Significant Events and Highlights
The Company’s significant events and highlights for the three months ended
- Operating Results – The Company increased sales volume to 1.0 million tonnes for the third quarter of 2020 from 0.8 million tonnes for the third quarter of 2019. The average selling price of coal decreased from
$35.0 per tonne in the third quarter of 2019 to$31.6 per tonne in the third quarter of 2020 as a result of a higher portion of sales made at the mine gate instead of transporting the coal to the Company’sInner Mongolia subsidiary and selling to third party customers withinChina . - Financial Results – The Company recorded a gross profit of
$10.9 million in the third quarter of 2020 compared to$12.8 million in the third quarter of 2019 while a$1.1 million net profit was recorded in the third quarter of 2020 compared to$2.1 million in the third quarter of 2019. The financial results were impacted by the reduced gross profit as a result of a lower average selling price achieved during the quarter. - Impactof the Coronavirus Disease 2019 (“COVID-19”) Pandemic – The Company was informed that effective as of
February 11, 2020 , theMongolian State Emergency Commission closed Mongolia’s southern border withChina in order to prevent the spread of COVID-19. Accordingly, the Company suspended coal exports toChina beginning as ofFebruary 11, 2020 as a result of the border closure.
OnMarch 28, 2020 , the Mongolian-Chinese border was re-opened for coal export on a trial basis, with a limit imposed on the total volume of coal that was permitted to be exported during this trial period. The Company has experienced a continuous improvement in the volume of coal exported toChina sinceMarch 28, 2020 . During the period between April toDecember 2020 , an aggregate of 2.4 million tonnes of coal was exported by the Company fromMongolia toChina , as compared to an aggregate of 2.6 million tonnes of coal during the same period in the 2019 calendar year.
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 closures and preserve its working capital, the Company temporarily ceased major mining operations (including coal mining), reduced production to only coal-blending activities and placed approximately half of its workforce on furlough fromFebruary 2020 . SinceAugust 2, 2020 , the Company has resumed its mining operations, which includes mining, blending and washing of coal. As atDecember 31, 2020 , SGS employed 237 employees at theOvoot Tolgoi Mine site (December 31, 2019 : 383 employees). The Company produced 1.5 million tonnes from August toDecember 2020 , as compared to 2.3 million tonnes from August toDecember 2019 . There were a few COVID-19 cases reported in Ulaanbaatar (being the capital city ofMongolia ) onNovember 11, 2020 . As a result, the Mongolian local authorities have taken certain precautionary steps to minimize further transmission and announced a lockdown of Ulaanbaatar effective as ofNovember 12, 2020 . Although the Company’s mining operations and the export of coal fromMongolia toChina continues as of the date hereof, there can be no guarantee that the Company will be able to continue exporting coal toChina , or the border crossings would not be the subject of additional closures as a result of COVID-19 in the future. The Company will continue to closely monitor the development of the COVID-19 pandemic and the impact it has on coal exports toChina 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 Mongolian-Chinese border crossing, this is expected to have a material adverse effect on the business and operations of the Company and may negatively affect the price and volatility of the Common Shares and any investment in such shares could suffer a significant decline or total loss in value. China Investment Corporation (“CIC”) Convertible Debenture (“CIC Convertible Debenture”) – OnApril 23, 2019 , the Company executed a deferral agreement (the “2019 Deferral Agreement”) with CIC in relation to a deferral and revised repayment schedule in respect of (i)$41.8 million of outstanding cash and payment in kind interest (“PIK Interest”) and associated costs due and payable to CIC onNovember 19, 2018 (the “Outstanding Interest Payable”) under the CIC Convertible Debenture and a deferral agreement executed with CIC onJune 12, 2017 (the “June 2017 Deferral Agreement”); and (ii)$27.9 million of cash and PIK Interest payments payable to CIC under the CIC Convertible Debenture fromApril 23, 2019 to and includingMay 19, 2020 (the “Deferral”). Pursuant to Section 501(c) of the TSX Company Manual, the 2019 Deferral Agreement was approved at the Company’s adjourned annual and special meeting of shareholders onJune 13, 2019 .
The key repayment terms of the 2019 Deferral Agreement are: (i) the Company agreed to pay a total of$14.3 million over eight instalments fromNovember 2019 toJune 2020 ; (ii) the Company agreed to pay the PIK Interest covered by the Deferral by way of cash payments, rather than the issuance of Common Shares; and (iii) the Company agreed to pay the remaining balance of$62.6 million onJune 20, 2020 . The Company agreed to pay a deferral fee at a rate of 6.4% per annum in consideration of the deferred amounts.
As a condition to agreeing to the Deferral, CIC required that the mutual co-operation agreement (the “Cooperation Agreement”) datedNovember 19, 2009 between SGS and CIC, be amended and restated (the “Amended and Restated Cooperation Agreement”) to clarify the manner in which the service fee (the “Management Fee”) payable to CIC under the Cooperation Agreement is calculated, with effect as ofJanuary 1, 2017 . Specifically, the Management Fee under the Amended and Restated Cooperation Agreement is determined based on the net revenues realized by the Company and all of its subsidiaries derived from sales intoChina (rather than the net revenues realized by the Company and its Mongolian subsidiaries as currently contemplated under the Cooperation Agreement). As consideration for deferring payment of the additional Management Fee payable to CIC as a result of the Amended and Restated Cooperation Agreement, the Company agreed to pay to CIC a deferral fee at the rate of 2.5% on the outstanding Management Fee. Pursuant to the Amended and Restated Cooperation Agreement, the Company agreed to pay CIC the total outstanding Management Fee and related accrued deferral fee of$4.2 million over six instalments fromJune 2019 toNovember 2019 . The Company executed the Amended and Restated Cooperation Agreement with CIC onApril 23, 2019 .
Pursuant to their terms, both the 2019 Deferral Agreement and the Amended and Restated Cooperation Agreement became effective onJune 13, 2019 , being the date on which the 2019 Deferral Agreement was approved by shareholders at the Company’s adjourned annual and special meeting of shareholders.
In connection with the 2019 Deferral Agreement, the Company also announced that it intends to discuss a potential debt restructuring plan with respect to amounts owing to CIC which is mutually beneficial to the Company and CIC; and to form a special committee comprised of independent directors to ensure that the interests of its minority shareholders are fairly considered in the negotiation and review of any such restructuring; however, there can be no assurance that a favorable outcome will be reached. As of the date hereof, there has not been any significant progress in relations to the restructuring plan.
OnFebruary 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 onJanuary 19, 2020 andFebruary 19, 2020 , respectively, under the 2019 Deferral Agreement; and (ii) approximately$0.7 million of the Management Fee which was due and payable onFebruary 14, 2020 to CIC under the Amended and Restated Cooperation Agreement. The 2020 February Deferral Agreement became effective onMarch 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 andJune 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.
OnMarch 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 onMarch 19, 2020 under the 2019 Deferral Agreement (the “2020 March Deferral Amount”) will be deferred untilJune 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 onMarch 19, 2020 . The 2020 March Deferral Agreement became effective onMarch 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.
OnApril 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 onApril 19, 2020 under the 2019 Deferral Agreement (the “2020 April Deferral Amount”) will be deferred untilJune 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 onApril 19, 2020 . The 2020 April Deferral Agreement became effective onApril 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.
OnMay 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 onMay 19, 2020 under the 2019 Deferral Agreement; and approximately$0.2 million of Management Fees which were due and payable onMay 15, 2020 to CIC under the Amended and Restated Cooperation Agreement (collectively, the “2020 May Deferral Amount”) will be deferred untilJune 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 onMay 19, 2020 and a deferral fee equal to 2.5% per annum on the deferred Management Fees commencing onMay 15, 2020 . The 2020 May Deferral Agreement became effective onJune 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.
OnJune 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 onJune 19, 2020 under the 2019 Deferral Agreement and the prior deferral agreements entered into during the period between February toMay 2020 will be deferred untilSeptember 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 onJune 19, 2020 . The 2020 June Deferral Agreement became effective onJuly 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.
OnNovember 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 beforeSeptember 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 onNovember 19, 2020 andMay 19, 2021 ; (iii)$4.0 million worth of PIK Interest shares (“2020 November PIK Interest”) issuable to CIC onNovember 19, 2020 under the CIC Convertible Debenture; and (iv) the Management Fee which payable to CIC onNovember 14, 2020 ,February 14, 2021 ,May 15, 2021 ,August 14, 2021 andNovember 14, 2021 under the Amended and Restated Cooperation Agreement (collectively, the “2020 November Deferral Amounts”). The effectiveness of the 2020 November Deferral Agreement and the respective covenants, agreements and obligations of each party under the 2020 November Deferral Agreement are subject to the Company obtaining the requisite approval of the 2020 November Deferral Agreement from the Company’s shareholders in accordance with applicable TSX rules. OnOctober 29, 2020 , the Company obtained an order from theBritish Columbia Securities Commission (“BCSC”), the Company’s principal securities regulator inCanada , which partially revoked the CTO (as defined below) to, amongst other things, permit the Company to execute the 2020 November Deferral Agreement.
The principal terms of the 2020 November Deferral Agreement are as follows: - Payment of the 2020 November Deferral Amounts will be deferred until
August 31, 2023 . - CIC agreed to waive its rights arising from any default or event 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 ofAugust 17, 2020 , in each case for a period of more than five trading days. - As consideration for the deferral of the 2020 November Deferral Amounts, the Company agreed to pay CIC: (i) a deferral fee equal to 6.4% per annum on the 2020 November Deferral Amounts payable under the CIC Convertible Debenture and the 2020 June Deferral Agreement, commencing on the date on which each such 2020 November Deferral Amount would otherwise have been due and payable under the CIC Convertible Debenture or the 2020 June 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 2020 June 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 theNovember 2020 PIK Interest is fully repaid, CIC reserves the right to require the Company to pay and satisfy the amount of theNovember 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.
Until such time as the 2020 November Deferral Agreement is approved by the Company’s shareholders and the deferral and waiver thereunder in favour of the Company become effective, the Company remains in default under the CIC Convertible Debenture and 2020 June Deferral Agreement and CIC may declare the amounts owing thereunder immediately due and payable, and may take steps to enforce payment thereof, which would have a material adverse effect on the business and operations of the Company and could 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.
- Cease
Trade Order and Halt Trading on TSX – OnJune 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 inCanada . Trading in the Common Shares on the TSX was halted as a result of the CTO. The CTO was issued as of result of the Company’s failure to file: (i) its annual consolidated financial statements for the year endedDecember 31, 2019 and the accompanying Management’s Discussion & Analysis of Financial Condition and Results of Operations (“MD&A”); (ii) its Annual Information Form for the year endedDecember 31, 2019 ; and (iii) its condensed consolidated interim financial statements for the three-month period endedMarch 31, 2020 and accompanying Management’s Discussion & Analysis, in each case prior to the filing deadline ofJune 15, 2020 .
The CTO will remain in effect until such time as the Company makes a successful application to the BCSC to have the CTO revoked. While the Company is taking such actions as it considers necessary in order to remedy its filing defaults as soon as possible, there can be no assurance that the Company will have the CTO lifted in a timely manner or at all. For so long as the CTO remains in effect, it will have a significant adverse impact on the liquidity of the Common Shares and shareholders may suffer a significant decline or total loss in value of its investment in the Common Shares as a result.
- Suspension of Trading on HKEX – At the request of the Company, trading in the shares of the Company on the HKEX was suspended with effect as of
August 17, 2020 pending the publication of the audited annual results of the Company for the year endedDecember 31, 2019 .
OnSeptember 2, 2020 , the Company received a letter from the HKEX setting out the following resumption guidance for the resumption of trading in the Common Shares on the HKEX (the “Resumption Guidance”): (i) publish all outstanding financial results and address any audit modifications; (ii) inform the market of all material information for the Company’s shareholders and investors to appraise its position; and (iii) announce quarterly updates on the Company’s developments under Rules 13.24A of the HKEX’s Listing Rules, including, amongst other relevant matters, its business operations, its resumption plan and the progress of implementation.
OnSeptember 30, 2020 , the Company was notified by the HKEX of the following additional condition which must be satisfied in order for trading in the Common Shares on the HKEX to resume: resolve issues arising from the CTO and/or the TSX Delisting Review (as defined below), or take steps to the satisfaction of the HKEX that the Company will be eligible for a primary listing on the HKEX.
OnDecember 8, 2020 , the Company was notified by the HKEX of the following additional condition which must be satisfied in order for trading in the Common Shares on the HKEX to resume: demonstrate compliance with Rule 13.24 of the HKEX listing rules which requires that an issuer carry out a business with a sufficient level of operations and assets of sufficient value to support its operations to warrant the continued listing of the issuer's securities.
If the Company fails to remedy the issues causing its trading suspension, fully comply with the Listing Rules to the HKEX’s satisfaction and resume trading in its shares on the HKEX byFebruary 16, 2022 , the HKEX’s Listing Division will recommend to the HKEX’s Listing Committee that it proceed with the cancellation of the Company’s HKEX listing. Under Rules 6.01 and 6.10 of the Listing Rules, the HKEX also has the right to impose a shorter specific remedial period, where appropriate.
- TSX Delisting Review – On
September 11, 2020 , the TSX notified the Company that it is reviewing the eligibility for continued listing of the Common Shares on the TSX pursuant to the TSX’s Remedial Review Process (“TSX Delisting Review”). OnDecember 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 untilFebruary 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 (collectively, the “Delisting Criteria”).
The TSX Continued Listing Committee has scheduled a meeting to be held onFebruary 11, 2021 to consider whether or not to suspend trading in and delist the Common Shares on the TSX. If the Company fails to demonstrate to the TSX that it has remedied the Delisting Criteria on or beforeFebruary 16, 2021 , the Common Shares will be delisted from the TSX 30 days from such date.
- Changes in Directors
Mr.Xiaoxiao Li :Mr. Li resigned as a non-executive director onNovember 13, 2020 .
Ms.Ka Lee Ku :Ms. Ku was appointed as a non-executive director onDecember 9, 2020 .
- Going Concern – Several adverse conditions and material uncertainties relating to the Company cast significant doubt upon the going concern assumption which includes the deficiencies in assets and working capital.
See section “Liquidity and Capital Resources” of this press release for details.
OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS
Summary of Operational Data
Three months ended | Nine months ended | |||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||
Sales Volumes, Prices and Costs | ||||||||||||||||||
Premium semi-soft coking coal | ||||||||||||||||||
Coal sales (millions of tonnes) | 0.35 | 0.05 | 0.63 | 0.28 | ||||||||||||||
Average realized selling price (per tonne) | $ | 30.17 | $ | 31.49 | $ | 29.48 | $ | 38.27 | ||||||||||
Standard semi-soft coking coal/ premium thermal coal | ||||||||||||||||||
Coal sales (millions of tonnes) | 0.54 | 0.51 | 0.93 | 1.95 | ||||||||||||||
Average realized selling price (per tonne) | $ | 30.80 | $ | 31.67 | $ | 31.71 | $ | 33.87 | ||||||||||
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) | 0.10 | 0.25 | 0.12 | 0.43 | ||||||||||||||
Average realized selling price (per tonne) | $ | 41.30 | $ | 42.37 | $ | 41.64 | $ | 43.10 | ||||||||||
Total | ||||||||||||||||||
Coal sales (millions of tonnes) | 0.99 | 0.81 | 1.68 | 2.75 | ||||||||||||||
Average realized selling price (per tonne) | $ | 31.63 | $ | 34.98 | $ | 31.58 | $ | 35.54 | ||||||||||
Raw coal production (millions of tonnes) | 0.52 | 1.21 | 0.53 | 3.57 | ||||||||||||||
Cost of sales of product sold (per tonne) | $ | 20.23 | $ | 19.16 | $ | 21.70 | $ | 22.17 | ||||||||||
Direct cash costs of product sold (per tonne)(i) | $ | 12.38 | $ | 18.03 | $ | 11.57 | $ | 15.03 | ||||||||||
Mine administration cash costs of product sold (per tonne)(i) | $ | 1.15 | $ | 1.09 | $ | 1.47 | $ | 1.26 | ||||||||||
Total cash costs of product sold (per tonne) (i) | $ | 13.53 | $ | 19.12 | $ | 13.04 | $ | 16.29 | ||||||||||
Other Operational Data | ||||||||||||||||||
Production waste material moved (millions of bank cubic meters) | 1.67 | 4.36 | 2.24 | 14.61 | ||||||||||||||
Strip ratio (bank cubic meters of waste material per tonne of coal produced) | 3.20 | 3.61 | 4.24 | 4.09 | ||||||||||||||
Lost time injury frequency rate (ii) | - | 0.08 | 0.04 | 0.05 | ||||||||||||||
(i) | A Non-International Financial Reporting Standards (“IFRS”) financial measure, which does not have a standardized meaning according to 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 Operational Data
For the three months ended
The Company ended the third quarter of 2020 without a lost time injury. For the three months ended
The average selling price of coal decreased from
The product mix for the third quarter of 2020 consisted of approximately 35% of premium semi-soft coking coal, 55% of standard semi-soft coking coal/premium thermal coal and 10% of washed coal compared to approximately 6% of premium semi-soft coking coal, 63% of standard semi-soft coking coal/premium thermal coal and 31% of washed coal in the third quarter of 2019.
The Company sold 1.0 million tonnes for the third quarter of 2020 as compared to 0.8 million tonnes for the third quarter of 2019.
The Company’s production in the third quarter of 2020 was lower than the third quarter of 2019 as a result of the temporary cessation of the Company’s major mining operations (including coal mining) which took effect in
The Company’s unit cost of sales of product sold for the third quarter of 2020 was
For the nine months ended
The Company sold 1.7 million tonnes for the first nine months of 2020 as compared to 2.8 million tonnes for the first nine months of 2019 due to suspension of coal exports to
The Company’s production in the first nine months of 2020 was much lower than the first nine months of 2019 as a result of the temporary cessation of the Company’s major mining operations (including coal mining) which took effect in
The Company’s unit cost of sales of product sold for the first nine months of 2020 was
Summary of Financial Results
Three months ended | Nine months ended | |||||||||||||||||
$ in thousands, except per share information | 2020 | 2019 | 2020 | 2019 | ||||||||||||||
Revenue (i) | $ | 30,960 | $ | 28,309 | $ | 52,072 | $ | 97,599 | ||||||||||
Cost of sales (i) | (20,027 | ) | (15,518 | ) | (36,464 | ) | (60,954 | ) | ||||||||||
Gross profit excluding idled mine asset costs (ii) | 11,789 | 13,664 | 19,537 | 39,339 | ||||||||||||||
Gross profit | 10,933 | 12,791 | 15,608 | 36,645 | ||||||||||||||
Other operating expenses | (575 | ) | (1,245 | ) | (5,255 | ) | (3,992 | ) | ||||||||||
Administration expenses | (1,789 | ) | (2,074 | ) | (4,851 | ) | (8,061 | ) | ||||||||||
Evaluation and exploration expenses | (63 | ) | (22 | ) | (171 | ) | (70 | ) | ||||||||||
Profit from operations | 8,506 | 9,450 | 5,331 | 24,522 | ||||||||||||||
Finance costs | (9,885 | ) | (7,184 | ) | (24,250 | ) | (20,915 | ) | ||||||||||
Finance income | 2,583 | 68 | 2,600 | 4,381 | ||||||||||||||
Share of earnings of a joint venture | 660 | 277 | 882 | 1,104 | ||||||||||||||
Income tax expense | (793 | ) | (468 | ) | (2,425 | ) | (2,708 | ) | ||||||||||
Net profit/(loss) attributable to equity holders of the Company | 1,071 | 2,143 | (17,862 | ) | 6,384 | |||||||||||||
Basic and diluted earnings/(loss) per share | $ | - | $ | 0.01 | $ | (0.07 | ) | $ | 0.02 | |||||||||
(i) | Revenue and cost of sales relate to the Company’s | |||||||||||||||||
(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 Financial Results
For the three months ended
The Company recorded a gross profit of
Revenue was
Royalty regime in
The royalty regime in
On
On
Cost of sales was
Three months ended | ||||||||
$ in thousands | 2020 | 2019 | ||||||
Operating expenses | $ | 13,390 | $ | 15,485 | ||||
Share-based compensation expense | 4 | 2 | ||||||
Depreciation and depletion | 2,297 | 2,121 | ||||||
Royalties | 3,480 | 2,326 | ||||||
Reversal of impairment of coal stockpile inventories | - | (5,289) | ||||||
Cost of sales from mine operations | 19,171 | 14,645 | ||||||
Cost of sales related to idled mine assets | 856 | 873 | ||||||
Cost of sales | $ | 20,027 | $ | 15,518 |
Operating expenses in cost of sales were
Cost of sales in the third quarter of 2019 included a reversal of impairment of coal stockpile inventories of
Cost of sales related to idled mine assets in the third quarter of 2020 included
Other operating expenses was
Three months ended | ||||||||
$ in thousands | 2020 | 2019 | ||||||
CIC management fee | $ | (864) | $ | (1,175) | ||||
Reversal of provision/(provision) for doubtful trade and other receivables | 482 | (344) | ||||||
Foreign exchange gain/(loss) | (113) | 477 | ||||||
Loss on disposal of property, plant and equipment | (80) | - | ||||||
Provision for commercial arbitration | - | (180) | ||||||
Loss on disposal of properties for resale | - | (23) | ||||||
Other operating expenses | $ | (575) | $ | (1,245) |
Administration expenses were
$ in thousands | Three months ended | |||||||
2020 | 2019 | |||||||
Corporate administration | $ | 394 | $ | 457 | ||||
Professional fees | 395 | 365 | ||||||
Salaries and benefits | 781 | 1,084 | ||||||
Share-based compensation expense | 15 | 7 | ||||||
Depreciation | 204 | 161 | ||||||
Administration expenses | $ | 1,789 | $ | 2,074 |
The decrease was mainly due to the decrease in salaries and benefits incurred during the third quarter of 2020.
The Company continued to minimize evaluation and exploration expenditures in the third quarter of 2020 in order to preserve the Company’s financial resources. Evaluation and exploration activities and expenditures in the third 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
For the nine months ended
The Company recorded a
Revenue was
Cost of sales was
Nine months ended | ||||||||
$ in thousands | 2020 | 2019 | ||||||
Operating expenses | $ | 21,912 | $ | 44,794 | ||||
Share-based compensation expense | 23 | 7 | ||||||
Depreciation and depletion | 4,163 | 8,379 | ||||||
Royalties | 6,437 | 6,903 | ||||||
Reversal of impairment of coal stockpile inventories | - | (1,823) | ||||||
Cost of sales from mine operations | 32,535 | 58,260 | ||||||
Cost of sales related to idled mine assets | 3,929 | 2,694 | ||||||
Cost of sales | $ | 36,464 | $ | 60,954 |
Operating expenses in cost of sales were
Cost of sales related to idled mine assets in the first nine months of 2020 included
Cost of sales in the first nine months of 2019 included a reversal of impairment of coal stockpile inventories of
Other operating expenses was
Nine months ended | ||||||||
$ in thousands | 2020 | 2019 | ||||||
Provision for commercial arbitration | $ | (4,634) | $ | (406) | ||||
CIC management fee | (1,399) | (3,355) | ||||||
Reversal of provision/(provision) for doubtful trade and other receivables | 200 | (441) | ||||||
Foreign exchange gain | 639 | 478 | ||||||
Gain/(loss) on disposal of property, plant and equipment | (61) | 29 | ||||||
Provision for prepaid expenses and deposits | - | (260) | ||||||
Loss on disposal of properties for resale | - | (37) | ||||||
Other operating expenses | $ | (5,255) | $ | (3,992) |
Administration expenses were
Nine months ended | ||||||||
$ in thousands | 2020 | 2019 | ||||||
Corporate administration | $ | 842 | $ | 1,555 | ||||
Professional fees | 944 | 2,668 | ||||||
Salaries and benefits | 2,448 | 3,315 | ||||||
Share-based compensation expense | 84 | 30 | ||||||
Depreciation | 533 | 493 | ||||||
Administration expenses | $ | 4,851 | $ | 8,061 | ||||
Administration expenses were lower for the first nine months of 2020 compared to the first nine months of 2019 primarily due to decrease in professional fees incurred.
The Company continued to minimize evaluation and exploration expenditures in the first nine months of 2020 in order to preserve the Company’s financial resources. Evaluation and exploration activities and expenditures in the first nine months of 2020 were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining licenses.
Finance costs were
Summary of Quarterly Operational Data
2020 | 2019 | 2018 | |||||||||||||||||||||||||||
Quarter Ended | 30-Sep | 30-Jun | 31-Mar | 31-Dec | 30-Sep | 30-Jun | 31-Mar | 31-Dec | |||||||||||||||||||||
Sales Volumes, Prices and Costs | |||||||||||||||||||||||||||||
Premium semi-soft coking coal | |||||||||||||||||||||||||||||
Coal sales (millions of tonnes) | 0.35 | 0.21 | 0.07 | 0.39 | 0.05 | 0.12 | 0.11 | 0.24 | |||||||||||||||||||||
Average realized selling price (per tonne) | $ | 30.17 | $ | 28.69 | $ | 28.46 | $ | 29.18 | $ | 31.49 | $ | 32.72 | $ | 47.34 | $ | 47.37 | |||||||||||||
Standard semi-soft coking coal/ premium thermal coal | |||||||||||||||||||||||||||||
Coal sales (millions of tonnes) | 0.54 | 0.26 | 0.13 | 0.40 | 0.51 | 0.59 | 0.85 | 0.40 | |||||||||||||||||||||
Average realized selling price (per tonne) | $ | 30.80 | $ | 33.12 | $ | 32.71 | $ | 31.88 | $ | 31.67 | $ | 35.67 | $ | 33.34 | $ | 32.60 | |||||||||||||
Standard thermal coal | |||||||||||||||||||||||||||||
Coal sales (millions of tonnes) | - | - | - | - | - | - | 0.09 | 0.12 | |||||||||||||||||||||
Average realized selling price (per tonne) | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 34.88 | $ | 24.26 | |||||||||||||
Washed coal | |||||||||||||||||||||||||||||
Coal sales (millions of tonnes) | 0.10 | 0.02 | - | 0.20 | 0.25 | 0.17 | 0.01 | 0.15 | |||||||||||||||||||||
Average realized selling price (per tonne) | $ | 41.30 | $ | 43.26 | $ | - | $ | 42.95 | $ | 42.37 | $ | 44.20 | $ | 45.07 | $ | 44.02 | |||||||||||||
Total | |||||||||||||||||||||||||||||
Coal sales (millions of tonnes) | 0.99 | 0.49 | 0.20 | 0.99 | 0.81 | 0.88 | 1.06 | 0.91 | |||||||||||||||||||||
Average realized selling price (per tonne) | $ | 31.63 | $ | 31.66 | $ | 31.18 | $ | 33.04 | $ | 34.98 | $ | 36.80 | $ | 34.91 | $ | 37.32 | |||||||||||||
Raw coal production (millions of tonnes) | 0.52 | - | 0.01 | 1.48 | 1.21 | 1.33 | 1.03 | 1.87 | |||||||||||||||||||||
Cost of sales of product sold (per tonne) | $ | 20.23 | $ | 21.16 | $ | 30.36 | $ | 23.68 | $ | 19.16 | $ | 25.04 | $ | 22.08 | $ | 30.80 | |||||||||||||
Direct cash costs of product sold (per tonne) (i) | $ | 12.38 | $ | 9.90 | $ | 11.69 | $ | 13.61 | $ | 18.03 | $ | 17.18 | $ | 10.82 | $ | 14.41 | |||||||||||||
Mine administration cash costs of product sold (per tonne) (i) | $ | 1.15 | $ | 1.70 | $ | 2.50 | $ | 1.29 | $ | 1.09 | $ | 1.39 | $ | 1.41 | $ | 2.19 | |||||||||||||
Total cash costs of product sold (per tonne) (i) | $ | 13.53 | $ | 11.60 | $ | 14.19 | $ | 14.90 | $ | 19.12 | $ | 18.57 | $ | 12.23 | $ | 16.60 | |||||||||||||
Other Operational Data | |||||||||||||||||||||||||||||
Production waste material moved (millions of bank cubic meters) | 1.67 | - | 0.57 | 3.61 | 4.36 | 5.34 | 4.91 | 5.54 | |||||||||||||||||||||
Strip ratio (bank cubic meters of waste material per tonne of coal produced) | 3.20 | - | 85.08 | 2.44 | 3.61 | 4.01 | 4.76 | 2.97 | |||||||||||||||||||||
Lost time injury frequency rate (ii) | - | 0.04 | 0.09 | 0.08 | 0.08 | 0.06 | 0.00 | 0.00 | |||||||||||||||||||||
(i) | A Non-IFRS financial measure. 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. | ||||||||||||||||||||||||||||
Summary of Quarterly Financial Results
The Company’s consolidated financial statements are reported under IFRS issued by the
$ in thousands, except per share information | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||
Quarter Ended | 30-Sep | 30-Jun | 31-Mar | 31-Dec | 30-Sep | 30-Jun | 31-Mar | 31-Dec | |||||||||||||||||||||
Financial Results | |||||||||||||||||||||||||||||
Revenue (i) | $ | 30,960 | $ | 14,975 | $ | 6,137 | $ | 32,113 | $ | 28,309 | $ | 32,479 | $ | 36,811 | $ | 33,814 | |||||||||||||
Cost of sales (i) | (20,027 | ) | (10,366 | ) | (6,071 | ) | (23,446 | ) | (15,518 | ) | (22,031 | ) | (23,405 | ) | (28,027 | ) | |||||||||||||
Gross profit excluding idled mine asset costs | 11,789 | 6,286 | 1,462 | 9,971 | 13,664 | 11,318 | 14,357 | 7,305 | |||||||||||||||||||||
Gross profit including idled mine asset costs | 10,933 | 4,609 | 66 | 8,667 | 12,791 | 10,448 | 13,406 | 5,787 | |||||||||||||||||||||
Other operating income/(expenses) | (575 | ) | (5,150 | ) | 470 | (1,589 | ) | (1,245 | ) | (2,333 | ) | (414 | ) | (2,921 | ) | ||||||||||||||
Administration expenses | (1,789 | ) | (1,291 | ) | (1,771 | ) | (1,386 | ) | (2,074 | ) | (2,878 | ) | (3,109 | ) | (1,583 | ) | |||||||||||||
Evaluation and exploration expenses | (63 | ) | (52 | ) | (56 | ) | (382 | ) | (22 | ) | (23 | ) | (25 | ) | (36 | ) | |||||||||||||
Profit/(loss) from operations | 8,506 | (1,884 | ) | (1,291 | ) | 5,310 | 9,450 | 5,214 | 9,858 | 1,247 | |||||||||||||||||||
Finance costs | (9,885 | ) | (7,258 | ) | (7,135 | ) | (7,095 | ) | (7,184 | ) | (7,001 | ) | (6,739 | ) | (10,899 | ) | |||||||||||||
Finance income | 2,583 | 2 | 43 | 36 | 68 | 4,305 | 17 | 13 | |||||||||||||||||||||
Share of earnings/(loss) of a joint venture | 660 | 268 | (46 | ) | 225 | 277 | 375 | 452 | 416 | ||||||||||||||||||||
Income tax expense | (793 | ) | (900 | ) | (732 | ) | (659 | ) | (468 | ) | (801 | ) | (1,439 | ) | (1,023 | ) | |||||||||||||
Net profit/(loss) | 1,071 | (9,772 | ) | (9,161 | ) | (2,183 | ) | 2,143 | 2,092 | 2,149 | (10,246 | ) | |||||||||||||||||
Basic and diluted earnings/(loss) per share | $ | - | $ | (0.04 | ) | $ | (0.03 | ) | $ | (0.01 | ) | $ | 0.01 | $ | 0.01 | $ | 0.01 | $ | (0.04 | ) | |||||||||
(i) | Revenue and cost of sales relate to the Company’s | ||||||||||||||||||||||||||||
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.
On
- 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
September 30, 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
Costs reimbursable to Turquoise Hill Resources Ltd (“Turquoise Hill”)
Prior to the completion of a private placement with
As at
Going concern considerations
The Company’s condensed consolidated interim financial statements have been prepared on a going concern basis which assumes that the Company will continue operating until at least
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 condensed consolidated interim financial statements. The Company had a deficiency in assets of
Included in the working capital deficiency as at
In addition, the Common Shares have been suspended from trading since
The Company also has other current liabilities, including trade and other payables of
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 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
Further, the Company was informed that effective as of
On
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 closures and preserve its working capital, the Company temporarily ceased major mining operations (including coal mining), reduced production to only coal-blending activities and placed approximately half of its workforce on furlough from
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 condensed consolidated interim 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 condensed consolidated interim 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
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
CIC Convertible Debenture
In
On
On
On
The key repayment terms of the 2019 Deferral Agreement are: (i) the Company agreed to pay a total of
At any time before the payment under the terms of the 2019 Deferral Agreement is fully repaid, the Company is required to consult with and obtain written consent from CIC prior to effecting a replacement or termination of either or both of its Chief Executive Officer and its Chief Financial Officer, otherwise this will constitute an event of default under the CIC Convertible Debenture, but CIC shall not withhold its consent if the Board of Directors (the “Board”) proposes to replace either or both such officers with nominees selected by the Board, provided that the Board acted honestly and in good faith with a view to the best interests of the Company in the selection of the applicable replacements.
As a condition to agreeing to the Deferral, CIC required that the Cooperation Agreement dated
Pursuant to their terms, both the 2019 Deferral Agreement and the Amended and Restated Cooperation Agreement became effective on
In connection with the 2019 Deferral Agreement, the Company also announced that it intends to discuss a potential debt restructuring plan with respect to amounts owing to CIC which is mutually beneficial to the Company and CIC; and to form a special committee comprised of independent directors to ensure that the interests of its minority shareholders are fairly considered in the negotiation and review of any such restructuring; however, there can be no assurance that a favorable outcome will be reached. As of the date hereof, there has not been any significant progress in relations to the restructuring plan.
On
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 Amount would otherwise have been due and payable under the 2019 Deferral Agreement; and (ii) a deferral fee equal to 2.5% per annum on the Management Fee, commencing on the date on which the 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 andJune 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
On
On
On
On
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 ofAugust 17, 2020 , in each case for a period of more than five trading days. - As consideration for the deferral of the 2020 November Deferral Amounts, the Company agreed to pay CIC: (i) a deferral fee equal to 6.4% per annum on the 2020 November Deferral Amounts payable under the CIC Convertible Debenture and the 2020 June Deferral Agreement, commencing on the date on which each such 2020 November Deferral Amount would otherwise have been due and payable under the CIC Convertible Debenture or the 2020 June 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 2020 June 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 theNovember 2020 PIK Interest is fully repaid, CIC reserves the right to require the Company to pay and satisfy the amount of theNovember 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.
Until such time as the 2020 November Deferral Agreement is approved by the Company’s shareholders and the deferral and waiver thereunder in favour of the Company become effective, the Company remains in default under the CIC Convertible Debenture and 2020 June Deferral Agreement and CIC may declare the amounts owing thereunder immediately due and payable, and may take steps to enforce payment thereof, which would have a material adverse effect on the business and operations of the Company and could 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.
A deferral of the 2020 June Deferral Amount was not in effect as at
Commercial Arbitration in
On
On
On
On
On
On
REGULATORY ISSUES AND CONTINGENCIES
Class Action Lawsuit
In
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
Both the plaintiffs and the Company appealed the Leave Motion decision to the
The Company filed an application for leave to appeal to the
In
Since
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
Toll Wash Plant Agreement with Ejin Jinda
In 2011, the Company entered into an agreement with Ejin Jinda, a subsidiary of
Under the original agreement with Ejin Jinda, which required the commercial operation of the wet washing facility to commence on
Special Needs Territory in Umnugobi
On
On
On
Termination of Soumber Deposit Mining Licenses
On
According to the Notice Letter, the Soumber Licenses have been terminated pursuant to Clause 56.1.5 of Article 56 of the Minerals Law, Clauses 4.2.1 and 4.2.5 of Article 4 and Clause 28.1.1 of Article 28 of the General Administrative Law and a decision order of a working group established under an order of the Minister of Environment and Tourism (
The Company believes the cancellation of the Soumber Licenses is without merit. The Company is not aware of any failure on its part to fulfill its environmental reclamation duties as they relate to the Soumber Deposit. On
Mongolian Royalties
During 2017, the Company was ordered by the Mongolian tax authority to apply the “reference price” determined by the Government of
On
Restrictions on Importing F-Grade Coal into
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
OUTLOOK
Looking forward, market conditions in
In the long run, the Company remains cautiously optimistic regarding the Chinese coal market as coal is still considered to be the primary energy source which
The Company’s objectives for the medium term are as follows:
- Enhance product mix – The Company will focus on improving the product mix and increase production of higher quality coal by: (i) improving mining operations and employing enhanced mining techniques and equipment; (ii) washing lower quality coal in the Company’s coal wash plant; (iii) blending lower quality coal with higher quality coal; and (iv) adopting other processing options available to the Company.
- Expand customer base – The Company will endeavor to increase sales volume, expand its sales network and diversify its customer base so as to enhance the pricing competency of the Company.
- Optimize cost structure – The Company will aim to reduce its production costs and optimize its cost structure through innovation, ongoing training, productivity enhancement and engaging third party contract mining companies.
- Operate in a socially responsible manner – The Company will continue to maintain the highest standards in health, safety and environmental performance in a corporate socially responsible manner.
Going forward, the Company will continue to focus on creating shareholders value by leveraging its key competitive strengths, including:
- Strategic location –
The Ovoot Tolgoi Mine is located approximately 40km fromChina , 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 inChina . - A large resources and reserves base – The Ovoot Tolgoi Deposit has mineral reserves of 114.1 million tonnes, while the aggregate coal resources include measured and indicated mineral resources of 194.6 million tonnes and inferred resources of 32.1 million tonnes.
- Bridge between
Mongolia andChina – The Company is well positioned to capture the resulting business opportunities betweenChina andMongolia under the Belt and Road Initiative. The Company will seek potential strategic support from its two largest shareholders (i.e., CIC and Cinda), which are both state-owned-enterprises inChina , and its strong operational record for the past twelve years inMongolia , being one of the largest enterprises and taxpayers inMongolia .
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, impairments 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.
Summarized Comprehensive Income Information
(Expressed in thousands of USD, except for share and per share amounts)
Three months ended | Nine months ended | ||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||
Revenue | $ | 30,960 | $ | 28,309 | $ | 52,072 | $ | 97,599 | |||||||||
Cost of sales | (20,027 | ) | (15,518 | ) | (36,464 | ) | (60,954 | ) | |||||||||
Gross profit | 10,933 | 12,791 | 15,608 | 36,645 | |||||||||||||
Other operating expenses | (575 | ) | (1,245 | ) | (5,255 | ) | (3,992 | ) | |||||||||
Administration expenses | (1,789 | ) | (2,074 | ) | (4,851 | ) | (8,061 | ) | |||||||||
Evaluation and exploration expenses | (63 | ) | (22 | ) | (171 | ) | (70 | ) | |||||||||
Profit from operations | 8,506 | 9,450 | 5,331 | 24,522 | |||||||||||||
Finance costs | (9,885 | ) | (7,184 | ) | (24,250 | ) | (20,915 | ) | |||||||||
Finance income | 2,583 | 68 | 2,600 | 4,381 | |||||||||||||
Share of earnings of a joint venture | 660 | 277 | 882 | 1,104 | |||||||||||||
Profit/(loss) before tax | (1,864 | ) | 2,611 | (15,437 | ) | 9,092 | |||||||||||
Current income tax expense | (793 | ) | (468 | ) | (2,425 | ) | (2,708 | ) | |||||||||
Net profit/(loss) attributable to equity holders of the Company | (1,071 | ) | 2,143 | (17,862 | ) | 6,384 | |||||||||||
Other comprehensive income to be reclassified to profit or loss in subsequent periods | |||||||||||||||||
Exchange difference on translation of foreign operation | (1,576 | ) | (695 | ) | (6,365 | ) | (1,474 | ) | |||||||||
Net comprehensive income/(loss) attributable to equity holders of the Company | $ | (505 | ) | $ | 1,448 | $ | (24,227 | ) | $ | 4,910 | |||||||
Basic and diluted earnings/(loss) per share | $ | - | $ | 0.01 | $ | (0.07 | ) | $ | 0.02 | ||||||||
Summarized Financial Position Information
(Expressed in thousands of USD)
As at | |||||||||
2020 | 2019 | ||||||||
Assets | |||||||||
Current assets | |||||||||
Cash and cash equivalents | $ | 3,590 | $ | 7,164 | |||||
Restricted cash | 885 | 862 | |||||||
Trade and other receivables | 841 | 1,778 | |||||||
Inventories | 39,953 | 52,237 | |||||||
Prepaid expenses and deposits | 1,443 | 2,312 | |||||||
Total current assets | 46,712 | 64,353 | |||||||
Non-current assets | |||||||||
Property, plant and equipment | $ | 131,958 | $ | 137,221 | |||||
Inventories | 2,613 | 9,332 | |||||||
Investments in a joint venture | 16,620 | 17,521 | |||||||
Total non-current assets | 151,191 | 164,074 | |||||||
Total assets | $ | 197,903 | $ | 228,427 | |||||
Equity and liabilities | |||||||||
Current liabilities | |||||||||
Trade and other payables | $ | 77,597 | $ | 87,013 | |||||
Provision for commercial arbitration | - | 5,593 | |||||||
Deferred revenue | 8,109 | 16,057 | |||||||
Interest-bearing borrowings | 2,837 | 2,835 | |||||||
Lease liabilities | 211 | 460 | |||||||
Current portion of convertible debenture | 174,977 | 67,106 | |||||||
Total current liabilities | 263,731 | 179,064 | |||||||
Non-current liabilities | |||||||||
Lease liabilities | - | 108 | |||||||
Convertible debenture | - | 89,868 | |||||||
Decommissioning liability | 7,510 | 8,605 | |||||||
Total non-current liabilities | 7,510 | 98,581 | |||||||
Total liabilities | 271,241 | 277,645 | |||||||
Equity | |||||||||
Common shares | 1,098,634 | 1,098,634 | |||||||
Share option reserve | 52,696 | 52,589 | |||||||
Capital reserve | 396 | 396 | |||||||
Exchange reserve | (29,593 | ) | (23,228 | ) | |||||
Accumulated deficit | (1,195,471 | ) | (1,177,609 | ) | |||||
Total deficiency in assets | (73,338 | ) | (49,218 | ) | |||||
Total equity and liabilities | $ | 197,903 | $ | 228,427 | |||||
Net current liabilities | $ | (217,019 | ) | . | $ | (114,711 | ) | ||
Total assets less current liabilities | $ | (65,828 | ) | $ | 49,363 | ||||
REVIEW OF INTERIM RESULTS
The condensed consolidated interim financial statements of the Company for the three and nine months ended
The Company’s results for the three and nine months ended
ABOUT SOUTHGOBI
SouthGobi, listed on the
Contact:
Investor Relations | ||
Office: | +852 2156 7030 ( | |
+1 604 762 6783 ( | ||
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 condensed consolidated interim financial statements and the impact thereof;
- the Company’s expectations of sufficient liquidity and capital resources to meet its ongoing obligations and future contractual commitments, including the Company’s ability to settle its trade payables, to secure additional funding and to meet its obligations under each of the CIC Convertible Debenture, the 2020 June Deferral Agreement, the 2020 May Deferral Agreement, the 2020 April Deferral Agreement, the 2020 March Deferral Agreement, the 2020 February Deferral Agreement, the 2020 November Deferral Agreement, the 2019 Deferral Agreement, the Amended and Restated Cooperation Agreement and the 2018 Bank Loan, as the same become due;
- the Company's anticipated financing needs, development plans and future production levels;
- the ability of the Company to successfully apply for a revocation of the CTO;
- the resumption of trading in the Common Shares on the TSX or HKEX;
- the Company entering into discussions with CIC regarding a potential debt restructuring plan with respect to the amounts owing to CIC;
- the results and impact of the
Ontario class action (as described under section “Regulatory Issues and Contingencies” of this press release under the heading entitled "Class Action Lawsuit"); - the estimates and assumptions included in the Company’s impairment analysis and the possible impact of changes thereof;
- the agreement with Ejin Jinda and the payments thereunder (as described under section “Regulatory Issues and Contingencies” of this press release under the heading entitled "Toll Wash Plant Agreement with Ejin Jinda”);
- the ability of the Company to successfully recover the balance of its doubtful trade and notes receivables;
- the ability of the Company to enhance the operational efficiency and output throughput of the washing facilities at Ovoot Tolgoi;
- the ability to enhance the product value by conducting coal processing and coal washing;
- the impact of the Company’s activities on the environment and actions taken for the purpose of mitigation of potential environmental impacts and planned focus on health, safety and environmental performance;
- the impact of the delays in the custom clearance process at the Ceke border on the Company’s operations and the restrictions established by Chinese authorities on the import of F-grade coal into
China ; - the impact of the COVID-19 pandemic and closure of Mongolia’s southern border with
China on the Company’s business, financial condition and operations; - the ability of the Company to successfully appeal the decision of MRAM to terminate the Soumber Licenses and the anticipated timing of the
High Court ruling on the appeal; - the ability of the Company to successfully negotiate an extension of the agreement with the third party contractor relating to the operation of the wash plant at the Ovoot Tolgoi mine site;
- the ability of the Company to successfully reinstate the Soumber Licenses;
- the future demand for coal in
China ; - future trends in the Chinese coal industry;
- the Company’s outlook and objectives for 2020 and beyond (as more particularly described under section “Outlook” of this press release); and
- other statements that are not historical facts.
Forward-looking information is based on certain factors and assumptions described below and elsewhere in this press release, including, among other things: the current mine plan for the Ovoot Tolgoi mine; mining, production, construction and exploration activities at the Company’s mineral properties; the costs relating to anticipated capital expenditures; the capacity and future toll rate of the paved highway; plans for the progress of mining license application processes; mining methods; the Company's anticipated business activities, planned expenditures and corporate strategies; management’s business outlook, including the outlook for 2020 and beyond; currency exchange rates; operating, labour and fuel costs; the ability of the Company to successfully apply for a revocation of the CTO; the ability to remedy the Delisting Criteria of the TSX and to satisfy the Resumption Guidance of the HKEX; the ability of the Company to raise additional financing; the anticipated royalties payable under Mongolia’s royalty regime; the future coal market conditions in
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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