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SouthGobi Resources Ltd. (TSX:SGQ)(SEHK:1878) (the "Company" or "SouthGobi")
today announced its financial results for the six months ended June 30, 2011.
All figures are in US dollars unless otherwise stated.
HIGHLIGHTS
The Company's highlights for the quarter ended June 30, 2011 and subsequent
weeks are as follows:
-- Total sales of approximately 1.05 million tonnes and revenue of $47.3
million for the quarter ended June 30, 2011, with both figures
representing a record for any given second quarter and the revenue also
being the highest quarterly revenue since the commencement of mining
operations;
-- Average realized selling price for the second quarter of 2011 was $54
per tonne, an increase of 7% compared to the first quarter of 2011 and
an increase of 27% compared to the second quarter of 2010;
-- Income from mining operations of $9.7 million for the second quarter of
2011, which represents a quarterly record since the commencement of
mining operations;
-- Cash costs impacted by unforeseen issue of diesel fuel shortage in
Mongolia but issue largely resolved now;
-- Entered into an agreement with Ejinaqi Jinda Coal Industry Co. Ltd
("Ejin Jinda") to toll wash coal from the Ovoot Tolgoi Mine; and
-- Received a mining license pertaining to the Soumber Deposit.
-- Awarded the tender to construct a paved highway from Ovoot Tolgoi to
Mongolia-China border with consortium partner NTB LLC.
REVIEW OF QUARTERLY OPERATING RESULTS
The Company's operating results for the previous eight quarters are summarized
in the table below:
------------- ---------------------------- -------------
2011 2010 2009
----------------------------- ---------------------------- -------------
QUARTER ENDED 30- 31- 31- 30- 30- 31- 31- 30-
Jun Mar Dec Sep Jun Mar Dec Sep
----------------------------- ---------------------------- -------------
Volumes and
prices
Raw semi-soft
coking coal
Raw coal
production
(millions of
tonnes) 0.52 0.48 0.41 0.18 0.39 0.21 0.16 0.35
Coal sales
(millions of
tonnes) 0.60 0.34 0.35 0.11 0.42 0.40 0.36 0.46
Average
realized
sales price
(per tonne) $65.96 $56.50 $47.08 $46.04 $44.10 $36.62 $29.55 $27.82
Raw higher-ash
coal
Raw coal
production
(millions of
tonnes) 0.35 0.63 0.97 0.39 0.23 0.01 - 0.01
Coal sales
(millions of
tonnes) 0.45 0.11 1.12 0.08 0.03 0.03 - -
Average
realized
sales price
(per tonne) $38.32 $31.68 $26.75 $25.34 $18.82 $21.24 $ - $ -
Total
Raw coal
production
(millions of
tonnes) 0.87 1.11 1.38 0.57 0.62 0.22 0.16 0.36
Coal sales
(millions of
tonnes) 1.05 0.45 1.47 0.19 0.45 0.43 0.36 0.46
Average
realized
sales price
(per tonne) $54.06 $50.29 $31.56 $37.15 $42.63 $35.52 $29.55 $27.82
Costs
Direct cash
costs of
product sold
(per tonne) $26.77 $18.91 $18.53 $18.59 $21.37 $22.25 $16.97 $11.16
Total cash
costs of
product sold
(per tonne) $27.61 $20.61 $19.25 $22.04 $22.30 $23.32 $18.29 $13.41
Waste movement
and stripping
ratio
Ovoot Tolgoi
Mine -
Sunset Pit
Total waste
material moved
(millions of
bank cubic
meters) 4.08 3.85 3.56 2.90 1.73 1.50 0.87 1.06
Strip ratio
(bank cubic
meters of
waste rock per
tonne of coal
produced) 4.74 3.47 2.58 5.09 2.79 6.79 5.38 2.98
Ovoot Tolgoi
Mine -
Sunrise Pit
Total waste
material moved
(millions of
bank cubic
meters) 0.80 0.49 0.73 0.43 0.02 - - -
Other operating
capacity
statistics
Capacity
Number of
mining
shovels/
excavators
available
at period end 4 3 3 2 2 2 1 1
Total combined
stated mining
shovel/
excavator
capacity at
period end
(cubic meters) 98 83 82 48 48 48 14 14
Number of haul
trucks
available at
period end 16 16 15 12 11 9 7 7
Total combined
stated haul
truck capacity
at period end
(tonnes) 2,599 2,599 2,254 1,727 1,509 1,073 637 637
Employees and
safety
Employees at
period end 658 600 544 472 421 388 334 308
Lost time
injury
frequency rate
(per 100,000
man hours) 1.2 0.9 0.8 0.9 1.0 0.6 n/a(i) n/a(i)
----------------------------- ---------------------------- -------------
(i) Lost time injury frequency data for all periods in 2009 is not
available.
For the three months ended June 30, 2011
For the three months ended June 30, 2011, the Company produced 0.87 million
tonnes of raw coal with a strip ratio of 4.74 compared to production of 1.11
million tonnes of raw coal with a strip ratio of 3.47 for the three months ended
March 31, 2011 and production of 0.62 million tonnes of raw coal with a strip
ratio of 2.79 for the three months ended June 30, 2010.
Production in the second quarter of 2011 was impacted by the fuel shortages in
Mongolia announced by the Company in the press release dated May 10, 2011. The
diesel fuel shortage impacted the Ovoot Tolgoi Mine in two ways. Firstly, there
was some curtailment of mining to varying degrees during May and June of 2011,
which made equipment generally less efficient. Secondly, the Company paid a
higher price to secure diesel fuel supplies. The average price paid for diesel
fuel in the second quarter of 2011 was $1.37 per liter, 25% higher than in the
first quarter of 2011.
In addition to the specific diesel fuel issue, the strip ratio was higher for
the second quarter of 2011 compared to both the first quarter of 2011 and the
second quarter of 2010, meaning that a higher proportion of material movement
capacity was allocated to waste movement as opposed to coal production. The
higher allocation of waste material movement per tonne of coal production
further increased direct cash costs per tonne in the period.
For the three months ended June 30, 2011, the Company sold 1.05 million tonnes
of coal at an average realized selling price of approximately $54 per tonne.
This compares to 0.45 million tonnes of coal sold for the three months ended
March 31, 2011 at an average realized selling price of approximately $50 per
tonne and 0.45 million tonnes of coal sold for the three months ended June 30,
2010 at an average realized selling price of approximately $43 per tonne.
The average realized selling price for both of the Company's individual coal
types increased in the second quarter of 2011. The average realized selling
price for the raw semi-soft coking coal increased by 17% compared to the first
quarter of 2011 and by 50% compared to the second quarter of 2010. The average
realized selling price for the raw higher-ash coal increased by 21% compared to
the first quarter of 2011 and by 104% compared to the second quarter of 2010.
The overall increase in the average realized selling price for the second
quarter of 2011 was partially offset by the mix of product sold.
Direct cash costs of product sold were $26.77 per tonne for the three months
ended June 30, 2011 compared to $21.37 per tonne for the three months ended June
30, 2010. Direct cash costs have increased due to higher fuel costs, screening
costs and the increased strip ratio. The Company only began screening its raw
higher-ash coal in the third quarter of 2010.
For the six months ended June 30, 2011
For the six months ended June 30, 2011, the Company produced 1.97 million tonnes
of raw coal with a strip ratio of 4.03 compared to production of 0.84 million
tonnes of raw coal with a strip ratio of 3.84 for the six months ended June 30,
2010. The increase in raw coal production for the six months ended June 30, 2011
primarily resulted from the expansion of the Company's mining fleet.
For the six months ended June 30, 2011, the Company sold approximately 1.5
million tonnes of coal at an average realized selling price of approximately $53
per tonne. This compares to 0.87 million tonnes of coal at an average realized
selling price of approximately $39 per tonne for the six months ended June 30,
2010. The average realized selling price has increased due to increased prices
of individual customer contracts in 2011.
Direct cash costs of product sold were $24.39 per tonne for the six months ended
June 30, 2011 compared to $21.81 per tonne for the same period in 2010. The
increase in direct cash costs is due primarily to increased fuel costs,
screening costs and the higher strip ratio in 2011. The Company began screening
its higher-ash coal in the third quarter of 2010.
REVIEW OF QUARTERLY FINANCIAL RESULTS
The Company's financial results for the previous eight quarters are summarized
in the table below:
($ in thousands, except for per share information, unless otherwise
indicated)
----------------- -------------------------------------
2011 2010
----------------------------------- -------------------------------------
QUARTER ENDED 30-Jun 31-Mar 31-Dec 30-Sep 30-Jun 31-Mar
----------------------------------- -------------------------------------
Revenue $ 47,336 $ 20,158 $ 41,595 $ 6,597 $ 17,668 $ 13,917
Income/(loss)
from mine
operations 9,744 7,690 3,376 (6,674) 4,400 1,187
Margin on revenue 21% 38% 8% -101% 25% 9%
Evaluation and
exploration
expenses (4,356) (1,991) (4,144) (6,314) (6,659) (1,651)
Operating loss
from continuing
operations (4,444) (1,020) (8,914) (20,969) (10,595) (6,498)
Net interest
expense (2,023) (4,251) (4,191) (4,385) (4,384) (9,024)
Net income/(loss) 67,323 (46,602) (28,720) 27,495 53,301 (168,271)
Basic
income/(loss)
per share 0.37 (0.25) (0.16) 0.15 0.29 (1.09)
----------------------------------- -------------------------------------
------------------
2009
-------------------------------------------------------------------------
QUARTER ENDED 31-Dec 30-Sep
-------------------------------------------------------------------------
Revenue $ 9,960 $ 11,871
Income/(loss)
from mine
operations 1,524 3,234
Margin on revenue 15% 27%
Evaluation and
exploration
expenses (739) (2,150)
Operating loss
from continuing
operations (6,948) (5,031)
Net interest
expense (8,243) (642)
Net income/(loss) (69,153) (23,782)
Basic
income/(loss)
per share (0.52) (0.17)
-------------------------------------------------------------------------
----------------- -------------------------------------
2011 2010
----------------------------------- -------------------------------------
QUARTER ENDED 30-Jun 31-Mar 31-Dec 30-Sep 30-Jun 31-Mar
----------------------------------- -------------------------------------
Net income/(loss) $ 67,323 $(46,602) $(28,720) $27,495 $ 53,301 $(168,271)
Excluding
Gain/(loss) on
value change
of embedded
derivatives in
CIC debenture 70,422 (36,780) (19,995) 49,772 72,232 (1,372)
Loss on partial
conversion of
CIC debenture - - - - - (151,353)
Mark to market
gain/(loss) in
value of
investment in
Kangaroo 3,453 (3,762) 4,209 1,363 (4,509) (703)
Income/(loss)
from
discontinued
operations - - - - - -
Net income/(loss)
excluding
specified items (6,552) (6,060) (12,934) (23,640) (14,422) (14,843)
----------------------------------- -------------------------------------
------------------
2009
-------------------------------------------------------------------------
QUARTER ENDED 31-Dec 30-Sep
-------------------------------------------------------------------------
Net income/(loss) $ (69,153) $ (23,782)
Excluding
Gain/(loss) on
value change
of embedded
derivatives in
CIC debenture (44,980) -
Loss on partial
conversion of
CIC debenture - -
Mark to market
gain/(loss) in
value of
investment in
Kangaroo 1,099 -
Income/(loss)
from
discontinued
operations 1,034 (26,006)
Net income/(loss)
excluding
specified items (26,306) 2,224
-------------------------------------------------------------------------
For the three months ended June 30, 2011
The Company recorded net income for the three months ended June 30, 2011 of
$67.3 million compared to a net loss of $46.6 million for the three months ended
March 31, 2011 and net income of $53.3 million for the three months ended June
30, 2010. The net income in the second quarter of 2011 is due primarily to the
$70.4 million gain on the fair value change of the embedded derivatives in the
China Investment Corporation ("CIC") convertible debenture. This compares to a
loss of $36.8 million in the first quarter of 2011 and a gain of $72.2 million
in the second quarter of 2010 on the fair value change of the embedded
derivatives in the CIC convertible debenture.
The Company incurred an operating loss for the three months ended June 30, 2011
of $4.4 million compared to a $1.0 million loss for the three months ended March
31, 2011 and a $10.6 million loss for the three months ended June 30, 2010. The
changes in the operating loss are due to the factors discussed below:
Income from Mine Operations:
The Company's income from mine operations is composed of revenue and cost of
sales and relates solely to the Mongolian Coal Division. Income from mine
operations increased to a record level of $9.7 million in the second quarter of
2011. This compares to income from mine operations of $7.7 million in the first
quarter of 2011 and $4.4 million in the second quarter of 2010.
Revenue was $47.3 million for the three months ended June 30, 2011, which
represented record quarterly revenue since the commencement of mining
operations. This compares to $20.2 million for the three months ended March 31,
2011 and $17.7 million for the three months ended June 30, 2010. The increase in
revenue relates to increased sales volumes and increased selling prices for
individual coal types between 17% and 21% when compared to the three months
ended March 31, 2011 and between 50% and 104% when compared to the three months
ended June 30, 2010. Revenue in 2011 was negatively impacted by an increase in
the average proportional royalty payable. The effective royalty rose from 9% in
the first quarter of 2011 to 14% in the second quarter of 2011 due to the
methodology being applied to royalties basing fees on benchmark price levels set
by the Mongolian government.
Cost of sales was $37.6 million for the three months ended June 30, 2011
compared to $12.5 million for the three months ended March 31, 2011 and $13.3
million for the three months ended June 30, 2010. Cost of sales has increased in
the second quarter of 2011 compared to both the first quarter of 2011 and the
second quarter of 2010 due to higher sales volumes and higher unit costs. Cost
of sales comprise the direct cash cost of products sold, mine administration
costs, equipment depreciation, depletion of stripping costs, and share-based
compensation.
Administration Expenses:
Administration expenses for the three months ended June 30, 2011, were $1.5
million higher compared to the three months ended June 30, 2010. This increase
is related primarily to the following three items. Salaries and benefits were
$0.6 million higher for the three months ended June 30, 2011 as compared to the
same period in 2010, due primarily to an increase in share-based compensation
expense. Public infrastructure costs were $1.6 million higher for the three
months ended June 30, 2011 as compared to the same period in 2010. These costs
relate to maintenance and upgrading of public transportation infrastructure used
to transport coal from the Ovoot Tolgoi Mine to the Chinese border and also to
work completed on the Mongolian side of the border to facilitate the future
opening of the dedicated coal border crossing channels. Finally, foreign
exchange gains/losses were $0.5 million lower for the three months ended June
30, 2011 compared to 2010. Foreign exchange gains/losses are primarily the
result of changes of the U.S. to Canadian dollar ("Cdn$"), and the U.S. dollar
to Mongolian Tugrik exchange rates.
Evaluation and Exploration Expenses:
Evaluation and exploration expenses for the three months ended June 30, 2011
were $4.4 million compared to $6.7 million for the three months ended June 30,
2010. Exploration was still in the process of mobilization during the second
quarter of 2011. Key exploration targets for 2011 include additional drilling at
the Soumber Deposit and the fields surrounding the Soumber Deposit and
additional areas within the Ovoot Tolgoi mining licenses that have not been
fully explored. Exploration activities include drilling, trenching, water
exploration and geological reconnaissance.
Finance Income & Finance Costs:
The Company incurred finance costs for the three months ended June 30, 2011 of
$2.4 million compared to $5.0 million for the three months ended June 30, 2010.
The finance costs in the second quarter of 2011 relate primarily to $2.2 million
of interest expense on the CIC convertible debenture.
The Company recorded finance income for the three months ended June 30, 2011 of
$74.4 million compared to $68.3 million for the three months ended June 30,
2010. The increase primarily relates to a $3.6 million mark to market gain on
the Company's investment in Kangaroo Resources Limited for the three months
ended June 30, 2011 compared to a $4.5 million loss for the three months ended
June 30, 2010. For the three months ended June 30, 2011, the Company recorded a
$70.4 million gain on the fair value change of embedded derivatives in the CIC
convertible debenture compared to a $72.2 million gain for the three months
ended June 30, 2010.
The Company's investment in Aspire Mining Limited ("Aspire") continues to be
classified as an available-for-sale financial instrument and for the three
months ended June 30, 2011, the Company recorded an after-tax mark to market
loss of $39.6 million related to Aspire that has been recorded in other
comprehensive income.
For the six months ended June 30, 2011
The Company recorded net income for the six months ended June 30, 2011 of $20.7
million compared to a net loss of $115.0 million for the six months ended June
30, 2010. The net income for the six months ended June 30, 2011 is primarily due
to a $33.6 million gain on the fair value change of the embedded derivatives in
the CIC convertible debenture. For the six months ended June 30, 2010, a $151.4
million loss on partial conversion of the CIC convertible debenture was
recorded.
The Company incurred an operating loss for the six months ended June 30, 2011 of
$5.5 million compared to $17.1 million for the same period in 2010. The decrease
in the operating loss is due to the factors discussed below:
Income from Mine Operations:
The Company's income from mine operations is composed of revenue and cost of
sales and relates solely to the Mongolian Coal Division. For the six months
ended June 30, 2011, the Company had income from mine operations of $17.4
million. This compares to income from mine operations of $5.6 million for the
six months ended June 30, 2010.
Revenue was $67.5 million for the six months ended June 30, 2011, compared to
$31.6 million for the six months ended June 30, 2010. Revenue has increased due
to both higher sales volumes and higher realized sales prices.
Cost of sales was $50.1 million for the six months ended June 30, 2011, which
includes the direct cash cost of products sold, mine administration costs,
equipment depreciation, depletion of stripping costs and share-based
compensation. Cost of sales was $26.0 million for the six months ended June 30,
2010. The increase in cost of sales for the six months ended June 30, 2011 is
due to the higher sales volumes and higher unit costs.
Administration Expenses:
Administration expenses for the six months ended June 30, 2011, were $2.2
million higher compared to the six months ended June 30, 2010. This increase is
related primarily to public infrastructure costs which were $1.9 million higher
for the six months ended June 30, 2011 as compared to the same period in 2010.
These costs relate to the upgrading of transportation infrastructure from the
Ovoot Tolgoi Mine to the Chinese border.
Evaluation and Exploration Expenses:
Evaluation and exploration expenses for the six months ended June 30, 2011 were
$2.0 million lower than the six months ended June 30, 2010. The exploration
program began later in 2011 and therefore costs in 2011 are lower compared to
2010.
Finance Income & Finance Costs:
The Company incurred finance costs for the six months ended June 30, 2011 of
$7.1 million compared to $165.9 million for the six months ended June 30, 2010.
The finance costs for the six months ended June 30, 2011 relate primarily to
$6.7 million of interest expense on the CIC convertible debenture. For the six
months ended June 30, 2010, finance costs include a $151.4 million non-cash loss
on the partial conversion of the CIC convertible debenture and $14.5 million of
interest expense on the CIC convertible debenture.
The Company recorded finance income for the six months ended June 30, 2011 of
$33.9 million compared to $66.8 million for the six months ended June 30, 2010.
The decrease primarily relates to a $33.6 million gain on the fair value change
of embedded derivatives in the CIC convertible debenture for the six months
ended June 30, 2011 compared to a $70.8 million gain for the three months ended
June 30, 2010 and a $0.3 million mark to market loss on the Company's investment
in Kangaroo Resources Limited for the six months ended June 30, 2011 compared to
a $5.2 million loss for the six months ended June 30, 2010.
The Company's investment in Aspire continues to be classified as an
available-for-sale financial instrument and for the six months ended June 30,
2011, the Company recorded an after-tax mark to market gain of $11.2 million
related to Aspire that has been recorded in other comprehensive income.
FINANCIAL POSITION AND LIQUIDITY
The Company's total assets at June 30, 2011 were $966.9 million compared with
$961.9 million at December 31, 2010.
At June 30, 2011, the Company had $282.7 million in cash and cash equivalents
and $75.0 million in money market investments for a total liquidity of $357.7
million compared with $492.0 million in cash and cash equivalents and $62.7
million in money market investments for a total liquidity of $554.7 million at
December 31, 2010.
The Company's non-current liabilities at June 30, 2011 were $221.2 million
compared with $252.5 million at December 31, 2010. The decrease in non-current
liabilities primarily relates to the decrease in the fair value of the CIC
convertible debenture.
TOLL WASHING AGREEMENT
On July 5, 2011, the Company entered into an agreement with Ejin Jinda, a
subsidiary of China Mongolia Coal Co. Ltd. ("CMC"), to toll wash coal from the
Ovoot Tolgoi Mine. The agreement has a duration of 5-years from commencement
(expected in early 2012) and provides for an annual wet washing capacity of
approximately 3.5 million tonnes of input raw coal. Raw higher-ash and
medium-ash coals from the Ovoot Tolgoi Mine will be washed at this facility.
Washed coal will generally meet semi-soft coking coal specifications.
Ejin Jinda's wet washing facility is located approximately 10 kilometers inside
China from the Mongolia-China border crossing at Shivee Khuren-Ceke (i.e.,
approximately 50 kilometers from the Ovoot Tolgoi Mine). Raw higher-ash and
medium-ash coals with only basic processing through Ovoot Tolgoi's on-site dry
coal handling facility will be transported from the Ovoot Tolgoi Mine to the
facility under a separate transport agreement. Based on preliminary samples, the
Company expects these coals can then be washed to produce coals with ash in the
range of 8% to 11% at a yield of 85% to 90%. Ejin Jinda will charge the Company
a single toll washing fee which will cover their expenses, capital recovery and
profit.
SOUMBER MINING LICENSE
On June 3, 2011, the Company announced it had successfully registered the
resource associated with the Soumber Deposit with the Mineral Resource Authority
of Mongolia ("MRAM"). Further, on July 6, 2011, the Company announced that MRAM
had issued the Company a mining license pertaining to the Soumber Deposit. The
new 10,993 hectare mining license was granted for an initial term of 30 years
with an option for two 20 year extensions.
REGIONAL INFRASTRUCTURE
The Ovoot Tolgoi Mine's proximity to the Shivee Khuren-Ceke border crossing
allows the Company's coal to be transported by truck on an unpaved road from the
mine site to China. On August 2, 2011, the State Property Committee of Mongolia
awarded the tender to construct a paved highway from Ovoot Tolgoi to the
Mongolia-China border to consortium partners NTB LLC and the Company's Mongolian
operating subsidiary, SouthGobi Sands LLC ("NTB-SGS"). NTB-SGS now has the right
to conclude a 15-year build, operate and transfer ("BOT") contract under the
Mongolian Law on Concessions. NTB-SGS intends to commence construction this year
of the paved highway with an intended carrying capacity upon completion of in
excess of 20 million tonnes of coal per year.
COMMON SHARE REPURCHASE PROGRAM
On June 8, 2010, the Company announced that its Board of Directors authorized a
share repurchase program to purchase up to 2.5 million common shares of the
Company on each or either of the Toronto Stock Exchange and the Hong Kong Stock
Exchange, in aggregate representing up to 5.0 million common shares of the
Company. On June 8, 2011, the Company announced the renewal of its share
repurchase program. The share repurchase program commenced on June 15, 2011, and
will remain until June 14, 2012, or until the purchases are complete or the
program is terminated by the Company. As of August 10, 2011, the Company had
repurchased 0.9 million shares on the Hong Kong Stock Exchange and 1.5 million
shares on the Toronto Stock Exchange for a total of 2.4 million common shares.
The Company cancels all shares after they are repurchased.
OUTLOOK
SouthGobi substantially proliferated its customer base during the first half of
2011 and raised prices for individual products.
To date the Company has signed seven major customers to purchase coal in the
third quarter of 2011. Pricing for the raw semi-soft coking coal product and raw
higher-ash coal product should be similar to those prices of the second quarter
of 2011 at approximately $65 per tonne and $40 per tonne respectively because
SouthGobi has pursued a strategy to substantially expand volume for the third
quarter. A new product will also be introduced being a raw medium-ash coal.
Initial contracts have been signed reflecting pricing of approximately $47 per
tonne for that product. With the three products, SouthGobi anticipates the
overall average realized sales price in the third quarter of 2011 should be
similar to that achieved in the second quarter and in the range of $50 per tonne
to $55 per tonne.
Assuming various contracts are performed and the Mongolia-China border remains
efficient, the Company anticipates sales volumes for the third quarter of 2011
to be in the range of 1.2 million tonnes to 1.6 million tonnes.
The country-wide shortage of diesel fuel that caused a large abnormal increase
in direct cash cost per tonne of coal produced has currently been resolved.
Assuming no recurrence of the issue, nor an increase in waste-to-coal ratio
(strip ratio) substantially above the long-term mine plan level of approximately
4 bank cubic meters of waste per tonne, SouthGobi anticipates direct cash costs
will return to recent trend levels over the balance of the year.
Based on the Company's current expectation for volumes, pricing and costs,
SouthGobi anticipates a further expansion of its normalized income from mine
operations in the third quarter of 2011 when compared to the second quarter of
2011.
The success to date and potential for future growth can be attributed to a
combination of the Company's competitive strengths, including the following:
-- Projects are strategically located close to China;
-- Substantial resources and reserves;
-- Produce premium quality coals;
-- Low cost structure due to favorable geographic and geological
conditions;
-- Strong financial profile after the financings in late 2009 and early
2010;
-- Established production with strong growth potential through future
expansion of existing mine capacity and development of the Company's
priority assets; and
-- Experienced management team with strong skills in mining, exploration
and marketing.
Overview and Objectives
The Company continues to focus its efforts on mining, development and
exploration of coking and raw coal products in Mongolia for supply of quality
products to customers in China. As the Company looks forward through 2011, the
Company is encouraged by the overall long term demand for our products. There
are many positive developments in Mongolia, which provide further support that
the mining sector will develop its resource base for long term growth. The
Company is making progress with its sales and marketing efforts, continuing to
focus on efficiency and prudent financial management and intends to manage
production levels to meet anticipated demand for the Company's products.
The Company's objectives for 2011 remain unchanged from the year ended December
31, 2010 and are as follows:
-- Grow Ovoot Tolgoi Mine - The additional capacity of the new mining
fleets should support growth in coal availability and sales for 2011
over 2010, and the future.
-- Continue to develop regional infrastructure - The Company's immediate
priority centers on improving roads in the area around Ovoot Tolgoi
Mine. SouthGobi is part of a consortium awarded the tender to construct
a paved highway from Ovoot Tolgoi to the Mongolia-China border. The
consortium intends to commence construction this year of the highway
that is expected upon completion to have a carrying capacity in excess
of 20 million tonnes of coal per year.
-- Advancing the Soumber Deposit - SouthGobi intends to further define the
deposit with continued exploration work while also substantially
advancing the feasibility and planning for a mine at Soumber.
-- Value-adding/upgrading coal - The Company has commenced construction of
a coal-handling facility at Ovoot Tolgoi Mine including the secondary
processing stage of dry air separation.
-- Exploration - Further greenfields exploration will take place, with the
Company planning an exploration budget in the order of $10-20 million.
-- Operations - Continuing to focus on production safety, environmental
protection, operational excellence and community relations.
CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Interim Statement of Comprehensive Income
(Unaudited)
(Expressed in thousands of U.S. Dollars, except for share and per share
amounts)
Three months ended Six months ended
June 30, June 30,
------------------------- ------------------------
2011 2010 2011 2010
----------- ----------- ----------- -----------
Revenue $ 47,336 $ 17,668 $ 67,494 $ 31,585
Cost of sales (37,592) (13,268) (50,060) (25,998)
--------------------------------------------------------------------------
Income from mine
operations 9,744 4,400 17,434 5,587
Administration expenses (9,832) (8,336) (16,551) (14,370)
Evaluation and
exploration expenses (4,356) (6,659) (6,347) (8,310)
--------------------------------------------------------------------------
Operating loss from
continuing operations (4,444) (10,595) (5,464) (17,093)
Finance costs (2,378) (5,033) (7,054) (165,983)
Finance income 74,406 68,326 33,935 66,844
--------------------------------------------------------------------------
Income/(loss) before
tax 67,584 52,698 21,417 (116,232)
Current income tax
expense (1,722) (368) (3,475) (378)
Deferred income tax
recovery 1,461 971 2,779 1,642
--------------------------------------------------------------------------
Net income/(loss) for
the period
attributable
to equity holders of
the Company 67,323 53,301 20,721 (114,968)
--------------------------------------------------------------------------
OTHER COMPREHENSIVE
INCOME
Gain/(loss) on
available-for-sale
assets, net of tax (39,573) - 11,175 -
Net comprehensive
income/(loss)
attributable
to equity holders of
the Company $ 27,750 $ 53,301 $ 31,896 $ (114,968)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
BASIC INCOME/(LOSS)
PER SHARE $ 0.37 $ 0.29 $ 0.11 $ (0.68)
DILUTED INCOME/(LOSS)
PER SHARE $ 0.00 $ (0.07) $ (0.03) $ (0.68)
Condensed Consolidated Interim Statement of Financial Position
(Unaudited)
(Expressed in thousands of U.S. Dollars)
As at
-------------------------------
June 30, December 31,
2011 2010
--------------- --------------
ASSETS
Current assets
Cash and cash equivalents $ 282,733 $ 492,038
Trade and other receivables 67,705 30,246
Short term investments 15,003 17,529
Inventories 45,211 26,160
Prepaid expenses and deposits 15,679 10,026
--------------------------------------------------------------------------
Total current assets 426,331 575,999
Non-current assets
Property, plant and equipment 390,865 266,771
Deferred income tax assets 14,221 11,442
Long term investments 135,196 107,416
Other receivables 238 238
--------------------------------------------------------------------------
Total non-current assets 540,520 385,867
--------------------------------------------------------------------------
Total assets $ 966,851 $ 961,866
--------------------------------------------------------------------------
--------------------------------------------------------------------------
EQUITY AND LIABILITIES
Current liabilities
Trade and other payables $ 32,369 $ 24,137
Amounts due under line of credit facility 1,666 -
Current portion of convertible debenture 4,285 6,312
--------------------------------------------------------------------------
Total current liabilities 38,320 30,449
Non-current liabilities
Convertible debenture 211,892 245,498
Deferred income tax liabilities 5,562 3,966
Decommissioning liability 3,761 3,063
--------------------------------------------------------------------------
Total non-current liabilities 221,215 252,527
--------------------------------------------------------------------------
Total liabilities 259,535 282,976
Shareholders' equity
Common shares 1,063,995 1,061,560
Share option reserve 36,102 32,360
Investment revaluation reserve 38,936 27,761
Accumulated deficit (431,717) (442,791)
--------------------------------------------------------------------------
Total shareholders' equity 707,316 678,890
--------------------------------------------------------------------------
Total shareholders' equity and liabilities $ 966,851 $ 961,866
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net current assets $ 388,011 $ 545,550
Total assets less current liabilities $ 928,531 $ 931,417
REVIEW OF INTERIM RESULTS
The condensed consolidated financial statements for the Company for the six
months ended June 30, 2011, were reviewed by the Audit Committee of the Company.
SouthGobi's results for the quarter ended June 30, 2011 are contained in the
unaudited Condensed Consolidated Interim Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations,
available on the SEDAR website at www.sedar.com and SouthGobi Resources website
at www.southgobi.com.
ABOUT SOUTHGOBI RESOURCES
SouthGobi Resources is focused on exploration and development of its Permian-age
metallurgical and thermal coal deposits in Mongolia's South Gobi Region. The
Company's flagship coal mine, Ovoot Tolgoi, is producing and selling coal to
customers in China. The Company plans to supply a wide range of coal products to
markets in Asia.
Disclosure of a scientific or technical nature in this release and the Company's
MD&A with respect to the Company's Coal Division was prepared by, or under the
supervision of Dave Bartel, P.Eng., the Company's Senior Engineer. Mr. Bartel is
a "qualified person" for the purposes of National Instrument 43-101 of the
Canadian Administrators ("NI 43-101").
Forward-Looking Statements: This document includes forward-looking statements.
Forward-looking statements include, but are not limited to: pricing for the raw
semi-soft coking coal product and raw higher-ash coal product in the third
quarter of 2011 to be similar to prices achieved in the second quarter of 2011,
approximately $65 per tonne and $40 per tonne respectively; average realized
sales prices between $50 per tonne and $55 per tonne for the third quarter of
2011; sales volumes for the third quarter of 2011 will be between 1.2 million
and 1.6 million tonnes; reduction of direct cash costs to recent trend levels
over the balance of the year; normalized income from mine operations in the
third quarter of 2011 will exceed the second quarter of 2011; long-term demand
for SouthGobi's products; positive developments in Mongolia will support the
mining sector and will develop Mongolia's resource base; management of
production levels to meet anticipated demand for SouthGobi's products; plans to
supply a wide range of coal products to markets in Asia; and other statements
that are not historical facts. When used in this document, the words such as
"plan", "estimate", "expect", "intend", "may", and similar expressions are
forward-looking statements. Although SouthGobi believes that the expectations
reflected in these forward-looking statements are reasonable, such statements
involve risks and uncertainties and no assurance can be given that actual
results will be consistent with these forward-looking statements. Important
factors that could cause actual results to differ from these forward-looking
statements are disclosed under the heading "Risk Factors" in SouthGobi's
Management Discussion and Analysis of Financial Condition and Results of
Operations for the year ended December 31, 2010 and quarter ended June 30, 2011,
which are available at www.sedar.com.
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