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| Name | Symbol | Market | Type |
|---|---|---|---|
| CI Canadian Banks Coverd Call Income Class ETF | TSX:CIC | Toronto | Exchange Traded Fund |
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SouthGobi Resources Ltd. (TSX:SGQ)(HKSE:1878) (the "Company"). Reference is made
to the announcements of the Company dated November 8, 2013, November 11, 2013
and November 14, 2013 in relation to the decision by the Company's board of
directors (the "Board") to approve the restatement of the Company's consolidated
financial statements for 2011 and 2012. The Company today announced its restated
financial and operating results for the years ended December 31, 2011 and 2012.
All figures are in U.S. Dollars unless otherwise stated.
FINANCIAL STATEMENT RESTATEMENT
Restated financial statement and MD&A presentation
In the consolidated financial statements for the year ended December 31, 2012,
the Company has restated the financial position at December 31, 2012, December
31, 2011 and January 1, 2011, the results of operations for the years ended
December 31, 2012 and December 31, 2011 and the statement of changes in equity
and statement of cash flows for the years ended December 31, 2012 and December
31, 2011. The financial information and other affected information presented in
the restated 2012 Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A"), including financial information pertaining
to selected quarterly data of 2012 and 2011, have been restated to give effect
to the correction in the point of revenue recognition.
The Company has updated the disclosure presented in the restated consolidated
financial statements and restated MD&A to reflect events occurring subsequent to
the original filing.
In consultation with its auditor PricewaterhouseCoopers LLP ("PwC"), the Company
has included extensive disclosure regarding the periods affected by the
restatement in the MD&A and this announcement, therefore, the Company has not
amended and does not intend to amend the annual filings made for the years ended
December 31, 2011 or 2010 or the interim filings of the affected years prior to
the interim filing for the three and nine months ended September 30, 2013,
although restated balances will be presented as comparatives in future filings
where appropriate. Accordingly, the restated MD&A should be read in conjunction
with the Company's filings that have been filed on or after November 14, 2013,
the effective date of the interim filing for the three and nine months ended
September 30, 2013.
As a result of the material effects of the restatement on the Company's
consolidated financial statements, the consolidated financial statements,
auditors' reports and related financial information for the affected periods
contained in the Company's filings filed prior to November 14, 2013 should no
longer be relied upon.
Summary of key impacts of restatement
Year ended
------------------------------------------------------
December 31, 2012
------------------------------------------------------
As previously
reported Adjustment Restated
------------------ ----------------------------------
Raw coal production
(millions of tonnes) 1.33 - 1.33
Coal sales (millions
of tonnes) 1.33 0.65 1.98
Average realized
selling price (per $ $ $
tonne) 47.76 (0.27) 47.49
Revenue $ 53,116 $ 24,945 $ 78,061
Cost of sales (97,118) (30,289) (127,407)
Other operating
expenses (54,345) 12,700 (41,645)
Net income/(loss) (103,019) 5,517 (97,502)
Basic income/(loss)
per share $ (0.57) $ 0.03 $ (0.54)
Year ended
----------------------------------------------------
December 31, 2011
----------------------------------------------------
As previously
reported Adjustment Restated
---------------- ----------------------------------
Raw coal production
(millions of tonnes) 4.57 - 4.57
Coal sales (millions
of tonnes) 4.02 (0.93) 3.09
Average realized
selling price (per $ $ $
tonne) 54.03 (3.39) 50.64
Revenue $ 179,049 $ (48,293) $ 130,756
Cost of sales (127,343) 35,165 (92,178)
Other operating
expenses (29,189) 872 (28,317)
Net income/(loss) 57,745 (9,192) 48,552
Basic income/(loss)
per share $ 0.32 $ (0.05) $ 0.27(i)
(i) Amount revised to $0.27 from $0.24 as previously reported in the
announcements dated November 11, 2013 and November 14, 2013
----------------------------------------------------
December 31, 2012
----------------------------------------------------
As previously
reported Adjustment Restated
----------------- ---------------------------------
Trade and other
receivables $ 17,430 $ (14,138) $ 3,292
Inventories 53,661 6,074 59,735
Deferred revenue - 8,181 8,181
----------------------------------------------------
December 31, 2011
--------------------------------------------------
As previously
reported Adjustment Restated
--------------- ---------------------------------
Trade and other
receivables $ 80,285 $ (64,051) $ 16,234
Inventories 52,443 52,418 104,861
Deferred revenue - 17,653 17,653
Year ended
------------------------------------------------------
December 31, 2010
------------------------------------------------------
As previously
reported Adjustment Restated
------------------ ----------------------------------
Raw coal production
(millions of tonnes) 2.79 - 2.79
Coal sales (millions
of tonnes) 2.54 (0.81) 1.73
Average realized
selling price (per
tonne) $ 34.61 $ 3.63 $ 38.24
Revenue $ 79,777 $ (19,365) $ 60,412
Cost of sales (69,904) 17,253 (52,651)
Other operating
expenses (12,643) 218 (12,425)
Net income/(loss) (116,195) (1,421) (117,616)
Basic income/(loss)
per share $ (0.66) $ (0.01) $ (0.67)
---------------------------------------------------
December 31, 2010
------------------------------------------------------
As previously
reported Adjustment Restated
------------------ ----------------------------------
Trade and other
receivables $ 30,246 $ (10,911) $ 19,335
Inventories 26,160 17,253 43,413
Deferred revenue - 10,827 10,827
Following the correction in the Company's point of revenue recognition, revenues
from affected coal sales contracts are recognized in later periods than
previously reported and some revenue has been reported after December 31, 2012
as not all contracted coal has been collected by customers. This change results
in lower revenues and cost of sales in 2010 and 2011 followed by higher revenues
and cost of sales in 2012.
The adjustments to other operating expenses in each applicable period primarily
result from the reversal of provisions for doubtful trade and other receivables
in those periods.
The impact on the net income/(loss) for the restated periods follows from the
restated revenues, net of cost of sales and adjustments to other operating
expenses. The net loss for the year 2010 increases, the net income for the year
2011 decreases and the net loss for the year 2012 decreases.
During the periods from 2010 to December 31, 2012, trade and other receivables
have been adjusted lower and deferred revenue recognized to reflect revenue
being recorded in later periods than previously reported. The inventory balance
increased over the same period to reflect higher coal inventory stockpile
balances. Prepaid expenses also increased, with a corresponding decrease in
trade and other payables, as coal sales royalty expenses were recognized in
later periods than previously reported. Further information on these adjustments
and a reconciliation of amounts previously reported is contained in Note 2 of
the restated consolidated financial statements.
The restatements do not result in a change in cash at the end of any period. The
statement of cash flows as reported does not change except for the
reclassification of various items within operating activities. Financing
activities, investing activities, change in cash, cash at the beginning of
period and cash at the end of period remain unchanged from previously filed
financial statements.
Internal controls over financial reporting
In conjunction with the matter described above, the Company's management has
identified a material weakness in the Company's internal controls over financial
reporting as of December 31, 2012 and December 31, 2011, resulting in the
failure to properly account for revenues in complex transactions. Specifically,
the Company did not ensure that all aspects of sales arrangements were
considered in the determination of the appropriate accounting for contracts in
which the specified location of transfer of title in the contracts is the
customer's stockpile in a stockyard located within the SouthGobi Ovoot Tolgoi
mining license area. As a result of the material weakness, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that internal
controls over financial reporting were not effective as of December 31, 2012 and
December 31, 2011.
Management has been enhancing internal controls over financial reporting by
developing a more thorough review process in evaluating complex sales
arrangements in each reporting period. The remedial controls that have now been
implemented must operate for a sufficient period of time before management can
conclude, through testing, that these controls are effective. Management expects
this to be achieved by December 31, 2013.
OPERATING UPDATE
On November 19, 2013, the Company paid $8.1 million in cash to the China
Investment Corporation ("CIC") in accordance with the convertible debenture
agreement. The amount related to the 6.4% per annum cash interest payment and is
payable semi-annually. Further, on November 21, 2013, the Company issued 3.5
million common shares to the CIC. The common share issuance related to the
annual 1.6% common share interest payment, where the number of common shares
issued was based on the 50-day volume-weighted average share price on November
19, 2013 of Cdn$1.21.
Except as noted above, the Company's Outlook and other operating information
from the Company's filing on November 14, 2013, the effective date of the
interim filing for the three and nine months ended September 30, 2013, remain
unchanged.
REVIEW OF QUARTERLY OPERATING RESULTS
The Company's restated quarterly operating results for the years ended December
31, 2011 and 2012 and the fourth quarter of 2010 are summarized in the table
below:
--------------------------------------------
2012 (i)
-----------------------------------------------------------------
QUARTER ENDED 31-Dec 30-Sep 30-Jun 31-Mar
-----------------------------------------------------------------
Raw coal production
(millions of tonnes) - - 0.27 1.07
Sales volumes and
prices (ii)
SouthGobi premium
semi-soft coking
coal
Coal sales (millions
of tonnes) 0.03 - 0.42 0.33
Average realized
selling price (per
tonne) (iii) $ 47.86 $ - $ 67.46 $ 67.58
SouthGobi standard
semi-soft coking
coal
Coal sales (millions
of tonnes) - 0.01 0.36 0.10
Average realized
selling price (per
tonne) (iii) $ - $ 49.91 $ 49.74 $ 49.43
SouthGobi thermal
coal
Coal sales (millions
of tonnes) - 0.31 0.28 0.15
Average realized
selling price (per
tonne) (iii) $ - $ 15.87 $ 34.10 $ 30.29
Total
Coal sales (millions
of tonnes) 0.03 0.32 1.06 0.58
Average realized
selling price (per
tonne) (iii) $ 47.86 $ 16.98 $ 52.86 $ 54.60
Costs
Direct cash costs of
product sold
excluding idled
mine costs (per $ 11.67 $ 9.56 $ 16.52 $ 22.09
tonne) (iv)
Total cash costs of
product sold
excluding idled
mine costs (per $ 16.75 $ 13.31 $ 17.85 $ 28.25
tonne) (iv)
Waste movement and
stripping ratio
Production waste
material moved
(millions of bank
cubic meters) - - 1.16 2.20
Strip ratio (bank
cubic meters of
waste material per
tonne of coal
produced) - - 4.31 2.07
Pre-production waste
material moved
(millions of bank
cubic meters) - - - -
Other operating
capacity statistics
Capacity
Number of mining
shovels/excavators
available at period
end 5 4 4 3
Total combined
stated mining
shovel/excavator
capacity at period
end (cubic meters) 113 98 98 64
Number of haul
trucks available at
period end 27 27 27 27
Total combined
stated haul truck
capacity at period
end (tonnes) 4,743 4,743 4,743 4,743
Employees and safety
Employees at period
end 465 644 693 720
Lost time injury
frequency rate (v) 0.1 0.2 0.2 0.3
-----------------------------------------------------------------
------------------------------------------ ---------
2011 (i) 2010 (i)
--------------------- ------------------------------------------ ---------
QUARTER ENDED 31-Dec 30-Sep 30-Jun 31-Mar 31-Dec
--------------------- ------------------------------------------ ---------
Raw coal production
(millions of tonnes) 1.34 1.25 0.87 1.11 1.38
Sales volumes and
prices (ii)
SouthGobi premium
semi-soft coking
coal
Coal sales (millions
of tonnes) 0.26 0.56 0.39 0.34 0.35
Average realized
selling price (per
tonne) (iii) $ 66.91 $ 66.73 $ 65.83 $ 56.50 $ 47.08
SouthGobi standard
semi-soft coking
coal
Coal sales (millions
of tonnes) 0.26 0.20 - - -
Average realized
selling price (per
tonne) (iii) $ 48.48 $ 48.17 $ - $ - $ -
SouthGobi thermal
coal
Coal sales (millions
of tonnes) 0.37 0.41 0.17 0.13 0.31
Average realized
selling price (per
tonne) (iii) $ 29.92 $ 35.49 $ 29.00 $ 31.10 $ 26.24
Total
Coal sales (millions
of tonnes) 0.89 1.17 0.56 0.47 0.65
Average realized
selling price (per
tonne) (iii) $ 46.18 $ 52.55 $ 54.66 $ 49.49 $ 37.31
Costs
Direct cash costs of
product sold
excluding idled
mine costs (per $ 24.70 $ 21.69 $ 22.01 $ 16.79 $ 8.58
tonne) (iv)
Total cash costs of
product sold
excluding idled
mine costs (per $ 25.92 $ 22.31 $ 23.57 $ 18.43 $ 10.20
tonne) (iv)
Waste movement and
stripping ratio
Production waste
material moved
(millions of bank
cubic meters) 4.58 4.10 4.08 3.85 3.56
Strip ratio (bank
cubic meters of
waste material per
tonne of coal
produced) 3.42 3.28 4.74 3.47 2.58
Pre-production waste
material moved
(millions of bank
cubic meters) - 0.39 0.80 0.49 0.73
Other operating
capacity statistics
Capacity
Number of mining
shovels/excavators
available at period
end 3 3 4 3 3
Total combined
stated mining
shovel/excavator
capacity at period
end (cubic meters) 64 64 98 83 82
Number of haul
trucks available at
period end 25 16 16 16 15
Total combined
stated haul truck
capacity at period
end (tonnes) 4,561 2,599 2,599 2,599 2,254
Employees and safety
Employees at period
end 720 695 658 600 544
Lost time injury
frequency rate (v) 0.2 0.2 0.1 0.1 0.2
--------------------- ------------------------------------------ ---------
(i) Restated. Reference is made to the announcements of the Company dated
November 8, 2013, November 11, 2013 and November 14, 2013 in relation
to the decision by the Company's Board to restate the consolidated
financial statements of the Company for 2011 and 2012.
(ii) The sales volumes previously disclosed as raw semi-soft coking coal,
raw medium-ash coal and raw higher-ash coal have now been reclassified
as SouthGobi premium semi-soft coking coal, SouthGobi standard semi-
soft coking coal and SouthGobi thermal coal, respectively, to reflect
the Company's new product strategy.
(iii) Average realized selling price excludes royalties and selling fees.
(iv) A non-International Financial Reporting Standards ("IFRS") financial
measure, see Non-IFRS Financial Measures section.
(v) Per 200,000 man hours.
For the year ended December 31, 2012
Mining activities at the Ovoot Tolgoi Mine were curtailed to varying degrees in
the second quarter of 2012, with mining activities fully curtailed at the end of
the second quarter, to manage coal inventories and to maintain efficient working
capital levels. Mining activities remained fully curtailed for the remainder of
2012; however, operations at the Ovoot Tolgoi Mine resumed on March 22, 2013.
In 2012, the Company produced 1.33 million tonnes of raw coal with a strip ratio
of 2.52 compared to production of 4.57 million tonnes of raw coal with a strip
ratio of 3.63 in 2011. The decrease in production primarily related to the
curtailment of the Company's mining operations in the last three quarters of the
year; whereas, the decrease in the strip ratio primarily related to the
below-trend strip ratio in the first quarter of 2012 which will be normalized
over the life-of-mine.
In 2012, the Company sold 1.98 million tonnes of coal at an average realized
selling price of $47.49 per tonne compared to sales of 3.09 million tonnes of
coal at an average realized selling price of $50.64 per tonne in 2011. The
Company's average realized selling price was negatively impacted by the
softening of the inland China coking coal markets closest to SouthGobi's
operations throughout 2012. The Company's higher-ash coals were impacted more
substantially than its other products.
Direct cash costs of product sold excluding idled mine costs (a non-IFRS
financial measure, see Non-IFRS Financial Measures section) were $16.86 per
tonne in 2012 compared to $22.81 per tonne in 2011. Direct cash costs of product
sold excluding idled mine costs primarily decreased due to a lower strip ratio
and reduced fuel prices.
For the three months ended December 31, 2012
For the three months ended December 31, 2012, the Company's mining activities
remained fully curtailed; however, the Company generated revenue through the
sale of existing coal stockpiles.
For the three months ended December 31, 2012, the Company sold 0.03 million
tonnes of coal at an average realized selling price of $47.86 per tonne compared
to sales of 0.89 million tonnes of coal at an average realized selling price of
$46.18 per tonne in 2011. For the three months ended December 31, 2012, the
Company's sales volumes and average realized selling price continued to be
negatively impacted by the softening of the inland China coking coal markets
closest to SouthGobi's operations.
Direct cash costs of product sold excluding idled mine costs (a non-IFRS
financial measure, see Non-IFRS Financial Measures section) were $11.67 per
tonne for the three months ended December 31, 2012 compared to $24.70 for the
three months ended December 31, 2011.
REVIEW OF QUARTERLY FINANCIAL RESULTS
The Company's restated quarterly financial results for the years ended December
31, 2011 and 2012 and the fourth quarter of 2010 are summarized in the table
below:
($ in thousands, except for per share information, unless otherwise indicated)
-----------------------------------------------
2012 (i)
----------------------------------------------------------------
QUARTER ENDED 31-Dec 30-Sep 30-Jun 31-Mar
----------------------------------------------------------------
Revenue $ 1,186 $ 3,804 $ 46,575 $ 26,497
Gross
profit/(loss)
excluding idled (12,601) (8,719) 20,277 4,657
mine costs
Gross profit
margin
excluding -1063% -229% 44% 18%
idled mine
costs
Gross
profit/(loss)
including idled (31,043) (27,650) 4,690 4,657
mine costs
Other operating
expenses (19,282) (18,315) (1,344) (2,702)
Administration
expenses (6,080) (5,178) (7,497) (5,882)
Evaluation and
exploration (508) (958) (2,099) (5,033)
expenses
Income/(loss)
from operations (56,913) (52,101) (6,250) (8,961)
Net
income/(loss) (56,564) (46,413) 15,955 (10,480)
Basic
income/(loss) (0.31) (0.26) 0.09 (0.06)
per share
Diluted
income/(loss) (0.31) (0.26) (0.04) (0.06)
per share
----------------------------------------------------------------
--------------------------------------------- ---------
2011 (i) 2010 (i)
---------------- ---------------------------------------------- ----------
QUARTER ENDED 31-Dec 30-Sep 30-Jun 31-Mar 31-Dec
---------------- ---------------------------------------------- ----------
Revenue $ 33,626 $ 50,616 $ 25,966 $ 20,547 $ 22,230
Gross
profit/(loss)
excluding idled 4,639 16,129 8,769 9,040 $ 1,838
mine costs
Gross profit
margin
excluding 14% 32% 34% 44% 8%
idled mine
costs
Gross
profit/(loss)
including idled 4,639 16,129 8,769 9,040 1,838
mine costs
Other operating
expenses (24,426) 80 (2,806) (1,165) (1,903)
Administration
expenses (8,612) (7,993) (6,808) (5,336) (6,599)
Evaluation and
exploration (14,513) (10,908) (4,356) (1,991) (4,144)
expenses
Income/(loss)
from operations (42,912) (2,692) (5,201) 548 (10,808)
Net
income/(loss) (27,732) 54,955 66,755 (45,426) (30,140)
Basic
income/(loss) (0.16) 0.29 0.36 (0.25) (0.17)
per share
Diluted
income/(loss) (0.18) (0.03) (0.01) (0.25) (0.17)
per share
---------------- ---------------------------------------------- ----------
-----------------------------------------------
2012 (i)
-----------------------------------------------------------------
QUARTER ENDED 31-Dec 30-Sep 30-Jun 31-Mar
-----------------------------------------------------------------
Net income/(loss) $ (56,564) $ (46,413) $ 15,955 $ (10,480)
Income/(loss)
adjustments, net
of tax
Idled mine costs 14,474 13,572 10,966 -
Share-based
compensation
expense/
(recovery) (1,144) 1,490 4,383 3,799
Net impairment
loss/
(recovery) on
assets 25,375 23,258 - -
Unrealized
foreign
exchange
losses/
(gains) 906 335 (355) (794)
Unrealized loss/
(gain) on
embedded
derivatives in
CIC debenture (662) (12,856) (26,770) 776
Realized loss/
(gain) on
disposal of
FVTPL
investments
(ii) 15 - 46 (85)
Unrealized loss/
(gain) on FVTPL
investments 664 1,197 2,282 339
Adjusted net
income/
(loss) (iii) (16,935) (19,418) 6,507 (6,446)
-----------------------------------------------------------------
--------------------------------------------- --------
2011 (i) 2010 (i)
----------------------------------------------------------------------------
QUARTER ENDED 31-Dec 30-Sep 30-Jun 31-Mar 31-Dec
----------------------------------------------------------------------------
Net income/(loss) $ (27,732) $ 54,955 $ 66,755 $ (45,426) $ (30,140)
Income/(loss)
adjustments, net
of tax
Idled mine costs - - - - -
Share-based
compensation
expense/
(recovery) 4,050 4,296 3,349 2,715 3,840
Net impairment
loss/
(recovery) on
assets 23,818 (2,925) - - 574
Unrealized
foreign
exchange
losses/
(gains) (184) (115) 45 (1,211) (1,837)
Unrealized loss/
(gain) on
embedded
derivatives in
CIC debenture (10,790) (62,058) (70,422) 36,780 19,995
Realized loss/
(gain) on
disposal of
FVTPL
investments
(ii) - - - - -
Unrealized loss/
(gain) on FVTPL
investments 155 2,449 (3,629) 4,116 (4,375)
Adjusted net
income/
(loss) (iii) (10,683) (3,398) (3,902) (3,026) (11,943)
----------------------------------------------------------------------------
(i) Restated. Reference is made to the announcements of the Company dated
November 8, 2013, November 11, 2013 and November 14, 2013 in relation
to the decision by the Company's Board to restate the consolidated
financial statements of the Company for 2011 and 2012.
(ii) FVTPL is defined as "fair value through profit or loss".
(iii) A non-IFRS financial measure, see Non-IFRS Financial Measures section.
For the year ended December 31, 2012
The Company recorded a net loss of $97.5 million for the year ended December 31,
2012 compared to a net income of $48.6 million for the year ended December 31,
2011.
Gross Profit/(Loss):
The Company's gross profit/(loss) is composed of revenue (which is presented net
of royalties and selling fees) and cost of sales and relates solely to the
Mongolian Coal Division. In 2012, the Company's gross profit/(loss) was
negatively impacted by $53.0 million of idled mine costs, resulting in a gross
loss of $49.3 million. The Company recorded a gross profit excluding idled mine
costs of $3.7 million in 2012 compared to a gross profit excluding idled mine
costs of $38.6 million in 2011. Gross profit will vary by year depending on
sales volumes, sales prices and unit costs.
In 2012, SouthGobi recorded revenue of $78.1 million compared to $130.8 million
in 2011. In the last three quarters of 2012, customers were reluctant to enter
into new sales contracts primarily due to the following:
-- Customers' ability to export coal through the Shivee Khuren Border
Crossing for the first half of 2012 was significantly below their
projections due to: a) the delayed opening of the expanded border
crossing infrastructure at the Shivee Khuren Border Crossing; b) the
extended closure of the Shivee Khuren Border Crossing for the Chinese
New Year and Mongolian Tsagaan Sar public holidays in the first quarter
of 2012; c) the closure of the existing gravel road used to transport
coal from the Ovoot Tolgoi Mine and neighboring mines to the Shivee
Khuren Border Crossing for over four weeks in the second quarter of
2012;
-- The uncertainty with respect to whether SouthGobi would receive a formal
request from the Mineral Resources Authority of Mongolia to suspend
mining activities on its Ovoot Tolgoi mining license, which caused
customers concern that they would be unable to collect and export
additional coal purchased from the Ovoot Tolgoi Mine in the second and
third quarters of 2012; and
-- The softening of inland China coking coal markets closest to SouthGobi's
operations throughout the last three quarters of 2012.
The Company is subject to a 5% royalty on all coal sales exported out of
Mongolia based on a set reference price per tonne published monthly by the
Government of Mongolia. Effective January 1, 2011, the Company is also subject
to a sliding scale additional royalty of up to 5% on coal sales exported out of
Mongolia based on the set reference price. Based on the 2012 reference prices,
the Company was subject to an average 8% royalty based on a weighted average
reference price of $88.07 per tonne. The Company's effective royalty rate for
2012, based on the Company's average realized selling price of $47.49 per tonne,
was 15%.
SouthGobi, together with other Mongolian mining companies impacted by the
escalation of effective royalty rates, opened a dialog with the appropriate
Government of Mongolia authorities with a view of moving to a more equitable
process for setting reference prices. Effective October 1, 2012 (for a six month
trial period), the royalty was determined using the contracted sales price per
tonne, not the reference price per tonne published by the Government of
Mongolia. As a result, the Company's effective royalty rate was reduced
significantly over the six month trial period. Despite SouthGobi, together with
other Mongolian mining companies, engaging the appropriate Government of
Mongolia authorities, the six month trial period was not extended and effective
April 1, 2013, the royalty on all coal sales exported out of Mongolia was once
again based on a set reference price per tonne published monthly by the
Government of Mongolia. In the fourth quarter of 2012 (a full quarter under the
trial period), the Company's effective royalty rate was 6%, a significant
reduction from prior quarters in 2012.
Cost of sales was $127.4 million in 2012 compared to $92.2 million in 2011. Cost
of sales comprise the direct cash costs of product sold, mine administration
cash costs of product sold, idled mine costs, inventory impairments, equipment
depreciation, depletion of mineral properties and share-based compensation
expense. Of the $127.4 million recorded as cost of sales in 2012, $74.4 million
related to mine operations and $53.0 million related to idled mine costs. Cost
of sales related to mine operations decreased in 2012 compared to 2011 primarily
due to lower sales volumes and lower unit costs, partially offset by coal
stockpile impairments totaling $20.5 million. Cost of sales related to idled
mine costs primarily consist of period costs, which are expensed as incurred and
depreciation expense. The depreciation expense relates to the Company's idled
plant and equipment.
Other Operating Expenses:
Other operating expenses in 2012 increased to $41.6 million compared to $28.3
million in 2011. The increase in other operating expenses primarily relates to
an impairment loss on available-for-sale financial assets, partially offset by
reduced public infrastructure costs.
In 2012, the Company recorded $35.5 million of provisions and impairments in
other operating expenses related to the following:
-- Trade and other receivables - the Company recorded a loss provision of
$1.0 million in 2012. The loss provision relates to a reduction in
expected insurance proceeds of $1.0 million.
-- Available-for-sale financial asset - in 2012, the Company determined
that objective evidence of impairment in the Company's investment in
Aspire Mining Limited ("Aspire") existed. Therefore, an impairment loss
of $19.2 million was recognized in other operating expenses.
-- Property, plant and equipment - the Company recorded $15.2 million of
impairment charges to reduce various items of property, plant and
equipment to their recoverable amounts. The impairment charges consist
of a $14.1 million impairment pertaining to non-refundable prepayments
made on cancelled mobile equipment orders to preserve the Company's
financial resources and a $1.1 million impairment of construction in
progress expenditures that were not expected to be recovered.
Public infrastructure costs decreased in 2012 compared to 2011 due to reduced
maintenance costs on transportation infrastructure from the Ovoot Tolgoi Mine to
the Shivee Khuren Border Crossing and reduced works on the expanded border
crossing infrastructure at the Shivee Khuren Border Crossing.
In 2011, other operating expenses primarily consisted of a $16.6 million
impairment charge on various capitalized construction projects and $8.1 million
of public infrastructure costs.
Administration Expenses:
Administration expenses in 2012 were $24.6 million compared to $28.7 million in
2011. The decrease in administration expenses primarily related to reduced
corporate administration and share-based compensation expense, partially offset
by increased legal and professional fees.
Evaluation and Exploration Expenses:
Exploration expenses in 2012 were $8.6 million compared to $31.8 million in
2011. Exploration expenses will vary period to period depending on the number of
projects and the related seasonality of the exploration programs. The 2012
exploration program was suspended in the second quarter of 2012 in order to
preserve the Company's financial resources while mining operations at the Ovoot
Tolgoi Mine were curtailed, with the exception of certain water exploration
activities and minimum exploration activities required on exploration licenses
held by the Company.
Finance Income & Finance Costs:
The Company incurred finance costs for the year ended December 31, 2012 of $15.4
million compared to $12.8 million for the year ended December 31, 2011. Finance
costs for the year ended December 31, 2012 primarily consisted of $10.5 million
of interest expense on the CIC convertible debenture and a $4.5 million
unrealized loss on FVTPL investments; whereas, finance costs for the year ended
December 31, 2011 primarily consisted of $9.1 million of interest expense on the
CIC convertible debenture and a $3.1 million unrealized loss on FVTPL
investments.
The Company recorded finance income for the year ended December 31, 2012 of
$39.9 million compared to $107.7 million for the year ended December 31, 2011.
For the year ended December 31, 2012, finance income primarily consisted of a
$39.5 million unrealized gain on the fair value change of the embedded
derivatives in the CIC convertible debenture; whereas, in the year ended
December 31, 2011, finance income primarily consisted of a $106.5 million
unrealized gain on the fair value change of the embedded derivatives in the CIC
convertible debenture.
The Company's investment in Aspire continues to be classified as an
available-for-sale financial asset. In the third quarter of 2012, the Company
determined that objective evidence of impairment in the Company's investment in
Aspire existed. Therefore, an impairment loss of $19.2 million was recognized in
other operating expenses. Other comprehensive income for the year ended December
31, 2011 consists of an unrealized loss (net of tax) of $11.2 million related to
the Company's investment in Aspire.
Taxes:
For the year ended December 31, 2012, the Company recorded a current income tax
expense of $0.4 million related to its Mongolian operations compared to a
current income tax expense of $7.3 million for the year ended December 31, 2011.
The Company has recorded a deferred income tax recovery related to deductible
temporary differences of $1.9 million for the year ended December 31, 2012
compared to a deferred income tax recovery of $11.2 million for the year ended
December 31, 2011.
For the three months ended December 31, 2012
The Company recorded a net loss of $56.6 million for the three months ended
December 31, 2012 compared to a net loss of $27.7 million for the three months
ended December 31, 2011.
Gross Profit/(Loss):
The Company's gross profit/(loss) is composed of revenue and cost of sales and
relates solely to the Mongolian Coal Division. For the three months ended
December 31, 2012, gross profit was negatively impacted by $18.4 million of
idled mine costs, contributing to a gross loss of $31.0 million. The Company
recorded a gross loss excluding idled mine costs of $12.6 million in the fourth
quarter of 2012 compared to a gross profit of $4.6 million in the fourth quarter
of 2011. Gross profit will vary by quarter depending on sales volumes, sales
prices and unit costs.
The Company recognized revenue of $1.2 million in the fourth quarter of 2012
compared $33.6 million in the fourth quarter of 2011. The significant decrease
in revenue for the three months ended December 31, 2012 compared to the three
months ended December 31, 2011 can be attributed to decreased sales volume.
SouthGobi's effective royalty rate in the fourth quarter of 2012 was 6%, a
significant reduction from prior quarters in 2012. Effective October 1, 2012
(for a six month trial period) the royalty rate was determined using the
contracted sales price per tonne, not the reference price per tonne published by
the Government of Mongolia. Despite SouthGobi, together with other Mongolian
mining companies, engaging the appropriate Government of Mongolia authorities,
the six month trial period was not extended and effective April 1, 2013, the
royalty on all coal sales exported out of Mongolia was once again based on a set
reference price per tonne published monthly by the Government of Mongolia.
Although discussions have not been successful to date, SouthGobi, together with
other Mongolian mining companies, continue the dialog with the appropriate
Government of Mongolia authorities with the goal of moving to a more equitable
process for setting reference prices.
Cost of sales was $32.2 million for the three months ended December 31, 2012
compared to $29.0 million for the three months ended December 31, 2011. Cost of
sales comprise the direct cash costs of product sold, mine administration cash
costs of product sold, idled mine costs, inventory impairments, equipment
depreciation, depletion of mineral properties and share-based compensation
expense. Of the $32.2 million recorded as cost of sales for the three months
ended December 31, 2012, $13.8 million related to mine operations and $18.4
million related to idled mine costs. Cost of sales related to mine operations
decreased for the three months ended December 31, 2012 compared to the three
months ended December 31, 2011 primarily due to lower sales volumes, partially
offset by a coal stockpile impairment totaling $15.8 million. For the three
months ended December 31, 2012, the Company recorded a coal stockpile impairment
of $15.8 million to reduce the carrying value to its net realizable value.
Other Operating Expenses:
Other operating expenses for the three months ended December 31, 2012 decreased
to $19.3 million compared to $24.4 million for the three months ended December
31, 2011. The decrease in other operating expenses compared to the three months
ended December 31, 2011 primarily relates to recognizing a smaller impairment of
property, plant and equipment.
For the three months ended December 31, 2012, the Company recorded $17.2 million
of provisions and impairments in other operating expenses related to the
following:
-- Trade and other receivables - the Company recorded a reduction in the
expected insurance proceeds of $1.0 million.
-- Available-for-sale financial asset - in the third quarter of 2012, the
Company determined that objective evidence of impairment in the
Company's investment in Aspire existed. Therefore, a further impairment
loss of $3.1 million was recognized in other operating expenses.
-- Property, plant and equipment - the Company recorded $13.0 million of
impairment charges to reduce non-refundable prepayments made on
cancelled mobile equipment orders to their recoverable amounts. The
mobile equipment orders were cancelled to preserve the Company's
financial resources.
Administration Expenses:
Administration expenses for the three months ended December 31, 2012 were $6.1
million compared to $8.6 million for the three months ended December 31, 2011.
Administration expenses decreased for the three months ended December 31, 2012
compared to the three months ended December 31, 2011 primarily due to decreased
salaries and benefits and share-based compensation expenses, partially offset by
increased legal and professional fees.
Evaluation and Exploration Expenses:
Exploration expenses for the three months ended December 31, 2012 were $0.5
million compared to $14.5 million for the three months ended December 31, 2011.
Exploration expenses will vary from quarter to quarter depending on the number
of projects and the related seasonality of the exploration programs. The Company
curtailed exploration activities in the fourth and third quarters of 2012 to
preserve financial resources. The majority of the exploration activities in the
fourth quarter of 2012 related to water exploration activities. Exploration
expenses in the fourth quarter of 2011 included a higher proportion of the 2011
exploration program expenses due to delays in receiving required government
approvals in the first half of 2011.
Finance Income & Finance Costs:
Finance costs for the three months ended December 31, 2012 were $5.6 million
compared to $1.1 million for the three months ended December 31, 2011. Finance
costs for the three months ended December 31, 2012 primarily consisted of $4.8
million of interest expense on the CIC convertible debenture and a $0.7 million
unrealized loss on FVTPL investments; whereas, finance costs for the three
months ended December 31, 2011 primarily consisted of $0.9 million of interest
expense on the CIC convertible debenture.
Finance income for the three months ended December 31, 2012 was $0.7 million
compared to $11.0 million for the three months ended December 31, 2011. For the
three months ended December 31, 2012, finance income primarily consisted of a
$0.7 million unrealized gain on the fair value change of the embedded
derivatives in the CIC convertible debenture; whereas, for the three months
ended December 31, 2011, finance income primarily consisted of a $10.8 million
unrealized gain on the fair value change of the embedded derivatives in the CIC
convertible debenture.
The Company's investment in Aspire continues to be classified as an
available-for-sale financial asset. In the third quarter of 2012, the Company
determined that objective evidence of impairment in the Company's investment in
Aspire existed. Therefore, in the fourth quarter of 2012, a further impairment
loss of $3.1 million was recognized in other operating expenses. Other
comprehensive income for the three months ended December 31, 2011 consists of an
unrealized loss (net of tax) of $6.5 million related to the Company's investment
in Aspire.
Taxes:
For the three months ended December 31, 2012, the Company recorded a current
income tax expense of $0.1 million related to its Mongolian operations compared
to a current income tax recovery of $0.4 million for the three months ended
December 31, 2011. The Company has recorded a deferred income tax recovery
related to deductible temporary differences of $5.1 million for the three months
ended December 31, 2012 compared to a deferred income tax recovery of $5.0
million for the three months ended December 31, 2011.
FINANCIAL POSITION AND LIQUIDITY
Cash Position and Liquidity
As at December 31, 2012, the Company had cash of $19.7 million and short term
money market investments of $15.0 million for a total of $34.7 million in cash
and money market investments compared to cash of $123.6 million and long term
money market investments of $45.0 million for a total of $168.6 million in cash
and money market investments as at December 31, 2011. Working capital (excess
current assets over current liabilities) was $120.4 million as at December 31,
2012 compared to $221.9 million as at December 31, 2011.
The Company's total assets as at December 31, 2012 were $732.5 million compared
with $918.7 million as at December 31, 2011. The Company's non-current
liabilities as at December 31, 2012 were $103.8 million compared with $145.6
million as at December 31, 2011.
COMPLIANCE WITH THE CODE ON CORPORATE GOVERNANCE PRACTICES
The Company, throughout the year ended December 31, 2012, applied the principles
and complied with the requirements of its corporate governance practices as
defined by the Board of Directors and all applicable statutory, regulatory and
stock exchange listings standards (old Corporate Governance Code from January 1,
2012 to March 31, 2012 and new Corporate Governance Code from April 1, 2012 to
December 31, 2012).
COMPLIANCE WITH THE MODEL CODE FOR SECURITIES TRANSACTIONS BY DIRECTORS OF
LISTED COMPANIES
The Company has adopted policies regarding directors' securities transactions in
its Corporate Disclosure, Confidentiality and Securities Trading policy that has
terms that are no less exacting than those set out in the Model Code of Appendix
10 of the rules governing the listing of securities on the Hong Kong Stock
Exchange.
The Board of Directors confirms that all of the Directors of the Company have
complied with the required policies in the Company's Corporate Disclosure,
Confidentiality and Securities Trading policy throughout the year ended December
31, 2012.
NON-IFRS FINANCIAL MEASURES
Cash Costs
The Company uses cash costs to describe its cash production costs. Cash costs
incorporate all production costs, which include direct and indirect costs of
production, with the exception of idled mine costs and non-cash expenses which
are excluded. Non-cash adjustments include share-based compensation expense,
inventory impairments, depreciation and depletion of mineral properties.
The Company uses this performance measure to monitor its operating cash costs
internally and believes this measure provides investors and analysts with useful
information about the Company's underlying cash costs of operations. The Company
believes that conventional measures of performance prepared in accordance with
IFRS do not fully illustrate the ability of its mining operations to generate
cash flows. The Company reports cash costs on a sales basis. This performance
measure is commonly utilized in the mining industry.
The cash costs of product sold may differ from cash costs of product produced
depending on the timing of stockpile inventory turnover.
Adjusted Net Income/(Loss)
Adjusted net income/(loss) excludes idled mine costs, share-based compensation
expense/(recovery), net impairment loss/(recovery) on assets, unrealized foreign
exchange losses/(gains), unrealized loss/(gain) on the fair value change of the
embedded derivatives in the CIC convertible debenture, the loss on the partial
conversion of the CIC convertible debenture, realized losses/(gains) on the
disposal of FVTPL investments and unrealized losses/(gains) on FVTPL
investments. The Company excludes these items from net income/(loss) to provide
a measure which allows the Company and investors to evaluate the results of the
underlying core operations of the Company and its profitability from operations.
The items excluded from the computation of adjusted net income/(loss), which are
otherwise included in the determination of net income/(loss) prepared in
accordance with IFRS, are items that the Company does not consider to be
meaningful in evaluating the Company's past financial performance or the future
prospects and may hinder a comparison of its period-to-period results.
CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
Consolidated Statements of Comprehensive Income (Restated)
(Expressed in thousands of U.S. Dollars, except for share and per share
amounts)
Year ended December 31,
------------------------------------------
Notes 2012 2011
------- -------------------- --------------------
(Restated - Note 2)
Revenue $ 78,061 $ 130,756
Cost of sales 4 (127,407) (92,178)
----------------------------------------------------------------------------
Gross profit/(loss) (49,346) 38,578
Other operating expenses 5 (41,645) (28,317)
Administration expenses 6 (24,637) (28,749)
Evaluation and
exploration expenses 7 (8,598) (31,769)
----------------------------------------------------------------------------
Loss from operations (124,226) (50,257)
Finance costs 8 (15,385) (12,765)
Finance income 8 39,942 107,732
Share of earnings of
joint venture 635 -
----------------------------------------------------------------------------
Income/(loss) before tax (99,034) 44,710
Current income tax
expense 9 (354) (7,340)
Deferred income tax
recovery 9 1,886 11,182
----------------------------------------------------------------------------
Net income/(loss)
attributable to equity
holders of the Company (97,502) 48,552
----------------------------------------------------------------------------
OTHER COMPREHENSIVE LOSS
Loss on available-for-
sale financial asset,
net of tax - (11,202)
Reclassification of gain
on available-for-sale
financial asset, net of
tax (16,559) -
----------------------------------------------------------------------------
Net comprehensive
income/(loss)
attributable to equity
holders of the $ (114,061) $ 37,350
----------------------------------------------------------------------------
----------------------------------------------------------------------------
BASIC INCOME/(LOSS) PER
SHARE 10 $ (0.54) $ 0.27
DILUTED LOSS PER SHARE 10 $ (0.60) $ (0.24)
Consolidated Statements of Financial Position (Restated)
(Expressed in thousands of U.S. Dollars)
As at
-------------------------------------------------
December 31, December 31, January 1,
Notes 2012 2011 2011
-------- --------------- --------------- ---------------
ASSETS (Restated - (Restated - (Restated -
Note 2) Note 2) Note 2)
Current assets
Cash $ 19,674 $ 123,567 $ 492,038
Trade and other
receivables 11 3,292 16,234 19,335
Short term
investments 15,000 - 17,529
Inventories 59,735 104,861 43,413
Prepaid expenses
and deposits 47,432 44,760 10,026
----------------------------------------------------------------------------
Total current
assets 145,133 289,422 582,341
Non-current
assets
Prepaid expenses
and deposits 16,778 8,389 238
Property, plant
and equipment 521,473 498,533 266,771
Long term
investments 24,084 99,238 107,416
Deferred income
tax assets 9 24,984 23,098 11,915
----------------------------------------------------------------------------
Total non-current
assets 587,319 629,258 386,340
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total assets $ 732,452 $ 918,680 $ 968,682
----------------------------------------------------------------------------
----------------------------------------------------------------------------
EQUITY AND
LIABILITIES
Current
liabilities
Trade and other
payables 12 $ 10,216 $ 43,552 $ 21,546
Deferred revenue 8,181 17,653 10,827
Current portion
of convertible
debenture 13 6,301 6,301 6,312
----------------------------------------------------------------------------
Total current
liabilities 24,698 67,506 38,685
Non-current
liabilities
Convertible
debenture 13 99,667 139,085 245,498
Deferred income
tax liabilities 9 - 2,366 3,966
Decommissioning
liability 4,104 4,156 3,063
----------------------------------------------------------------------------
Total non-current
liabilities 103,771 145,607 252,527
----------------------------------------------------------------------------
Total liabilities 128,469 213,113 291,212
Equity
Common shares 1,059,710 1,054,298 1,061,560
Share option
reserve 51,303 44,143 32,360
Investment
revaluation
reserve - 16,559 27,761
Accumulated
deficit 14 (507,030) (409,433) (444,211)
----------------------------------------------------------------------------
Total equity 603,983 705,567 677,470
----------------------------------------------------------------------------
Total equity and
liabilities $ 732,452 $ 918,680 $ 968,682
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net current
assets $ 120,435 $ 221,916 $ 543,656
Total assets less
current
liabilities $ 707,754 $ 851,174 $ 929,997
SELECTED INFORMATION FROM THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(RESTATED)
Additional information required by the Hong Kong Stock Exchange and not
disclosed elsewhere in this announcement is as follows. All amounts are
expressed in thousands of U.S. Dollars and shares in thousands, unless otherwise
indicated.
1. BASIS OF PREPARATION
1.1 Corporate information and liquidity
The Company curtailed its mining activities at the Ovoot Tolgoi Mine during the
three months ended June 30, 2012 to varying degrees to manage coal inventories
and to maintain efficient working capital levels. As at June 30, 2012, mining
activities had been fully curtailed. The Company's mining activities remained
fully curtailed until March 22, 2013, when the Company recommenced mining
activities at the Ovoot Tolgoi Mine.
The Company had cash and short term investments of $34,674 and working capital
of $120,435 at December 31, 2012. These consolidated financial statements have
been prepared on a going concern basis which assumes that the Company will
continue operating until at least December 31, 2013 and will be able to realize
its assets and discharge its liabilities in the normal course of operations as
they come due.
The Company expects to have sufficient liquidity and capital resources to be
able to continue as a going concern until at least December 31, 2013 based on
existing capital resources and estimated cash flows from mining operations.
Estimated cash flows from mining operations are subject to a number of external
market factors including supply and demand and pricing in the coal industry. The
Company continues to minimize uncommitted capital expenditures and exploration
expenditures in order to preserve the Company's financial resources.
1.2 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") issued
by the International Accounting Standards Board ("IASB") and Interpretations of
the IFRS Interpretations Committee.
1.3 Basis of presentation
The consolidated financial statements have been prepared on a historical cost
basis except for certain financial assets and financial liabilities which are
measured at fair value. The Company's reporting currency and the functional
currency of all of its operations is the U.S. Dollar as this is the principal
currency of the economic environment in which the Company operates.
2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
Subsequent to the original issuance of the Company's annual consolidated
financial statements, the Company determined that certain revenue transactions
were previously recognized in the Company's consolidated financial statements
prior to meeting relevant revenue recognition criteria. These transactions
relate to coal that had been delivered to the customer's stockpile in a
stockyard located within the Ovoot Tolgoi mining license area ("the Stockyard"),
the location at which title transferred, but from which the coal had not been
collected by the customers. The restatement of the Company's consolidated
financial statements reflects a correction in the point of revenue recognition
from: (A) the delivery of coal to the customer stockpiles within the Stockyard
to (B) the loading of coal onto the customer's trucks at the time of collection.
3. SEGMENTED INFORMATION (RESTATED)
The Company's one reportable operating segment is its Mongolian Coal Division.
The Company's Corporate Division does not earn revenues and therefore does not
meet the definition of an operating segment.
The carrying amounts of the Company's assets, liabilities, reported income or
loss and revenues analyzed by operating segment are as follows:
Mongolian Coal Unallocated Consolidated
Division (i) Total
----------------- --------------- ---------------
Segment assets
As at December 31, 2012 $ 676,981 $ 55,471 $ 732,452
As at December 31, 2011 695,089 223,591 918,680
As at January 1, 2011 349,407 619,275 968,682
Segment liabilities
As at December 31, 2012 $ 19,496 $ 108,973 $ 128,469
As at December 31, 2011 60,226 152,887 213,113
As at January 1, 2011 33,644 257,568 291,212
Segment income/(loss)
For the year ended
December 31, 2012 $ (84,992) $ (12,510) $ (97,502)
For the year ended
December 31, 2011 (23,236) 71,788 48,552
Segment revenues
For the year ended
December 31, 2012 $ 78,061 $ - $ 78,061
For the year ended
December 31, 2011 130,756 - 130,756
Impairment charge on
assets (ii), (iii)
For the year ended
December 31, 2012 $ 36,808 $ 19,184 $ 55,992
For the year ended
December 31, 2011 20,893 - 20,893
(i) The unallocated amount contains all amounts associated with the
Corporate Division
(ii) The impairment charge on assets for the year ended December 31, 2012
relates to trade and other receivables, investments, inventories and
property, plant and equipment
(iii) The impairment charge on assets for the year ended December 31, 2011
relates to trade and other receivables, inventories and property,
plant and equipment
4. COST OF SALES (RESTATED)
The Company's cost of sales consists of the following amounts:
Year ended December 31,
--------------------------------------------
2012 2011
---------------------- --------------------
Operating expenses $ 39,671 $ 72,127
Share-based compensation expense 1,205 1,942
Depreciation and depletion 13,042 18,109
Impairment of inventories 20,531 -
----------------------------------------------------------------------------
Cost of sales during mine
operations 74,449 92,178
Cost of sales during idled mine
period (i) 52,958 -
----------------------------------------------------------------------------
Cost of sales $ 127,407 $ 92,178
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) Cost of sales during idled mine period for the year ended December 31,
2012 includes $33,198 of depreciation expense and $942 of share-based
compensation expense. The depreciation expense relates to the
Company's idled plant and equipment.
5. OTHER OPERATING EXPENSES (RESTATED)
The Company's other operating expenses consist of the following amounts:
Year ended December 31,
---------------------------------------------
2012 2011
---------------------- ---------------------
Public infrastructure $ 1,273 $ 8,069
Sustainability and community
relations 894 1,017
Foreign exchange (gain)/loss 3,226 (1,662)
Provision for doubtful trade
and other receivables 1,032 1,892
Impairment loss on available-
for-sale financial asset 19,184 -
Impairment of inventories - 2,396
Impairment of property, plant
and equipment 15,245 16,605
Other 791 -
----------------------------------------------------------------------------
Other operating expenses $ 41,645 $ 28,317
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6. ADMINISTRATION EXPENSES
The Company's administration expenses consist of the following amounts:
Year ended December 31,
--------------------------------------------
2012 2011
---------------------- --------------------
Corporate administration $ 5,525 $ 7,136
Legal and professional fees 7,293 4,279
Salaries and benefits 5,556 5,538
Share-based compensation expense 6,048 11,474
Depreciation 215 322
----------------------------------------------------------------------------
Administration expenses $ 24,637 $ 28,749
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7. EVALUATION AND EXPLORATION EXPENSES
The Company's evaluation and exploration expenses consist of the following amounts:
Year ended December 31,
--------------------------------------------
2012 2011
---------------------- --------------------
Drilling and trenching $ 3,708 $ 21,842
Other direct expenses 1,428 4,801
Share-based compensation expense 333 994
Overhead and other 3,129 4,132
----------------------------------------------------------------------------
Evaluation and exploration
expenses $ 8,598 $ 31,769
----------------------------------------------------------------------------
----------------------------------------------------------------------------
8. FINANCE COSTS AND INCOME
The Company's finance costs consist of the following amounts:
Year ended December 31,
--------------------------------------------
2012 2011
---------------------- --------------------
Interest expense on convertible
debenture $ 10,466 $ 9,137
Unrealized loss on FVTPL
investments 4,482 3,091
Interest expense on line of
credit facility 322 351
Accretion of decommissioning
liability 115 186
----------------------------------------------------------------------------
Finance costs $ 15,385 $ 12,765
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company's finance income consists of the following amounts:
Year ended December 31,
--------------------------------------------
2012 2011
---------------------- --------------------
Unrealized gain on embedded
derivatives in
convertible debenture $ 39,512 $ 106,489
Interest income 406 1,243
Realized gain on disposal of
FVTPL investments 24 -
----------------------------------------------------------------------------
Finance income $ 39,942 $ 107,732
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9. TAXES (RESTATED)
9.1 Income tax recognized in profit or loss
The Company and its subsidiaries are subject to income or profits tax in the
jurisdictions in which the Company operates, including Canada, Hong Kong,
Singapore and Mongolia. Income or profits tax was not provided for the Company's
operations in Canada, Hong Kong or Singapore as the Company had no assessable
income or profit arising in or derived from these jurisdictions. The Company's
tax balances reflect income tax assessed on its Mongolian operations. A
reconciliation between the Company's tax recovery and the product of the
Company's income or loss from operations before tax multiplied by the Company's
domestic tax rate is as follows:
Year ended December 31,
----------------------------------------------
2012 2011
----------------------- ---------------------
(Income)/loss before tax $ 99,034 $ (44,710)
Statutory tax rate 25.00% 26.50%
Income tax (recovery)/expense
based on combined
Canadian federal and
provincial statutory rates (24,758) 11,848
Deduct:
Lower effective tax rate in
foreign jurisdictions 323 502
Tax effect of tax losses and
temporary differences not
recognized 15,563 12,465
Non-taxable (income)/non-
deductible expenses 7,340 (28,657)
----------------------------------------------------------------------------
Income tax recovery $ (1,532) $ (3,842)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9.2 Income tax recognized in other comprehensive income
Year ended December 31,
----------------------------------------------
2012 2011
----------------------------------------------
Fair value remeasurement of
available-for-sale financial
asset $ (2,366) $ (1,600)
----------------------------------------------------------------------------
Deferred tax recovery $ (2,366) $ (1,600)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9.3 Deferred tax balances
The Company's deferred tax assets/(liabilities) consist of the following amounts:
As at
---------------------------------------------------
December 31, December 31, January 1,
2012 2011 2011
----------------- ---------------- ---------------
Tax loss carryforwards $ 8,473 $ - $ -
Property, plant and
equipment 5,048 8,647 2,880
Other assets 11,463 14,451 9,035
Available-for-sale
financial assets - (2,366) (3,966)
----------------------------------------------------------------------------
Total deferred tax
balances $ 24,984 $ 20,732 $ 7,949
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9.4 Unrecognized deductible temporary differences and unused tax losses
The Company's deductible temporary differences and unused tax losses for which
no deferred tax asset is recognized consist of the following amounts:
As at
---------------------------------------------------
December 31, December 31, January 1,
2012 2011 2011
----------------- --------------- ---------------
Non-capital losses $ 46,130 $ 119,212 $ 77,076
Capital losses - 63,649 25,075
Deductible temporary
differences 103,589 120,254 30,822
----------------------------------------------------------------------------
Total unrecognized
amounts $ 149,719 $ 303,115 $ 132,973
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9.5 Expiry dates
The expiry dates of the Company's unused tax losses are as follows:
As at December 31, 2012
----------------------------------------------
U.S. Dollar Expiry
Equivalent dates
----------------------------------------------
Non-capital losses
Canada $ 33,715 2032
Mongolia 33,892 2016
Hong Kong 12,302 indefinite
Singapore 113 indefinite
------------------------
$ 80,022
------------------------
------------------------
10. EARNINGS/(LOSS) PER SHARE (RESTATED)
The calculation of basic earnings/(loss) and diluted loss per share is based on
the following data:
Year ended December 31,
----------------------------------------------
2012 2011
----------------------- ---------------------
Net income/(loss) $ (97,502) $ 48,552
Weighted average number of
shares 181,859 182,970
----------------------------------------------------------------------------
Basic income/(loss) per share $ (0.54) $ 0.27
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Income/(loss)
Net income/(loss) $ (97,502) $ 48,552
Interest expense on
convertible debenture 10,466 9,137
Unrealized gain on embedded
derivatives in convertible
debenture (39,512) (106,489)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Diluted net loss $ (126,548) $ (48,800)
----------------------------------------------------------------------------
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Number of shares
Weighted average number of
shares 181,859 182,970
Convertible debenture 28,406 20,931
----------------------------------------------------------------------------
Diluted weighted average
number of shares 210,265 203,901
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Diluted loss per share $ (0.60) $ (0.24)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Potentially dilutive items not included in the calculation of diluted
earnings/(loss) per share for the year ended December 31, 2012 were 7,507 stock
options that were anti-dilutive.
11. TRADE AND OTHER RECEIVABLES (RESTATED)
The Company's trade and other receivables consist of the following amounts:
As at
---------------------------------------------------
December 31, December 31, January 1,
2012 2011 2011
----------------- --------------- ---------------
Trade receivables $ 1,439 $ - $ 4,386
VAT/HST receivable 86 144 14,541
Insurance proceeds
receivable 500 12,913 -
Other receivables 1,267 3,177 408
----------------------------------------------------------------------------
Total trade and other
receivables $ 3,292 $ 16,234 $ 19,335
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The aging of the Company's trade and other receivables is as follows:
As at
---------------------------------------------------
December 31, December 31, January 1,
2012 2011 2011
----------------- --------------- ---------------
Less than 1 month $ 2,374 $ 795 $ 4,693
1 to 3 months 95 93 1,869
3 to 6 months 159 12,919 2,600
Over 6 months 662 2,425 10,173
----------------------------------------------------------------------------
Total trade and other
receivables $ 3,292 $ 16,234 $ 19,335
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the year ended December 31, 2012, the Company recorded a $1,032 loss
provision on its trade and other receivables (2011: $1,892). The loss provision
relates to a reduction in the expected insurance proceeds of $1,011.
12. TRADE AND OTHER PAYABLES (RESTATED)
Trade and other payables of the Company primarily consists of amounts
outstanding for trade purchases relating to coal mining, development and
exploration activities and mining royalties payable. The usual credit period
taken for trade purchases is between 30 to 90 days.
The aging of the Company's trade and other payables is as follows:
As at
---------------------------------------------------
December 31, December 31, January 1,
2012 2011 2011
----------------- --------------- ---------------
Less than 1 month $ 8,999 $ 43,349 $ 21,415
1 to 3 months 176 76 33
3 to 6 months - 105 72
Over 6 months 1,041 22 26
----------------------------------------------------------------------------
Total trade and other
payables $ 10,216 $ 43,552 $ 21,546
----------------------------------------------------------------------------
----------------------------------------------------------------------------
13. CONVERTIBLE DEBENTURE
On November 19, 2009, the Company issued a convertible debenture to a wholly
owned subsidiary of the China Investment Corporation for $500,000.
The convertible debenture is presented as a liability since it contains no
equity components. The convertible debenture is a hybrid instrument, containing
a debt host component and three embedded derivatives - the investor's conversion
option, the issuer's conversion option and the equity based interest payment
provision (the 1.6% share interest payment) (the "embedded derivatives"). The
debt host component is classified as other-financial-liabilities and is measured
at amortized cost using the effective interest rate method and the embedded
derivatives are classified as FVTPL and all changes in fair value are recorded
in profit or loss. The difference between the debt host component and the
principal amount of the loan outstanding is accreted to profit or loss over the
expected life of the convertible debenture.
The embedded derivatives were valued upon initial measurement and subsequent
periods using a Monte Carlo simulation valuation model. A Monte Carlo simulation
model is a valuation model that relies on random sampling and is often used when
modeling systems with a large number of inputs and where there is significant
uncertainty in the future value of inputs and where the movement of the inputs
can be independent of each other. Some of the key inputs used by the Company in
its Monte Carlo simulation include: the floor and ceiling conversion prices, the
Company's common share price, the risk-free rate of return, expected volatility
of the stock price, forward foreign exchange rate curves (between the Cdn$ and
U.S. Dollar) and spot foreign exchange rates.
13.1 Partial conversion
On March 29, 2010, pursuant to the convertible debenture conversion terms, the
Company exercised its conversion 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).
13.2 Presentation
Based on the Company's valuations as at December 31, 2012, the fair values of
the embedded derivatives decreased by $39,512 compared to December 31, 2011. The
decrease was recorded as finance income for the year ended December 31, 2012.
For the year ended December 31, 2012, the Company recorded interest expense of
$20,094 (2011: $20,076) related to the convertible debenture of which $9,628 was
capitalized as borrowing costs and the remaining $10,466 was recorded as a
finance cost. The interest expense consists of the interest at the contract rate
and the accretion of the debt host component of the convertible debenture. To
calculate the accretion expense, the Company uses the contract life of 30 years
and an effective interest rate of 22.2%.
The movements of the amounts due under the convertible debenture are as
follows:
Year ended December 31,
------------------------------------
2012 2011
------------------ ----------------
Balance, beginning of
year $ 145,386 $ 251,810
Interest expense on
convertible debenture 20,094 20,076
Decrease in fair value
of embedded
derivatives (39,512) (106,489)
Interest paid (20,000) (20,011)
----------------------------------------------------------------------------
Balance, end of year $ 105,968 $ 145,386
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The convertible debenture balance consists of the following amounts:
As at
---------------------------------------------------
December 31, December 31, January 1,
2012 2011 2011
-----------------------------------------------------
Debt host $ 90,791 $ 90,696 $ 90,621
Fair value of embedded
derivatives 8,876 48,389 154,877
Interest payable 6,301 6,301 6,312
----------------------------------------------------------------------------
Convertible debenture $ 105,968 $ 145,386 $ 251,810
----------------------------------------------------------------------------
----------------------------------------------------------------------------
13.3 Convertible debenture share interest payment and application of Mongolian
Foreign Investment Law
On May 17, 2012, the Parliament of Mongolia approved a Law on Regulation of
Foreign Investment in Business Entities Operating in Sectors of Strategic
Importance ("Foreign Strategic Sectors Law") that regulated foreign direct
investment into a number of key sectors of strategic importance, which included
mineral resources.
As a result of the Foreign Strategic Sectors Law, the Company expected it would
require parliamentary approval for the shares to be issued for the November 19,
2012 share interest payment. As a result, subsequent to December 31, 2012, the
Company settled the 1.6% share interest payment of $4,000 in cash.
Following amendments to the Foreign Strategic Sectors Law, passed in the three
months ended June 30, 2013, the requirement for parliamentary approval was
limited to circumstances where a state owned entity is to exceed 49% share
ownership of a strategic asset, irrespective of the amount of investment. As a
result, the Company is only required to give notice, rather than obtaining
parliamentary or other approval, under the Foreign Strategic Sectors Law for the
1.6% share interest payment to the CIC.
On October 3, 2013 Mongolia's foreign investment environment changed again when
the Parliament of Mongolia passed the Foreign Investment Law to repeal and
replace the Foreign Strategic Sectors Law. The Foreign Investment Law regulates,
amongst other things, investment by Foreign State Owned Entities ("FSOEs") in
sectors of strategic importance, which includes mineral resources, by requiring
that FSOEs obtain a permit from Mongolia's Ministry of Economic Development if
they are to acquire 33% or more of the shareholding of a Mongolian entity
operating in a sector of strategic importance. The Company understands that it
will not be required to obtain a permit from the Ministry of Economic
Development in connection with the 1.6% share interest payment to CIC, unless
such share interest payment will result in CIC acquiring 33% or more of the
shareholding in the Company. The Company will fully comply with the requirements
of the Foreign Investment Law in connection with share interest payments.
14. ACCUMULATED DEFICIT AND DIVIDENDS
At December 31, 2012, the Company has accumulated a deficit of $507,030 (2011:
$409,433). No dividends have been paid or declared by the Company since
inception.
REVIEW OF RESULTS AND RELEASE OF AUDITED RESULTS
The restated audited consolidated financial statements for the Company for the
year ended December 31, 2012, were reviewed by the Audit Committee of the
Company and approved and authorized for issue by the Board of Directors of the
Company on December 12, 2013. The previously issued consolidated financial
statements of the Company for the year ended December 31, 3012 were approved and
authorized for issue by the Board of Directors of the Company on March 25, 2013.
The figures in respect of the Company's consolidated statement of financial
position (restated), consolidated statement of comprehensive income (restated)
and the related notes thereto (restated) as of and for the years ended December
31, 2012 and 2011 and the consolidated statement of financial position
(restated) as at January 1, 2011, as set out in this announcement have been
agreed by the Company's auditor, PwC, to the amounts set out in the Company's
audited consolidated financial statements (restated). The work performed by PwC
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 PwC on this announcement.
SouthGobi's results for the year ended December 31, 2012 (restated), are
contained in the audited consolidated financial statements (restated) and MD&A
(restated), which are available on the SEDAR website at www.sedar.com and
SouthGobi's website at www.southgobi.com.
ABOUT SOUTHGOBI RESOURCES
SouthGobi Resources is listed on the Toronto and Hong Kong stock exchanges, in
which Turquoise Hill Resources Ltd., also publicly listed in Toronto and New
York, has a 56% shareholding. Turquoise Hill took management control of
SouthGobi in September 2012 and made changes to the board and senior management.
Rio Tinto has a majority shareholding in Turquoise Hill.
SouthGobi Resources is focused on exploration and development of its
metallurgical and thermal coal deposits in Mongolia's South Gobi Region. It has
a 100% shareholding in SouthGobi Sands LLC, the Mongolian registered company
that holds the mining and exploration licenses in Mongolia and operates the
flagship Ovoot Tolgoi coal mine. Ovoot Tolgoi produces and sells coal to
customers in China.
Website: www.southgobi.com
Forward-Looking Statements: This document includes forward-looking statements.
Forward-looking statements include, but are not limited to: the statement that
gross profit will vary by year depending on sales volume, sales price and unit
costs; statements relating to the determination of the royalty rate on coal
sales exported out of Mongolia; statements regarding future variances in
exploration expenses; the statement that the Company expects to have sufficient
liquidity and capital resources to be able to continue as a going concern until
at least December 31, 2013 based on existing capital resources and estimated
cash flows from mining operations; statements regarding the supply and demand of
the coking coal market; 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 MD&A for the year ended December 31, 2012
(restated) which is available at www.sedar.com.
FOR FURTHER INFORMATION PLEASE CONTACT:
Information contacts, SouthGobi Resources
Investors Relations
Galina Rogova
Office: +852-2839-9208
Email: galina.rogova@southgobi.com
Media Relations
Altanbagana Bayarsaikhan
Office: +976 70070710
Email: altanbagana.bayarsaikhan@southgobi.com
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