SouthGobi Resources Ltd. (TSX:SGQ)(HK:1878), ("SouthGobi" or the "Company") is
pleased to announce its unaudited financial results for the fourth quarter and
year ended December 31, 2010. All figures are in U.S. dollars unless otherwise
stated.
HIGHLIGHTS FOR 2010 AND SIGNIFICANT ITEMS
-- Coal sales of 2.5 million tonnes, representing a 92% increase in sales
volume compared to 2009.
-- Revenue of $79.8 million, 121% higher than 2009.
-- Second and third mining fleets successfully commissioned, with the
second fleet fully commissioned in June 2010 and the third fleet fully
commissioned in October 2010.
-- Global equity offering on January 29, 2010 raised gross proceeds of $437
million. Simultaneously with the global equity offering, the Company's
shares began trading on the Hong Kong Stock Exchange under the ticker
HK: 1878.
-- On March 29, 2010, $250 million of China Investment Corporation ("CIC")
convertible debenture was converted into common shares. CIC currently
holds 13.6% of the Company's common shares outstanding.
-- In June 2010, construction of a coal-handling facility commenced, which
will include a 300-tonne-capacity dump hopper, a coal rotary breaker and
dry air separation modules.
-- On December 23, 2010, $20.3 million was invested for a 19.9% stake in
Aspire Mining Limited ("Aspire"), a mineral exploration Company with
exciting coking coal resource development prospects in Mongolia. The
Aspire investment was worth $75.2 million as at March 7, 2011.
REVIEW OF QUARTERLY FINANCIAL RESULTS
The Company recorded a net loss for the three months ended December 31, 2010 of
$28.7 million compared to a net loss of $69.2 million for the three months ended
December 31, 2009. The change is due to the factors discussed below.
Revenues increased significantly to $41.6 million in the fourth quarter of 2010
from $10.0 million in the fourth quarter of 2009. The Company sold 1.5 million
tonnes at an average realized price of $32 per tonne in the fourth quarter of
2010 compared to sales of 0.36 million tonnes at an average realized price of
$29 per tonne in the fourth quarter of 2009.
The cost of sales was $38.2 million in the fourth quarter of 2010 compared to
$8.4 million in the fourth quarter of 2009. Cost of sales will vary depending on
sales volume, production and unit costs, which directly affects income from mine
operations. Cost of sales is comprised of three main components, direct cash
costs of products sold, mine administration costs and non-cash items. Non-cash
items include depreciation, depletion of stripping costs, impairments and
share-based compensation. The increase in cost of sales in the fourth quarter of
2010 compared to the fourth quarter of 2009 relates primarily to the increased
sales volume.
Direct cash cost per tonne sold was $18.53 per tonne for the fourth quarter of
2010 compared to $16.97 per tonne for the fourth quarter of 2009. Direct cash
cost per tonne sold increased in the fourth quarter of 2010 compared to the
fourth quarter of 2009 due to the sale of higher cost inventory from previous
quarters.
Administration costs in the fourth quarter of 2010 were slightly higher than the
fourth quarter of 2009. The increase in the fourth quarter of 2010 compared to
the fourth quarter of 2009 is due to increased office costs, salary costs and
government relations costs partially offset by lower professional and legal
costs.
Exploration expenses for the three months ended December 31, 2010 were $4.1
million compared to $0.7 million for the three months ended December 31, 2009.
The increase relates to Greenfields exploration, ongoing water exploration and
reverse circulation and core drilling.
Finance costs and income for the three months ended December 31, 2010, includes
a loss of $20.0 million on the fair value change of the embedded derivative and
a mark to market gain of $4.4 million mainly related to the Company's investment
in Kangaroo Resources Ltd. This compares to a $45.0 million loss on the fair
value change of the embedded derivative in the fourth quarter of 2009.
Income tax recovery for the three months ended December 31, 2010, was $0.08
million compared to $1.5 million for the three months ended December 31, 2009.
REVIEW OF ANNUAL FINANCIAL RESULTS
In 2010, 2.79 million tonnes of raw coal was produced with a strip ratio 3.47
compared to 0.67 million tonnes of raw coal produced in 2009 with a strip ratio
of 3.36. Although production was lower in the first half of 2010 due to the
realigning of the Sunset Pit, production increased significantly in the fourth
quarter of 2010 due to the commissioning of the third fleet, which increased the
capacity of the mining operation. In the second quarter of 2010, the Company
also began stripping the Sunrise pit. The costs associated with 1.18 million
bank cubic meters ("BCM") removed from the Sunrise pit were capitalized as
deferred stripping.
The Company's net loss for the year ended December 31, 2010 was $116.2 million
or $0.66 per share compared with $110.8 million or $0.83 per share in 2009.
The Company incurred an operating loss from continuing operations for the year
ended December 31, 2010 of $47.0 million compared to $23.3 million for the year
ended December 31, 2009. The increase in the operating loss is due to the
factors discussed below.
In 2010, the Company had sales of 2.54 million tonnes at an average realized
price of approximately $35 per tonne. This compares to 1.33 million tonnes sold
in 2009 at an average realized selling price of $29 per tonne. Revenue increased
from $36.0 million in 2009 to $79.8 million in 2010 due to the higher sales
volume and a higher realized average price. Individual contract pricing has
increased through 2010.
Cost of sales was $77.5 million in the year ended December 31, 2010, compared to
$29.4 million for the year ended December 31, 2009. The increase in cost of
sales is due to the increased sales volume, increased cash costs as well as the
impairment of the raw higher-ash coal stockpiles and the Liebherr 994 shovel and
related supplies recorded in the third quarter of 2010. The total impairment
recorded in cost of sales for the year ended December 31, 2010 was $7.6 million.
Administration expenses for the year ended December 31, 2010 were $30.5 million
compared to $24.5 million for the year ended December 31, 2009. Share-based
compensation expense allocated to administration expenses was $10.8 million for
the year ended December 31, 2010 and $10.5 million for the year ended December
31, 2009. The primary reason for the increase in administration expenses in 2010
is due to public infrastructure costs of $6.0 million incurred in 2010, which
were $nil in previous years. The public infrastructure costs in 2010 relate to
maintenance and upgrading of public transportation infrastructure used to
transport coal from the Ovoot Tolgoi Mine to the Chinese border and these costs
are included in administration costs.
Exploration expenses for the year ended December 31, 2010, were $13.4 million
higher than for the year ended December 31, 2009. Increased exploration expense
in 2010 relates to a more active exploration program in 2010, including
substantially increased drilling.
Finance costs, net of finance income, for the year ended December 31, 2010 were
$71.9 million compared to $62.8 million for the year ended December 31, 2009.
The increase in 2010 in finance costs is due to a $151.4 million non-cash loss
on partial conversion of the CIC convertible debenture, increased interest costs
and offset by a gain on the fair value of the embedded derivatives and increased
interest income.
INVESTMENT IN ASPIRE
On December 23, 2010, the Company announced that it had completed the private
placement with Aspire Mining Limited ("Aspire") announced on October 26, 2010.
Pursuant to the private placement, the Company has acquired 105,860,186 common
shares of Aspire at a price of Australian ("A$") $0.19 per share for an
aggregate purchase price of approximately $20.3 million (A$20.1 million). After
giving effect to the transaction, SouthGobi holds approximately 19.9% of Aspire.
SouthGobi has the right to nominate one director to the Board of Aspire and the
right to maintain its proportionate shareholding in Aspire for a period of two
years.
Aspire is a coal resource company which owns 100% of the Ovoot Coking Coal
Project in Mongolia along with the Nuramt, Jilchilibag and Shanagan Coal
Projects. In addition, Aspire owns a 49% interest in the Windy Knob gold and
base metals project located in Western Australia. In a press release dated
October 14, 2010, Aspire announced a maiden JORC compliant coal resource with an
estimated 93.3 million tonnes of measured coal resources, 182.4 million tonnes
of indicated coal resources plus an additional 55.0 million tonnes of inferred
coal resources for the Ovoot Coking Coal Project. In a press release dated
January 14, 2011, Aspire announced that it had received early results from some
raw coal quality tests. The raw coal tests results show a coal type of Raw
Coking Coal Quality (in situ) with: Inherent Moisture - 0.6%, Ash - 19.5%,
Volatiles - 27.1%, Sulphur - 1.1%, Crucible Swelling Index - 7.7 and Energy -
6,618 kcal/kg. Data results are on an air dried basis for raw coal samples.
Based on early results, it is expected that the Ovoot Coking Coal Project washed
product will be a high fluidity, mid-volatile coking coal.
For the year ended December 31, 2010, the Company recorded a gain of $27.8
million, net of tax, on its investment in Aspire. The gain has been recorded in
other comprehensive income.
LIQUIDITY AND FINANCIAL RESOURCES
The Company's total assets at the end of 2010 were $961.9 million compared to
$560.7 million in 2009 and $99.9 million at the end of 2008. The increase in
total assets relates to the global equity offering in January 2010 and the
continuing development of the Mongolia Coal Division.
At December 31, 2010, the Company had $492.0 in cash and cash equivalents, $17.5
million in short term money market investments and $45.2 million in long term
money market investments (i.e. total liquidity of $554.7 million) compared to
$357.3 million in cash and cash equivalents, $15.0 million in short term money
market investments and $47.2 million in long term money market investments at
December 31, 2009 (i.e. total liquidity of $419.5 million).
The Company's long term liabilities at the end of 2010 were $252.5 million
compared to $543.1 million at the end of 2009 and $0.3 million at the end of
2008. The decrease in long term liabilities in 2010 is due to the partial
conversion of $250.0 million of the CIC convertible debenture into common shares
of the Company.
COMPLIANCE WITH THE CODE ON CORPORATE GOVERNANCE PRACTICES
The Company has complied with provisions on the Code on Corporate Governance
Practices, as set out in Appendix 14 of the rules governing the listing of the
securities on the Hong Kong Stock Exchange (the "Listing Rules") throughout the
year ended December 31, 2010.
COMPLIANCE WITH THE MODEL CODE FOR SECURITIES TRANSACTIONS BY DIRECTORS OF
LISTED COMPANIES
The Company has adopted policies in its Corporate Disclosure, Confidentiality
and Securities policy that has terms that are no less exacting than those set
out in Appendix 10 of the rules governing the listing of securities on the Hong
Kong Stock Exchange.
The Board confirms that all of the Directors have complied with the required
standard set out in the Model Code throughout the year ended December 31, 2010.
PURCHASE, SALE AND REDEMPTION OF THE COMPANY'S LISTED SECURITIES
On June 8, 2010, the Company announced that its Board of Directors authorized a
share repurchase program to purchase up to 2.5 million common shares of the
Company on each or either of the Toronto Stock Exchange and the Hong Kong Stock
Exchange, in aggregate representing up to 5 million common shares of the
Company. As of March 21, 2011, the Company had repurchased 250,750 shares on the
Hong Kong Stock Exchange and 1,255,550 shares on the Toronto Stock Exchange for
a total of 1,506,300 common shares at a total cost of approximately $19.0
million. The Company cancels all shares after they are repurchased.
OUTLOOK
It is difficult to reliably forecast commodity prices and customer demand for
the Company's products; however, the Company's sales and marketing efforts
continue to provide positive results. Mongolia set a new record for coal
shipments to China in 2010 and has become a significant supplier of China's
coking coal needs.
SouthGobi's marketing efforts have been successful in terms of diversifying the
number and nature of the Company's customers. Historically, the Company has only
sold to customers on a 'mine gate' basis, whereby customers collect their coal
at the mine and are responsible for all logistics. In the past, this posed a
restriction for some potential customers that preferred not to deal with
logistics and regulatory formalities on the Mongolian side of the border and
SouthGobi was generally reliant on two to three major customers at any one time.
However, in the first quarter of 2011, the Company opened its second sales
channel, being direct delivery to customers in China. Working with a logistics
provider, SouthGobi sells directly to certain customers with the point of
delivery being the Chinese side of the Shivee Khuren-Ceke border. The
availability of the second channel and additional interest in the Mongolia to
China coal trade generally is enabling the Company to proliferate its customer
base to include end-users and international traders. SouthGobi believes this
proliferation combined with transport synergies on the Chinese side of the
border can result in improved value for its individual coal products in the
future.
For the first quarter of 2011, SouthGobi has the potential to set a new
quarterly record realized average sales price for its coal. Prices of individual
coal products have been increased between 15% and 25% on average on a mine-gate
equivalent basis (i.e., for direct sales in China considering revenue less
outbound transport costs and fees). The Company anticipates that with the
changed individual product pricing compared with a sales mix more weighted
towards the semi-soft coking coal for the first quarter of 2011, total average
realized selling price per tonne should increase more than 50% over the level
for the fourth quarter of 2010.
Sales volumes for the first quarter of 2011 are likely to be substantially lower
than for the fourth quarter of 2010 for the reasons that: (a) the fourth quarter
of 2010 included a large amount of stock-piled coal, adding to volumes; and (b)
the first quarter of each year generally has less shipping days due to the
Chinese lunar new year holidays and the Mongolian Tsagaan Tsar festival, which
closed the border for some time. However, SouthGobi anticipates coal sales for
the first quarter of 2011 to exceed the 426,000 tonnes sold in the first quarter
of 2010, which if achieved would represent record volumes for the Company in a
first quarter of any given year.
The Company continues to focus its efforts on mining, development and
exploration of coking and raw coal products in Mongolia for supply of quality
products to customers in China. As the Company looks forward through 2011, the
Company is encouraged by the overall long term demand for our products. There
are many positive developments in Mongolia, which provide further support that
the mining sector will develop its resource base for long term growth. The
Company is making progress with its sales and marketing efforts, continuing to
focus on efficiency and prudent financial management and intends to manage
production levels to meet anticipated demand for the Company's products.
NON-IFRS FINANCIAL MEASURES
The Company has included, throughout this press release, certain non-IFRS
financial measures, such as "cash costs", which are not standardized measures
recognized under IFRS and do not have a standardized meaning prescribed by IFRS.
These measures are commonly utilized in the mining industry and are considered
informative for management, shareholders and analysts. These measures may differ
from those made by other corporations and accordingly may not be comparable to
such measures as reported by other mining companies.
Cash costs is the term used by the Company to describe the cash production costs
and consists of cost of product, which includes direct and indirect costs of
production. Non-cash adjustments include share-based compensation costs,
depreciation, depletion and impairments. The figures disclosed below are for
cash cost of product sold and may differ from cash cost of product produced
depending on stockpile inventory turnover.
REVIEW OF RESULTS AND RELEASE OF AUDITED RESULTS
The Audit Committee has reviewed the annual results of the Company for the year
ended December 31, 2010.
The figures in respect of the Company's consolidated statement of financial
position, consolidated statement of comprehensive income and the related notes
thereto for the year ended December 31, 2010, as set out in the Announcement of
Preliminary Results have been agreed by the Company's auditor, Deloitte & Touche
LLP, to the amounts set out in the Company's audited consolidated financial
statements for the year. The work performed by Deloitte & Touche LLP in this
respect did not constitute an assurance engagement in accordance with Hong Kong
Standards on Auditing, Hong Kong Standards on Review Engagements or Hong Kong
Standards on Assurance Engagements issued by the Hong Kong Institute of
Certified Public Accountants and consequently no assurance has been expressed by
Deloitte & Touche LLP on the preliminary announcement.
SouthGobi's results for the year ended December 31, 2010, are contained in the
audited Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations, which will be
available on March 30, 2011 on the SEDAR website at www.sedar.com and SouthGobi
Resources website at www.southgobi.com. Copies of SouthGobi's 2010 Annual Report
containing the audited financial statements, and Management's Discussion and
Analysis of Financial Condition and Results of Operations (MD&A), and the Annual
Information Form will be available at www.southgobi.com under the corporate
page. Shareholders with registered addresses in Hong Kong will be sent copies of
SouthGobi's Annual Report as usual. Other Shareholders may request a hard copy
of the Annual Report free of charge by contacting our investor relations
department by phone at +1-604-681-6799 or by email at info@southgobi.com.
CONSOLIDATED FINANCIAL STATEMENTS AND SELECTED NOTES
(Unaudited)
SOUTHGOBI RESOURCES LTD.
Consolidated Statement of Comprehensive Income
(Unaudited)
(Expressed in thousands of U.S. Dollars, except for share and per share
amounts)
---------------------------------------------------------------------------
Year ended December 31,
------------------------------
Notes 2010 2009
-------------------------------------
CONTINUING OPERATIONS
Revenue $ 79,777 $ 36,038
Cost of sales 4 (77,488) (29,425)
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Income from mine operations 2,289 6,613
Administration expenses 5 (30,497) (24,535)
Evaluation and exploration expenses 6 (18,769) (5,399)
---------------------------------------------------------------------------
Operating loss from continuing
operations (46,977) (23,321)
Finance costs 7 (175,855) (63,754)
Finance income 7 103,948 920
---------------------------------------------------------------------------
Loss before tax (118,884) (86,155)
Current income tax expense 8 (1,806) (509)
Deferred income tax recovery 8 4,495 6,947
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Loss from continuing operations (116,195) (79,717)
Loss from discontinued operations - (31,088)
---------------------------------------------------------------------------
Net loss for the year (116,195) (110,805)
OTHER COMPREHENSIVE INCOME
Gain on available-for-sale assets, net
of tax 27,761 -
---------------------------------------------------------------------------
Net comprehensive loss attributable to
equity holders of the Company $ (88,434) $ (110,805)
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BASIC AND DILUTED LOSS PER SHARE FROM:
Continuing operations 9 $ (0.66) $ (0.60)
Discontinued operations 9 - (0.23)
---------------------------------------------------------------------------
Continuing and discontinued operations $ (0.66) $ (0.83)
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SOUTHGOBI RESOURCES LTD.
Consolidated Statement of Financial Position
(Unaudited)
(Expressed in thousands of U.S. Dollars)
---------------------------------------------------------------------------
As at December 31,
------------------------------
Notes 2010 2009
-------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 492,038 $ 357,342
Trade and other receivables 10 30,246 12,328
Short term investments 17,529 14,999
Inventories 26,160 16,384
Prepaid expenses and deposits 10,026 8,119
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Total current assets 575,999 409,172
Non-current assets
Property, plant and equipment 266,771 82,705
Deferred listing costs - 4,565
Deferred income tax assets 8 11,442 6,947
Long term investments 107,416 57,070
Other receivables 238 225
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Total non-current assets 385,867 151,512
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Total assets $ 961,866 $ 560,684
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EQUITY AND LIABILITIES
Current liabilities
Trade and other payables 11 $ 24,137 $ 12,669
Amounts due under line of credit
facility - 3,009
Current portion of convertible
debenture 12 6,312 4,712
---------------------------------------------------------------------------
Total current liabilities 30,449 20,390
Non-current liabilities
Convertible debenture 12 245,498 542,351
Deferred income tax liabilities 8 3,966 -
Decommissioning liability 3,063 735
---------------------------------------------------------------------------
Total non-current liabilities 252,527 543,086
---------------------------------------------------------------------------
Total liabilities 282,976 563,476
Shareholders' equity/(deficiency)
Common shares 1,061,560 296,419
Share option reserve 32,360 22,300
Investment revaluation reserve 27,761 -
Accumulated deficit (442,791) (321,511)
---------------------------------------------------------------------------
Total shareholders'
equity/(deficiency) 678,890 (2,792)
---------------------------------------------------------------------------
Total shareholders' equity and
liabilities $ 961,866 $ 560,684
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Net current assets $ 545,550 $ 388,782
Total assets less current liabilities $ 931,417 $ 540,294
SOUTHGOBI RESOURCES LTD.
Operating Statistics
(Unaudited)
---------------------------------------------------------------------------
Year ended December 31,
-----------------------------
2010 2009
-----------------------------
Volumes, Prices and Costs
Raw coal production (millions of tonnes) 2.79 0.67
Coal sales (millions of tonnes) 2.54 1.33
Average realized sales price (per tonne) $ 34.61 $ 28.97
Direct cash costs of product sold (per tonne) $ 19.66 $ 14.61
Total cash costs of product sold (per tonne) $ 20.70 $ 16.58
Operating Statistics
Sunset
Total waste material moved (millions of bank
cubic meters) 9.69 2.27
Strip ratio (bank cubic meters of waste rock
per tonne of coal produced) 3.47 3.36
Sunrise
Total waste material moved (millions of bank
cubic meters) 1.18 -
1. CORPORATE INFORMATION
SouthGobi Resources Ltd. (formerly SouthGobi Energy Resources Ltd.) is a
publicly listed company incorporated in Canada with limited liability under the
legislation of the Province of British Columbia and its shares are listed on the
Toronto Stock Exchange and Hong Kong Stock Exchange. The company together with
its subsidiaries (collectively referred to as the "Company") is an integrated
coal mining, development and exploration company. The Company's parent is
Ivanhoe Mines Ltd. (the "parent" or "Ivanhoe").
The head office, principal address and registered and records office of the
Company are located at 999 Canada Place, Suite 654, Vancouver, British Columbia,
V6C 3E1.
The Company's financial statements and those of all of its controlled
subsidiaries are presented in U.S. dollars and all values are rounded to the
nearest thousand dollars except where otherwise indicated. Information related
to shares and stock options is presented in thousands except for per share
information, which is presented in U.S. cents.
These consolidated financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and settlement of
liabilities in the normal course of business.
2. BASIS OF PREPARATION
2.1 Statement of compliance
The Company's Consolidated Financial Statements, including comparatives, have
been prepared in accordance with and using accounting policies in full
compliance with the International Financial Reporting Standards ("IFRS") and
International Accounting Standards ("IAS") issued by the International
Accounting Standards Board ("IASB") and Interpretations of the International
Financial Reporting Interpretations Committee ("IFRIC"), effective for the
Company's reporting for the year ended December 31, 2010.
2.2 Basis of presentation
The Company's Consolidated Financial Statements have been prepared on the
historical cost basis except for certain non-current assets and financial
instruments, which are measured at fair value, as explained in the accounting
policies set out in Note 3 of the Consolidated Financial Statements.
2.3 Adoption of new and revised standards and interpretations
The IASB issued a number of new and revised IASs, IFRSs, amendments and related
IFRICs (hereinafter collectively referred to as the "new IFRS") which are
effective for the Company's financial year beginning on January 1, 2010. For the
purpose of preparing and presenting the Consolidated Financial Statements, the
Company has consistently adopted all these new standards for the years ended
December 31, 2010 and 2009.
At the date of authorization of these Financial Statements, the IASB and IFRIC
has issued the following new and revised standards, amendments and
interpretations which are not yet effective during the year ended December 31,
2010.
-- IFRS 7 (Amendment) Clarification of required level of disclosure(i)
-- IFRS 9 New financial instruments standard that replaces IAS 39 for
classification and measurement of financial assets(ii)
-- IAS 1 (Amendment) Clarification of statement of changes in equity(i)
-- IAS 24 (Revised) Related party disclosures(i)
-- IAS 32 (Amendment) Classification of rights issues(iii)
-- IAS 34 (Amendment) Disclosure requirements for significant events and
transactions(i)
-- IFRIC 14 (Amendment) Prepayment of a minimum funding requirement(i)
-- IFRIC 19 Extinguishing financial liabilities with equity instruments(iv)
(i) Effective for annual periods beginning on or after January 1, 2011
(ii) Effective for annual periods beginning on or after January 1, 2013
(iii) Effective for annual periods beginning on or after February 1, 2010
(iv) Effective for annual periods beginning on or after July 1, 2010
The Company anticipates that the application of these standards, amendments and
interpretations will not have a material impact on the results and financial
position of the Company.
3. SEGMENTED INFORMATION
At December 31, 2010, the Company has one reportable operating segment, being
the Mongolian Coal Division. In prior periods, the Company's Indonesia Coal
Division was a segment of the Company.
An operating segment is defined as a component of the Company:
-- that engages in business activities from which it may earn revenues and
incur expenses;
-- whose operating results are reviewed regularly by the entity's chief
operating decision maker; and
-- for which discrete financial information is available.
For the Mongolian Coal Division, the Company receives discrete financial
information that is used by the chief operating decision maker to make decisions
about resources to be allocated to the segment and to assess its performance.
The division is principally engaged in coal mining, development and exploration
in Mongolia. As at December 31, 2010, the Mongolian Coal Division has achieved
commercial production and is earning revenue through the sale of coal to
external customers.
The Company's Corporate Division only earns revenues that are considered
incidental to the activities of the Company and therefore does not meet the
definition of an operating segment as defined in IFRS 8 'Operating Segments'.
At December 31, 2010, the Mongolian Coal Division had four active customers with
the largest customer accounting for 73% of trade receivables and the other
customers accounting for the remaining 27% of trade receivables.
For the year ended December 31, 2010, the largest customer accounted for 57% of
revenues, the second largest customer accounted for 40% of revenue and the other
customers accounted for the remaining 3% of revenues.
The following is an analysis of the carrying amounts of segment assets, segment
liabilities and reported segment profit or loss, revenues, depreciation and
depletion expense and impairment charge on assets analyzed by operating segment
and reconciled to the Company's Consolidated Financial Statements:
Mongolian Discontinued
Coal Operations Unallocate Consolidated
Division (i) (ii) Total
------------------------------------------------------------
Segment assets
As at December
31, 2010 $ 342,591 $ - $ 619,275 $ 961,866
As at December
31, 2009 129,454 - 431,230 560,684
Segment liabilities
As at December
31, 2010 $ 25,408 $ - $ 257,568 $ 282,976
As at December
31, 2009 7,300 - 556,176 563,476
Segment income/(losses)
For the year ended
December 31, 2010 $ (20,022) $ - $ (96,173) $ (116,195)
For the year ended
December 31, 2009 6,203 (31,088) (85,920) (110,805)
Segment revenues
For the year ended
December 31, 2010 $ 79,777 $ - $ - $ 79,777
For the year ended
December 31, 2009 36,038 - - 36,038
Capital expenditures
For the year ended
December 31, 2010 $ 199,354 $ - $ 416 $ 199,770
For the year ended
December 31, 2009 35,706 6,511 64 42,281
Depreciation and
depletion expense
For the year ended
December 31, 2010 $ 13,148 $ - $ 71 $ 13,219
For the year ended
December 31, 2009 5,837 - 19 5,856
Impairment charge on
assets (iii)(iv)
For the year ended
December 31, 2010 $ 7,584 $ - $ - $ 7,584
For the year ended
December 31, 2009 - 15,135 - 15,135
(i) The Indonesian Coal Division was treated as discontinued operations
for the year ended December 31, 2009
(ii) The unallocated amount contains all amounts associated with the
Corporate Division
(iii) The impairment charge in the year ended December 31, 2010 relates to
inventory and property, plant and equipment
(iv) The impairment charge in the year ended December 31, 2009 relates to
the Indonesian Coal Division
At December 31, 2010, the Company operates in three geographical areas, being
Canada, Hong Kong and Mongolia. Prior to December 23, 2009, the Company had
operations in Indonesia. The following is an analysis of the revenues and
non-current assets by geographical area and reconciled to the Company's
Consolidated Financial Statements:
Consolidated
Mongolia Hong Kong Canada Total
------------------------------------------------------
Revenues
For the year ended
December 31, 2010 $ 79,777 $ - $ - $ 79,777
For the year ended
December 31, 2009 36,038 - - 36,038
Non-current assets
As at December 31,
2010 $ 277,201 $ 401 $ 108,265 $ 385,867
As at December 31,
2009 89,587 49 61,876 151,512
4. COST OF SALES
The cost of sales for the Company is broken down as follows:
Year ended December 31,
-----------------------------
2010 2009
-----------------------------
Operating expenses $ 56,850 $ 23,611
Depreciation and depletion 13,054 5,814
Impairment of inventories 5,751 -
Impairment of property, plant and equipment 1,833 -
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Cost of sales $ 77,488 $ 29,425
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5. ADMINISTRATION EXPENSES
The administration expenses for the Company are broken down as follows:
Year ended December 31,
-----------------------------
2010 2009
-----------------------------
Corporate administration $ 6,020 $ 2,839
Legal 957 912
Professional fees 2,795 3,159
Listing fees - 2,470
Salaries and benefits 15,548 14,024
Sustainability and community relations 718 -
Public infrastructure 5,952 -
Depreciation 118 19
Foreign exchange (gain)/loss (1,611) 1,112
---------------------------------------------------------------------------
Administration expenses $ 30,497 $ 24,535
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6. EVALUATION AND EXPLORATION EXPENSES
The evaluation and exploration expenses for the Company are broken down as follows:
Year ended December 31,
-----------------------------
2010 2009
-----------------------------
Assaying $ 341 $ 273
Drilling and trenching 11,705 2,283
Geological 876 351
Geophysics 1,697 193
Surveying 108 14
License fees 1,223 1,543
Depreciation 47 23
Salaries 1,051 64
Overhead 1,721 655
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Evaluation and exploration expenses $ 18,769 $ 5,399
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7. FINANCE COSTS AND INCOME
The finance costs for the Company are broken down as follows:
Year ended December 31,
-----------------------------
2010 2009
-----------------------------
Loss on partial conversion of convertible
debenture $ 151,353 $ -
Fair value loss on embedded derivatives
in convertible debenture - 44,980
Interest expense on convertible debenture 24,294 7,684
Transaction costs on issuance of
convertible debenture 131 1,651
Accretion of asset retirement obligation 77 40
---------------------------------------------------------------------------
Finance costs $ 175,855 $ 63,754
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---------------------------------------------------------------------------
The finance income for the Company is broken down as follows:
Year ended December 31,
-----------------------------
2010 2009
-----------------------------
Fair value gain on embedded derivatives in
convertible
debenture $ 100,637 $ -
Mark to market gain on investments 870 843
Interest income 2,441 77
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Finance income $ 103,948 $ 920
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8. TAXES
The Company and its subsidiaries in Canada are subject to Canadian federal and
provincial tax for the estimated assessable profit for the years ended December
31, 2010 and 2009 at a rate of 28.5% and 30%, respectively. The Company had no
assessable profit in Canada for the years ended December 31, 2010 and 2009.
The Company's subsidiaries in Hong Kong are subject to Hong Kong profits tax for
the years ended December 31, 2010 and 2009 at a rate of 16.5%. No Hong Kong
profits tax was provided for as the Company had no assessable profit arising in
or derived from Hong Kong in the years ended December 31, 2010 and 2009.
The Company's subsidiaries in Mongolia are subject to Mongolian income tax for
the years ended December 31, 2010 and 2009 at a rate of 25%. In the year ended
December 31, 2010 the Company recorded a current income tax charge of $1,806
(2009:$509) related to assessable profit derived from Mongolia.
Taxation from other relevant jurisdictions is calculated at the rates prevailing
in each of those jurisdictions respectively.
8.1 Income tax recognized in profit or loss
Year ended December 31,
-----------------------------
2010 2009
-----------------------------
Current Tax
Current tax expense in respect of the
current year $ 1,806 $ 509
Deferred Tax
Deferred tax recovery recognized in the
current year (4,495) (6,947)
---------------------------------------------------------------------------
Total income tax recovery recognized in the
current year related to continuing
operations $ (2,689) $ (6,438)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The tax recovery for the Company can be reconciled to the loss for the year per
the Consolidated Statement of Comprehensive Income as follows:
Year ended December 31,
-----------------------------
2010 2009
-----------------------------
Loss from continuing operations before tax $ 118,884 $ 86,155
Statutory tax rate 28.50% 30.00%
Recovery of income taxes based on combined
Canadian federal and provincial statutory
rates (33,882) (25,847)
Deduct:
Lower effective tax rate in foreign
jurisdictions 1,905 463
Tax effect of tax losses and temporary
differences not recognized 2,789 1,937
Non-deductible expenses 24,708 14,160
Effect of change in future tax rates 1,791 2,849
---------------------------------------------------------------------------
Tax recovery for the year $ (2,689) $ (6,438)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
8.2 Income tax recognized in other comprehensive income
Year ended December 31,
-----------------------------
2010 2009
-----------------------------
Deferred Tax
Fair value remeasurement of available-for-sale
assets $ (3,966) $ -
---------------------------------------------------------------------------
Total income tax recovery recognized in the
current year
in other comprehensive income $ (3,966) $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
8.3 Deferred tax balances
The Company's deferred tax assets/(liabilities) are broken down as follows:
As at December 31,
-----------------------------
2010 2009
-----------------------------
Deferred tax assets $ 11,442 $ 6,947
Deferred tax liabilities (3,966) -
---------------------------------------------------------------------------
Deferred tax balances $ 7,476 $ 6,947
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The Company's deferred tax assets/(liabilities) are attributable to the
following items:
As at December 31,
-----------------------------
2010 2009
-----------------------------
Tax loss carry-forwards $ 8,515 $ 5,793
Property, plant and equipment 2,880 1,135
Other assets 47 19
Available-for-sale financial assets (3,966) -
---------------------------------------------------------------------------
Deferred tax balances $ 7,476 $ 6,947
---------------------------------------------------------------------------
---------------------------------------------------------------------------
8.4 Unrecognized deferred tax assets
The Company's unrecognized deductible temporary differences and unused tax
losses are attributable to the following items:
As at December 31,
-----------------------------
2010 2009
-----------------------------
Non-capital losses $ 18,952 $ 8,701
Capital losses 3,168 4,183
Deductible temporary differences 5,369 11,815
---------------------------------------------------------------------------
Deferred tax balances $ 27,489 $ 24,699
---------------------------------------------------------------------------
---------------------------------------------------------------------------
8.5 Expiry dates
The Company's recognized and unrecognized deferred tax assets related to unused
tax losses have the following expiry dates:
As at December 31, 2010
-------------------------------------
Local U.S. Dollar Expiry
currency Equivalent dates
-------------------------------------
Non-capital losses
Canadian Dollar Cdn$ 71,451 $ 71,065 2011 - 2030
Mongolian Tugrik MNT 42,793,003 34,058 2011 - 2021
Hong Kong Dollar HK$ 46,127 5,953 indefinite
Singapore Dollar SG$ 75 58 indefinite
-------------
$ 111,134
-------------
-------------
Capital losses
-------------
Canadian Dollar Cdn$ 25,211 $ 25,075 indefinite
-------------
-------------
9. LOSS PER SHARE
The calculation of basic and diluted loss per share is based on the following data:
Year ended December 31,
-----------------------------
2010 2009
-----------------------------
Net loss from continuing operations for the
purpose of basic and diluted loss per share $ 116,195 $ 79,717
Net loss from discontinued operations
for the purpose of basic and diluted
loss per share $ - $ 31,088
Weighted average number of shares for
the purpose of basic and diluted loss
per share 176,529 133,499
The basic loss per share is computed by dividing the net loss by the weighted
average number of common shares outstanding during the year. The diluted loss
per share reflects the potential dilution of common share equivalents, such as
outstanding stock options, share purchase warrants and convertible debentures,
in the weighted average number of common shares outstanding during the year, if
dilutive. All of the stock options and the convertible debenture were
anti-dilutive for the years ended December 31, 2010 and 2009.
10. TRADE AND OTHER RECEIVABLES
The Company's trade and other receivables arise from two main sources: trade
receivables due from customers for coal sales and value added tax ("VAT") and
goods and services tax ("GST") receivable due from various government taxation
authorities. These are broken down as follows:
As at December 31,
-----------------------------
2010 2009
-----------------------------
Trade receivables $ 15,297 $ 5,200
VAT/GST receivable 14,541 7,029
Other receivables 408 99
---------------------------------------------------------------------------
Total trade and other receivables $ 30,246 $ 12,328
---------------------------------------------------------------------------
---------------------------------------------------------------------------
11. TRADE AND OTHER PAYABLES
Trade and other payables of the Company are principally comprised of amounts
outstanding for trade purchases relating to coal mining and exploration
activities and amounts payable for financing activities. The usual credit period
taken for trade purchases is between 30 to 90 days.
The following is an aged analysis of the trade and other payables:
As at December 31,
-----------------------------
2010 2009
-----------------------------
Less than 1 month $ 24,006 $ 9,630
1 to 3 months 33 892
3 to 6 months 72 705
Over 6 months 26 1,442
---------------------------------------------------------------------------
Total trade and other payables $ 24,137 $ 12,669
---------------------------------------------------------------------------
---------------------------------------------------------------------------
12. CONVERTIBLE DEBENTURE
On November 19, 2009, the Company issued a convertible debenture to a wholly
owned subsidiary of the China Investment Corporation ("CIC") for $500,000, which
is secured and bears interest at 8.0% with a maximum term of 30 years.
Pursuant to the debenture conversion terms, the Company had the right to call
for the conversion of up to $250,000 of the debenture upon achieving a public
float of 25% of its common shares based on a conversion price of the lower of
Cdn$11.88 and the 50-day volume-weighted average price ("VWAP"). On March 29,
2010, the Company exercised this right and completed the conversion of $250,000
of the convertible debenture into 21,471 shares at a conversion price of $11.64
(Cdn$11.88). On March 29, 2010, the Company also settled the accrued interest
payable in shares on the converted $250,000 by issuing 90 shares for the $1,436
in accrued interest converted at the 50-day VWAP conversion price of $15.97
(Cdn$16.29). On April 1, 2010, the Company also settled the outstanding accrued
interest payable in cash on the converted debt of $250,000 with a cash payment
of $5,742.
The fair value of the shares issued upon the partial conversion, based on their
market value, was $347,643 compared to the carrying value of the debt host and
embedded derivatives associated with the debt that was converted of $196,290.
The difference of $151,353 was recognized in finance costs as a loss upon
partial conversion during the year ended December 31, 2010.
Based on the Company's valuations as at December 31, 2010, the fair value of the
embedded derivatives decreased by $100,637 compared to December 31, 2009. This
decrease was recorded as a gain in finance income for the year ended December
31, 2010.
In the year ended December 31, 2010, the Company also recorded an interest
expense of $24,294 (2009: $7,684) related to the convertible debenture. The
interest expense is composed of the interest at the contract rate and the
accretion of the debt host component of the convertible debenture. To calculate
the interest expense, the Company has used the contract life of 30 years and an
effective interest rate of 22.2%.
The movement of the amounts due under the convertible debenture are as follows:
Year ended December 31,
-----------------------------
2010 2009
-----------------------------
Balance, beginning of year $ 547,063 $ -
Amounts advanced - 500,000
Transaction costs - (5,601)
Interest expense on convertible debenture 24,896 7,684
Fair value (gain)/loss on embedded derivatives (100,637) 44,980
Loss on conversion of convertible debenture 151,353 -
Conversion of convertible debenture (347,643) -
Interest paid (23,222) -
---------------------------------------------------------------------------
Balance, end of the year $ 251,810 $ 547,063
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The amounts due under the convertible debenture are further broken down as follows:
As at December 31,
-----------------------------
2010 2009
-----------------------------
Debt host $ 90,621 $ 184,079
Fair value of embedded derivatives 154,877 358,272
Interest payable 6,312 4,712
---------------------------------------------------------------------------
Convertible debenture $ 251,810 $ 547,063
---------------------------------------------------------------------------
---------------------------------------------------------------------------
About SouthGobi Resources
SouthGobi Resources is focused on exploration and development of its Permian-age
metallurgical and thermal coal deposits in Mongolia's South Gobi Region. The
Company's flagship coal mine, Ovoot Tolgoi, is producing and selling coal to
customers in China. The company plans to supply a wide range of coal products to
markets in Asia.
Forward-Looking Statements: This document includes forward-looking statements.
Forward-looking statements include, but are not limited to: proliferation of
SouthGobi's customer base combined with transport synergies on the Chinese side
of the border can result in improved value for SouthGobi's individual coal
products; SouthGobi's potential to set a new quarterly record for coal sales and
average sale price per tonne in the first quarter of 2011; coal sales are
anticipated to exceed 426,000 tonnes in the first quarter of 2011; long-term
demand for SouthGobi's products; positive developments in Mongolia will support
the mining sector and will develop Mongolia's resource base; management of
production levels to meet anticipated demand for SouthGobi's products; plans to
supply a wide range of coal products to markets in Asia; and other statements
that are not historical facts. When used in this document, the words such as
"plan", "estimate", "expect", "intend", "may", and similar expressions are
forward-looking statements. Although SouthGobi believes that the expectations
reflected in these forward-looking statements are reasonable, such statements
involve risks and uncertainties and no assurance can be given that actual
results will be consistent with these forward-looking statements. Important
factors that could cause actual results to differ from these forward-looking
statements are disclosed under the heading "Risk Factors" in SouthGobi's
Management Discussion and Analysis of Financial Condition and Results of
Operations for the year ended Dec. 31, 2010, which are available at
www.sedar.com.
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