HONG KONG, CHINA--(Marketwire - May 14, 2012) - SouthGobi Resources Ltd. (TSX:SGQ)(HK:1878), (the "Company" or "SouthGobi") today announced its financial and operating results for the three months ended March 31, 2012. All figures are in U.S. dollars unless otherwise stated.
HIGHLIGHTS
The Company's highlights for the quarter ended March 31, 2012 and subsequent weeks are as follows:
- Record first quarter coal sales of 0.84 million tonnes (increase of 84% from the first quarter of 2011);
- Record first quarter revenue of $40.2 million (increase of 99% from the first quarter of 2011);
- Record quarterly average selling price of $56.79 per tonne (increase of 13% from the first quarter of 2011);
- Record quarterly gross profit of $22.7 million resulting in a record quarterly profit margin of 56% compared to gross profit of $7.7 million in the first quarter of 2011 resulting in a profit margin of 38%;
- Commissioned dry coal-handling facility ("DCHF") at the Ovoot Tolgoi Mine;
- Announced an agreement to sell the Tsagaan Tolgoi Deposit to Modun Resources Limited ("Modun") for expected consideration of $30.0 million;
- Updated NI 43-101 compliant resource and reserve estimates, which increased overall measured plus indicated resources by 35% (from 363.6 million tonnes to 492.6 million tonnes) and inferred resources by 42% (from 171.9 million tonnes to 244.0 million tonnes) and increased proven and probable reserves for the Ovoot Tolgoi Mine by 65% (from 106.8 million tonnes to 175.7 million tonnes); and
- Announced 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.
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 | 31-Mar | 31-Dec | 30-Sep | 30-Jun | 31-Mar | 31-Dec | 30-Sep | 30-Jun | ||||||||||
| Volumes and prices | ||||||||||||||||||
| Raw semi-soft coking coal | ||||||||||||||||||
| Raw coal production (millions of tonnes) | 0.28 | 0.47 | 0.55 | 0.52 | 0.48 | 0.41 | 0.18 | 0.39 | ||||||||||
| Coal sales (millions of tonnes) | 0.31 | 0.53 | 0.66 | 0.60 | 0.34 | 0.35 | 0.11 | 0.42 | ||||||||||
| Average realized selling price (per tonne) | $ | 67.59 | $ | 67.62 | $ | 66.83 | $ | 65.96 | $ | 56.50 | $ | 47.08 | $ | 46.04 | $ | 44.10 | ||
| Raw medium-ash coal | ||||||||||||||||||
| Raw coal production (millions of tonnes) | 0.64 | 0.37 | 0.20 | - | - | - | - | - | ||||||||||
| Coal sales (millions of tonnes) | 0.53 | 0.37 | 0.20 | - | - | - | - | - | ||||||||||
| Average realized selling price (per tonne) | $ | 50.40 | $ | 48.59 | $ | 48.17 | $ | - | $ | - | $ | - | $ | - | $ | - | ||
| Raw higher-ash coal | ||||||||||||||||||
| Raw coal production (millions of tonnes) | 0.15 | 0.50 | 0.50 | 0.35 | 0.63 | 0.97 | 0.39 | 0.23 | ||||||||||
| Coal sales (millions of tonnes) | - | 0.25 | 0.51 | 0.45 | 0.11 | 1.12 | 0.08 | 0.03 | ||||||||||
| Average realized selling price (per tonne) | $ | - | $ | 40.30 | $ | 39.74 | $ | 38.32 | $ | 31.68 | $ | 26.75 | $ | 25.34 | $ | 18.82 | ||
| Total | ||||||||||||||||||
| Raw coal production (millions of tonnes) | 1.07 | 1.34 | 1.25 | 0.87 | 1.11 | 1.38 | 0.57 | 0.62 | ||||||||||
| Coal sales (millions of tonnes) | 0.84 | 1.15 | 1.37 | 1.05 | 0.45 | 1.47 | 0.19 | 0.45 | ||||||||||
| Average realized selling price (per tonne) | $ | 56.79 | $ | 55.51 | $ | 54.01 | $ | 54.06 | $ | 50.29 | $ | 31.56 | $ | 37.15 | $ | 42.63 | ||
| Costs | ||||||||||||||||||
| Direct cash costs of product sold (per tonne) (i) | $ | 10.80 | $ | 22.14 | $ | 22.64 | $ | 26.77 | $ | 18.91 | $ | 18.53 | $ | 18.59 | $ | 21.37 | ||
| Total cash costs of product sold (per tonne) (i) | $ | 15.04 | $ | 23.09 | $ | 23.17 | $ | 27.61 | $ | 20.61 | $ | 19.25 | $ | 22.04 | $ | 22.30 | ||
| Waste movement and stripping ratio | ||||||||||||||||||
| Production waste material moved (millions of bank cubic meters) | 2.20 | 4.58 | 4.10 | 4.08 | 3.85 | 3.56 | 2.90 | 1.73 | ||||||||||
| Strip ratio (bank cubic meters of waste rock per tonne of coal produced) | 2.07 | 3.42 | 3.28 | 4.74 | 3.47 | 2.58 | 5.09 | 2.79 | ||||||||||
| Pre-production waste material moved (millions of bank cubic meters) | - | - | 0.39 | 0.80 | 0.49 | 0.73 | 0.43 | 0.02 | ||||||||||
| Other operating capacity statistics | ||||||||||||||||||
| Capacity | ||||||||||||||||||
| Number of mining shovels/excavators available at period end | 3 | 3 | 3 | 4 | 3 | 3 | 2 | 2 | ||||||||||
| Total combined stated mining shovel/excavator capacity at period end (cubic meters) | 64 | 64 | 64 | 98 | 83 | 82 | 48 | 48 | ||||||||||
| Number of haul trucks available at period end | 27 | 25 | 16 | 16 | 16 | 15 | 12 | 11 | ||||||||||
| Total combined stated haul truck capacity at period end (tonnes) | 4,743 | 4,561 | 2,599 | 2,599 | 2,599 | 2,254 | 1,727 | 1,509 | ||||||||||
| Employees and safety | ||||||||||||||||||
| Employees at period end | 720 | 720 | 695 | 658 | 600 | 544 | 472 | 421 | ||||||||||
| Lost time injury frequency rate (ii) | 1.4 | 1.2 | 0.9 | 0.6 | 0.7 | 0.8 | 0.9 | 1.0 | ||||||||||
- A non-IFRS financial measure, see Non-IFRS Financial Measures section
- Per 1,000,000 man hours
For the three months ended March 31, 2012, the Company produced 1.07 million tonnes of raw coal with a strip ratio of 2.07 compared to production of 1.11 million tonnes of raw coal for the three months ended March 31, 2011 with a strip ratio of 3.47. The below-trend strip ratio for the three months ended March 31, 2012 is a function of the mine plan and will be normalized over the life-of-mine.
For the three months ended March 31, 2012, the Company sold 0.84 million tonnes of coal at an average realized selling price of $56.79 per tonne compared to sales of 0.45 million tonnes of coal at an average realized selling price of $50.29 per tonne for the three months ended March 31, 2011. Coal sales in the first quarter of 2012 represent a record for any given first quarter and the average realized selling price represents the highest quarterly average since the commencement of mining operations.
Direct cash costs of product sold (a non-IFRS financial measure, see Non-IFRS Financial Measures section) were $10.80 per tonne for the three months ended March 31, 2012 compared to $18.91 per tonne for the three months ended March 31, 2011. Direct cash costs have primarily decreased as a result of a lower strip ratio.
REVIEW OF QUARTERLY FINANCIAL RESULTS
The Company's financial results for the previous eight quarters are summarized in the table below:
($ in thousands, except for per share information, unless otherwise indicated)
| 2012 | 2011 | 2010 | |||||||||||||||
| QUARTER ENDED | 31-Mar | 31-Dec | 30-Sep | 30-Jun | 31-Mar | 31-Dec | 30-Sep | 30-Jun | |||||||||
| Revenue | $ | 40,153 | $ | 51,064 | $ | 60,491 | $ | 47,336 | $ | 20,158 | $ | 41,595 | $ | 6,597 | $ | 17,668 | |
| Gross profit | 22,674 | 16,637 | 17,635 | 9,744 | 7,690 | 3,950 | 336 | 4,400 | |||||||||
| Gross profit margin | 56% | 33% | 29% | 21% | 38% | 9% | 5% | 25% | |||||||||
| Other operating expenses | (2,578) | (24,644) | (138) | (3,024) | (1,383) | (2,121) | (7,586) | (1,894) | |||||||||
| Administration expenses | (5,882) | (8,612) | (7,993) | (6,808) | (5,336) | (6,599) | (7,405) | (6,442) | |||||||||
| Evaluation and exploration expenses | (5,033) | (14,513) | (10,908) | (4,356) | (1,991) | (4,144) | (6,314) | (6,659) | |||||||||
| Income/(loss) from operations | 9,181 | (31,132) | (1,404) | (4,444) | (1,020) | (8,914) | (20,969) | (10,595) | |||||||||
| Net income/(loss) | 3,126 | (18,897) | 55,921 | 67,323 | (46,602) | (28,720) | 27,495 | 53,301 | |||||||||
| Basic income/(loss) per share | 0.02 | (0.10) | 0.31 | 0.37 | (0.25) | (0.16) | 0.15 | 0.29 | |||||||||
| Diluted income/(loss) per share | 0.02 | (0.14) | (0.02) | - | (0.25) | (0.16) | (0.08) | (0.07) | |||||||||
| 2012 | 2011 | 2010 | |||||||||||||||
| QUARTER ENDED | 31-Mar | 31-Dec | 30-Sep | 30-Jun | 31-Mar | 31-Dec | 30-Sep | 30-Jun | |||||||||
| Net income/(loss) | $ | 3,126 | $ | (18,897) | $ | 55,921 | $ | 67,323 | $ | (46,602) | $ | (28,720) | $ | 27,495 | $ | 53,301 | |
| Income/(loss) adjustments, net of tax | |||||||||||||||||
| Share-based compensation | 3,799 | 4,050 | 4,296 | 3,349 | 2,715 | 3,840 | 3,695 | 2,754 | |||||||||
| Net impairment loss/(recovery) on assets | - | 23,818 | (2,925) | - | - | 574 | 7,010 | - | |||||||||
| Unrealized foreign exchange losses/(gains) | (950) | 34 | 103 | 263 | (993) | (1,837) | (1,116) | (1,120) | |||||||||
| Unrealized loss/(gain) on embedded derivatives in CIC debenture | 776 | (10,790) | (62,058) | (70,422) | 36,780 | 19,995 | (49,772) | (72,232) | |||||||||
| Realized gain on disposal of FVTPL investments (i) | (85) | - | - | - | - | - | - | - | |||||||||
| Unrealized loss/(gain) on FVTPL investments | 339 | 155 | 2,449 | (3,629) | 4,116 | (4,375) | (1,735) | 4,555 | |||||||||
| Adjusted net income/(loss) (ii) | 7,005 | (1,630) | (2,214) | (3,116) | (3,984) | (10,523) | (14,423) | (12,742) | |||||||||
- FVTPL is defined as "fair value through profit or loss"
- A non-IFRS financial measure, see Non-IFRS Financial Measures section
The Company recorded net income of $3.1 million for the three months ended March 31, 2012 compared to a net loss of $18.9 million for the three months ended December 31, 2011 and a net loss of $46.6 million for the three months ended March 31, 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 March 31, 2012, the Company generated gross profit of $22.7 million compared to $16.6 million for the three months ended December 31, 2011 and $7.7 million for the three months March 31, 2011.
The Company recognized revenue of $40.2 million for the three months ended March 31, 2012 compared to $51.1 million for the three months ended December 31, 2011 and $20.2 million for the three months ended March 31, 2011. The decrease in revenue from the fourth quarter of 2011 can be attributed to decreased sales volume, partially offset by the reduced effective royalty rate. Sales volume declined in the first quarter of 2012 compared to the fourth quarter of 2011 due to the extended closure of the Shivee Khuren-Ceke crossing at the Mongolia-China border ("Shivee Khuren Border Crossing") for the Chinese New Year and Mongolian Tsagaan Sar public holidays, some customers' preference to purchase coal on a washed basis later in 2012 in lieu of taking unwashed coal during the first quarter of 2012 and management's decision to stockpile a manageable amount of coal for processing. The significant increase in revenue from the first quarter of 2011 can be attributed to increased sales volumes, an improved product mix and increased selling prices for individual coal types. Sales volume increased in the first quarter of 2012 compared to the first quarter of 2011 due to the expansion of the Company's customer base.
The Company is subject to a 5% royalty on all coal sold 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% based on the set reference price of coal. Based on the reference prices for the first quarter of 2012, the Company was subject to an average 8% royalty based on a weighted average reference price of $95.00 per tonne. The Company's effective royalty rate for the first quarter of 2012, based on the Company's average realized selling price of $56.79 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 $17.5 million for the three months ended March 31, 2012 compared to $34.4 million for the three months ended December 31, 2011 and $12.5 million for the three months ended March 31, 2011. Cost of sales comprise the direct cash costs of product sold, mine administration cash costs of product sold, equipment depreciation, depletion of mineral properties and share-based compensation. Cost of sales decreased in the first quarter of 2012 compared to the fourth quarter of 2011 due to lower sales volumes and lower unit costs. Cost of sales in the first quarter of 2012 increased compared to the first quarter of 2011 due to higher sales volumes, which were partially offset by lower unit costs.
Other Operating Expenses:
Other operating expenses decreased to $2.6 million for the three months ended March 31, 2012 compared to $24.6 million for the three months ended December 31, 2011. In the fourth quarter of 2011, $19.5 million and $2.4 million of impairment charges were recorded to reduce the carrying amount of property, plant and equipment and materials and supplies inventory, respectively. In addition, a $1.9 million loss provision was recorded for one uncollectible trade receivable. Other operating expenses increased from $1.4 million for the three months ended March 31, 2011 to $2.6 million for the three months ended March 31, 2012. The increase primarily relates to increased foreign exchange losses, partially offset by reduced public infrastructure costs.
Administration Expenses:
Administration expenses for the three months ended March 31, 2012 were $5.9 million compared to $8.6 million for the three months ended December 31, 2011 and $5.3 million for the three months ended March 31, 2011. The decreased administration expenses in the first quarter of 2012 compared to the fourth quarter of 2011 primarily relate to decreased salaries and benefits, employee bonuses were paid in the fourth quarter of 2011, and decreased legal and professional fees. The increased administration expenses in the first quarter of 2012 compared to the first quarter of 2011 primarily relates to increased share-based compensation expense and additional staff to support the expansion of the Company's operations, partially offset by decreased corporate administration and legal and professional fees.
Evaluation and Exploration Expenses:
Exploration expenses for the three months ended March 31, 2012 were $5.0 million compared to $14.5 million for the three months ended December 31, 2011 and $2.0 million for the three months ended March 31, 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 fourth quarter of 2011 a higher proportion of exploration expenses were incurred due to delays in receiving required government approvals in the first half of 2011. In the first quarter of 2012, exploration expenses primarily consisted of drilling and trenching and overheads. The majority of these costs related to water exploration activities.
Finance Income & Finance Costs:
The Company incurred finance costs for the three months ended March 31, 2012 of $1.5 million compared to $45.6 million for the three months ended March 31, 2011. Finance costs for the three months ended March 31, 2012 primarily consisted of a $0.8 million unrealized loss on the fair value change of the embedded derivatives in the China Investment Corporation ("CIC") convertible debenture, $0.3 million of interest expense on the CIC convertible debenture and a $0.3 million unrealized loss on FVTPL investments, whereas finance costs for the three months ended March 31, 2011 primarily consisted of a $36.8 million unrealized loss on the fair value change of the embedded derivatives in the CIC convertible debenture, $4.5 million of interest expense on the CIC convertible debenture and a $4.1 million unrealized loss on FVTPL investments.
The Company recorded finance income for the three months ended March 31, 2012 of $0.2 million compared to $0.4 million for the three months ended March 31, 2011. In the first quarter of 2012, finance income consisted of interest income and a realized gain on the disposal of FVTPL investments; whereas, in the first quarter of 2011, finance income consisted entirely of interest income.
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 March 31, 2012, the Company recorded an after-tax mark to market loss of $5.4 million related to Aspire that has been recorded in other comprehensive income.
Taxes:
For the three months ended March 31, 2012, the Company recorded current income tax expense of $4.9 million related to its Mongolian operations compared to $1.8 million for the three months ended March 31, 2011. The Company has recorded a deferred income tax recovery related to deductible temporary differences of $0.1 million for the three months ended March 31, 2012 compared to $1.3 million for the three months ended March 31, 2011.
FINANCIAL POSITION AND LIQUIDITY
The Company's total assets as at March 31, 2012 were $910.2 million compared with $920.3 million as at December 31, 2011.
As at March 31, 2012, the Company had $125.1 million in cash and cash equivalents and $30.0 million in money market investments for a total liquidity of $155.1 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 March 31, 2012 were $143.6 million compared with $145.6 million as at December 31, 2011.
DRY COAL-HANDLING FACILITY
On February 13, 2012, the Company announced the successful commissioning of the DCHF at the Ovoot Tolgoi Mine. The DCHF has capacity to process nine million tonnes of run-of-mine ("ROM") coal per year. The DCHF includes a 300-tonne-capacity dump hopper, which receives ROM coal from the Ovoot Tolgoi Mine and feeds a coal rotary breaker that sizes coal to a maximum of 50 millimeters and rejects oversize ash. Prior to the commissioning of the rotary breaker, temporary screening operations were used at the Ovoot Tolgoi Mine to process higher-ash coals. Screening performed a similar function to the rotary breaker, namely rejecting oversize ash and sizing the coal to a maximum of 50 millimeters; however, the rotary breaker is anticipated to reduce screening costs and improve yield recoveries.
During the course of 2012, the Company will continue to upgrade the DCHF to include dry air separation modules and covered load out conveyors with fan stackers to take processed coals to stockpiles and enable more efficient blending.
SALE OF TSAGAAN TOLGOI DEPOSIT
On March 5, 2012, SouthGobi announced an agreement to sell the Tsagaan Tolgoi Deposit to Modun, a company listed on the Australian Stock Exchange under the symbol MOU. Under the transaction, SouthGobi expects to receive $30.0 million of total consideration, comprising $7.5 million up-front in cash, $12.5 million up-front in Modun shares and deferred consideration of an additional $10.0 million also payable in Modun shares.
As a result, SouthGobi will have a significant shareholding in Modun and it will have the right to nominate one director to the board of Modun subject to SouthGobi holding an equity interest in excess of 14.9%. The transaction is subject to Modun shareholder approval, regulatory approvals under the laws of Mongolia, Hong Kong and Singapore, and Australian Foreign Investment Review Board approval. The transaction is expected to be completed by December 31, 2012.
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, Ivanhoe Mines Ltd. ("Ivanhoe"), that Ivanhoe 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 Ivanhoe 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 Ivanhoe will cooperate with the Government of Mongolia to ensure any requirements under such legislation are satisfied.
Subsequent to the announcement by CHALCO and Ivanhoe it has been reported in the media that draft legislation regarding foreign investment in Mongolia has now been introduced in the Parliament and is currently under review.
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 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 has stated that it expects to mail the takeover bid circular in connection with the Proportional Offer on or about July 5, 2012.
MRAM REQUEST TO SUSPEND EXPLORATION AND MINING LICENSES
On April 16, 2012, SouthGobi announced that the Mineral Resource 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 Resources Ltd. The request for suspension includes the mining license pertaining to SouthGobi's 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 Ivanhoe to tender its controlling interest in SouthGobi to such a takeover. The suspension would be initiated to allow the Government of Mongolia to review the proposed change of ownership.
As at May 14, 2012, the Company has not received any official notification and has no reason to believe SouthGobi's licenses are not in good standing. However, the Company cautions at this time that any official notification received will require a suspension of operations.
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 will remain in effect until June 14, 2012 or until the purchases are complete or the program is terminated by the Company. As at May 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 cancels all shares after they are repurchased.
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 has created 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. 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 Ivanhoe to tender its controlling interest in SouthGobi to such a takeover. The suspension would be initiated to allow the Government of Mongolia to review the proposed change of ownership. Although the Company has not received any official notification and has no reason to believe SouthGobi's licenses are not in good standing, the Company cautions at this time that any official notification received will require a suspension of operations.
The announcement regarding potential license suspension has created significant uncertainty among the Company's customers. Concern over whether SouthGobi will be able to deliver contracted volumes in the second quarter of 2012 has in some cases led customers to reduce their coal purchase requirements.
In addition to the aforementioned issues surrounding the Proportional Offer by CHALCO, the State Standards Inspection Authority of Mongolia inspected the existing gravel road used to transport coal from the Ovoot Tolgoi Complex and neighboring mines to China in early April and requested certain upgrades. During the period the upgrade work was performed, the road was inoperable. The works have been completed and the road has re-opened. However, the Company cautions that any future extended road closure would impact the ability for customers to collect coal.
Due to the uncertainty surrounding SouthGobi's business, the Company is unable to provide any guidance for the second quarter of 2012.
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 40 kilometers ("km") 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 - 2012 will see continued growth at the Ovoot Tolgoi Mine. Currently undeveloped resources at the Soumber Deposit and the Zag Suuj Deposit will 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 an active exploration program that provides additional resources of coal in a cost effective manner.
Objectives
The Company's objectives for 2012 are as follows:
- Grow Ovoot Tolgoi Mine - The additional capacity of the new mining fleets should support growth in coal availability and sales for 2012 over 2011.
- Continue to develop regional infrastructure - The Company's immediate priority centers on improving roads in the area around the Ovoot Tolgoi Mine. SouthGobi is part of a consortium awarded the tender to construct a paved highway from the Ovoot Tolgoi Complex to the Shivee Khuren Border Crossing. The consortium has engaged a contractor and commenced construction of the paved 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 advance the feasibility, planning and preparation for a mine at Soumber.
- Value-adding/upgrading coal - Ejin Jinda is close to completing the commissioning of its wet washing facility to process some SouthGobi coals close to the Shivee Khuren Border Crossing on a toll washing arrangement.
- Exploration - Exploration will take place to further define the Company's existing deposits.
- Operations - Continuing to focus on production safety, environmental protection, operational excellence and community relations.
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. 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 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 | ||||||
| March 31, | ||||||
| 2012 | 2011 | |||||
| Revenue | $ | 40,153 | $ | 20,158 | ||
| Cost of sales | (17,479 | ) | (12,468 | ) | ||
| Gross profit | 22,674 | 7,690 | ||||
| Other operating expenses | (2,578 | ) | (1,383 | ) | ||
| Administration expenses | (5,882 | ) | (5,336 | ) | ||
| Evaluation and exploration expenses | (5,033 | ) | (1,991 | ) | ||
| Income/(loss) from operations | 9,181 | (1,020 | ) | |||
| Finance costs | (1,497 | ) | (45,574 | ) | ||
| Finance income | 236 | 427 | ||||
| Income/(loss) before tax | 7,920 | (46,167 | ) | |||
| Current income tax expense | (4,874 | ) | (1,753 | ) | ||
| Deferred income tax recovery | 80 | 1,318 | ||||
| Net income/(loss) attributable to equity holders of the Company | 3,126 | (46,602 | ) | |||
| OTHER COMPREHENSIVE INCOME | ||||||
| (Loss)/gain on available-for-sale assets, net of tax | (5,422 | ) | 50,748 | |||
| Net comprehensive income/(loss) attributable to equity holders of the Company | $ | (2,296 | ) | $ | 4,146 | |
| BASIC INCOME/(LOSS) PER SHARE | $ | 0.02 | $ | (0.25 | ) | |
| DILUTED INCOME/(LOSS) PER SHARE | $ | 0.02 | $ | (0.25 | ) | |
Condensed Consolidated Interim Statement of Financial Position
(Unaudited)
(Expressed in thousands of U.S. Dollars)
| As at | ||||||
| March 31, | December 31, | |||||
| 2012 | 2011 | |||||
| ASSETS | ||||||
| Current assets | ||||||
| Cash and cash equivalents | $ | 125,122 | $ | 123,567 | ||
| Trade and other receivables | 72,447 | 80,285 | ||||
| Inventories | 56,345 | 52,443 | ||||
| Prepaid expenses and deposits | 32,303 | 38,308 | ||||
| Total current assets | 286,217 | 294,603 | ||||
| Non-current assets | ||||||
| Prepaid expenses and deposits | 8,389 | 8,389 | ||||
| Property, plant and equipment | 520,690 | 498,533 | ||||
| Deferred income tax assets | 19,639 | 19,560 | ||||
| Long term investments | 75,268 | 99,238 | ||||
| Total non-current assets | 623,986 | 625,720 | ||||
| Total assets | $ | 910,203 | $ | 920,323 | ||
| EQUITY AND LIABILITIES | ||||||
| Current liabilities | ||||||
| Trade and other payables | $ | 38,486 | $ | 52,235 | ||
| Current portion of convertible debenture | 7,274 | 6,301 | ||||
| Total current liabilities | 45,760 | 58,536 | ||||
| Non-current liabilities | ||||||
| Convertible debenture | 139,882 | 139,085 | ||||
| Deferred income tax liabilities | - | 2,366 | ||||
| Decommissioning liability | 3,734 | 4,156 | ||||
| Total non-current liabilities | 143,616 | 145,607 | ||||
| Total liabilities | 189,376 | 204,143 | ||||
| Equity | ||||||
| Common shares | 1,057,537 | 1,054,298 | ||||
| Share option reserve | 47,942 | 44,143 | ||||
| Investment revaluation reserve | 11,137 | 16,559 | ||||
| Accumulated deficit | (395,789 | ) | (398,820 | ) | ||
| Total equity | 720,827 | 716,180 | ||||
| Total equity and liabilities | $ | 910,203 | $ | 920,323 | ||
| Net current assets | $ | 240,457 | $ | 236,067 | ||
| Total assets less current liabilities | $ | 864,443 | $ | 861,787 | ||
REVIEW OF INTERIM RESULTS
The condensed consolidated interim financial statements for the Company for the three months ended March 31, 2012, were reviewed by the Audit Committee of the Company.
SouthGobi's results for the quarter ended March 31, 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.
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 continued growth at the Ovoot Tolgoi Mine in 2012; 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; the growth in coal availability and sales for 2012 due to the additional capacity of the new mining fleets; the capacity of the paved highway in excess of 20 million tonnes of coal per year; the intention to advance the feasibility, planning and preparation for a mine at Soumber; 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 March 31, 2012 which are available at www.sedar.com.
Contact Information:
Dave Bartel
Vice President, External Affairs and Investor Relations
+852 2156 7023
SouthGobi Resources Ltd. - Vancouver
Steven Feldman
Investor Relations Manager
+1 604 331 9813
www.southgobi.com