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| Name | Symbol | Market | Type |
|---|---|---|---|
| CI Canadian Banks Coverd Call Income Class ETF | TSX:CIC | Toronto | Exchange Traded Fund |
| Price Change | % Change | Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Traded | Last Trade | |
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SouthGobi Resources Ltd. (TSX:SGQ)(HKSE:1878) (the "Company" or "SouthGobi")
today announced its financial and operating results for the three and six months
ended June 30, 2012. All figures are in U.S. dollars unless otherwise stated.
HIGHLIGHTS
The Company's highlights for the quarter ended June 30, 2012 and subsequent
weeks are as follows:
-- Sales volume and revenue declined to 0.16 million tonnes and $8.4
million, respectively, in the second quarter of 2012;
-- Production declined to 0.27 million tonnes of raw coal in the second
quarter of 2012 due to the curtailment of mining operations to varying
degrees throughout the quarter. As at June 30, 2012, mining activities
had been fully curtailed;
-- The signing of a Cooperation Agreement with the Aluminum Corporation of
China Limited ("CHALCO") and received official notification of CHALCO's
intention to make a proportional takeover bid for up to 60% of the
issued and outstanding common shares of SouthGobi at Cdn$8.48 per share;
-- Mineral Resources Authority of Mongolia ("MRAM") held a press conference
announcing a request to suspend exploration and mining activity on
certain licenses owned by SouthGobi Sands LLC, a wholly-owned subsidiary
of SouthGobi;
-- The opening of expanded border crossing infrastructure at the Shivee
Khuren-Ceke crossing at the Mongolia-China border ("Shivee Khuren Border
Crossing");
-- Ribbon cutting ceremony to commemorate the start of construction on the
new paved coal highway from the Ovoot Tolgoi Complex to the Shivee
Khuren Border Crossing; and
-- SGQ Coal Investment Pte. Ltd., a wholly-owned subsidiary of SouthGobi
that owns 100% of the Company's Mongolian operating subsidiary SouthGobi
Sands LLC, filed a Notice of Investment Dispute on the Government of
Mongolia pursuant to the Bilateral Investment Treaty between Singapore
and Mongolia.
REVIEW OF QUARTERLY OPERATING RESULTS
The Company's operating results for the previous eight quarters are summarized
in the table below:
--------------------------------------------------------
2012 2011 2010
----------------------------------------------------------------------------
QUARTER ENDED 30-Jun 31-Mar 31-Dec 30-Sep 30-Jun 31-Mar 31-Dec 30-Sep
----------------------------------------------------------------------------
Volumes and prices
Raw semi-soft coking
coal
Raw coal
production
(millions of
tonnes) 0.07 0.28 0.47 0.55 0.52 0.48 0.41 0.18
Coal sales
(millions of
tonnes) 0.12 0.31 0.53 0.66 0.60 0.34 0.35 0.11
Average realized
selling price
(per tonne) $67.17 $67.59 $67.62 $66.83 $65.96 $56.50 $47.08 $46.04
Raw medium-ash coal
Raw coal
production
(millions of
tonnes) 0.11 0.64 0.37 0.20 - - - -
Coal sales
(millions of
tonnes) 0.04 0.53 0.37 0.20 - - - -
Average realized
selling price
(per tonne) $49.91 $50.40 $48.59 $48.17 $ - $ - $ - $ -
Raw higher-ash coal
Raw coal
production
(millions of
tonnes) 0.09 0.15 0.50 0.50 0.35 0.63 0.97 0.39
Coal sales
(millions of
tonnes) 0.00 - 0.25 0.51 0.45 0.11 1.12 0.08
Average realized
selling price
(per tonne) $38.80 $ - $40.30 $39.74 $38.32 $31.68 $26.75 $25.34
Total
Raw coal
production
(millions of
tonnes) 0.27 1.07 1.34 1.25 0.87 1.11 1.38 0.57
Coal sales
(millions of
tonnes) 0.16 0.84 1.15 1.37 1.05 0.45 1.47 0.19
Average realized
selling price
(per tonne) $62.56 $56.79 $55.51 $54.01 $54.06 $50.29 $31.56 $37.15
Costs
Direct cash costs
of product sold
excluding idled
mine costs (per
tonne) (i) $22.57 $10.80 $22.14 $22.64 $26.77 $18.91 $18.53 $18.59
Total cash costs
of product sold
excluding idled
mine costs (per
tonne) (i) $31.49 $15.04 $23.09 $23.17 $27.61 $20.61 $19.25 $22.04
Waste movement and
stripping ratio
Production waste
material moved
(millions of bank
cubic meters) 1.16 2.20 4.58 4.10 4.08 3.85 3.56 2.90
Strip ratio (bank
cubic meters of
waste rock per
tonne of coal
produced) 4.31 2.07 3.42 3.28 4.74 3.47 2.58 5.09
Pre-production
waste material
moved (millions
of bank cubic
meters) - - - 0.39 0.80 0.49 0.73 0.43
Other operating
capacity statistics
Capacity
Number of mining
shovels/excavator
s available at
period end 4 3 3 3 4 3 3 2
Total combined
stated mining
shovel/ excavator
capacity at
period end (cubic
meters) 98 64 64 64 98 83 82 48
Number of haul
trucks available
at period end 27 27 25 16 16 16 15 12
Total combined
stated haul truck
capacity at
period end
(tonnes) 4,743 4,743 4,561 2,599 2,599 2,599 2,254 1,727
Employees and
safety
Employees at
period end 693 720 720 695 658 600 544 472
Lost time injury
frequency rate
(ii) 1.1 1.4 1.2 0.9 0.6 0.7 0.8 0.9
----------------------------------------------------------------------------
(i) A non-IFRS financial measure, see Non-IFRS Financial Measures section
(ii) Per 1,000,000 man hours
For the three months ended June 30, 2012
For the three months ended June 30, 2012, the Company produced 0.27 million
tonnes of raw coal with a strip ratio of 4.31 compared to production of 0.87
million tonnes of raw coal for the three months ended June 30, 2011 with a strip
ratio of 4.74. SouthGobi curtailed its mining activities 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. Due to the curtailment of its mining
operations, the Company suspended uncommitted capital expenditures and
exploration expenditures to preserve the Company's financial resources.
For the three months ended June 30, 2012, the Company sold 0.16 million tonnes
of coal at an average realized selling price of $62.56 per tonne compared to
sales of 1.05 million tonnes of coal at an average realized selling price of
$54.06 per tonne for the three months ended June 30, 2011. Sales volume declined
for the three months ended June 30, 2012 due to the significant uncertainty
surrounding SouthGobi's business resulting from the proposed proportional
takeover bid by CHALCO, which resulted in MRAM holding a press conference
announcing a request to suspend exploration and mining activity on certain
licenses, various infrastructure constraints in Mongolia and the softening of
inland China coking coal markets towards the end of the second quarter. The
increase in the average realized selling price is primarily related to the
Company's improved sales mix.
Direct cash costs of product sold excluding idled mine costs (a non-IFRS
financial measure, see Non-IFRS Financial Measures section) were $22.57 per
tonne for the three months ended June 30, 2012 compared to $26.77 per tonne for
the three months ended June 30, 2011. Direct cash costs of product sold
excluding idled mine costs have primarily decreased as a result of a lower strip
ratio and reduced fuel prices.
For the six months ended June 30, 2012
For the six months ended June 30, 2012, the Company produced 1.33 million tonnes
of raw coal with a strip ratio of 2.52 compared to production of 1.98 million
tonnes of raw coal for the six months ended June 30, 2011 with a strip ratio of
4.03. The decrease in production primarily related to the curtailment of the
Company's mining operations in the second quarter of 2012; 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.
For the six months ended June 30, 2012, the Company sold 1.00 million tonnes of
coal at an average realized selling price of $57.71 per tonne compared to sales
of 1.50 million tonnes of coal at an average realized selling price of $52.92
per tonne for the six months ended June 30, 2011. Sales volume declined for the
six months ended June 30, 2012 due to the significant uncertainty surrounding
SouthGobi's business in the second quarter of 2012, despite first quarter 2012
sales volumes increasing 84% from the first quarter of 2011.
Direct cash costs of product sold excluding idled mine costs (a non-IFRS
financial measure, see Non-IFRS Financial Measures section) were $12.67 per
tonne for the six months ended June 30, 2012 compared to $24.39 per tonne for
the six months ended June 30, 2011. Direct cash costs of product sold excluding
idled mine costs have primarily decreased as a result of a lower strip ratio and
reduced fuel prices.
REVIEW OF QUARTERLY FINANCIAL RESULTS
The Company's financial results for the previous eight quarters are summarized
in the table below:
($ in thousands, except for per share information, unless otherwise indicated)
------------------------------------------------------------
2012 2011
----------------------------------------------------------------------------
QUARTER ENDED 30-Jun 31-Mar 31-Dec 30-Sep 30-Jun 31-Mar
----------------------------------------------------------------------------
Revenue $ 8,412 $ 40,153 $ 51,064 $ 60,491 $ 47,336 $ 20,158
Gross profit
excluding idled
mine costs 1,778 22,674 16,637 17,635 9,744 7,690
Gross profit
margin
excluding
idled mine
costs 21% 56% 33% 29% 21% 38%
Gross profit/
(loss)
including idled
mine costs (13,809) 22,674 16,637 17,635 9,744 7,690
Other operating
expenses (3,803) (2,578) (24,644) (138) (3,024) (1,383)
Administration
expenses (7,497) (5,882) (8,612) (7,993) (6,808) (5,336)
Evaluation and
exploration
expenses (2,099) (5,033) (14,513) (10,908) (4,356) (1,991)
Income/ (loss)
from operations (27,208) 9,181 (31,132) (1,404) (4,444) (1,020)
Net income/
(loss) 237 3,126 (18,897) 55,921 67,323 (46,602)
Basic income/
(loss) per
share 0.00 0.02 (0.10) 0.31 0.37 (0.25)
Diluted income/
(loss) per
share (0.12) 0.02 (0.14) (0.02) - (0.25)
----------------------------------------------------------------------------
--------------------
2010
------------------------------------
QUARTER ENDED 31-Dec 30-Sep
------------------------------------
Revenue $ 41,595 $ 6,597
Gross profit
excluding idled
mine costs 3,950 336
Gross profit
margin
excluding
idled mine
costs 9% 5%
Gross profit/
(loss)
including idled
mine costs 3,950 336
Other operating
expenses (2,121) (7,586)
Administration
expenses (6,599) (7,405)
Evaluation and
exploration
expenses (4,144) (6,314)
Income/ (loss)
from operations (8,914) (20,969)
Net income/
(loss) (28,720) 27,495
Basic income/
(loss) per
share (0.16) 0.15
Diluted income/
(loss) per
share (0.16) (0.08)
------------------------------------
------------------------------------------------------------
2012 2011
----------------------------------------------------------------------------
QUARTER ENDED 30-Jun 31-Mar 31-Dec 30-Sep 30-Jun 31-Mar
----------------------------------------------------------------------------
Net income/
(loss) $ 237 $ 3,126 $(18,897) $ 55,921 $ 67,323 $(46,602)
Income/ (loss)
adjustments,
net of tax
Idled mine
costs 10,966 - - - - -
Share-based
compensation 4,383 3,799 4,050 4,296 3,349 2,715
Net impairment
loss/
(recovery) on
assets 2,583 - 23,818 (2,925) - -
Unrealized
foreign
exchange
losses/
(gains) (511) (950) 34 103 263 (993)
Unrealized
loss/ (gain)
on embedded
derivatives
in CIC
debenture (26,770) 776 (10,790) (62,058) (70,422) 36,780
Realized loss/
(gain) on
disposal of
FVTPL
investments
(i) 46 (85) - - - -
Unrealized
loss/ (gain)
on FVTPL
investments 2,282 339 155 2,449 (3,629) 4,116
Adjusted net
income/ (loss)
(ii) (6,784) 7,005 (1,630) (2,214) (3,116) (3,984)
----------------------------------------------------------------------------
--------------------
2010
------------------------------------
QUARTER ENDED 31-Dec 30-Sep
------------------------------------
Net income/
(loss) $(28,720) $ 27,495
Income/ (loss)
adjustments,
net of tax
Idled mine
costs - -
Share-based
compensation 3,840 3,695
Net impairment
loss/
(recovery) on
assets 574 7,010
Unrealized
foreign
exchange
losses/
(gains) (1,837) (1,116)
Unrealized
loss/ (gain)
on embedded
derivatives
in CIC
debenture 19,995 (49,772)
Realized loss/
(gain) on
disposal of
FVTPL
investments
(i) - -
Unrealized
loss/ (gain)
on FVTPL
investments (4,375) (1,735)
Adjusted net
income/ (loss)
(ii) (10,523) (14,423)
------------------------------------
(i) FVTPL is defined as "fair value through profit or loss"
(ii) A non-IFRS financial measure, see Non-IFRS Financial Measures section
For the three months ended June 30, 2012
The Company recorded net income of $0.2 million for the three months ended June
30, 2012 compared to a net income of $3.1 million for the three months ended
March 31, 2012 and a net income of $67.3 million for the three months ended June
30, 2011.
Gross Profit:
The Company's gross profit is composed of revenue (net of royalties and selling
fees) and cost of sales and relates solely to the Mongolian Coal Division. For
the three months ended June 30, 2012, gross profit was negatively impacted by
$15.6 million of idled mine costs, resulting in a gross loss of $13.8 million.
The Company recorded a gross profit excluding idled mine costs of $1.8 million
for the three months ended June 30, 2012 compared to $22.7 million for the three
months ended March 31, 2012 and $9.7 million for the three months ended June 30,
2011.
The Company recognized revenue of $8.4 million for the three months ended June
30, 2012 compared to $40.2 million for the three months ended March 31, 2012 and
$47.3 million for the three months ended June 30, 2011. For the three months
ended June 30, 2012 customers were reluctant to enter into significant 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 far 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;
-- Uncertainty with respect to whether SouthGobi would receive a formal
request from MRAM to suspend mining activities on its Ovoot Tolgoi
mining license had customers concerned that they would be unable to
collect and export additional coal purchased from the Ovoot Tolgoi Mine;
and
-- The softening of inland China coking coal markets closest to SouthGobi's
operations towards the end of the second quarter.
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 reference prices for the
second quarter of 2012, the Company was subject to an average 8% royalty based
on a weighted average reference price of $97.83 per tonne. The Company's
effective royalty rate for the second quarter of 2012, based on the Company's
average realized selling price of $62.56 per tonne, was 13%.
Together with other Mongolian mining companies affected by the escalation of
effective royalty rates, a dialog was opened on this topic with the appropriate
Government of Mongolia authorities with a view to moving to a more equitable
process for setting reference prices. There has been a successful outcome and
commencing February 2012 royalty reference prices are now based on prices for
coal products sold at the two main coal export border locations in Mongolia,
namely Shivee Khuren-Ceke and Gashuun Sukhait-Ganqimaodao. The dialog is
continuing, with the aim of having prices based on actual contract prices for
sales at these locations, excluding export fees and Chinese VAT (i.e. revenue
received for coal delivered to the Mongolia-China border prior to export).
Cost of sales was $22.2 million for the three months ended June 30, 2012
compared to $17.5 million for the three months ended March 31, 2012 and $37.6
million for the three months ended June 30, 2011. Cost of sales comprise the
direct cash costs of product sold, mine administration cash costs of product
sold, idled mine costs, equipment depreciation, depletion of mineral properties
and share-based compensation. Of the $22.2 million recorded as cost of sales for
the three months ended June 30, 2012, $6.6 million related to mine operations
and $15.6 million related to idled mine costs. Cost of sales related to mine
operations decreased in the second quarter of 2012 compared to the first quarter
of 2012 and the second quarter of 2011 primarily due to lower sales volumes,
partially offset by higher unit costs.
Other Operating Expenses:
Other operating expenses for the three months ended June 30, 2012 increased to
$3.8 million compared to $2.6 million for the three months ended March 31, 2012
and $3.0 million for the three months ended June 30, 2011. In the second quarter
of 2012, other operating expenses consisted primarily of public infrastructure
costs and provisions for doubtful trade and other receivables. The loss
provision relates to allowances granted to certain customers in order to
expedite trade receivable cash collections. Other operating expenses consisted
primarily of foreign exchange losses in the first quarter of 2012 and of public
infrastructure costs in the second quarter of 2011.
Administration Expenses:
Administration expenses for the three months ended June 30, 2012 were $7.5
million compared to $5.9 million for the three months ended March 31, 2012 and
$6.8 million for the three months ended June 30, 2011. The increased
administration expenses in the second quarter of 2012 compared to the first
quarter of 2012 primarily related to increased legal and professional fees,
primarily due to increased legal activities, and increased share-based
compensation. The increased administration expenses in the second quarter of
2012 compared to the second quarter of 2011 primarily related to increased
salaries and benefits. In the second quarter of 2012, salaries and benefits
included severance payments resulting from personnel separations.
Evaluation and Exploration Expenses:
Exploration expenses for the three months ended June 30, 2012 were $2.1 million
compared to $5.0 million for the three months ended March 31, 2012 and $4.4
million for the three months ended June 30, 2011. Exploration expenses will vary
from quarter to quarter depending on the number of projects and the related
seasonality of the exploration programs. In the second quarter of 2012, the
Company curtailed exploration activities to preserve financial resources. The
majority of the exploration activities in the second quarter of 2012 related to
water exploration activities.
Finance Income & Finance Costs:
The Company incurred finance costs for the three months ended June 30, 2012 of
$4.0 million compared to $2.4 million for the three months ended June 30, 2011.
Finance costs in the second quarter of 2012 primarily consisted of $1.6 million
of interest expense on the China Investment Corporation ("CIC") convertible
debenture and a $2.3 million unrealized loss on FVTPL investments; whereas,
finance costs in the second quarter of 2011 primarily consisted of $2.2 million
of interest expense on the CIC convertible debenture.
The Company recorded finance income for the three months ended June 30, 2012 of
$26.9 million compared to $74.4 million for the three months ended June 30,
2011. In the second quarter of 2012, finance income primarily consisted of a
$26.8 million unrealized gain on the fair value change of the embedded
derivatives in the CIC convertible debenture; whereas, in the second quarter of
2011, finance income primarily consisted of a $70.4 million unrealized gain on
the fair value change of the embedded derivatives in the CIC convertible
debenture and a $3.6 million unrealized gain on FVTPL investments.
The Company's investment in Aspire Mining Limited ("Aspire") continues to be
classified as an available-for-sale financial asset and for the three months
ended June 30, 2012, the Company recorded an after-tax mark to market loss of
$20.1 million related to Aspire that has been recorded in other comprehensive
income.
Taxes:
For the three months ended June 30, 2012, the Company recorded a current income
tax recovery of $3.7 million related to its Mongolian operations compared to a
current tax expense of $1.7 million for the three months ended June 30, 2011.
The Company has recorded a deferred income tax recovery related to deductible
temporary differences of $0.6 million for the three months ended June 30, 2012
compared to $1.5 million for the three months ended June 30, 2011.
For the six months ended June 30, 2012
The Company recorded net income of $3.4 million for the six months ended June
30, 2012 compared to a net income of $20.7 million for the six months ended June
30, 2011.
Gross Profit:
The Company's gross profit is composed of revenue (net of royalties and selling
fees) and cost of sales and relates solely to the Mongolian Coal Division. For
the six months ended June 30, 2012, gross profit was negatively impacted by
$15.6 million of idled mine costs, resulting in a reduced gross profit of $8.9
million. The Company recorded a gross profit excluding idled mine costs of $24.5
million for the six months ended June 30, 2012 compared to $17.4 million for the
six months ended June 30, 2011.
Revenue decreased to $48.6 million for the six months ended June 30, 2012 from
$67.5 million for the six months ended June 30, 2011 primarily due to decreased
sales volumes in the second quarter of 2012, partially offset by higher sales
volumes in the first quarter of 2012 and higher average realized selling prices
for the first half of 2012.
Cost of sales was $39.7 million for the six months ended June 30, 2012 compared
to $50.1 million for the six months ended June 30, 2011. Cost of sales comprise
the direct cash costs of product sold, mine administration cash costs of product
sold, idled mine costs, equipment depreciation, depletion of mineral properties
and share-based compensation. Of the $39.7 million recorded as cost of sales for
the six months ended June 30, 2012, $24.1 million related to mine operations and
$15.6 million related to idled mine costs. Cost of sales related to mine
operations decreased for the six months ended June 30, 2012 compared to the six
months ended June 30, 2011 primarily due to lower sales volumes and lower unit
costs.
Other Operating Expenses:
Other operating expenses for the six months ended June 30, 2012 increased to
$6.4 million compared to $4.4 million for the six months ended June 30, 2011.
The increase in other operating expenses primarily relates to provisions for
doubtful trade and other receivables and increased foreign exchange losses,
partially offset by reduced public infrastructure costs. The increased loss
provisions related to allowances granted to certain customers in order to
expedite trade receivable cash collections. Public infrastructure costs
decreased for the six months ended June 30, 2012 compared to the six months
ended June 30, 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. Public infrastructure costs should continue to be lower
than prior periods due to the completion of the expanded border crossing
infrastructure at the Shivee Khuren Border Crossing.
Administration Expenses:
Administration expenses for the six months ended June 30, 2012 were $13.4
million compared to $12.1 million for the six months ended June 30, 2011. The
increase in administration expenses for the six months ended June 30, 2012
primarily related to increased salaries and benefits and increased share-based
compensation. In the second quarter of 2012, salaries and benefits included
severance payments resulting from personnel separations.
Evaluation and Exploration Expenses:
Exploration expenses for the six months ended June 30, 2012 were $7.1 million
compared to $6.3 million for the six months ended June 30, 2011. Exploration
expenses will vary period to period depending on the number of projects and the
related seasonality of the exploration programs. In the second quarter of 2012,
the Company curtailed exploration activities to preserve financial resources.
The majority of the exploration activities for the six months ended June 30,
2012 related to water exploration activities. For the six months ended June 30,
2011, exploration programs had not received all required government approvals;
thus a higher proportion of expenses were incurred in the second half of 2011.
Finance Income & Finance Costs:
Finance costs for the six months ended June 30, 2012 were $4.7 million compared
to $7.5 million for the six months ended June 30, 2011. Finance costs in the
first half of 2012 primarily consisted of $1.8 million of interest expense on
the CIC convertible debenture and a $2.6 million unrealized loss on fair value
through profit or loss ("FVTPL") investments; whereas, finance costs in the
first half of 2011 primarily consisted of $6.7 million of interest expense on
the CIC convertible debenture and a $0.5 million unrealized loss on FVTPL
investments.
Finance income for the six months ended June 30, 2012 was $26.3 million compared
to $34.4 million for the six months ended June 30, 2011. In the first half of
2012, finance income primarily consisted of a $26.0 million unrealized gain on
the fair value change of the embedded derivatives in the CIC convertible
debenture; whereas, in the first half of 2011, finance income primarily
consisted of a $33.6 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 and for the six months ended June 30, 2012,
the Company recorded an after-tax mark to market loss of $25.5 million related
to Aspire that has been recorded in other comprehensive income.
Taxes:
For the six months ended June 30, 2012, the Company recorded a current income
tax expense of $1.1 million related to its Mongolian operations compared to a
current tax expense of $3.5 million for the six months ended June 30, 2011. The
Company recorded a deferred income tax recovery related to deductible temporary
differences of $0.7 million for the six months ended June 30, 2012 compared to
$2.8 million for the six months ended June 30, 2011.
FINANCIAL POSITION AND LIQUIDITY
The Company's total assets as at June 30, 2012 were $846.5 million compared with
$920.3 million as at December 31, 2011.
As at June 30, 2012, the Company had $61.6 million in cash and cash equivalents
and $30.0 million in money market investments for a total liquidity of $91.6
million compared with $123.6 million in cash and cash equivalents and $45.0
million in money market investments for a total liquidity of $168.6 million as
at December 31, 2011.
The Company's non-current liabilities as at June 30, 2012 were $117.1 million
compared with $145.6 million as at December 31, 2011.
PROPOSED TRANSACTION
On April 2, 2012, SouthGobi announced a Cooperation Agreement with CHALCO and
received official notification of CHALCO's intention to make a proportional
takeover bid for up to 60% of the issued and outstanding common shares of
SouthGobi at Cdn$8.48 per share ("Proportional Offer"). SouthGobi has also been
informed by its 58% major shareholder, Turquoise Hill Resources Ltd. ("Turquoise
Hill"), that Turquoise Hill has signed a lock-up agreement with CHALCO,
committing to tender all of its shares held or thereafter acquired by it during
the offer period of CHALCO into the Proportional Offer. The Proportional Offer
will be made by way of a takeover bid circular under British Columbia law and
will be made to all SouthGobi shareholders. If shareholders tender more than 60%
of the outstanding common shares of SouthGobi to the takeover bid, a
proportional amount of shares will be taken up from each shareholder. SouthGobi
has not received any formal documentation relating to the Proportional Offer.
On April 25, 2012, CHALCO and Turquoise Hill announced that in the event of new
foreign investment legislation being implemented by the Government of Mongolia
prior to the completion of the Proportional Offer, CHALCO and Turquoise Hill
will cooperate with the Government of Mongolia to ensure any requirements under
such legislation are satisfied.
On May 17, 2012, the Parliament of Mongolia approved a Foreign Investment Law
("FIL") that regulates foreign direct investment into a number of key sectors of
strategic importance, which includes mineral resources. The FIL is extremely
ambiguous and leaves a lot of discretion in the parliamentary approval process.
If foreign shareholding exceeds 49% of an asset and the amount of the investment
at the time is to exceed MNT100 billion (approximately $75.0 million), then
parliamentary approval is required. In the case of state owned entities ("SOE")
there is no minimum threshold and all proposed investments from SOEs require
parliamentary approval. In addition, if a foreign entity wants to acquire one
third or more of the shares in an investment in a strategic sector, then the
MNT100 billion threshold is not applicable and cabinet approval for the
investment is required regardless of the value. As a result, the Proportional
Offer will require Government of Mongolia approval.
In conjunction with the Proportional Offer, CHALCO and SouthGobi have entered
into a Cooperation Agreement. CHALCO's obligations under the Cooperation
Agreement will become effective upon CHALCO acquiring a shareholding in
SouthGobi.
Key benefits under the Cooperation Agreement between SouthGobi and CHALCO include:
-- Coal off-take by CHALCO - SouthGobi will have the right to offer up to
100% of its salable coal to CHALCO and CHALCO will have the obligation
to purchase the coal at market prices for a period of 24 months.
-- Infrastructure support - CHALCO will assist SouthGobi to procure
electricity for its Mongolian business operations either through a
direct connection to grid power, or through development of a
conveniently located power plant. CHALCO will also provide support to
SouthGobi's coal-haul highway project.
SouthGobi has also been notified that CHALCO has entered into consultancy
agreements with nine key senior executives, officers and staff to assist CHALCO
with the integration and transition following CHALCO's acquisition of a
shareholding in SouthGobi. Services would be retained for 12 months from the
termination of their employment or for a period of 12-months less the notice
period actually served by them on their resignation, after CHALCO becomes a
shareholder of SouthGobi. Following arm's length negotiation between CHALCO and
the relevant individuals, it has been agreed that fees totaling $9.0 million
would be paid by CHALCO for the consulting services. Consultancy agreements have
been entered into with the President and Chief Executive Officer, Chief
Operating Officer, Chief Financial Officer, and key Vice Presidents, officers
and staff.
CHALCO had stated that it expected to mail the takeover bid circular in
connection with the Proportional Offer on or about July 5, 2012. On July 3,
2012, CHALCO and Turquoise Hill announced a 30 day extension for CHALCO to mail
the takeover bid circular.
Subsequently, on August 2, 2012, an additional 30 day extension was announced by
CHALCO and Turquoise Hill. CHALCO has agreed to mail the takeover bid circular
on or before September 4, 2012.
MRAM REQUEST TO SUSPEND EXPLORATION AND MINING LICENSES
On April 16, 2012, SouthGobi announced that MRAM held a press conference
announcing a request to suspend exploration and mining activity on certain
licenses owned by SouthGobi Sands LLC. The request for suspension includes the
mining license pertaining to the Ovoot Tolgoi Mine.
Advice to the Company suggests that the action has been taken under the broad
national security powers of the Government of Mongolia. MRAM stated that the
move is in connection to the proposed proportional takeover bid by CHALCO and
the agreement by Turquoise Hill to tender its controlling interest in SouthGobi
to such a takeover.
Subsequently, on May 30, 2012, the Mongolian Minister of Mineral Resources and
Energy ("MRE") commented at a press conference that "the temporary suspension
has been lifted, but regarding the new (Foreign Investment) law, the license of
Ovoot Tolgoi will be discussed by the cabinet and parliament." Subsequently, the
Company has written to MRAM and the MRE requesting official clarification.
However, as at August 13, 2012, no such clarification has been received.
As at August 13, 2012, the Company has not received any official notification to
suspend exploration and mining activity and has no reason to believe SouthGobi's
licenses are not in good standing. However, the Company cautions that any
official notification received will require a mandatory suspension of operations
and may result in the impairment of the Company's property, plant and equipment.
Although no official notification has been received to date, SouthGobi continues
to be impacted by the uncertainty over its licenses. Many government bodies and
regulatory authorities in Mongolia are reluctant to provide approvals and
permits. For example, SouthGobi has been unable to receive an approval for a
revision to its Environmental Impact Assessment for the dry coal handling
facility ("DCHF") from the Mongolian Ministry of Environment. As a result,
SouthGobi may be unable to operate the DCHF until it receives approval for the
revised Environmental Impact Assessment.
REGIONAL INFRASTRUCTURE
In July 2009, Chinese and Mongolian authorities agreed to create designated coal
transportation corridors at the Shivee Khuren Border Crossing. In 2011,
SouthGobi, together with Mongolyn Alt Corporation ("MAK"), completed the road
and construction works required on the Mongolian side of the border to match the
existing Chinese infrastructure. On May 28, 2012, the expanded border crossing
infrastructure, consisting of eight new border gates exclusively for coal
transportation, opened at the Shivee Khuren Border Crossing. The expanded border
crossing infrastructure will eliminate the existing bottleneck at the Shivee
Khuren Border Crossing and is expected to increase capacity to approximately 20
million tonnes or more of coal per year.
In June 2012, due to the expanded border crossing infrastructure at the Shivee
Khuren Border Crossing, the Company's customers exported 0.58 million tonnes of
Ovoot Tolgoi Mine coal (mostly from customer inventories) from Mongolia to
China, representing a monthly export record of coal from the Ovoot Tolgoi Mine.
On August 2, 2011, the State Property Committee of Mongolia awarded the tender
to construct a paved highway from the Ovoot Tolgoi Complex to the Shivee Khuren
Border Crossing to consortium partners NTB LLC and SouthGobi Sands LLC (together
referred to as "RDCC"). SouthGobi Sands LLC holds a 40% interest in RDCC. On
October 26, 2011, RDCC signed a concession agreement with the State Property
Committee of Mongolia. RDCC now has the right to conclude a 17 year build,
operate and transfer agreement under the Mongolian Law on Concessions. RDCC has
engaged a contractor and construction on the paved highway has commenced.
Completion of the paved highway is expected mid-2013. The paved highway will
have an intended carrying capacity upon completion in excess of 20 million
tonnes of coal per year.
NOTICE OF INVESTMENT DISPUTE
SGQ Coal Investment Pte. Ltd., a wholly-owned subsidiary of SouthGobi that owns
100% of the Company's Mongolian operating subsidiary SouthGobi Sands LLC, filed
a Notice of Investment Dispute on the Government of Mongolia pursuant to the
Bilateral Investment Treaty between Singapore and Mongolia. The Company has
filed the Notice of Investment Dispute following a determination by management
that they have exhausted all other possible means to resolve an ongoing
investment dispute between SouthGobi Sands LLC and the Mongolian authorities.
The Notice of Investment Dispute consists of, but is not limited to, the failure
by MRAM to execute the Pre-Mining Agreements ("PMA") associated with certain
exploration licenses of the Company pursuant to which valid PMA applications had
been lodged in 2011. The areas covered by the valid PMA applications include the
Zag Suuj Deposit and certain areas associated with the Soumber Deposit outside
the existing mining license.
The Notice of Investment Dispute triggers the dispute resolution process under
the Bilateral Investment Treaty whereby the Government of Mongolia has a
six-month cure period from the date of receipt of the notice to satisfactorily
resolve the dispute through negotiations. If the negotiations are not
successful, the Company will be entitled to commence conciliation/arbitration
proceedings under the auspices of the International Centre for Settlement of
Investment Disputes ("ICSID") pursuant to the Bilateral Investment Treaty.
However, in the event that the Government of Mongolia fails to negotiate, ICSID
arbitration proceedings may be accelerated before the six months have expired.
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 TSX and the HKEX, 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 concluded on June 14, 2012. As at June 14, 2012, the Company had
repurchased 1.6 million shares on the HKEX and 2.8 million shares on the TSX for
a total of 4.4 million common shares. The Company cancelled all repurchased
shares.
OUTLOOK
The announcement by CHALCO that it intends to make a proportional takeover bid
for up to 60% of the issued and outstanding common shares of SouthGobi continues
to create significant uncertainty for the Company's business. Further
uncertainly results from the MRAM press conference announcing a request to
suspend exploration and mining activity on certain licenses owned by SouthGobi
Sands LLC and general difficulty receiving permits and valid cooperation from
departments of the Government of Mongolia. This uncertainty has been compounded
by worsening conditions in coal markets in inland China.
Inland China coking coal markets closest to SouthGobi's operations have
continued to soften in the third quarter of 2012. The Company has observed a
substantial deterioration in sentiment among its customers and a decline in key
reference prices in key end-use markets.
Due to the uncertainty surrounding SouthGobi's business, the Company anticipates
its operations will remain fully curtailed in the third quarter of 2012.
Further, the Company cautions that production volumes, sales volumes and pricing
for the full year of 2012 cannot be estimated.
SouthGobi is uniquely positioned, with a number of key competitive strengths,
including:
-- Strategic location - SouthGobi is the closest major coking coal producer
in the world to China. The Ovoot Tolgoi Mine is approximately 40km from
China, which is approximately 190km closer than Tavan Tolgoi coal
producers in Mongolia and 7,000 to 10,000km closer than Australian and
North American coking coal producers. The Company has an infrastructure
advantage, being approximately 50km from existing railway
infrastructure, which is approximately one tenth the distance to rail of
Tavan Tolgoi coal producers in Mongolia.
-- Premium quality coals - Most of the Company's coal resources have coking
properties, including a mixture of semi-soft coking coals and hard
coking coals. SouthGobi is also completing its investment in processing
infrastructure to capture more of the value by selling 'clean' instead
of 'raw' coal products.
-- Sustainable volume growth - Subject to market conditions, the Ovoot
Tolgoi Mine, has the potential to produce well in excess of 2011 levels.
Currently undeveloped resources at the Soumber Deposit and the Zag Suuj
Deposit may provide additional growth in the future.
-- Expanding margins - The Company believes, subject to market conditions,
it will continue expanding margins through the benefits of coal
processing and increasing economies of scale.
-- Exploration as a core business competency - SouthGobi's resources in
Mongolia have been acquired through a long term in-house exploration
program. The Company continues to maintain exploration as a core long-
term strategy to provide additional resources of coal in a cost
effective manner.
Objectives
The Company's objectives for 2012 have been impacted by the external conditions
faced by it. SouthGobi intends to attempt to mitigate the issues, to the extent
possible, and reduce capital expenditures, operating costs and exploration to
preserve the Company's financial resources.
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 which are excluded. Non-cash
adjustments include share-based compensation, 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,
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, realized 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 INTERIM 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,
---------------------------------------------
Notes 2012 2011 2012 2011
---------------------------------------------------
Revenue $ 8,412 $ 47,336 $ 48,565 $ 67,494
Cost of sales 3 (22,221) (37,592) (39,700) (50,060)
----------------------------------------------------------------------------
Gross profit/(loss) (13,809) 9,744 8,865 17,434
Other operating expenses 4 (3,803) (3,024) (6,380) (4,407)
Administration expenses 5 (7,497) (6,808) (13,380) (12,144)
Evaluation and
exploration expenses 6 (2,099) (4,356) (7,132) (6,347)
----------------------------------------------------------------------------
Loss from operations (27,208) (4,444) (18,027) (5,464)
Finance costs 7 (4,006) (2,378) (4,681) (7,542)
Finance income 7 26,875 74,406 26,290 34,423
Share of earnings of
joint venture 204 - 204 -
----------------------------------------------------------------------------
Income/(loss) before tax (4,135) 67,584 3,786 21,417
Current income tax
recovery/(expense) 8 3,747 (1,722) (1,127) (3,475)
Deferred income tax
recovery 8 625 1,461 704 2,779
----------------------------------------------------------------------------
Net income attributable
to equity holders of the
Company 237 67,323 3,363 20,721
----------------------------------------------------------------------------
OTHER COMPREHENSIVE
INCOME/(LOSS)
Gain/(loss) on available-
for-sale assets, net of
tax (20,087) (39,573) (25,509) 11,175
----------------------------------------------------------------------------
Net comprehensive
income/(loss)
attributable to equity
holders of the Company $ (19,850) $ 27,750 $ (22,146) $ 31,896
----------------------------------------------------------------------------
BASIC INCOME/(LOSS) PER
SHARE 9 $ 0.00 $ 0.37 $ 0.02 $ 0.11
DILUTED INCOME/(LOSS) PER
SHARE 9 $ (0.12) $ 0.00 $ (0.10) $ (0.03)
Condensed Consolidated Interim Statement of Financial Position
(Unaudited)
(Expressed in thousands of U.S. Dollars)
As at
-----------------------------
June 30, December 31,
Notes 2012 2011
-----------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 61,578 $ 123,567
Trade and other receivables 10 49,795 80,285
Short term investments 30,000 -
Inventories 57,330 52,443
Prepaid expenses and deposits 34,714 38,308
----------------------------------------------------------------------------
Total current assets 233,417 294,603
Non-current assets
Prepaid expenses and deposits 8,389 8,389
Property, plant and equipment 555,483 498,533
Deferred income tax assets 8 20,264 19,560
Long term investments 28,935 99,238
----------------------------------------------------------------------------
Total non-current assets 613,071 625,720
----------------------------------------------------------------------------
Total assets $ 846,488 $ 920,323
----------------------------------------------------------------------------
EQUITY AND LIABILITIES
Current liabilities
Trade and other payables 11 $ 14,282 $ 52,235
Deferred revenue 4,872 -
Current portion of convertible debenture 12 4,284 6,301
----------------------------------------------------------------------------
Total current liabilities 23,438 58,536
Non-current liabilities
Convertible debenture 12 113,134 139,085
Deferred income tax liabilities - 2,366
Decommissioning liability 3,934 4,156
----------------------------------------------------------------------------
Total non-current liabilities 117,068 145,607
----------------------------------------------------------------------------
Total liabilities 140,506 204,143
Equity
Common shares 1,059,527 1,054,298
Share option reserve 50,957 44,143
Investment revaluation reserve (8,950) 16,559
Accumulated deficit 13 (395,552) (398,820)
----------------------------------------------------------------------------
Total equity 705,982 716,180
----------------------------------------------------------------------------
Total equity and liabilities $ 846,488 $ 920,323
----------------------------------------------------------------------------
Net current assets $ 209,979 $ 236,067
Total assets less current liabilities $ 823,050 $ 861,787
SELECT INFORMATION FROM THE NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
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 Statement of compliance
The Company's condensed consolidated interim financial statements, including
comparatives, have been prepared in accordance with International Accounting
Standard 34 "Interim Financial Reporting" ("IAS 34") using accounting policies
consistent with the International Financial Reporting Standards ("IFRS") issued
by the International Accounting Standards Board ("IASB") and Interpretations of
the IFRS Interpretations Committee.
1.2 Basis of presentation
The Company's consolidated financial statements have been prepared on the
historical cost basis except for certain financial instruments.
1.3 Prior Period Reclassifications
Certain items within the Company's condensed consolidated interim statement of
comprehensive income have been reclassified to better reflect the Company's
increased mining operations.
The reclassifications have resulted in the introduction of a new line item
entitled "other operating expenses". Expenses included in the other operating
expenses line item include operating items such as: gains, losses and impairment
charges on certain assets, public infrastructure expenses, sustainability and
community relations expenses and foreign exchange amounts.
For the three months ended June 30, 2011, the reclassifications resulted in
$3,024 from administration expenses being reclassified to other operating
expenses. For the six months ended June 30, 2011, the reclassifications resulted
in $4,407 from administration expenses being reclassified to other operating
expenses.
2. SEGMENTED INFORMATION
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 and reported income or
loss, revenues and impairments analyzed by operating segment are as follows:
Mongolian Unallocated Consolidated
Coal Division (i) Total
-------------------------------------------
Segment assets
As at June 30, 2012 $ 725,812 $ 120,676 $ 846,488
As at December 31, 2011 696,732 223,591 920,323
Segment liabilities
As at June 30, 2012 $ 21,813 $ 118,693 $ 140,506
As at December 31, 2011 51,256 152,887 204,143
Segment income/(loss)
For the three months ended June
30, 2012 $ (18,872) $ 19,109 $ 237
For the three months ended June
30, 2011 1,633 65,690 67,323
For the six months ended June
30, 2012 $ (7,108) $ 10,471 $ 3,363
For the six months ended June
30, 2011 5,263 15,458 20,721
Segment revenues
For the three months ended June
30, 2012 $ 8,412 $ - $ 8,412
For the three months ended June
30, 2011 47,336 - 47,336
For the six months ended June
30, 2012 $ 48,565 $ - $ 48,565
For the six months ended June
30, 2011 67,494 - 67,494
(i) The unallocated amount contains all amounts associated with the
Corporate Division
The operations of the Company are located in Mongolia, Hong Kong and Canada.
Consolidated
Mongolia Hong Kong Canada Total
-----------------------------------------------
Revenues
For the three months ended
June 30, 2012 $ 8,412 $ - $ - $ 8,412
For the three months ended
June 30, 2011 47,336 - - 47,336
For the six months ended
June 30, 2012 $ 48,565 $ - $ - $ 48,565
For the six months ended
June 30, 2011 67,494 - - 67,494
Non-current assets
As at June 30, 2012 $ 577,449 $ 197 $ 35,426 $ 613,071
As at December 31, 2011 519,003 283 106,434 625,720
3. COST OF SALES
The Company's cost of sales consists of the following amounts:
Three months ended Six months ended
June 30, June 30,
--------------------------------------------
2012 2011 2012 2011
--------------------------------------------
Operating expenses $ 4,975 $ 29,639 $ 17,567 $ 39,023
Share-based compensation expense 189 300 1,205 685
Depreciation and depletion 1,470 7,653 5,341 10,352
----------------------------------------------------------------------------
Cost of sales during mine
operations 6,634 37,592 24,113 50,060
Cost of sales during idled mine
period (i) 15,587 - 15,587 -
----------------------------------------------------------------------------
Cost of sales $ 22,221 $ 37,592 $ 39,700 $ 50,060
----------------------------------------------------------------------------
(i) Cost of sales during idled mine period includes $8,785 of depreciation
expense and $965 of stock-based compensation expense for the three and
six month periods ended June 30, 2012. The depreciation expense
relates to the Company's idled plant and equipment.
The Company curtailed its mining activities 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.
4. OTHER OPERATING EXPENSES
The Company's other operating expenses consist of the following amounts:
Three months ended Six months ended
June 30, June 30,
-----------------------------------------------
2012 2011 2012 2011
-----------------------------------------------
Public infrastructure $ 1,176 $ 3,202 $ 1,186 $ 3,938
Sustainability and community
relations 260 145 431 480
Foreign exchange (gain)/loss (483) (323) 1,960 (11)
Provision for doubtful trade
and other receivables (Note
10) 2,583 - 2,583 -
Other 267 - 220 -
----------------------------------------------------------------------------
Other operating expenses $ 3,803 $ 3,024 $ 6,380 $ 4,407
----------------------------------------------------------------------------
5. ADMINISTRATION EXPENSES
The Company's administration expenses consist of the following amounts:
Three months ended Six months ended
June 30, June 30,
--------------------------------------------
2012 2011 2012 2011
--------------------------------------------
Corporate administration $ 1,544 $ 1,634 $ 3,033 $ 3,386
Legal and professional fees 1,338 1,299 1,682 1,845
Salaries and benefits 1,508 986 2,857 1,863
Share-based compensation expense 3,052 2,848 5,698 4,934
Depreciation 55 41 110 116
----------------------------------------------------------------------------
Administration expenses $ 7,497 $ 6,808 $ 13,380 $ 12,144
----------------------------------------------------------------------------
6. EVALUATION AND EXPLORATION EXPENSES
The Company's evaluation and exploration expenses consist of the following amounts:
Three months ended Six months ended
June 30, June 30,
--------------------------------------------
2012 2011 2012 2011
--------------------------------------------
Drilling and trenching $ 696 $ 3,093 $ 3,470 $ 3,905
Other direct expenses 458 436 992 691
Share-based compensation expense 177 202 314 446
Overhead and other 768 625 2,356 1,305
----------------------------------------------------------------------------
Evaluation and exploration
expenses $ 2,099 $ 4,356 $ 7,132 $ 6,347
----------------------------------------------------------------------------
7. FINANCE COSTS AND INCOME
The Company's finance costs consist of the following amounts:
Three months ended Six months ended
June 30, June 30,
--------------------------------------------
2012 2011 2012 2011
--------------------------------------------
Interest expense on convertible
debenture $ 1,552 $ 2,177 $ 1,816 $ 6,684
Unrealized loss on FVTPL
investments 2,282 - 2,620 488
Realized loss on disposal of
FVTPL investments 46 - - -
Interest expense on line of
credit facility 99 156 187 286
Accretion of decommissioning
liability 27 45 58 84
----------------------------------------------------------------------------
Finance costs $ 4,006 $ 2,378 $ 4,681 $ 7,542
----------------------------------------------------------------------------
The Company's finance income consists of the following amounts:
Three months ended Six months ended
June 30, June 30,
--------------------------------------------
2012 2011 2012 2011
--------------------------------------------
Unrealized gain on embedded
derivatives in convertible
debenture $ 26,770 $ 70,422 $ 25,995 $ 33,641
Interest income 105 355 256 782
Unrealized gain on FVTPL
investments - 3,629 - -
Realized gain on disposal of
FVTPL investments - - 39 -
----------------------------------------------------------------------------
Finance income $ 26,875 $ 74,406 $ 26,290 $ 34,423
----------------------------------------------------------------------------
8. TAXES
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.
For the six months ended June 30, 2012 the Company recorded current income tax
expense of $1,127 (2011: $3,475) related to assessable profit derived from
Mongolia at prevailing rates. For the six months ended June 30, 2012, the
Company recorded a deferred income tax recovery of $704 (2011: $2,779) related
to its Mongolian operations.
9. EARNINGS/(LOSS) PER SHARE
Three months ended Six months ended
June 30, June 30,
------------------------------------------------
2012 2011 2012 2011
------------------------------------------------
Net income $ 237 $ 67,323 $ 3,363 $ 20,721
Weighted average number of
shares 181,860 183,745 181,802 183,746
----------------------------------------------------------------------------
Basic income/(loss) per
share $ 0.00 $ 0.37 $ 0.02 $ 0.11
----------------------------------------------------------------------------
Income/(loss)
Net income $ 237 $ 67,323 $ 3,363 $ 20,721
Interest expense on
convertible debenture 1,552 2,177 1,816 6,684
Unrealized gain on embedded
derivatives in convertible
debenture (26,770) (70,422) (25,995) (33,641)
----------------------------------------------------------------------------
Diluted net loss $ (24,981) $ (922) $ (20,816) $ (6,236)
----------------------------------------------------------------------------
Number of shares
Weighted average number of
shares 181,860 183,745 181,802 183,746
Convertible debenture 28,128 20,264 28,406 20,931
Weighted average number of
dilutive stock options - (i) - (i) - (i) - (i)
----------------------------------------------------------------------------
Diluted weighted average
number of shares 209,988 204,009 210,208 204,677
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Diluted income/(loss) per
share $ (0.12) $ 0.00 $ (0.10) $ (0.03)
----------------------------------------------------------------------------
(i) The stock options were anti-dilutive for the three and six month
periods ended June 30, 2012 and 2011
The diluted earnings/(loss) per share reflects the potential dilution of common
share equivalents, such as the convertible debenture and outstanding stock
options, in the weighted average number of common shares outstanding during the
period, if dilutive.
Potentially dilutive items not included in the calculation of diluted
earnings/(loss) per share for the three and six month periods ended June 30,
2012 were 10,974 stock options that were anti-dilutive (2011: 8,615 stock
options).
10. TRADE AND OTHER RECEIVABLES
The Company's trade and other receivables consist of the following amounts:
As at
----------------------------
June 30, December 31,
2012 2011
----------------------------
Trade receivables $ 43,852 $ 64,051
VAT/HST receivable 331 144
Insurance proceeds receivable 1,511 12,913
Other receivables 4,101 3,177
----------------------------------------------------------------------------
Total trade and other receivables $ 49,795 $ 80,285
----------------------------------------------------------------------------
The aging of the Company's trade and other receivables is as follows:
As at
----------------------------
June 30, December 31,
2012 2011
----------------------------
Less than 1 month $ 4,254 $ 50,824
1 to 3 months 744 3,337
3 to 6 months 26,737 23,699
Over 6 months 18,060 2,425
----------------------------------------------------------------------------
Total trade and other receivables $ 49,795 $ 80,285
----------------------------------------------------------------------------
For the three months and six months ended June 30, 2012, the Company recorded a
$2,583 loss provision on certain customer trade receivables (2011: $nil). The
loss provision relates to allowances granted to certain customers in order to
expedite trade receivable cash collections.
The Company anticipates full recovery of its remaining outstanding trade and
other receivables; therefore, no further loss provisions have been recorded in
respect of the Company's trade and other receivables.
11. TRADE AND OTHER PAYABLES
Trade and other payables of the Company consist of amounts outstanding for trade
purchases relating to coal mining, development and exploration activities and
mining royalties payable. The usual credit period taken for trade purchases is
between 30 to 90 days.
The aging of the Company's trade and other payables is as follows:
As at
----------------------------
June 30, December 31,
2012 2011
----------------------------
Less than 1 month $ 12,327 $ 52,032
1 to 3 months 886 76
3 to 6 months 1,067 105
Over 6 months 2 22
----------------------------------------------------------------------------
Total trade and other payables $ 14,282 $ 52,235
----------------------------------------------------------------------------
12. CONVERTIBLE DEBENTURE
On November 19, 2009, the Company issued a convertible debenture to a wholly
owned subsidiary of the China Investment Corporation ("CIC") for $500,000. The
convertible debenture is secured, bears interest at 8.0% per annum (6.4% payable
semi-annually in cash and 1.6% payable annually in the Company's shares) and has
a maximum term of 30 years.
On March 29, 2010, pursuant to the 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).
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.
12.1 Presentation
Based on the Company's valuations as at June 30, 2012, the fair value of the
embedded derivatives decreased by $26,770 compared to March 31, 2012. This
decrease was recorded as finance income for the three months ended June 30,
2012. The fair value of the embedded derivatives decreased by $25,995 compared
to December 31, 2011. This decrease was recorded as finance income for the six
months ended June 30, 2012.
For the three months ended June 30, 2012, the Company recorded interest expense
of $4,989 (2011: $5,005) related to the convertible debenture of which $3,437
was capitalized as borrowing costs and the remaining $1,552 was recorded as a
finance cost. For the six months ended June 30, 2012, the Company recorded
interest expense of $9,984 (2011: $9,953) related to the convertible debenture
of which $8,168 was capitalized as borrowing costs and the remaining $1,816 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 interest 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:
Three months ended Six months ended
June 30, June 30,
------------------------------------------------
2012 2011 2012 2011
------------------------------------------------
Balance, beginning of period $ 147,156 $ 289,529 $ 145,386 $ 251,810
Interest expense on
convertible debenture 4,989 5,005 9,984 9,953
Decrease in fair value of
embedded derivatives (26,770) (70,422) (25,995) (33,641)
Interest paid (7,957) (7,935) (11,957) (11,945)
----------------------------------------------------------------------------
Balance, end of period $ 117,418 $ 216,177 $ 117,418 $ 216,177
----------------------------------------------------------------------------
The convertible debenture balance consists of the following amounts:
As at
----------------------------
June 30, December 31,
2012 2011
----------------------------
Debt host $ 90,740 $ 90,696
Fair value of embedded derivatives 22,394 48,389
Interest payable 4,284 6,301
----------------------------------------------------------------------------
Convertible debenture $ 117,418 $ 145,386
----------------------------------------------------------------------------
13. ACCUMULATED DEFICIT AND DIVIDENDS
At June 30, 2012, the Company has accumulated a deficit of $395,552 (December
31, 2011: $398,820). No dividends have been paid or declared by the Company
since inception.
REVIEW OF INTERIM RESULTS
The condensed consolidated interim financial statements for the Company for the
six months ended June 30, 2012, were reviewed by the Audit Committee of the
Company.
SouthGobi's results for the quarter ended June 30, 2012 are contained in the
unaudited Condensed Consolidated Interim Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A"), available on the SEDAR website at www.sedar.com and SouthGobi
Resources website at www.southgobi.com.
COMPLIANCE WITH CORPORATE GOVERNANCE
The Company has, throughout the six months ended June 30, 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 June 30, 2012).
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 Mongolian 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 Securities Administrators ("NI 43-101").
Forward-Looking Statements: This document includes forward-looking statements.
Forward-looking statements include, but are not limited to: the Company
anticipates its operations will remain fully curtailed in the third quarter of
2012; the Ovoot Tolgoi Mine has the potential to produce well in excess of 2011
levels; the potential to convert any undeveloped resources into reserves; the
ability of the Company to expand margins through the benefits of coal processing
and increasing economies of scale; expanded border crossing infrastructure at
the Shivee Khuren Border Crossing is expected to increase capacity to
approximately 20 million tonnes or more of coal per year; the capacity of the
paved highway in excess of 20 million tonnes of coal per year; SouthGobi intends
to attempt to mitigate issues and to the extent possible reduce capital
expenditures, operating costs and exploration; 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's Discussion and Analysis of Financial Condition and Results of
Operations for the year ended December 31, 2011 and the three months ended June
30, 2012 which are available at www.sedar.com.
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