,
2021, the Company confirmed that it has fulfilled all the
conditions stated in the resumption guidance to the satisfaction of
the HKEX. Trading in the Common Shares resumed on the HKEX on
February 10, 2021.
- TSX Delisting
Review – On September 11, 2020, the TSX notified the
Company that it is reviewing the eligibility for continued listing
of the Common Shares on the TSX pursuant to the TSX’s Remedial
Review Process (“TSX Delisting Review”). On December 16, 2020, the
TSX accepted the Company’s request for a 60 day extension of the
TSX Delisting Review process and the Company has been granted until
February 16, 2021 to remedy the following delisting criteria, as
well as any other delisting criteria that become applicable during
the Remedial Review Process: (i) financial condition and/or
operating results; (ii) adequate working capital and appropriate
capital structure; and (iii) disclosure issues.On February 15,
2021, the Company announced that the TSX Continued Listing
Committee determined that the Company satisfies the TSX’s
applicable requirements for continued listing.
- Restoration of Soumber
Deposit Mining Licenses – On August 26, 2019, SGS received
a letter (the “Notice Letter”) from the Mineral Resource Authority
of Mongolia (“MRAM”) notifying that the Company’s three mining
licenses (MV-016869, MV-020436 and MV-020451) (the “Soumber Mining
Licenses”) for the Soumber Deposit have been terminated by the Head
of Cadastre Division of MRAM effective as of August 21, 2019.On
March 2, 2021, SGS received a notice from the Mongolian
governmental authority that the Soumber Mining Licenses have been
reinstated effective as of March 2, 2021.
- Changes in Management and
DirectorsMr. Wen Yao: Mr. Yao resigned as
a non-executive director on March 11, 2020.Mr. Jianmin
Bao: Mr. Bao was appointed as a non-executive director on
March 18, 2020.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
a non-executive director on November 13, 2020.Ms. Ka Lee
Ku: Ms. Ku was appointed as a non-executive director on
December 9, 2020.Mr. Weiguo Zhang: Mr. Zhang
resigned as Chief Financial Officer on February 10,
2021.Mr. Alan Ho: Mr. Ho was appointed as acting
Chief Financial Officer on February 10, 2021.Mr. Aiming
Guo: Mr. Guo resigned as Chief Operating Officer on
February 10, 2021.Mr. Tao Zhang: Mr. Zhang has
been re-designated from Vice President to Vice President of Sales
on February 10, 2021.Mr. Munkhbat Chuluun: Mr.
Chuluun was appointed as Vice President of Public Relations on
February 10, 2021.
- 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.Refer to section “Liquidity and Capital Resources” for
details.
OVERVIEW OF OPERATIONAL DATA AND
FINANCIAL RESULTS
Summary of Annual Operational
Data
| |
|
|
|
Year
ended |
| |
|
|
|
December 31, |
|
|
|
|
|
|
2020 |
|
|
|
2019 |
|
|
Sales Volumes, Prices and Costs |
|
|
|
|
|
| |
|
|
|
|
|
|
|
Premium semi-soft coking coal |
|
|
|
|
|
|
Coal sales (millions of tonnes) |
|
|
|
1.01 |
|
|
|
0.67 |
|
|
Average realized selling price (per tonne) |
|
|
$ |
33.22 |
|
|
$ |
32.96 |
|
|
Standard semi-soft coking coal/ premium thermal coal |
|
|
|
|
|
|
Coal sales (millions of tonnes) |
|
|
|
1.43 |
|
|
|
2.35 |
|
|
Average realized selling price (per tonne) |
|
|
$ |
31.69 |
|
|
$ |
33.54 |
|
|
Standard thermal coal |
|
|
|
|
|
|
Coal sales (millions of tonnes) |
|
|
|
- |
|
|
|
0.09 |
|
|
Average realized selling price (per tonne) |
|
|
$ |
- |
|
|
$ |
29.43 |
|
|
Washed coal |
|
|
|
|
|
|
Coal sales (millions of tonnes) |
|
|
|
0.19 |
|
|
|
0.63 |
|
|
Average realized selling price (per tonne) |
|
|
$ |
41.96 |
|
|
$ |
43.05 |
|
|
Total |
|
|
|
|
|
|
Coal sales (millions of tonnes) |
|
|
|
2.63 |
|
|
|
3.74 |
|
|
Average realized selling price (per tonne) |
|
|
$ |
33.01 |
|
|
$ |
34.88 |
|
| |
|
|
|
|
|
|
|
Raw coal production (millions of tonnes) |
|
|
|
1.49 |
|
|
|
5.05 |
|
| |
|
|
|
|
|
|
|
Cost of sales of product sold (per tonne) |
|
|
$ |
22.30 |
|
|
$ |
22.57 |
|
|
Direct cash costs of product sold (per tonne) (i) |
|
|
$ |
12.73 |
|
|
$ |
14.84 |
|
|
Mine administration cash costs of product sold (per tonne) (i) |
|
|
$ |
1.33 |
|
|
$ |
1.08 |
|
|
Total cash costs of product sold (per tonne) (i) |
|
|
$ |
14.06 |
|
|
$ |
15.92 |
|
| |
|
|
|
|
|
|
|
Other Operational Data |
|
|
|
|
|
| |
|
|
|
|
|
|
|
Production waste material moved (millions of bank
cubic meters) |
|
|
|
5.34 |
|
|
|
18.22 |
|
|
Strip ratio (bank cubic meters of waste material per tonne
of coal produced) |
|
|
|
3.59 |
|
|
|
3.61 |
|
|
Lost time injury frequency rate (ii) |
|
|
|
0.03 |
|
|
|
0.06 |
|
| |
|
|
|
|
|
|
|
(i) |
A non-International
Financial Reporting Standards (“non-IFRS”) financial measure, which
does not have a standardized meaning according to International
Financial Reporting Standards (“IFRS”). See “Non-IFRS financial
measures” section. Cash costs of product sold exclude idled mine
asset cash costs. |
|
(ii) |
Per 200,000 man
hours and calculated based on a rolling 12-month average. |
| |
|
Overview of Annual Operational
Data
As at December 31, 2020, the Company had a lost
time injury frequency rate of 0.03 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 $34.9 per tonne in 2019 to $33.0
per tonne in 2020 as a result of a higher portion of sales made at
the mine gate instead of transporting the coal to the Company’s
Inner Mongolia subsidiary and selling to third party customers
within China.
The product mix for 2020 consisted of
approximately 39% of premium semi-soft coking coal, 54% of standard
semi-soft coking coal/premium thermal coal and 7% of washed coal
compared to 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 in 2019.
Sales volume decreased from 3.7 million tonnes
in 2019 to 2.6 million tonnes in 2020. The Company’s production in
2020 was lower than 2019 as a result of the temporary cessation of
the Company’s major mining operations (including coal mining)
during February to August 2020 for the purpose of mitigating the
financial impact of the border closure and preserving the Company’s
working capital, yielding 1.5 million tonnes for 2020 as compared
to 5.1 million tonnes for 2019.
The Company’s unit cost of sales of product sold
for 2020 was $22.3 per tonne, which is similar to $22.6 per tonne
for 2019.
Summary of Annual Financial
Results
| |
|
Year
ended |
| |
|
December 31, |
|
$ in thousands, except per share information |
|
2020 |
|
|
|
2019 |
|
| |
|
|
|
|
|
Revenue (i) |
$ |
85,951 |
|
|
$ |
129,712 |
|
|
Cost of sales (i) |
|
(58,657 |
) |
|
|
(84,400 |
) |
|
Gross profit excluding idled mine asset costs (ii) |
|
32,147 |
|
|
|
49,310 |
|
|
Gross profit |
|
27,294 |
|
|
|
45,312 |
|
| |
|
|
|
|
|
Other operating expenses |
|
(4,821 |
) |
|
|
(5,581 |
) |
|
Administration expenses |
|
(6,971 |
) |
|
|
(9,447 |
) |
|
Evaluation and exploration expenses |
|
(226 |
) |
|
|
(452 |
) |
|
Profit from operations |
|
15,276 |
|
|
|
29,832 |
|
| |
|
|
|
|
|
Finance costs |
|
(31,692 |
) |
|
|
(28,010 |
) |
|
Finance income |
|
2,613 |
|
|
|
4,417 |
|
|
Share of earnings of a joint venture |
|
1,313 |
|
|
|
1,329 |
|
|
Current income tax expense |
|
(7,599 |
) |
|
|
(3,367 |
) |
| |
|
|
|
|
|
Net profit/(loss) attributable to equity holders of the
Company |
|
(20,089 |
) |
|
|
4,201 |
|
|
Basic and diluted earnings/(loss) per share |
$ |
(0.07 |
) |
|
$ |
0.02 |
|
|
(i) |
Revenue and cost of sales related to the Company’s Ovoot Tolgoi
Mine within the Coal Division operating segment. Refer to note 2 of
the selected information from the notes to 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 $15.3 million profit from
operations in 2020 compared to a $29.8 million profit in 2019. The
financial results were impacted by (i) the closure of the
Mongolia-China border beginning as of February 11, 2020 which
resulted in the Company being unable to export its coal products to
China during the first quarter of 2020; (ii) the export volume
limitation imposed following the reopening of the Mongolia-China
border on a trial basis on March 28, 2020; and (iii) the provision
for commercial arbitration of $4.6 million recorded in connection
with the Company entering into a settlement agreement with First
Concept on June 7, 2020.
Revenue was $86.0 million in 2020 compared to
$129.7 million in 2019. The Company’s effective royalty rate for
2020, based on the Company’s average realized selling price of
$33.0 per tonne, was 12.2% or $4.0 per tonne, compared to 8.9% or
$3.1 per tonne in 2019 (based on the average realized selling price
of $34.9 per tonne). The increase in effective royalty rate was
mainly due to the new royalty regime introduced by the Government
of Mongolia in the third quarter of 2019.
Royalty regime in Mongolia
The royalty regime in Mongolia is evolving and
has been subject to change since 2012.
On 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 $58.7 million in 2020 compared
to $84.4 million in 2019. The decrease in cost of sales in 2020 was
mainly due to the effect of decreased sales volume. 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,
refer to section “Non-IFRS Financial Measures” for further
analysis) during the year.
|
|
|
|
|
Year endedDecember 31, |
|
$ in thousands |
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
Operating expenses |
$ |
36,974 |
|
$ |
59,549 |
|
|
Share-based compensation expense |
|
24 |
|
|
9 |
|
|
Depreciation and depletion |
|
6,243 |
|
|
11,028 |
|
|
Royalties |
|
10,563 |
|
|
11,639 |
|
|
Reversal of impairment of coal stockpile inventories |
|
- |
|
|
(1,823 |
) |
|
Cost of sales from mine operations |
|
53,804 |
|
|
80,402 |
|
|
Cost of sales related to idled mine assets |
|
4,853 |
|
|
3,998 |
|
|
Cost of sales |
$ |
58,657 |
|
$ |
84,400 |
|
|
|
|
|
|
Operating expenses in cost of sales were $37.0
million in 2020 compared to $59.5 million in 2019. The overall
decrease in operating expenses was primarily due to the decreased
sales volume from 3.7 million tonnes in 2019 to 2.6 million tonnes
in 2020.
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.
Cost of sales related to idled mine assets in
2020 included $4.9 million related to depreciation expenses for
idled equipment (2019: $4.0 million).
Other operating expenses were $4.8 million in
2020 (2019: $5.6 million), which mainly comprises of the provision
for commercial arbitration of $4.6 million recorded in connection
with the Company entering into a settlement agreement with First
Concept on June 7, 2020.
|
|
|
|
|
|
|
Year endedDecember 31, |
|
|
|
2020 |
|
|
|
2019 |
|
|
|
|
|
|
|
CIC management fee |
$ |
2,170 |
|
|
$ |
3,185 |
|
|
Other taxes on foreign payments |
|
- |
|
|
|
1,881 |
|
|
Provision/(reversal of provision) for doubtful trade and other
receivables |
|
(336 |
) |
|
|
501 |
|
|
Provision of commercial arbitration |
|
4,634 |
|
|
|
485 |
|
|
Impairment of prepaid expenses |
|
8 |
|
|
|
253 |
|
|
Loss on disposal of properties for resale |
|
- |
|
|
|
36 |
|
|
Foreign exchange gain, net |
|
(1,586 |
) |
|
|
(706 |
) |
|
Gain on disposal of property, plant and equipment, net |
|
(69 |
) |
|
|
(29 |
) |
|
Others |
|
- |
|
|
|
(25 |
) |
|
Other operating expenses |
$ |
4,821 |
|
|
$ |
5,581 |
|
|
|
|
|
|
Administration expenses were $7.0 million in
2020 as compared to $9.4 million in 2019, as follows:
|
|
Year endedDecember 31, |
|
$ in thousands |
|
2020 |
|
|
2019 |
|
|
|
|
|
|
Corporate administration |
$ |
1,268 |
|
$ |
2,111 |
|
Professional fees |
|
1,363 |
|
|
3,076 |
|
Salaries and benefits |
|
3,518 |
|
|
3,522 |
|
Share-based compensation expense |
|
89 |
|
|
38 |
|
Depreciation |
|
733 |
|
|
700 |
|
Administration expenses |
$ |
6,971 |
|
$ |
9,447 |
|
|
|
|
|
Administration expenses were lower for 2020
compared to 2019 primarily due to decrease in legal and
professional fees incurred during the year.
The Company continued to minimize evaluation and
exploration expenditures in 2020 in order to preserve the Company’s
financial resources. Evaluation and exploration activities and
expenditures in 2020 were limited to ensuring that the Company met
the Mongolian Minerals Law requirements in respect of its mining
licenses.
Finance costs were $31.7 million and $28.0
million in 2020 and 2019, respectively, which primarily consisted
of interest expense on the $250.0 million CIC Convertible
Debenture.
Summary of Quarterly Operational
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
|
2019 |
|
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) |
|
|
0.38 |
|
0.35 |
|
0.21 |
|
0.07 |
|
|
0.39 |
|
0.05 |
|
0.12 |
|
0.11 |
|
Average realized selling price (per tonne) |
|
$ |
39.34 |
$ |
30.17 |
$ |
28.69 |
$ |
28.46 |
|
$ |
29.18 |
$ |
31.49 |
$ |
32.72 |
$ |
47.34 |
|
Standard semi-soft coking coal/ premium thermal coal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal sales (millions of tonnes) |
|
|
0.50 |
|
0.54 |
|
0.26 |
|
0.13 |
|
|
0.40 |
|
0.51 |
|
0.59 |
|
0.85 |
|
Average realized selling price (per tonne) |
|
$ |
31.66 |
$ |
30.80 |
$ |
33.12 |
$ |
32.71 |
|
$ |
31.88 |
$ |
31.67 |
$ |
35.67 |
$ |
33.34 |
|
Standard thermal coal |
|
|
|
|
|
|
|
|
|
|
|
|
Coal sales (millions of tonnes) |
|
|
- |
|
- |
|
- |
|
- |
|
|
- |
|
- |
|
- |
|
0.09 |
|
Average realized selling price (per tonne) |
|
$ |
- |
$ |
- |
$ |
- |
$ |
- |
|
$ |
- |
$ |
- |
$ |
- |
$ |
34.88 |
|
Washed coal |
|
|
|
|
|
|
|
|
|
|
Coal sales (millions of tonnes) |
|
|
0.07 |
|
0.10 |
|
0.02 |
|
- |
|
|
0.20 |
|
0.25 |
|
0.17 |
|
0.01 |
|
Average realized selling price (per tonne) |
|
$ |
42.51 |
$ |
41.30 |
$ |
43.26 |
$ |
- |
|
$ |
42.95 |
$ |
42.37 |
$ |
44.20 |
$ |
45.07 |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
Coal sales (millions of tonnes) |
|
|
0.95 |
|
0.99 |
|
0.49 |
|
0.20 |
|
|
0.99 |
|
0.81 |
|
0.88 |
|
1.06 |
|
Average realized selling price (per tonne) |
|
$ |
35.53 |
$ |
31.63 |
$ |
31.66 |
$ |
31.18 |
|
$ |
33.04 |
$ |
34.98 |
$ |
36.80 |
$ |
34.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw coal production (millions of tonnes) |
|
|
0.96 |
|
0.52 |
|
- |
|
0.01 |
|
|
1.48 |
|
1.21 |
|
1.33 |
|
1.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales of product sold (per tonne) |
|
$ |
23.36 |
$ |
20.23 |
$ |
21.16 |
$ |
30.36 |
|
$ |
23.68 |
$ |
19.16 |
$ |
25.04 |
$ |
22.08 |
|
Direct cash costs of product sold (per tonne) (i) |
|
$ |
14.78 |
$ |
12.38 |
$ |
9.90 |
$ |
11.69 |
|
$ |
13.61 |
$ |
18.03 |
$ |
17.18 |
$ |
10.82 |
|
Mine administration cash costs of product sold (per tonne) (i) |
|
$ |
1.07 |
$ |
1.15 |
$ |
1.70 |
$ |
2.50 |
|
$ |
1.29 |
$ |
1.09 |
$ |
1.39 |
$ |
1.41 |
|
Total cash costs of product sold (per tonne) (i) |
|
$ |
15.85 |
$ |
13.53 |
$ |
11.60 |
$ |
14.19 |
|
$ |
14.90 |
$ |
19.12 |
$ |
18.57 |
$ |
12.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operational Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production waste material moved (millions of bank cubic
meters) |
|
|
3.10 |
|
1.67 |
|
- |
|
0.57 |
|
|
3.61 |
|
4.36 |
|
5.34 |
|
4.91 |
|
Strip ratio (bank cubic meters of waste material per tonne
of coal produced) |
|
|
3.24 |
|
3.20 |
|
- |
|
85.08 |
|
|
2.44 |
|
3.61 |
|
4.01 |
|
4.76 |
|
Lost time injury frequency rate (ii) |
|
|
0.00 |
|
0.00 |
|
0.04 |
|
0.09 |
|
|
0.08 |
|
0.08 |
|
0.06 |
|
0.00 |
|
(i) |
A non-IFRS financial measure, refer to “Non-IFRS Financial
Measures” section. Cash costs of product sold exclude idled mine
asset cash costs. |
|
(ii) |
Per 200,000 man hours and calculated based on a rolling
12-month average. |
Overview of Quarterly Operational
Data
The Company ended the fourth quarter of 2020
without a lost time injury.
The Company experienced an increase in the
average selling price of coal from $33.0 per tonne in the fourth
quarter of 2019 to $35.5 per tonne in the fourth quarter of 2020.
The product mix for the fourth quarter of 2020 consisted of
approximately 40% of premium semi-soft coking coal, 53% of standard
semi-soft coking coal/premium thermal coal and 7% of washed coal
compared to approximately 39% of premium semi-soft coking coal, 41%
of standard semi-soft coking coal/premium thermal coal and 20% of
washed coal in the fourth quarter of 2019.
The Company sold 1.0 million tonnes for the
fourth quarter of 2020, which is the same as the fourth quarter of
2019.
The Company’s production in the fourth quarter
of 2020 was lower than the fourth quarter of 2019 as a result of
management’s decision to pace production to meet expected sales,
yielding 1.0 million tonnes for the fourth quarter of 2020 as
compared to 1.5 million tonnes for the fourth quarter of 2019.
The Company’s unit cost of sales of product sold
for the fourth quarter of 2020 was $23.4 per tonne in the fourth
quarter of 2020, which is similar to $23.7 per tonne for the fourth
quarter of 2019.
Summary of Quarterly Financial
Results
The Company’s annual financial statements are
reported under IFRS issued by the International Accounting
Standards Board (“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 |
|
|
2020 |
|
|
|
2019 |
|
|
Quarter Ended |
31-Dec |
30-Sep |
30-Jun |
31-Mar |
|
31-Dec |
30-Sep |
30-Jun |
31-Mar |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Results |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue (i) |
$ |
33,879 |
|
$ |
30,960 |
|
$ |
14,975 |
|
$ |
6,137 |
|
|
$ |
32,113 |
|
$ |
28,309 |
|
$ |
32,479 |
|
$ |
36,811 |
|
|
Cost of sales (i) |
|
(22,193 |
) |
|
(20,027 |
) |
|
(10,366 |
) |
|
(6,071 |
) |
|
|
(23,446 |
) |
|
(15,518 |
) |
|
(22,031 |
) |
|
(23,405 |
) |
|
Gross profit excluding idled mine asset costs |
|
|
12,610 |
|
|
11,789 |
|
|
6,286 |
|
|
1,462 |
|
|
|
9,971 |
|
|
13,664 |
|
|
11,318 |
|
|
14,357 |
|
|
Gross profit including idled mine asset costs |
|
|
11,686 |
|
|
10,933 |
|
|
4,609 |
|
|
66 |
|
|
|
8,667 |
|
|
12,791 |
|
|
10,448 |
|
|
13,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income/(expenses) |
|
|
434 |
|
|
(575 |
) |
|
(5,150 |
) |
|
470 |
|
|
|
(1,589 |
) |
|
(1,245 |
) |
|
(2,333 |
) |
|
(414 |
) |
|
Administration expenses |
|
|
(2,120 |
) |
|
(1,789 |
) |
|
(1,291 |
) |
|
(1,771 |
) |
|
|
(1,386 |
) |
|
(2,074 |
) |
|
(2,878 |
) |
|
(3,109 |
) |
|
Evaluation and exploration expenses |
|
|
(55 |
) |
|
(63 |
) |
|
(52 |
) |
|
(56 |
) |
|
|
(382 |
) |
|
(22 |
) |
|
(23 |
) |
|
(25 |
) |
|
Profit/(loss) from operations |
|
|
9,945 |
|
|
8,506 |
|
|
(1,884 |
) |
|
(1,291 |
) |
|
|
5,310 |
|
|
9,450 |
|
|
5,214 |
|
|
9,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance costs |
|
(7,442 |
) |
|
(9,885 |
) |
|
(7,258 |
) |
|
(7,135 |
) |
|
|
(7,095 |
) |
|
(7,184 |
) |
|
(7,001 |
) |
|
(6,739 |
) |
|
Finance income |
|
13 |
|
|
2,583 |
|
|
2 |
|
|
43 |
|
|
|
36 |
|
|
68 |
|
|
4,305 |
|
|
17 |
|
|
Share of earnings/(loss) of a joint venture |
|
|
431 |
|
|
660 |
|
|
268 |
|
|
(46 |
) |
|
|
225 |
|
|
277 |
|
|
375 |
|
|
452 |
|
|
Current Income tax expense |
|
|
(5,174 |
) |
|
(793 |
) |
|
(900 |
) |
|
(732 |
) |
|
|
(659 |
) |
|
(468 |
) |
|
(801 |
) |
|
(1,439 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profit/(loss) |
|
(2,227 |
) |
|
1,071 |
|
|
(9,772 |
) |
|
(9,161 |
) |
|
|
(2,183 |
) |
|
2,143 |
|
|
2,092 |
|
|
2,149 |
|
|
Basic and diluted earnings/(loss) per share |
|
$ |
(0.01) |
|
$ |
- |
|
$ |
0.04 |
|
$ |
0.03 |
|
|
$ |
0.01 |
|
$ |
0.01 |
|
$ |
0.01 |
|
$ |
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
2 of the selected information from the notes to the consolidated
financial statements for further analysis regarding the Company’s
reportable operating segments. |
Overview of Quarterly Financial
Results
The Company recorded a $9.9 million profit from
operations in the fourth quarter of 2020 compared to a $5.3 million
profit from operations in the fourth quarter of 2019. The
improvement was principally attributable to the higher average
realized selling price achieved for the fourth quarter of 2020.
Revenue was $33.9 million in the fourth quarter
of 2020 compared to $32.1 million in the fourth quarter of 2019.
The Company’s effective royalty rate for the fourth quarter of
2020, based on the Company’s average realized selling price of
$35.5 per tonne, was 12.3% or $4.4 per tonne, compared to 14.7% or
$4.8 per tonne in the fourth quarter of 2019 (based on the average
realized selling price of $33.0 per tonne).
Cost of sales was $22.2 million in the fourth
quarter of 2020 compared to $23.4 million in the fourth quarter of
2019.
Cost of sales consists of operating expenses,
share-based compensation expense, equipment depreciation, depletion
of mineral properties, royalties and idled mine asset costs.
Operating expenses in cost of sales reflect the total cash costs of
product sold (a non-IFRS financial measure, refer to section
“Non-IFRS Financial Measures” for further analysis) during the
quarter.
|
|
|
|
|
|
|
|
|
|
|
|
Three months endedDecember
31, |
|
|
$ in thousands |
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
$ |
15,062 |
|
$ |
14,754 |
|
|
Share-based compensation expense |
|
|
|
|
1 |
|
|
2 |
|
|
Depreciation and depletion |
|
|
2,080 |
|
|
2,649 |
|
|
Royalties |
|
|
|
4,126 |
|
|
4,737 |
|
|
Impairment of coal stockpile inventories |
|
|
|
|
- |
|
|
- |
|
|
Cost of sales from mine operations |
|
21,269 |
|
|
22,142 |
|
|
Cost of sales related to idled mine assets |
|
|
|
|
924 |
|
|
1,304 |
|
|
Cost of sales |
|
|
$ |
22,193 |
|
$ |
23,446 |
|
|
|
|
|
|
|
|
|
|
Operating expenses in cost of sales were $15.1
million in the fourth quarter of 2020 compared to $14.8 million in
the fourth quarter of 2019, as the sales volume in both quarters
were at similar levels.
Cost of sales related to idled mine assets in
the fourth quarter of 2020 included $0.9 million related to
depreciation expenses for idled equipment (fourth quarter of 2019:
$1.3 million).
Other operating income was $0.4 million in the
fourth quarter of 2020 (fourth quarter of 2019: other operating
expenses of $1.6 million). The increase was mainly due to the
foreign exchange gain during the fourth quarter of 2020.
|
|
|
|
|
|
|
Three months endedDecember
31, |
|
$ in thousands |
|
2020 |
|
|
|
2019 |
|
|
|
|
|
|
|
CIC management fee |
$ |
(771 |
) |
|
$ |
(853 |
) |
|
Reversal of provision/(provision) for doubtful trade and other
receivables |
|
136 |
|
|
|
(60 |
) |
|
Other taxes on foreign payments |
|
- |
|
|
|
(858 |
) |
|
Foreign exchange gain, net |
|
947 |
|
|
|
228 |
|
|
Gain on disposal of property, plant and equipment, net |
|
130 |
|
|
|
- |
|
|
Provision for commercial arbitration |
|
- |
|
|
|
(79 |
) |
|
Others |
|
(8 |
) |
|
|
33 |
|
|
Other operating income/(expenses) |
$ |
434 |
|
|
$ |
(1,589 |
) |
|
|
|
|
|
Administration expenses were $2.1 million in the
fourth quarter of 2020 as compared to $1.4 million in the fourth
quarter of 2019. The salaries and benefits expenses for the fourth
quarter of 2019 included a reversal in relations to the staff bonus
over-provision.
|
|
|
|
|
Three months endedDecember
31, |
|
$ in thousands |
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
|
Corporate administration |
|
$ |
427 |
|
$ |
554 |
|
Legal and Professional fees |
|
|
|
418 |
|
|
408 |
|
Salaries and benefits |
|
|
1,070 |
|
|
208 |
|
Share-based compensation expense |
|
|
|
|
5 |
|
|
9 |
|
Depreciation |
|
|
|
200 |
|
|
207 |
|
Administration expenses |
|
$ |
2,120 |
|
$ |
1,386 |
|
|
|
|
|
|
|
|
The Company continued to minimize evaluation and
exploration expenditures in the fourth quarter of 2020 in order to
preserve the Company’s financial resources. Evaluation and
exploration activities and expenditures in the fourth quarter of
2020 were limited to ensuring that the Company met the Mongolian
Minerals Law requirements in respect of its mining licenses.
Finance costs were $7.4 million in the fourth
quarter of 2020 compared to $7.1 million in the fourth quarter of
2019, 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, 2020, the net carrying amount of the pledged items
of property, plant and equipment was $0.1 million (December 31,
2019: $0.4 million).
As at December 31, 2020, the outstanding
principal balance of the 2018 Bank Loan was $2.8 million (December
31, 2019: $2.8 million) and the accrued interest owed by the
Company was negligible (December 31, 2019: negligible).
In February 2021, $2.8 million was repaid to the
Bank by the Company in full settlement of the outstanding principal
balance of the 2018 Bank Loan and the accrued interest thereon.
Costs reimbursable to Turquoise Hill
Resources Limited (“Turquoise Hill”)
Prior to the completion of a private placement
with Novel Sunrise Investments Limited (“Novel Sunrise”) on April
23, 2015, Rio Tinto plc (“Rio Tinto”) was the Company’s ultimate
parent company. In the past, Rio Tinto sought reimbursement from
the Company for the salaries and benefits of certain Rio Tinto
employees who were assigned by Rio Tinto to work for the Company,
as well as certain legal and professional fees incurred by Rio
Tinto in relation to the Company’s prior internal investigation and
Rio Tinto’s participation in the tripartite committee. Subsequently
Rio Tinto transferred and assigned to Turquoise Hill its right to
seek reimbursement for these costs and fees from the Company.
As at December 31, 2020, the amount of
reimbursable costs and fees claimed by Turquoise Hill (the “TRQ
Reimbursable Amount”) amounted to $8.1 million (such amount is
included in the trade and other payables). No agreement on
repayment had been reached between the Company and Turquoise Hill
as at December 31, 2020.
On January 20, 2021, the Company and Turquoise
Hill entered into a settlement agreement, whereby Turquoise Hill
agreed to a repayment schedule in settlement of certain secondment
costs in the amount of $2.8 million (representing a portion of the
TRQ Reimbursable Amount) pursuant to which the Company agreed to
make monthly payments to TRQ in the amount of $0.1 million per
month from January 2021 to June 2022. The Company is contesting the
validity of the remaining balance of the TRQ Reimbursable Amount
claimed by Turquoise Hill.
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, 2021
and will be able to realize its assets and discharge its
liabilities in the normal course of operations as they come due.
However, in order to continue as a going concern, the Company must
generate sufficient operating cash 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 incurred a loss attributable to equity
holders of the Company of $20.1 million for the year ended December
31, 2020 (compared to a profit attributable to equity holders of
the Company for the year ended December 31, 2019), and as of that
date, had a deficiency in assets of $76.2 million as compared to a
deficiency in assets of $49.2 million as at December 31, 2019 while
the working capital deficiency (excess current liabilities over
current assets) reached $217.6 million as compared to a working
capital deficiency of $114.7 million as at December 31, 2019.
Included in the working capital deficiency as at
December 31, 2020 are significant obligations, which include the
interest amounting to $91.1 million in relation to the CIC
Convertible Debenture and trade and other payables of $78.7
million, which includes the unpaid taxes of $36.1 million that are
repayable on demand to the Mongolian Tax Authority (“MTA”).
The Company failed to make payment of
convertible debenture interest to CIC in according to the terms of
convertible debenture agreement. This constituted an event of
default of the relevant convertible debenture agreements as at
December 31, 2020 and the 2020 November Deferral Agreement became
effective on January 21, 2021. As a result, the entire balance of
the CIC Convertible Debenture was classified as current liability
as at December 31, 2020.
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 March
30, 2021. 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.
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,
2020. 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; (ii) agreeing to deferral
arrangements and improved payment terms with certain vendors; (iii)
reducing the outstanding tax payable by making monthly payments to
MTA beginning as of June 2020; and (iv) reducing the inventory of
low quality coal by wet washing and coal blending. After
considering the above measures, and given the re-opening of the
Mongolia-China 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, 2020 and therefore
are satisfied that it is appropriate to prepare the consolidated
financial statements on a going concern basis.
Factors that impact the Company’s liquidity are
being closely monitored and include, but are not limited to, impact
of 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, 2020 and December 31, 2019,
the Company was not subject to any externally imposed capital
requirements.
Impact of the COVID-19
Pandemic
The Company was informed that effective as of
February 11, 2020, the Mongolian State Emergency Commission closed
Mongolia’s southern border with China in order to prevent the
spread of COVID-19. Accordingly, the Company suspended coal exports
to China beginning as of February 11, 2020 as a result of the
border closure.
On March 28, 2020, the Mongolia-China 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.
The border closure 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
closure 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 in February 2020.
On August 2, 2020, the Company resumed its mining operations.
Although the mining operations and the export of coal from Mongolia
to China continues, there can be no guarantee that the Company
will be able to continue exporting coal to China, or the border
crossings would not be the subject of additional closure 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.
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 debts, 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, 2020 CIC
owned approximately 23.8% of the issued and outstanding Common
Shares of the Company.
On February 19, 2020, the Company and CIC
entered into the 2020 February Deferral Agreement pursuant to which
CIC agreed to grant the Company a deferral of: (i) the 2020
February Deferral Amounts; and (ii) approximately $0.7 million of
the Management Fee which was due and payable on February 14, 2020
to CIC under the Amended and Restated Cooperation Agreement. The
2020 February Deferral Agreement became effective on March 10,
2020, being the date on which the Company obtained the requisite
acceptance of the 2020 February Deferral Agreement from the TSX as
required under applicable TSX rules.
The principal terms of the 2020 February
Deferral Agreement are as follows:
- Payment of the 2020 February
Deferral Amounts will be deferred until June 20, 2020, while the
Management Fee will be deferred until they are repaid by the
Company.
- As consideration for the deferral
of these amounts, the Company agreed to pay CIC: (i) a deferral fee
equal to 6.4% per annum on the 2020 February Deferral Amounts,
commencing on the date on which each such 2020 February Deferral
Amounts would otherwise have been due and payable under the 2019
Deferral Agreement; and (ii) a deferral fee equal to 2.5% per annum
on the Management Fee, commencing on the date on which the
Management Fee would otherwise have been due and payable under the
Amended and Restated Cooperation Agreement.
- The Company agreed to provide CIC
with monthly updates regarding its operational and financial
affairs.
- As the Company anticipated prior to
agreeing to the 2020 February Deferral Agreement that a deferral
was likely required in respect of the monthly payments due and
payable in the period between April 2020 and June 2020 under the
2019 Deferral Agreement and Amended and Restated Cooperation
Agreement, the Company and CIC have agreed to discuss in good faith
a deferral of these payments on a monthly basis as they become due.
There can be no assurance, however, that a favorable outcome will
be reached either at all or on favorable terms.
- The Company agreed to comply with
all of its obligations under the 2019 Deferral Agreement and the
Amended and Restated Cooperation Agreement, as amended by the 2020
February Deferral Agreement.
- The Company and CIC agreed that
nothing in the 2020 February Deferral Agreement prejudices CIC’s
rights to pursue any of its remedies at any time pursuant to the
2019 Deferral Agreement and Amended and Restated Cooperation
Agreement, respectively.
On March 10, 2020, the Company agreed with CIC
that the 2020 March Deferral Amount which was due and payable to
CIC on March 19, 2020 under the 2019 Deferral Agreement will be
deferred until June 20, 2020. The terms of the 2020 March Deferral
Agreement are substantially the same as the terms of the 2020
February Deferral Agreement, including that the Company agreed to
pay CIC a deferral fee equal to 6.4% per annum on the 2020 March
Deferral Amount, commencing on March 19, 2020. The 2020 March
Deferral Agreement became effective on March 25, 2020, being the
date on which the Company obtained the requisite acceptance of the
2020 March Deferral Agreement from the TSX as required under
applicable TSX rules.
On April 10, 2020, the Company agreed with CIC
that the 2020 April Deferral Amount which was due and payable to
CIC on April 19, 2020 under the 2019 Deferral Agreement will be
deferred until June 20, 2020. The terms of the 2020 April Deferral
Agreement are substantially the same as the terms of the 2020
February Deferral Agreement, including that the Company agreed to
pay CIC a deferral fee equal to 6.4% per annum on the 2020 April
Deferral Amount, commencing on April 19, 2020. The 2020 April
Deferral Agreement became effective on April 29, 2020, being the
date on which the Company obtained the requisite acceptance of the
2020 April Deferral Agreement from the TSX as required under
applicable TSX rules.
On May 8, 2020, the Company agreed with CIC that
the 2020 May Deferral Amount which was due and payable to CIC on
May 19, 2020 and May 15, 2020 under the 2019 Deferral Agreement and
the Amended and Restated Cooperation Agreement, respectively, will
be deferred until June 20, 2020. The terms of the 2020 May Deferral
Agreement are substantially the same as the terms of the 2020
February Deferral Agreement, including that the Company agreed to
pay CIC a deferral fee equal to 6.4% per annum on the deferred cash
interest and deferral fees commencing on May 19, 2020 and a
deferral fee equal to 2.5% per annum on the deferred Management Fee
commencing on May 15, 2020. The 2020 May Deferral Agreement became
effective on June 8, 2020, being the date on which the Company
obtained the requisite acceptance of the 2020 May Deferral
Agreement from the TSX as required under applicable TSX rules.
On June 19, 2020, the Company agreed with CIC
that the 2020 June Deferral Amount which was due and payable to CIC
on June 19, 2020 under the 2019 Deferral Agreement and the prior
deferral agreements entered into during the period between February
and 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. On October 29, 2020, the Company obtained an
order from the BCSC, the Company’s principal securities regulator
in Canada, which partially revoked the CTO to, amongst other
things, permit the Company to execute the 2020 November Deferral
Agreement. The 2020 November Deferral Agreement became effective on
January 21, 2021, being the date on which the 2020 November
Deferral Agreement was approved by shareholders at the Company’s
annual and special meeting of shareholders. As a consequence of the
Company not entering into a deferral agreement with CIC as at
December 31, 2020, IAS 1 requires the Company to classify the
entire balance of the CIC Convertible Debenture as a current
liability as at December 31, 2020.
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 Amounts 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 instalments commencing in November
2018. Provided that SGS complies with the terms of the Settlement
Deed, First Concept agreed to waive its costs in connection with
the Arbitration and Arbitration Award and interest for the period
from January 4, 2018 to October 31, 2018.
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.
On February 7, 2020, SGS was informed by its
Mongolian banks that they received a request from the Court
Decision Implementing Agency of Mongolia (the “CDIA”) to freeze the
respective bank accounts of SGS in Mongolia in relation to the
enforcement of the Arbitration Award. Approximately $0.8 million in
cash was frozen by the banks as at February 7, 2020 and such amount
was subsequently transferred to the CDIA on March 6, 2020.
On June 7, 2020, SGS entered into a settlement
agreement with First Concept, pursuant to which SGS agreed to pay
to First Concept the Full Settlement Sum of $8.0 million in full.
The Full Settlement Sum was fully satisfied by the Company in June
2020 and the outstanding payable to First Concept as of the date
hereof is $nil.
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, 2020. The impairment indicator was the fact that
the Company suffered loss for the year.
Therefore, the Company conducted an impairment
test whereby the carrying value of the Company’s Ovoot Tolgoi Mine
cash generating unit was compared to the recoverable amount (being
the “fair value less costs of disposal”) 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, washing production, operating costs and life of mine coal
production estimates as at December 31, 2020. The carrying value of
the Company’s Ovoot Tolgoi Mine cash generating unit was $129.4
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 16%
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
$12.1/(12.2) 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 $(14.0)/14.8
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
$(7.0)/6.9 million; and
- For each 1% increase/(decrease) in
Mongolian inflation rate, the calculated fair value of the cash
generating unit (decreases)/increases by approximately $(0.9)/0.8
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, 2020. A
decline of 15% in the long-term price estimates, an increase of
more than 20% in the post-tax discount rate, an increase of 25% in
the cash mining cost estimates or an increase of 264% 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, 2020 and December 31,
2019 is 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, 2020 and
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 Mining Licenses and
until the License Areas are removed from the SNT.
The Company will continue to liaise and work
with CRKh to have the License Areas excluded from the SNT, however,
the Company has not yet received any indication on the timing of
the next session of the CRKh.
Restoration 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.
On March 2, 2021, SGS received a notice from the
Mongolian governmental authority that the Soumber Mining Licenses
have been reinstated effective as of March 2, 2021.
Mongolian royalties
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.
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, 2020, RDCC LLC recognized toll fee revenue of $1.9
million (2019: $1.4 million) and $5.7 million (2019: $ 6.8
million), respectively.
PLEDGE OF ASSETS
As at December 31, 2020, certain items of the
Company’s property, plant and equipment of $0.1 million (December
31, 2019: $0.4 million) were pledged as security for a bank loan
granted to the Company.
PURCHASE, SALE OR REDEMPTION OF LISTED
SECURITIES OF THE COMPANY
The Company did not redeem its listed
securities, nor did the Company or any of its subsidiaries purchase
or sell such securities during the year ended December 31,
2020.
COMPLIANCE WITH CORPORATE
GOVERNANCE
The Company has, throughout the year ended
December 31, 2020, applied the principles and complied with the
requirements of its corporate governance practices as defined by
the Board and all applicable statutory, regulatory and stock
exchange listings standards, which include the code provisions set
out in the Corporate Governance Code (the “Corporate Governance
Code”) contained in Appendix 14 to the Rules Governing the Listing
of Securities on the Hong Kong Stock Exchange (the “Hong Kong
Listing Rules”), except for the following:
- pursuant to code provision A.2 of
the Corporate Governance Code, the Chairman of the Board should be
responsible for the overall management of the Board. The Company
has not had a Chairman since November 2017. The Board has appointed
an Independent Lead Director, who is fulfilling the duties of the
Chairman; and
- pursuant to code provision E.1.2 of
the Corporate Governance Code, the Chairman of the Board of
Directors should attend the annual general meeting (“AGM”). Mr. Mao
Sun, an INED and the Independent Lead Director, attended and acted
as Chairman of the Company’s annual general and special meeting
held on January 21, 2021 (the “2020 AGM”) to ensure effective
communication with shareholders of the Company
(“Shareholders”).
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
presence of the executive director. During 2020, two (2) meetings
between the Independent Lead Director, who is fulfilling the duties
of the Chairman, and the non-executive directors were held. 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,
2020.
OUTLOOK
The Company anticipates that 2021 will be a year
of both opportunities and difficulties for SouthGobi. The COVID-19
pandemic has caused unprecedented challenges around the world and
adversely impacted the global economy. In Mongolia, the Mongolian
State Emergency Commission closed Mongolia’s southern border with
China between February 11, 2020 and March 27, 2020 in order to
prevent the spread of COVID-19, which forced the Company to suspend
all coal transport into China during this period. In order to
mitigate the financial impact of the border closure 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 in February 2020. Even though the
Mongolia-China border has re-opened and the Company’s mining
operations resumed on August 2, 2020, the Company anticipates that
it will continue to be negatively impacted by the COVID-19 pandemic
for the foreseeable future, which will have an adverse effect on
the Company’s sales, production, logistics and financials. The
Company has adopted and will continue to implement strict COVID-19
precautionary measures at the mine site as well as in all of its
offices in order to maintain operations in the normal course, while
also complying with the advice or orders of local public health
authorities. In order to further enhance its operational
efficiencies, the Company has recently adopted a new flat
management structure and has undertaken various improvements to its
sales, logistics and production processes. The Company’s Management
is confident that these changes will allow the Company to operate
successfully during these difficult times and drive the Company
forward.
The Company remains cautiously optimistic
regarding the Chinese coal market, as coal is still considered to
be the primary energy source which China will continue to rely on
in the foreseeable future. Coal supply and coal import in China is
expected to be limited due to increasingly stringent requirements
relating to environmental protection and safety production, which
may result in volatile coal prices in China. The Company will
continue to monitor and react proactively to the dynamic
market.
In the medium term, the Company will continue to
adopt various strategies to enhance its product mix in order to
maximize revenue, expand its customer base and sales network,
improve logistics, optimize its operational cost structure and,
most importantly, operate in a safe and socially responsible
manner.
The Company’s objectives for the medium term are
as follows:
- Enhance product
mix – The Company will focus on improving the product mix
and increasing the production of higher quality coal by: (i)
improving mining operations; (ii) washing lower quality coal in the
Company’s coal wash plant and partnering with other nearby coal
wash plant(s); (iii) resuming the construction and operation of the
Company’s dry coal processing plant, and (iv) trading and blending
different types of coal to produce blended coal products that are
economical to the Company.
- Expand customer
base – The Company will endeavor to increase sales volume
and sales price by (i) expanding its sales network and diversifying
its customer base, (ii) increasing its coal logistics capacity to
resolve the bottleneck in the distribution channel, (iii) setting
and adjusting the sales price based on a more market-oriented
approach in order to maximize profit while maintaining sustainable
long-term business relationships with customers.
- Optimize cost
structure – The Company will aim to reduce its production
costs and optimize its cost structure through engaging third party
contract mining companies to enhance its operation efficiency,
strengthening procurement management, ongoing training and
productivity enhancement.
- Operate in a safe and
socially responsible manner – The Company will continue to
maintain the highest standards in health, safety and environmental
performance and operate in a corporate socially responsible manner,
and continue to strictly implement its COVID-19 precautionary
measures at the mine site and across all offices.
In the long term, the Company will continue to
focus on creating and maximizing 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 reserves
base – The Ovoot Tolgoi Deposit has mineral reserves of
more than 100 million tonnes. The Company also has several
development options in its Zag Suuj coal deposit and Soumber coal
deposit.
- 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, which are both state-owned-enterprises in China, and
its strong operational record for the past decade 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 endedDecember 31, |
|
|
|
|
|
2020 |
|
|
|
2019 |
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
85,951 |
|
|
$ |
129,712 |
|
|
Cost of sales |
|
|
(58,657 |
) |
|
|
(84,400 |
) |
|
Gross profit |
|
|
27,294 |
|
|
|
45,312 |
|
|
|
|
|
|
|
|
|
Other operating expenses |
|
(4,821 |
) |
|
|
(5,581 |
) |
|
Administration expenses |
|
(6,971 |
) |
|
|
(9,447 |
) |
|
Evaluation and exploration expenses |
|
(226 |
) |
|
|
(452 |
) |
|
Profit from operations |
|
15,276 |
|
|
|
29,832 |
|
|
|
|
|
|
|
|
|
Finance costs |
|
|
(31,692 |
) |
|
|
(28,010 |
) |
|
Finance income |
|
|
2,613 |
|
|
|
4,417 |
|
|
Share of earnings of a joint venture |
|
1,313 |
|
|
|
1,329 |
|
|
Profit/(loss) before tax |
|
(12,490 |
) |
- |
|
7,568 |
|
|
Current income tax expense |
|
(7,599 |
) |
|
|
(3,367 |
) |
|
Net profit/(loss) attributable to equity holders of the
Company |
|
|
|
(20,089 |
) |
|
|
4,201 |
|
|
|
|
|
|
|
|
|
Other comprehensive loss to be reclassified to profit
or loss in subsequent periods |
|
|
|
Exchange difference on translation of foreign operation |
|
|
|
(7,043 |
) |
|
|
(5,129 |
) |
|
Net comprehensive loss attributable to equity holders of
the Company |
|
$ |
(27,132 |
) |
|
$ |
(928 |
) |
|
|
|
|
|
|
|
|
Basic and diluted earnings/(loss) per share |
|
|
$ |
(0.07 |
) |
|
$ |
0.02 |
|
|
|
|
|
|
|
|
Consolidated Statement of Financial
Position(Expressed in thousands of USD)
|
(expressed in thousands of U.S. Dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, |
|
|
|
|
|
2020 |
|
|
|
2019 |
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
Cash and cash equivalents |
|
|
$ |
20,121 |
|
|
$ |
7,164 |
|
|
Restricted cash |
|
|
918 |
|
|
|
862 |
|
|
Trade and other receivables |
|
|
|
1,305 |
|
|
|
1,778 |
|
|
Inventories |
|
|
42,383 |
|
|
|
52,237 |
|
|
Prepaid expenses |
|
1,666 |
|
|
|
2,312 |
|
|
Total current assets |
|
66,393 |
|
|
|
64,353 |
|
|
|
|
|
|
|
|
|
Non-current assets |
|
|
|
|
Property, plant and equipment |
|
|
|
131,425 |
|
|
|
137,221 |
|
|
Inventories |
|
|
680 |
|
|
|
9,332 |
|
|
Investment in a joint venture |
|
|
|
16,134 |
|
|
|
17,521 |
|
|
Total non-current assets |
|
148,239 |
|
|
|
164,074 |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
214,632 |
|
|
$ |
228,427 |
|
|
|
|
|
|
|
|
|
Equity and liabilities |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
Trade and other payables |
$ |
78,730 |
|
|
$ |
87,013 |
|
|
Provision for commercial arbitration |
|
|
|
- |
|
|
|
5,593 |
|
|
Deferred revenue |
|
|
20,831 |
|
|
|
16,057 |
|
|
Interest-bearing borrowing |
|
2,826 |
|
|
|
2,835 |
|
|
Lease liabilities |
|
|
202 |
|
|
|
460 |
|
|
Current portion of convertible debenture |
|
|
|
181,411 |
|
|
|
67,106 |
|
|
Total current liabilities |
|
284,000 |
|
|
|
179,064 |
|
|
|
|
|
|
|
|
|
Non-current liabilities |
|
|
|
|
Lease liabilities |
|
|
424 |
|
|
|
108 |
|
|
Convertible debenture |
|
- |
|
|
|
89,868 |
|
|
Decommissioning liability |
|
6,445 |
|
|
|
8,605 |
|
|
Total non-current liabilities |
|
|
|
6,869 |
|
|
|
98,581 |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
290,869 |
|
|
|
277,645 |
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
Common shares |
|
|
1,098,634 |
|
|
|
1,098,634 |
|
|
Share option reserve |
|
52,702 |
|
|
|
52,589 |
|
|
Capital reserve |
|
|
396 |
|
|
|
396 |
|
|
Exchange reserve |
|
(30,271 |
) |
|
|
(23,228 |
) |
|
Accumulated deficit |
|
(1,197,698 |
) |
|
|
(1,177,609 |
) |
|
Total deficiency in assets |
|
|
|
(76,237 |
) |
|
|
(49,218 |
) |
|
|
|
|
|
|
|
|
Total equity and liabilities |
|
|
$ |
214,632 |
|
|
$ |
228,427 |
|
|
|
|
|
|
|
|
|
Net current liabilities |
$ |
(217,607 |
) |
. |
$ |
(114,711 |
) |
|
Total assets less current liabilities |
|
|
$ |
(69,368 |
) |
|
$ |
49,363 |
|
|
|
|
|
|
|
|
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, 2021 and will be able to realize its assets and
discharge its liabilities in the normal course of operations as
they come due. However, in order to continue as a going concern,
the Company must generate sufficient operating cash 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 incurred a loss attributable to equity
holders of the Company of $20,089 for the year ended December 31,
2020 (compared to a profit attributable to equity holders of the
Company for the year ended December 31, 2019), and as of that date,
had a deficiency in assets of $76,237 as at December 31, 2020
compared to a deficiency in assets of $49,218 as at December 31,
2019 while the working capital deficiency (excess current
liabilities over current assets) reached $217,607 as at December
31, 2020 compared to a working capital deficiency of $114,711 as at
December 31, 2019.
Included in the working capital deficiency as at
December 31, 2020 are significant obligations, which include the
interest amounting to $91,059 in relation to the convertible
debenture with CIC and trade and other payables of $78,730, which
includes the unpaid taxes of $36,107 that are repayable on demand
to MTA.
The Company failed to make payment of
convertible debenture interest to CIC in according to the terms of
convertible debenture agreement. This constituted an event of
default of the relevant convertible debenture agreements as at
December 31, 2020 and the 2020 November Deferral Agreement became
effective on January 21, 2021. As a result, the entire balance of
the CIC Convertible Debenture was classified as current liability
as at December 31, 2020.
The Company may not be able to settle all trade
and other payables on a timely basis, and as a result any
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 this press release, no such
lawsuits or proceedings were pending as at March 30, 2021.
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,
2020. The cash flow projection has taken into account the
anticipated cash flow to be generated from the Company’s business
during the period under projection including cost saving measures.
In particular, the Company has taken into account the following
measures for improvement of the Company’s liquidity and financial
position, which include: (i) entering into the 2020 November
Deferral Agreement with CIC for a deferral of the 2020 November
Deferral Amounts until August 31, 2023; (ii) agreeing to deferral
arrangements and improved payment terms with certain vendors; (iii)
reducing the outstanding tax payable by making monthly payments to
MTA beginning as of June 2020; and (iv) reducing the inventory of
low quality coal by wet washing and coal blending. After
considering the above, and given the re-opening of the
Mongolia-China 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, 2020 and therefore
are satisfied that it is appropriate to prepare the consolidated
financial statements on a going concern basis.
Factors that impact the Company’s liquidity are
being closely monitored and include, but are not limited to, impact
of 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, 2020 and December 31, 2019,
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, 2020 were approved and
authorized for issue by the Board of the Company on March 30,
2021.
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, 2020.
|
Amendments to IAS 1 and IAS 8 |
Definition of Material |
|
Amendments to IFRS 3 |
Definition of a Business |
|
Amendments to IFRS 9, IAS 39 and IFRS 7 |
Interest Rate Benchmark Reform |
|
Amendments to IFRS 3 |
Revised Conceptual Framework for Financial Reporting |
There have been no new IFRSs or IFRIC
interpretations that have a material impact on the Company’s
results and financial position for the year ended December 31,
2020. The Company has not early applied any new or amended IFRSs
that is not yet effective for the year ended December 31, 2020.
2. SEGMENT INFORMATION
The Company’s Chief Executive Officer (chief
operating decision maker) reviews the financial information in
order to make decisions about resources to be allocated to the
segment and to assess its performance. No operating segment
identified by the Board of Directors has been aggregated in
arriving at the reporting segments of the Company. For management’s
purpose, the Company has only one reportable operating segment,
which is the coal division. The division is principally engaged in
coal mining, development and exploration in Mongolia, and logistics
and trading of coal in Mongolia and China for the years ended
December 31, 2020 and 2019.
The Company’s resources are integrated and as a
result, no discrete operating segment financial information is
available. Since this is the only reportable and operating segment
of the Company, no further analysis thereof is presented. All the
revenue of the Company is generated from trading of coal for the
years ended December 31, 2020 and 2019.
During the years ended December 31, 2020 and
2019, the Coal Division had 14 and 13 active customers,
respectively. 4 customers with respective revenues contributed over
10% of the total revenue during the year ended December 31, 2020
and 2019, with the largest customer accounting for 26% of revenues
(2019: 42%), the second largest customer accounting for 18% of
revenues (2019: 36%), the third largest customer accounting for 15%
of revenues (2019: 9%) and the fourth largest customer accounting
for 12% of revenues (2019: 6%).
3. REVENUE
Revenue represents the value of goods sold which
arises from the trading of coal. The Company recognizes all revenue
from the trading of coal at a point in time when the customer
obtains control of the goods or services.
4. EXPENSES BY NATURE
The Company’s profit/(loss) before tax is
arrived at after charging/(crediting):
|
|
|
|
|
Year endedDecember 31, |
|
|
|
|
|
|
2020 |
|
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
$ |
8,736 |
|
|
$ |
15,726 |
|
|
Auditors' remuneration |
|
|
637 |
|
|
|
764 |
|
|
|
|
|
|
|
|
|
|
Employee benefit expense (including directors' remuneration) |
|
Wages and salaries |
|
$ |
7,639 |
|
|
$ |
9,790 |
|
|
Equity-settled share option expense |
|
|
|
|
113 |
|
|
|
47 |
|
|
Pension scheme contributions |
|
|
|
|
531 |
|
|
|
1,302 |
|
|
|
|
|
|
$ |
8,283 |
|
|
$ |
11,139 |
|
|
|
|
|
|
|
|
|
|
Lease payments under operating leases |
|
|
|
$ |
101 |
|
|
$ |
128 |
|
|
Foreign exchange gain, net |
|
(1,586 |
) |
|
|
(706 |
) |
|
Reversal of impairment of coal stockpile inventories |
|
|
|
|
- |
|
|
|
(1,823 |
) |
|
Royalties |
|
|
|
10,563 |
|
|
|
11,639 |
|
|
CIC management fee |
|
|
2,170 |
|
|
|
3,185 |
|
|
Other taxes on foreign payments |
|
- |
|
|
|
1,881 |
|
|
Provision of commercial arbitration |
|
4,634 |
|
|
|
485 |
|
|
Provision/(reversal of provision) for doubtful trade and other
receivables |
|
|
|
|
(336 |
) |
|
|
501 |
|
|
Impairment of prepaid expenses |
|
8 |
|
|
|
253 |
|
|
Loss on disposal of properties for resale |
|
|
|
|
- |
|
|
|
36 |
|
|
Gain on disposal of property, plant and equipment, net |
|
|
|
|
(69 |
) |
|
|
(29 |
) |
|
Mine operating costs and others |
|
37,534 |
|
|
|
56,701 |
|
|
Total operating expenses |
$ |
70,675 |
|
|
$ |
99,880 |
|
|
|
|
|
|
|
|
|
5. COST OF SALES
The Company’s cost of sales consists of the
following amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year endedDecember 31, |
|
|
|
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
$ |
36,974 |
|
$ |
59,549 |
|
|
Share-based compensation expense |
|
|
|
|
24 |
|
|
9 |
|
|
Depreciation and depletion |
|
6,243 |
|
|
11,028 |
|
|
Royalties |
|
|
|
10,563 |
|
|
11,639 |
|
|
Reversal of impairment of coal stockpile inventories |
|
|
|
|
- |
|
|
(1,823 |
) |
|
Cost of sales from mine operations |
|
53,804 |
|
|
80,402 |
|
|
Cost of sales related to idled mine assets (i) |
|
|
|
|
4,853 |
|
|
3,998 |
|
|
Cost of sales |
|
|
$ |
58,657 |
|
$ |
84,400 |
|
|
(i) |
Cost of sales related to idled mine assets for the year ended
December 31, 2020 includes $4,853 of depreciation expense (2019:
includes $3,998 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, 2020 totaled $38,499
(2019: $67,892).
6. OTHER OPERATING EXPENSES
The Company’s other operating expenses consist
of the following amounts:
|
|
|
|
|
Year endedDecember 31, |
|
|
|
|
|
|
2020 |
|
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
CIC management fee |
|
$ |
2,170 |
|
|
$ |
3,185 |
|
|
Other taxes on foreign payments |
|
- |
|
|
|
1,881 |
|
|
Provision/(reversal of provision) for doubtful trade and other
receivables |
|
|
|
|
(336 |
) |
|
|
501 |
|
|
Provision of commercial arbitration |
|
4,634 |
|
|
|
485 |
|
|
Impairment of prepaid expenses |
|
8 |
|
|
|
253 |
|
|
Loss on disposal of properties for resale |
|
|
|
|
- |
|
|
|
36 |
|
|
Foreign exchange gain, net |
|
(1,586 |
) |
|
|
(706 |
) |
|
Gain on disposal of property, plant and equipment, net |
|
|
|
|
(69 |
) |
|
|
(29 |
) |
|
Others |
|
|
|
|
- |
|
|
|
(25 |
) |
|
Other operating expenses |
$ |
4,821 |
|
|
$ |
5,581 |
|
|
|
|
|
|
|
|
|
7. FINANCE COSTS AND INCOME
The Company’s finance costs consist of the
following amounts:
|
|
|
|
|
Year endedDecember 31, |
|
|
|
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
|
Interest expense on convertible debenture |
|
|
|
$ |
27,726 |
|
$ |
23,751 |
|
Interest expense on borrowing |
|
413 |
|
|
742 |
|
Value added tax on interest from intercompany loan |
|
|
|
|
2,900 |
|
|
2,986 |
|
Interest elements on leased assets |
|
69 |
|
|
129 |
|
Accretion of decommissioning liability |
|
|
|
|
584 |
|
|
402 |
|
Finance costs |
|
|
$ |
31,692 |
|
$ |
28,010 |
|
|
|
|
|
|
|
|
The Company’s finance income consists of the
following amounts:
|
|
|
|
|
Year endedDecember 31, |
|
|
|
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
|
Unrealized gain on embedded derivatives in convertible
debenture |
|
|
|
$ |
44 |
|
$ |
69 |
|
Interest income |
|
|
|
24 |
|
|
55 |
|
Modification of convertible debenture |
|
|
|
|
2,545 |
|
|
4,293 |
|
Finance income |
|
|
$ |
2,613 |
|
$ |
4,417 |
|
|
|
|
|
|
|
|
8. TAXES
8.1
Income tax recognized in profit or
loss
The Canadian statutory tax rate was 27% (2019:
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 endedDecember 31, |
|
|
|
|
|
|
2020 |
|
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
Profit/(loss) before tax |
|
$ |
(12,490 |
) |
|
|
$ |
7,568 |
|
|
|
|
|
|
|
|
|
|
Statutory tax rate |
|
|
|
27 |
% |
|
|
27 |
% |
|
Income tax expense/(recovery) based on combined Canadian federal
and provincial statutory rates |
|
|
|
|
(3,372 |
) |
|
|
2,044 |
|
|
Lower effective tax rate in foreign jurisdictions |
|
|
|
|
377 |
|
|
|
186 |
|
|
Over-provision in prior year |
|
|
- |
|
|
|
(258 |
) |
|
Tax effect of tax losses and temporary differences not
recognized |
|
|
|
|
10,352 |
|
|
|
4,271 |
|
|
Withholding tax on intercompany interest |
|
|
|
|
2,881 |
|
|
|
2,881 |
|
|
Profit or loss attributable to a joint venture |
|
|
|
|
328 |
|
|
|
332 |
|
|
Income not subject to tax |
|
|
(6,281 |
) |
|
|
(6,213 |
) |
|
Non-deductible expenses |
|
|
3,314 |
|
|
|
124 |
|
|
Income tax expenses |
|
$ |
7,599 |
|
|
$ |
3,367 |
|
|
|
|
|
|
|
|
|
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, |
|
|
|
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
|
Non-capital losses |
|
$ |
169,173 |
|
$ |
163,632 |
|
Capital losses |
|
|
|
30,049 |
|
|
30,049 |
|
Foreign exchange and others |
|
463,778 |
|
|
487,102 |
|
Total unrecognized amounts |
$ |
663,000 |
|
$ |
680,783 |
|
|
|
|
|
|
|
|
8.3
Expiry dates
The expiry dates of the Company’s unused tax
losses are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2020 |
|
|
U.S. Dollars |
|
Expiry |
|
|
Equivalent |
|
dates |
|
Non-capital losses |
|
|
|
|
Canada |
$ |
165,184 |
|
2038 - 2040 |
|
China |
|
3,989 |
|
2025 |
|
|
$ |
169,173 |
|
|
|
Capital losses |
|
|
|
|
Canada |
$ |
30,049 |
|
indefinite |
|
|
|
|
|
| |
|
|
|
|
|
As at December 31, 2019 |
|
|
U.S. Dollars |
|
Expiry |
|
|
Equivalent |
|
dates |
|
Non-capital losses |
|
|
|
|
Canada |
$ |
159,892 |
|
2037 - 2039 |
|
China |
|
3,740 |
|
2024 |
|
|
$ |
163,632 |
|
|
|
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 endedDecember 31, |
|
|
|
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
|
Net profit/(loss) |
|
|
$ |
(20,089 |
) |
$ |
4,201 |
|
Weighted average number of shares |
|
|
|
|
272,703 |
|
|
272,703 |
|
Basic and diluted earnings/(loss) per share |
|
|
|
$ |
0.07 |
|
$ |
0.02 |
|
|
|
|
|
|
|
|
Potentially dilutive items not included in the
calculation of diluted earnings per share for the year ended
December 31, 2020 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, |
|
|
|
|
|
|
2020 |
|
|
2019 |
| |
|
|
|
|
|
|
|
Trade receivables |
|
|
$ |
995 |
|
$ |
1,081 |
|
Other receivables |
|
|
|
310 |
|
|
697 |
|
Total trade and other receivables |
$ |
1,305 |
|
$ |
1,778 |
| |
|
|
|
|
|
|
The aging of the Company’s trade and other
receivables, based on invoice date and net of provisions, is as
follows:
|
|
|
|
|
As at December 31, |
|
|
|
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
|
Less than 1 month |
|
$ |
1,260 |
|
$ |
1,623 |
|
1 to 3 months |
|
|
|
20 |
|
|
23 |
|
3 to 6 months |
|
|
|
25 |
|
|
132 |
|
Over 6 months |
|
|
|
- |
|
|
- |
|
Total trade and other receivables |
$ |
1,305 |
|
$ |
1,778 |
|
|
|
|
|
|
|
|
Overdue balances are reviewed regularly by
senior management. The Company does not hold any collateral or
other credit enhancements over its trade and other receivable
balances.
The Company has determined that the loss
allowance on its trade and other receivables was $23,055 (December
31, 2019: $21,976) as at December 31, 2020, based upon an expected
loss rate of 10% for trade and other receivables 90 days past due
and 100% for trade and other receivables 180 days past due. The
closing allowances for trade and other receivables as at December
31, 2020 reconcile to the opening loss allowances as follows:
|
Loss allowance for trade and other
receivables |
|
Opening loss allowance as at January 1, 2020 |
|
|
|
$ |
21,976 |
|
|
Decrease in loss allowance recognised in profit or loss during the
year |
|
|
|
|
(336 |
) |
|
Exchange realignment |
|
|
1,415 |
|
|
Loss allowance as at December 31, 2020 |
|
|
|
$ |
23,055 |
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
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, is as follows:
|
|
|
|
|
As at December 31, |
|
|
|
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
|
Less than 1 month |
|
$ |
27,168 |
|
$ |
29,750 |
|
1 to 3 months |
|
|
|
4,935 |
|
|
13,165 |
|
3 to 6 months |
|
|
|
6,365 |
|
|
12,218 |
|
Over 6 months |
|
|
|
40,262 |
|
|
31,880 |
|
Total trade and other payables |
$ |
78,730 |
|
$ |
87,013 |
|
|
|
|
|
|
|
|
The trade and other payables of $78,730 (2019:
$87,013) included the income tax payable $4,365 (2019: $400) and
other tax payables of $31,742 (2019: $31,443).
12. DEFERRED REVENUE
At December 31, 2020, the Company had deferred
revenue of $20,831, which represents cash prepayments from
customers for future coal sales (December 31, 2019: $16,057).
The movement of the Company’s deferred revenue
is as follows:
|
|
|
|
Year endedDecember 31, |
|
|
|
|
|
2020 |
|
|
|
2019 |
|
|
Balance, beginning of year |
$ |
16,057 |
|
|
$ |
12,658 |
|
|
Revenue recognized that was included in the deferred revenue
balance at beginning of the year |
|
|
|
(15,486 |
) |
|
|
(12,385 |
) |
|
Increase due to trade deposits received, excluding amounts
recognized as revenue during the year |
|
|
|
20,913 |
|
|
|
16,155 |
|
|
Exchange realignment |
|
(653 |
) |
|
|
(371 |
) |
|
Balance, end of year |
$ |
20,831 |
|
|
$ |
16,057 |
|
|
|
|
|
|
|
|
|
|
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 date. 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
BORROWING
The Company’s interest-bearing borrowing
consists of the following amounts:
|
|
|
As at December 31, |
|
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
Bank loan (i) |
$ |
2,826 |
|
$ |
2,835 |
|
Total interest-bearing borrowing |
|
$ |
2,826 |
|
$ |
2,835 |
|
|
|
|
|
|
|
|
(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, 2020, the net book value of the pledged items of
property, plant and equipment was $44 (December 31, 2019:
$439).
As at December 31, 2020, the outstanding
principal balance for the 2018 Bank Loan was $2,800 (December 31,
2019: $2,800) and the Company owed accrued interest of $26
(December 31, 2019: $35).
In February 2021, $2,826 was repaid to the Bank
by the Company in full settlement of the outstanding principal
balance of the 2018 Bank Loan and the accrued interest thereon.
14. LEASE LIABILITIES
The Company leases certain of its office
premises for daily operations. These leases have remaining lease
terms ranging from 1 to 5 years.
At December 31, 2020, the total future minimum
lease payments and their present values were as follows:
|
|
|
|
|
|
|
|
Present value of minimu lease payments |
|
|
|
|
Minimum lease payments |
|
|
|
|
|
As at December 31, |
|
As at December 31, |
|
|
|
|
|
2020 |
|
|
|
2019 |
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
Amounts payable: |
|
|
|
|
|
|
|
|
Within one year |
|
$ |
272 |
|
|
$ |
509 |
|
|
$ |
202 |
|
$ |
460 |
|
In the second year |
|
|
|
174 |
|
|
|
101 |
|
|
|
112 |
|
|
108 |
|
In the third to fifth year, inclusive |
|
|
|
418 |
|
|
|
- |
|
|
|
312 |
|
|
- |
|
Total minimum finance lease payments |
|
|
$ |
864 |
|
|
$ |
610 |
|
|
$ |
626 |
|
$ |
568 |
|
Future finance charges |
|
(238 |
) |
|
|
(42 |
) |
|
|
|
|
|
Total net lease finance payables |
|
|
$ |
626 |
|
|
$ |
568 |
|
|
|
|
|
|
Portion classified as current liabilities |
|
|
|
(202 |
) |
|
|
(460 |
) |
|
|
|
|
|
Non-current portion |
$ |
424 |
|
|
$ |
108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2020, the fair value of the embedded derivatives decreased by
$44 compared to December 31, 2019. The decrease was recorded as
finance income for the year ended December 31, 2020.
For the year ended December 31, 2020, the
Company recorded interest expense of $27,726 related to the
convertible debenture as a finance cost (2019: $23,751). 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%.
A modification gain of $2,545 was recognised in
profit or loss for the year ended December 31, 2020 (2019: $4,293)
for the difference between the original contractual cash flows and
the modified cash flows under six (2019: four) Deferral Agreements
discounted at the original effective interest rate.
The movements of the amounts due under the
convertible debenture are as follows:
|
|
|
|
|
Year endedDecember 31, |
|
|
|
|
|
|
2020 |
|
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
156,974 |
|
|
$ |
139,901 |
|
|
Interest expense on convertible debenture |
|
|
|
|
27,726 |
|
|
|
23,751 |
|
|
Decrease in fair value of embedded derivatives |
|
|
|
|
(44 |
) |
|
|
(69 |
) |
|
Modification of convertible debenture |
|
|
|
|
(2,545 |
) |
|
|
(4,293 |
) |
|
Interest paid |
|
|
|
(700 |
) |
|
|
(2,316 |
) |
|
Balance, end of year |
|
$ |
181,411 |
|
|
$ |
156,974 |
|
|
|
|
|
|
|
|
|
|
|
The convertible debenture balance consists of
the following amounts:
|
|
|
|
|
As at December 31, |
|
|
|
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
|
Current portion |
|
|
|
|
|
|
Interest payable |
|
|
$ |
91,059 |
|
$ |
67,106 |
|
Debt host |
|
|
|
90,200 |
|
|
- |
|
Fair value of embedded derivatives |
|
|
|
|
152 |
|
|
- |
|
|
|
|
|
|
181,411 |
|
|
67,106 |
|
|
|
|
|
|
|
|
|
Non-current portion |
|
|
|
|
|
Debt host |
|
|
|
- |
|
|
89,672 |
|
Fair value of embedded derivatives |
|
|
|
|
- |
|
|
196 |
|
|
|
|
|
|
- |
|
|
89,868 |
|
Total |
|
|
|
$ |
181,411 |
|
$ |
156,974 |
|
|
|
|
|
|
|
|
16. ACCUMULATED DEFICIT AND
DIVIDENDS
At December 31, 2020, the Company has
accumulated a deficit of $1,197,698 (2019: $1,177,609). No dividend
has been paid or declared by the Company since inception.
The Board did not recommend the payment of any
dividend for the year ended December 31, 2020 (2019: 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 years
ended December 31, 2020 and 2019.
“Opinion
In our opinion, the accompanying consolidated
financial statements present fairly, in all material respects, the
consolidated financial position of the Group as at December 31,
2020 and 2019, and its consolidated financial performance and its
consolidated cash flows for the years then ended in accordance with
International Financial Reporting Standards issued by International
Accounting Standard Board.
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 Group 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 Group’s incurred a
loss attributable to equity holders of the Company of $20.1 million
for the year ended December 31, 2020, and as of that date, had a
deficiency in assets of $76.2 million while the working capital
deficiency reached $217.6 million. These conditions, 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 Group'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, 2020 were reviewed by the Audit Committee of the
Company and approved and authorized for issue by the Board on March
30, 2021.
The figures in respect of the Company’s
consolidated statements of financial position, consolidated
statements of comprehensive income and the related notes thereto
for the year ended December 31, 2020, 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, 2020 are contained in the audited consolidated
financial statements and MD&A, which will be available on March
30, 2021 on the SEDAR website at www.sedar.com and the Company’s
website at www.southgobi.com. Copies of the Company’s 2020 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 2020 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 project, the Ovoot
Tolgoi Mine, 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 |
Disclosure of a scientific or technical nature
relating to the Ovoot Tolgoi Mine is derived from a technical
report (“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.
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 November Deferral Agreement,
and the Amended and Restated Cooperation Agreement, as the same
become due;
- the Company's anticipated financing
needs, development plans and future production levels;
- 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
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 the potential closure of Mongolia’s southern border with China
on the Company’s business, financial condition and operations;
- the future demand for coal in
China;
- future trends in the Chinese coal
industry;
- the Company’s outlook and
objectives for 2021 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 2021 and beyond; currency exchange rates; operating,
labour and fuel costs; 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 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 closure; the
negative impact of the COVID-19 pandemic on the demand for coal and
the economy generally in China; the risk that the COVID-19 pandemic
is not effectively controlled in China and Mongolia; the risk that
the Company’s existing coal inventories are unable to sufficiently
satisfy expected sales demand; the possible impact of changes to
the inputs to the valuation model used to value the embedded
derivatives in the CIC Convertible Debenture; the risk of the
Company failing to successfully negotiate favorable repayment terms
on the TRQ Reimbursable Amount (as described under section
Liquidity and Capital Management of this press release under the
heading entitled “Costs Reimbursable to Turquoise Hill”); the risk
of the Company or its subsidiaries defaulting under its existing
debt obligations, including the CIC Convertible Debenture, 2020
November Deferral Agreement, and the Amended and Restated
Cooperation Agreement; 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 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; 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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