Reference is made to the announcement of the Company dated
The Board wish to inform that the Company’s independent auditors,
Significant Events and Highlights
The Company’s significant events and highlights for the year ended
- Operating Results – The Company’s sales volume increased from 2.8 million tonnes in 2018 to 3.7 million tonnes in 2019. The average selling price of coal decreased from
$37.1 per tonne in 2018 to$34.9 per tonne in 2019. The decrease in the average selling price was principally attributable to (i) a change of the Company’s product mix, as sales of premium semi-soft coking coal represented a smaller proportion of total sales in 2019; and (ii) a higher portion of sales made at the mine gate instead of transporting the coal to the Company’sInner Mongolia subsidiary and selling to third party customers withinChina . - Financial Results – The Company recorded a
$29.8 million profit from operations in 2019 compared to a$10.5 million loss from operations in 2018. The improvement in profit from operations was principally attributable to (i) a lower provision for doubtful trade and other receivables being made during the year ($0.5 million and$20.9 million for 2019 and 2018, respectively); and (ii) increased sales volume. - Impactof the Coronavirus Disease 2019 (“COVID-19”)Pandemic – The Company was informed that effective as of
February 11, 2020 , theMongolian State Emergency Commission closed Mongolia’s southern border withChina in order to prevent the spread of COVID-19. Accordingly, the Company suspended coal exports toChina beginning as ofFebruary 11, 2020 as a result of the border closure.
OnMarch 28, 2020 , the Mongolian-Chinese border was re-opened for coal export on a trial basis, with a limit imposed on the total volume of coal that was permitted to be exported during this trial period. The Company has experienced a continuous improvement in the volume of coal exported toChina sinceMarch 28, 2020 . During the period between April toOctober 2020 , an aggregate of 1.9 million tonnes of coal was exported by the Company fromMongolia toChina , as compared to an aggregate of 2.0 million tonnes of coal during the same period in the 2019 calendar year.
The border closure has had an adverse impact on the Company’s sales and cash flows in the first and second quarter of 2020. In order to mitigate the financial impact of the border closures and preserve its working capital, the Company temporarily ceased major mining operations (including coal mining), reduced production to only coal-blending activities and placed approximately half of its workforce on furlough effective as ofFebruary 2020 . SinceAugust 2, 2020 , the Company has resumed its mining operations, which includes mining, blending and washing of coal. As atOctober 31, 2020 ,SouthGobi Sands LLC (“SGS”), a subsidiary of the Company, employed 208 employees at theOvoot Tolgoi Mine site (December 31, 2019 : 383 employees). The Company produced 1.1 million tonnes from August toOctober 2020 , as compared to 1.3 million tonnes from August toOctober 2019 . There were a few COVID-19 cases reported in Ulaanbaatar (being the capital city ofMongolia ) onNovember 11, 2020 . As a result, the Mongolian local authorities have taken certain precautionary steps to minimize further transmission and announced a lockdown for the city untilDecember 2, 2020 . Although the mining operations and the export of coal fromMongolia toChina continues as of the date hereof, there can be no guarantee that the Company will be able to continue exporting coal toChina , or the border crossings would not be the subject of additional closures as a result of COVID-19 in the future. The Company will continue to closely monitor the development of the COVID-19 pandemic and the impact it has on coal exports toChina and will react promptly to preserve the working capital of the Company.
Based on a preliminary review of the information and operational data of the Company currently available, the Company expects to record a net loss for the three months endedMarch 31, 2020 and for the six months endedJune 30, 2020 . The anticipated net loss was principally attributable to decreased sales volumes in the first quarter of 2020 as a result of the closure of the Mongolian-Chinese border crossings which took effect inFebruary 2020 and therefore, the Company was unable to export coal intoChina as a result. In the event that the Company’s ability to export coal into the Chinese market becomes restricted or limited again as a result of any future restrictions which may be implemented at the Mongolian-Chinese border crossing, this is expected to have a material adverse effect on the business and operations of the Company and may negatively affect the price and volatility of the Common Shares and any investment in such shares could suffer a significant decline or total loss in value.
China Investment Corporation (together with its wholly-owned subsidiaries and affiliates, “CIC”)convertible debenture (“CIC Convertible Debenture”) – OnApril 23, 2019 , the Company executed a deferral agreement (the “2019 Deferral Agreement”) with CIC in relation to a deferral and revised repayment schedule in respect of (i)$41.8 million of outstanding cash and payment in kind interest (“PIK Interest”) and associated costs due and payable to CIC onNovember 19, 2018 (the “Outstanding Interest Payable”) under the CIC Convertible Debenture and a deferral agreement executed with CIC onJune 12, 2017 (the “June 2017 Deferral Agreement”); and (ii)$27.9 million of cash and PIK Interest payments payable to CIC under the CIC Convertible Debenture fromApril 23, 2019 to and includingMay 19, 2020 (the “Deferral”). Pursuant to Section 501(c) of the TSX Company Manual, the 2019 Deferral Agreement was approved at the Company’s adjourned annual and special meeting of shareholders onJune 13, 2019 .
The key repayment terms of the 2019 Deferral Agreement are: (i) the Company agreed to pay a total of$14.3 million over eight instalments fromNovember 2019 toJune 2020 ; (ii) the Company agreed to pay the PIK Interest covered by the Deferral by way of cash payments, rather than the issuance of Common Shares; and (iii) the Company agreed to pay the remaining balance of$62.6 million onJune 20, 2020 . The Company agreed to pay a deferral fee at a rate of 6.4% per annum in consideration of the deferred amounts.
As a condition to agreeing to the Deferral, CIC required that the mutual co-operation agreement (the “Cooperation Agreement”) datedNovember 19, 2019 between SGS and CIC, be amended and restated (the “Amended and Restated Cooperation Agreement”) to clarify the manner in which the service fee (the “Management Fee”) payable to CIC under the Cooperation Agreement is calculated, with effect as ofJanuary 1, 2017 . Specifically, the Management Fee under the Amended and Restated Cooperation Agreement is determined based on the net revenues realized by the Company and all of its subsidiaries derived from sales intoChina (rather than the net revenues realized by the Company and its Mongolian subsidiaries as currently contemplated under the Cooperation Agreement). As consideration for deferring payment of the additional Management Fee payable to CIC as a result of the Amended and Restated Cooperation Agreement, the Company agreed to pay to CIC a deferral fee at the rate of 2.5% on the outstanding Management Fee. Pursuant to the Amended and Restated Cooperation Agreement, the Company agreed to pay CIC the total outstanding Management Fee and related accrued deferral fee of$4.2 million over six instalments fromJune 2019 toNovember 2019 . The Company executed the Amended and Restated Cooperation Agreement with CIC onApril 23, 2019 .
Pursuant to their terms, both the 2019 Deferral Agreement and the Amended and Restated Cooperation Agreement became effective onJune 13, 2019 , being the date on which the 2019 Deferral Agreement was approved by shareholders at the Company’s adjourned annual and special meeting of shareholders.
In connection with the 2019 Deferral Agreement, the Company also announced that it intends to discuss a potential debt restructuring plan with respect to amounts owing to CIC which is mutually beneficial to the Company and CIC; and to form a special committee comprised of independent directors to ensure that the interests of its minority shareholders are fairly considered in the negotiation and review of any such restructuring; however, there can be no assurance that a favorable outcome will be reached. As of the date hereof, there has not been any significant progress in relations to the restructuring plan.
OnFebruary 19, 2020 , the Company and CIC entered into an agreement (the “2020 February Deferral Agreement”) pursuant to which CIC agreed to grant the Company a deferral of: (i) deferred cash interest and deferral fees of$1.3 million and$2.0 million which were due and payable to CIC onJanuary 19, 2020 andFebruary 19, 2020 , respectively, under the 2019 Deferral Agreement (collectively, the “2020 February Deferral Amounts”); and (ii) approximately$0.7 million of the Management Fee which was due and payable onFebruary 14, 2020 to CIC under the Amended and Restated Cooperation Agreement. The 2020 February Deferral Agreement became effective onMarch 10, 2020 , being the date on which the Company obtained the requisite acceptance of the 2020 February Deferral Agreement from the TSX as required under applicable TSX rules.
The principal terms of the 2020 February Deferral Agreement are as follows:
• Payment of the 2020 February Deferral Amounts will be deferred untilJune 20, 2020 , while the Management Fee will be deferred until they are repaid by the Company.
• As consideration for the deferral of these amounts, the Company agreed to pay CIC: (i) a deferral fee equal to 6.4% per annum on the 2020 February Deferral Amounts, commencing on the date on which each such 2020 Deferral Amount would otherwise have been due and payable under the 2019 Deferral Agreement; and (ii) a deferral fee equal to 2.5% per annum on the Management Fee, commencing on the date on which the Managements Fee would otherwise have been due and payable under the Amended and Restated Cooperation Agreement.
• The Company agreed to provide CIC with monthly updates regarding its operational and financial affairs.
• As the Company anticipates prior to agreeing to the 2020 February Deferral Agreement that a deferral was likely required in respect of the monthly payments due and payable in the period betweenApril 2020 andJune 2020 under the 2019 Deferral Agreement and Amended and Restated Cooperation Agreement, the Company and CIC agreed to discuss in good faith a deferral of these payments on a monthly basis as they become due.
• The Company agreed to comply with all of its obligations under the 2019 Deferral Agreement and the Amended and Restated Cooperation Agreement, as amended by the 2020 February Deferral Agreement.
• The Company and CIC agreed that nothing in the 2020 February Deferral Agreement prejudices CIC’s rights to pursue any of its remedies at any time pursuant to the 2019 Deferral Agreement and Amended and Restated Cooperation Agreement, respectively.
OnMarch 10, 2020 , the Company agreed with CIC (the “2020 March Deferral Agreement”) that the$2.0 million of deferred cash interest and deferral fees which were due and payable to CIC onMarch 19, 2020 under the 2019 Deferral Agreement (the “2020 March Deferral Amount”) will be deferred untilJune 20, 2020 . The terms of the 2020 March Deferral Agreement are substantially the same as the terms of the 2020 February Deferral Agreement, including that the Company agreed to pay CIC a deferral fee equal to 6.4% per annum on the 2020 March Deferral Amount, commencing onMarch 19, 2020 . The 2020 March Deferral Agreement became effective onMarch 25, 2020 , being the date on which the Company obtained the requisite acceptance of the 2020 March Deferral Agreement from the TSX as required under applicable TSX rules.
OnApril 10, 2020 , the Company agreed with CIC (the “2020 April Deferral Agreement”) that the$2.0 million of deferred cash interest and deferral fees which were due and payable to CIC onApril 19, 2020 under the 2019 Deferral Agreement (the “2020 April Deferral Amount”) will be deferred untilJune 20, 2020 . The terms of the 2020 April Deferral Agreement are substantially the same as the terms of the 2020 February Deferral Agreement, including that the Company agreed to pay CIC a deferral fee equal to 6.4% per annum on the 2020 April Deferral Amount, commencing onApril 19, 2020 . The 2020 April Deferral Agreement became effective onApril 29, 2020 , being the date on which the Company obtained the requisite acceptance of the 2020 April Deferral Agreement from the TSX as required under applicable TSX rules.
OnMay 8, 2020 , the Company agreed with CIC (the “2020 May Deferral Agreement”) that the deferred cash interest and deferral fees of$2.0 million which were due and payable to CIC onMay 19, 2020 under the 2019 Deferral Agreement; and approximately$0.2 million of Management fees which were due and payable onMay 15, 2020 to CIC under the Amended and Restated Cooperation Agreement (collectively, the “2020 May Deferral Amount”) will be deferred untilJune 20, 2020 . The terms of the 2020 May Deferral Agreement are substantially the same as the terms of the 2020 February Deferral Agreement, including that the Company agreed to pay CIC a deferral fee equal to 6.4% per annum on the deferred cash interest and deferral fees commencing onMay 19, 2020 and a deferral fee equal to 2.5% per annum on the deferred Management fees commencing onMay 15, 2020 . The 2020 May Deferral Agreement became effective onJune 8, 2020 , being the date on which the Company obtained the requisite acceptance of the 2020 May Deferral Agreement from the TSX as required under applicable TSX rules.
OnJune 19, 2020 , the Company agreed with CIC (the “2020 June Deferral Agreement”) that the deferred cash interest and deferral fees in the aggregate amount of approximately$74.0 million (the “2020 June Deferral Amount”) which were due and payable to CIC onJune 19, 2020 under the 2019 Deferral Agreement and the prior deferral agreements entered into during the period between February toMay 2020 will be deferred untilSeptember 14, 2020 . The terms of the 2020 June Deferral Agreement are substantially the same as the terms of the 2020 February Deferral Agreement, including that the Company agreed to pay CIC a deferral fee equal to 6.4% per annum on the 2020 June Deferral Amount commencing onJune 19, 2020 . The 2020 June Deferral Agreement became effective onJuly 17, 2020 , being the date on which the Company obtained the requisite acceptance of the 2020 June Deferral Agreement from the TSX as required under applicable TSX rules.
OnNovember 19, 2020 , the Company and CIC entered into an agreement (the “2020 November Deferral Agreement”) pursuant to which CIC agreed to grant the Company a deferral of: (i) deferred cash interest and deferral fees of approximately$75.2 million which were due and payable to CIC on or beforeSeptember 14, 2020 , under the 2020 June Deferral Agreement; (ii) semi-annual cash interest payments in the aggregate amount of$16.0 million payable to CIC onNovember 19, 2020 andMay 19, 2021 ; (iii)$4.0 million worth of PIK Interest shares (“2020 November PIK Interest”) issuable to CIC onNovember 19, 2020 under the CIC Convertible Debenture; and (iv) the Management Fees which payable to CIC onNovember 14, 2020 ,February 14, 2021 ,May 15, 2021 ,August 14, 2021 andNovember 14, 2021 under the Amended and Restated Cooperation Agreement. (collectively, the “2020 November Deferral Amounts”). The effectiveness of the 2020 November Deferral Agreement and the respective covenants, agreements and obligations of each party under the 2020 November Deferral Agreement are subject to the Company obtaining the requisite approval of the 2020 November Deferral Agreement from Company shareholders in accordance with applicable TSX rules. OnOctober 29, 2020 , the Company obtained an order from theBritish Columbia Securities Commission (“BCSC”), the Company’s principal securities regulator inCanada , which partially revoked the CTO (as defined below) to, amongst other things, permit the Company to execute the 2020 November Deferral Agreement.
The principal terms of the 2020 November Deferral Agreement are as follows:
• Payment of the 2020 November Deferral Amounts will be deferred untilAugust 31, 2023 .
CIC agreed to waive its rights arising from any default or event default under the CIC Convertible Debenture as a result of trading in the Common Shares being halted on the TSX beginning as ofJune 19, 2020 and suspended on the HKEX beginning as ofAugust 17, 2020 , in each case for a period of more than five trading days.
• As consideration for the deferral of the 2020 November Deferral Amounts, the Company agreed to pay CIC: (i) a deferral fee equal to 6.4% per annum on the 2020 November Deferral Amounts payable under the CIC Convertible Debenture and the 2020 June Deferral Agreement, commencing on the date on which each such 2020 November Deferral Amount would otherwise have been due and payable under the CIC Convertible Debenture or theJune 2020 Deferral Agreement, as applicable; and (ii) a deferral fee equal to 2.5% per annum on the 2020 November Deferral Amounts payable under the Amended and Restated Cooperation Agreement, commencing on the date on which the Management Fee would otherwise have been due and payable under the Amended and Restated Cooperation Agreement.
• The 2020 November Deferral Agreement does not contemplate a fixed repayment schedule for the 2020 November Deferral Amounts and related deferral fees. Instead, the Company and CIC would agree to assess in good faith the Company’s financial condition and working capital position on a monthly basis and determine the amount, if any, of the 2020 November Deferral Amounts and related deferral fees that the Company is able to repay under the CIC Convertible Debenture, theJune 2020 Deferral Agreement or the Amended and Restated Cooperation Agreement, having regard to the working capital requirements of the Company’s operations and business at such time and with the view of ensuring that the Company’s operations and business would not be materially prejudiced as a result of any repayment.
• Commencing as ofNovember 19, 2020 and until such time as theNovember 2020 PIK Interest is fully repaid, CIC reserves the right to require the Company to pay and satisfy the amount of theNovember 2020 PIK Interest, either in full or in part, by way of issuing and delivering PIK interest shares in accordance with the CIC Convertible Debenture provided that, on the date of issuance of such shares, the Common Shares are listed and trading on at least one stock exchange.
• If at any time before the 2020 November Deferral Amounts and related deferral fees are fully repaid, the Company proposes to appoint, replace or terminate one or more of its Chief Executive Officer, its Chief Financial Officer or any other senior executive(s) in charge of its principal business function or its principal subsidiary, then the Company must first consult with, and obtain written consent from CIC prior to effecting such appointment, replacement or termination.
- Settlement with First Concept
Industrial Group Limited (“First Concept”) – OnJune 7, 2020 , SGS entered into a settlement agreement with First Concept, pursuant to which SGS agreed to pay to First Concept a settlement sum in the amount of$8.0 million in full and final settlement of any and all claims which First Concept may have against SGS in relation to Arbitration Award (as defined below), the subject matter of the Arbitration Award including any claims for interests and costs and the fees and expenses of the Arbitration Award, and any and all enforcement proceedings and applications in any jurisdictions, and in relation to the deed of settlement with First Concept (the “Full Settlement Sum”). The Full Settlement Sum was fully satisfied by the Company inJune 2020 and the outstanding payable to First Concept as of the date hereof is $nil.
- Termination of Soumber Deposit Mining Licenses – On
August 26, 2019 , SGS received a letter (the “Notice Letter”) from theMineral Resources and Petroleum Authority of Mongolia (“MRAM”) notifying that the Company’s three mining licenses (MV-016869, MV-020436 and MV-020451) (the “Soumber Licenses”) for the Soumber Deposit have been terminated by the Head ofCadastre Division of MRAM effective as ofAugust 21, 2019 .
According to the Notice Letter, the Soumber Licenses have been terminated pursuant to Clause 56.1.5 of Article 56 of the Minerals Law, Clauses 4.2.1 and 4.2.5 of Article 4 and Clause 28.1.1 of Article 28 of the General Administrative Law and a decision order of a working group established under an order of the Minister of Environment and Tourism (Mongolia ). According to this decision order, the working group determined that SGS had violated its environmental reclamation obligations with respect to the Soumber Deposit. The Soumber Deposit is an undeveloped coal deposit covering approximately 22,263 hectares located approximately 20 kilometers east of the Company’s Ovoot Tolgoi coal mine inMongolia . The Company owned a 100% interest in the Soumber Deposit.
The Company believes the cancellation of the Soumber Licenses is without merit. The Company is not aware of any failure on its part to fulfill its environmental reclamation duties as they relate to the Soumber Deposit. OnOctober 4, 2019 , SGS filed a claim against MRAM and theMinistry of Environment andTourism of Mongolia in theAdministration Court of theCapital City (the “Administration Court”) seeking an order to restore the Soumber Licenses. The Appeal Court issued the ruling inOctober 2020 and made an order to accept SGS’s claim and restore the Soumber Licenses. The case was transferred to theHigh Court of the Capital City (the “High Court”) for final ruling. The Company anticipates that theHigh Court will issue its ruling before the end of the first quarter of 2021. The Company will take all such actions, including additional legal actions, as it considers necessary to reinstate the Soumber Licenses. However, there can be no assurance that a favorable outcome will be reached. The termination of the Soumber Licenses does not have any impact on the Company’s current mining operations at the Ovoot Tolgoi mine site.
- Key Findings of Formal Investigation – Following the learning of certain information relating to past conduct engaged in by former senior executive officers and employees of the Company (“Former Management and Employees”) which raised suspicions of serious fraud, misappropriation of Company assets and other criminal acts by the Former Management and Employees relating to prior transactions (“Suspicious Transactions”) between 2016 and the first half of 2018 involving the Company,
Inner Mongolia SouthGobi Energy Co. Ltd. (“IMSGE”), a subsidiary of the Company and certain coal trading and transportation companies, some of which are allegedly related to or controlled by the Former Management and Employees or their related persons, the Company’s board of directors (the “Board”) expanded the mandate of its special committee of independent non-executive directors (the “Special Committee”) to include a formal investigation (the “Formal Investigation”) of the Suspicious Transactions, the implicated Former Management and Employees, and their impact, if any, on the business and affairs of the Company. The Special Committee engagedBlake, Cassels & Graydon LLP as independent Canadian legal counsel, andErnst & Young (China) Advisory Limited (the “Forensic Accountant”), as forensic accountants, to assist in the Formal Investigation. The Special Committee and the Forensic Accountant jointly engaged Zhong Lun Law Firm, as independent Chinese legal counsel.
OnMarch 30, 2019 , the Company announced that the Special Committee concluded the Formal Investigation and delivered a final report summarizing its key findings to the Board, which was adopted and approved at a meeting held onMarch 30, 2019 . Please refer to the Company’s unaudited Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) for the three months endedMarch 31, 2019 for a summary of the key findings of the Formal Investigation, a copy of which is available under the Company’s profile on SEDAR at www.sedar.com.
Based on the key findings of and information obtained from the Formal Investigation, the Company considered the resulting financial impact on its prior financial statements and restated certain items in the Company’s financial statements for the years endedDecember 31, 2016 andDecember 31, 2017 (the “Prior Restatement”), as disclosed in the Company’s audited annual consolidated financial statements and related MD&A for the year endedDecember 31, 2018 , copies of which are available under the Company’s profile on SEDAR at www.sedar.com. The Prior Restatement reflects the impact of the misappropriation of assets as well as the reclassification of certain balances of assets in the prior years.
- Remedial Actions and Preventative Measures – On
April 30, 2019 , the Company announced that the Special Committee, with the assistance of the Forensic Accountant, completed its assessment of the potential remedial actions and preventative measures to improve and strengthen the Company’s commitment to a culture of honesty, integrity and accountability and compliance with the highest standards of professional and ethical conduct. The Special Committee delivered its report setting out a set of recommended remedial actions and preventative measures (the “Remedial Actions and Preventative Measures”) to the Board which was approved at a meeting of the Board held onApril 28, 2019 . Please refer to the Company’s MD&A for the three months endedMarch 31, 2019 for a summary of the Remedial Actions and Preventative Measures which were adopted and approved by the Board and the actions that the Company has taken to implement the Remedial Actions and Preventative Measures, a copy of which is available under the Company’s profile on SEDAR at www.sedar.com. - Resumption of Trading on HKEX and TSX in May 2019 – On
May 30, 2019 , the Company announced that it had fulfilled the trading resumption guidance to the satisfaction of the HKEX and the HKEX and the TSX had accepted the Company’s trading resumption application. Trading in the Common Shares on the TSX and the HKEX resumed onMay 30, 2019 andMay 31, 2019 , respectively.
- Cease
Trade Order and Halt Trading on TSX – OnJune 19, 2020 , the BCSC issued a general “failure to file” cease trade order (“CTO”), to prohibit the trading by any person of any securities of the Company inCanada . Trading in the Common Shares on the TSX was halted as a result of the CTO. The CTO was issued as of result of the Company’s failure to file: (i) its annual consolidated financial statements for the year endedDecember 31, 2019 and the accompanying MD&A; (ii) its Annual Information Form for the year endedDecember 31, 2019 ; and (iii) its interim consolidated financial statements for the three-month period endedMarch 31, 2020 and accompanying MD&A, in each case prior to the filing deadline ofJune 15, 2020 .
The CTO will remain in effect until such time as the Company fully remedies its filing defaults under applicable Canadian securities laws, including filing of its 2019 Annual Information Form and its interim financial statements for the three month periods endedMarch 31, 2020 and three and six-month period endedJune 30, 2020 and the accompanying MD&A, and makes a successful application to the BCSC to have the CTO revoked. While the Company is taking such actions as it considers necessary in order to remedy its filing defaults as soon as possible, there can be no assurance that the Company will have the CTO lifted in a timely manner or at all. For so long as the CTO remains in effect, it will have a significant adverse impact on the liquidity of the Common Shares and shareholders may suffer a significant decline or total loss in value of its investment in the Common Shares as a result.
- Suspension of Trading on HKEX – At the request of the Company, trading in the shares of the Company on the HKEX was suspended with effect as of
August 17, 2020 pending the publication of the audited annual results of the Company for the year endedDecember 31, 2019 .
OnSeptember 2, 2020 , the Company received a letter from the HKEX setting out the following resumption guidance for the resumption of trading in the Common Shares on the HKEX (the “Resumption Guidance”): (i) publish all outstanding financial results and address any audit modifications; (ii) inform the market of all material information for the Company’s shareholders and investors to appraise its position; and (iii) announce quarterly updates on the Company’s developments under Rules 13.24A of the HKEX’s Listing Rules, including, amongst other relevant matters, its business operations, its resumption plan and the progress of implementation.
OnSeptember 30, 2020 , the Company was notified by the HKEX of the following additional condition which must be satisfied in order for trading in the Common Shares on the HKEX to resume: resolve issues arising from the CTO and/or the TSX Delisting Review (as defined below), or take steps to the satisfaction of the HKEX that the Company will be eligible for a primary listing on the HKEX.
If the Company fails to remedy the issues causing its trading suspension, fully comply with the Listing Rules to the HKEX’s satisfaction and resume trading in its shares on the HKEX byFebruary 16, 2022 , the HKEX’s Listing Division will recommend to the HKEX’s Listing Committee that it proceed with the cancellation of the Company’s HKEX listing. Under Rules 6.01 and 6.10 of the Listing Rules, the HKEX also has the right to impose a shorter specific remedial period, where appropriate.
- TSX Delisting Review– On
September 11, 2020 , the TSX notified the Company that it is reviewing the eligibility for continued listing of the Common Shares on the TSX pursuant to the TSX’s Remedial Review Process (“TSX Delisting Review”). The Company has been granted untilJanuary 11, 2021 to remedy the following delisting criteria, as well as any other delisting criteria that become applicable during the Remedial Review Process: (i) financial condition and/or operating results; (ii) adequate working capital and appropriate capital structure; and (iii) disclosure issues (collectively, the “Delisting Criteria”).
The TSX Continued Listing Committee has scheduled a meeting to be held onJanuary 7, 2021 to consider whether or not to suspend trading in and delist the Common Shares on the TSX. If the Company fails to demonstrate to the TSX that it has remedied the Delisting Criteria on or beforeJanuary 11, 2021 , the Common Shares will be delisted from the TSX 30 days from such date, unless an extension is granted by the TSX prior to theJanuary 11, 2021 deadline.
- Changes in Management and Directors
Ms.Lan Cheng :Ms. Cheng did not stand for re-election at the Company’s annual and special meeting of shareholders (the “AGM”) held onMay 30, 2019 and ceased to be a non-executive director following the conclusion of the AGM.
Mr. Ben Niu: OnMay 30, 2019 ,Mr. Niu was elected as a non-executive director of the Company at the AGM.
Mr.Wen Yao :Mr. Yao resigned as a non-executive director onMarch 11, 2020 .
Mr. JianminBao: OnMarch 18, 2020 ,Mr. Bao was appointed as a non-executive director of the Company by CIC pursuant to a contractual nomination right granted to CIC pursuant to a securityholders’ agreement by and among the Company,CIC and Turquoise Hill Resources Ltd.
Mr. Shougao Wang:Mr. Wang resigned as Chief Executive Officer and an executive director onMarch 31, 2020 .
Mr. Dalanguerban: Mr. Dalanguerban was appointed as Chief Executive Officer and an executive director onMarch 31, 2020 .
Mr. Xiaoxiao Li:Mr. Li resigned as non-executive director onNovember 13, 2020 .
- GoingConcern – Several adverse conditions and material uncertainties relating to the Company cast significant doubt upon the going concern assumption which includes the deficiencies in assets and working capital.
See section “Liquidity and Capital Resources” for details.
OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS
Summary of Annual Operational Data
Year ended | ||||||
2019 | 2018 | |||||
Sales Volumes, Prices and Costs | ||||||
Premium semi-soft coking coal | ||||||
Coal sales (millions of tonnes) | 0.67 | 0.59 | ||||
Average realized selling price (per tonne) | $ | 32.96 | $ | 50.34 | ||
Standard semi-soft coking coal/ premium thermal coal | ||||||
Coal sales (millions of tonnes) | 2.35 | 1.26 | ||||
Average realized selling price (per tonne) | $ | 33.54 | $ | 37.61 | ||
Standard thermal coal | ||||||
Coal sales (millions of tonnes) | 0.09 | 0.78 | ||||
Average realized selling price (per tonne) | $ | 29.43 | $ | 25.07 | ||
Washed coal | ||||||
Coal sales (millions of tonnes) | 0.63 | 0.15 | ||||
Average realized selling price (per tonne) | $ | 43.05 | $ | 44.02 | ||
Total | ||||||
Coal sales (millions of tonnes) | 3.74 | 2.78 | ||||
Average realized selling price (per tonne) | $ | 34.88 | $ | 37.12 | ||
Raw coal production (millions of tonnes) | 5.05 | 4.34 | ||||
Cost of sales of product sold (per tonne) | $ | 22.57 | $ | 28.72 | ||
Direct cash costs of product sold (per tonne)(i) | $ | 14.84 | $ | 14.90 | ||
Mine administration cash costs of product sold (per tonne)(i) | $ | 1.08 | $ | 1.50 | ||
Total cash costs of product sold (per tonne) (i) | $ | 15.92 | $ | 16.40 | ||
Other Operational Data | ||||||
Production waste material moved (millions of bank cubic | 18.22 | 18.16 | ||||
meters) | ||||||
Strip ratio (bank cubic meters of waste material per tonne of | 3.61 | 4.17 | ||||
coal produced) | ||||||
Lost time injury frequency rate (ii) | 0.06 | 0.05 |
(i) | A non-IFRS financial measure, see section “Non-IFRS financial measures”. Cash costs of product sold exclude idled mine asset cash costs. |
(ii) | Per 200,000 man hours and calculated based on a rolling 12-month average. |
Overview of Annual Operational Data
As at
The Company experienced a decrease in the average selling price of coal from
Sales volume increased from 2.8 million tonnes in 2018 to 3.7 million tonnes in 2019. The Company’s production in 2019 was higher than that in 2018 as a result of a decrease in strip ratio for 2019, yielding 5.1 million tonnes for 2019 as compared to 4.3 million tonnes for 2018.
The Company’s unit cost of sales of product sold decreased from
Summary of Annual Financial Results
Year ended | |||||||||||
$ in thousands, except per share information | 2019 | 2018 | |||||||||
Revenue (i) | $ | 129,712 | $ | 103,804 | |||||||
Cost of sales (i) | (84,400 | ) | (79,835 | ) | |||||||
Gross profit excluding idled mine asset costs (ii) | 49,310 | 36,829 | |||||||||
Gross profit | 45,312 | 23,969 | |||||||||
Other operating expenses | (5,581 | ) | (23,607 | ) | |||||||
Administration expenses | (9,447 | ) | (10,540 | ) | |||||||
Evaluation and exploration expenses | (452 | ) | (356 | ) | |||||||
Profit/(loss) from operations | 29,832 | (10,534 | ) | ||||||||
Finance costs | (28,010 | ) | (28,578 | ) | |||||||
Finance income | 4,417 | 184 | |||||||||
Share of earnings of a joint venture | 1,329 | 1,631 | |||||||||
Income tax expense | (3,367 | ) | (3,828 | ) | |||||||
Net profit/(loss) attributable to equity holders of the Company | 4,201 | (41,125 | ) | ||||||||
Basic and diluted earnings/(loss) per share | $ | 0.02 | $ | (0.15 | ) |
(i) | Revenue and cost of sales related to the Company’s Ovoot Tolgoi Mine within the Coal Division operating segment. Refer to note 4 of the consolidated financial statements for further analysis regarding the Company’s reportable operating segments. |
(ii) | A non-IFRS financial measure, idled mine asset costs represents the depreciation expense relates to the Company’s idled plant and equipment. |
Overview of Annual Financial Results
The Company recorded a
Revenue was
Royalty expenses were
Royalty regime in
The royalty regime in
On
On
Cost of sales was
Year ended | |||||||||
$ in thousands | 2019 | 2018 | |||||||
Operating expenses | $ | 59,549 | $ | 45,604 | |||||
Share-based compensation expense | 9 | 4 | |||||||
Depreciation and depletion | 11,028 | 7,693 | |||||||
Royalties | 11,639 | 8,237 | |||||||
Impairment/(reversal of impairment) of coal stockpile inventories | (1,823 | ) | 5,437 | ||||||
Cost of sales from mine operations | 80,402 | 66,975 | |||||||
Cost of sales related to idled mine assets | 3,998 | 12,860 | |||||||
Cost of sales | $ | 84,400 | $ | 79,835 | |||||
Operating expenses in cost of sales were
Cost of sales in 2019 included a reversal of impairment of coal stockpile inventories of
Cost of sales related to idled mine assets in 2019 included
Other operating expenses were
Year ended | |||||||||
$ in thousands | 2019 | 2018 | |||||||
CIC management fee | $ | 3,185 | $ | 2,098 | |||||
Other taxes on foreign payments | 1,881 | 599 | |||||||
Provision for doubtful trade and other receivables | 501 | 20,892 | |||||||
Provision for commercial arbitration | 485 | 124 | |||||||
Impairment of prepaid expenses | 253 | 134 | |||||||
Loss on disposal of properties for resale | 36 | 179 | |||||||
Foreign exchange loss/(gain) | (706 | ) | 643 | ||||||
Gain on disposal of property, plant and equipment | (29 | ) | (994 | ) | |||||
Impairment of properties for resale | - | 2,239 | |||||||
Penalty on late settlement of trade payables | - | 427 | |||||||
Gain on settlement of trade payables | - | (2,392 | ) | ||||||
Net reversal of impairment of items of property, plant and equipment | - | (346 | ) | ||||||
Others | (25 | ) | 4 | ||||||
Other operating expenses | $ | 5,581 | $ | 23,607 |
The Company made a provision for doubtful trade and other receivables of
Administration expenses were
Year ended | ||||||||
$ in thousands | 2019 | 2018 | ||||||
Corporate administration | $ | 2,111 | $ | 2,639 | ||||
Professional fees | 3,076 | 2,685 | ||||||
Salaries and benefits | 3,522 | 5,004 | ||||||
Share-based compensation expense | 38 | 75 | ||||||
Depreciation | 700 | 137 | ||||||
Administration expenses | $ | 9,447 | $ | 10,540 |
Administration expenses were lower for 2019 compared to 2018 primarily due to lower salaries and benefits incurred during the year.
Evaluation and exploration expenses were
Finance costs were
Summary of Quarterly Operational Data
2019 | 2018 | |||||||||||||||||
Quarter Ended | 31-Dec | 30-Sep | 30-Jun | 31-Mar | 31-Dec | 30-Sep | 30-Jun | 31-Mar | ||||||||||
Sales Volumes, Prices and Costs | ||||||||||||||||||
Premium semi-soft coking coal | ||||||||||||||||||
Coal sales (millions of tonnes) | 0.39 | 0.05 | 0.12 | 0.11 | 0.24 | 0.25 | 0.07 | 0.03 | ||||||||||
Average realized selling price (per tonne) | $ | 29.18 | $ | 31.49 | $ | 32.72 | $ | 47.34 | $ | 47.37 | $ | 48.15 | $ | 59.98 | $ | 67.94 | ||
Standard semi-soft coking coal/ premium thermal coal | ||||||||||||||||||
Coal sales (millions of tonnes) | 0.40 | 0.51 | 0.59 | 0.85 | 0.40 | 0.26 | 0.19 | 0.41 | ||||||||||
Average realized selling price (per tonne) | $ | 31.88 | $ | 31.67 | $ | 35.67 | $ | 33.34 | $ | 32.60 | $ | 34.40 | $ | 33.80 | $ | 46.34 | ||
Standard thermal coal | ||||||||||||||||||
Coal sales (millions of tonnes) | - | - | - | 0.09 | 0.12 | 0.22 | 0.32 | 0.12 | ||||||||||
Average realized selling price (per tonne) | $ | - | $ | - | $ | - | $ | 34.88 | $ | 24.26 | $ | 23.49 | $ | 26.32 | $ | 25.40 | ||
Washed coal | ||||||||||||||||||
Coal sales (millions of tonnes) | 0.20 | 0.25 | 0.17 | 0.01 | 0.15 | - | - | - | ||||||||||
Average realized selling price (per tonne) | $ | 42.95 | $ | 42.37 | $ | 44.20 | $ | 45.07 | $ | 44.02 | $ | - | $ | - | $ | - | ||
Total | ||||||||||||||||||
Coal sales (millions of tonnes) | 0.99 | 0.81 | 0.88 | 1.06 | 0.91 | 0.73 | 0.58 | 0.56 | ||||||||||
Average realized selling price (per tonne) | $ | 33.04 | $ | 34.98 | $ | 36.80 | $ | 34.91 | $ | 37.32 | $ | 35.77 | $ | 32.81 | $ | 43.02 | ||
Raw coal production (millions of tonnes) | 1.48 | 1.21 | 1.33 | 1.03 | 1.87 | 1.11 | 0.98 | 0.38 | ||||||||||
Cost of sales of product sold (per tonne) | $ | 23.68 | $ | 19.16 | $ | 25.04 | $ | 22.08 | $ | 30.80 | $ | 23.44 | $ | 29.27 | $ | 31.64 | ||
Direct cash costs of product sold (per tonne) (i) | $ | 13.61 | $ | 18.03 | $ | 17.18 | $ | 10.82 | $ | 14.41 | $ | 11.90 | $ | 14.93 | $ | 19.60 | ||
Mine administration cash costs of product sold (per tonne) (i) | $ | 1.29 | $ | 1.09 | $ | 1.39 | $ | 1.41 | $ | 2.19 | $ | 1.24 | $ | 1.00 | $ | 1.24 | ||
Total cash costs of product sold (per tonne) (i) | $ | 14.90 | $ | 19.12 | $ | 18.57 | $ | 12.23 | $ | 16.60 | $ | 13.14 | $ | 15.93 | $ | 20.84 | ||
Other Operational Data | ||||||||||||||||||
Production waste material moved (millions of bank cubic meters) | 3.61 | 4.36 | 5.34 | 4.91 | 5.54 | 4.56 | 5.18 | 2.88 | ||||||||||
Strip ratio (bank cubic meters of waste material per tonne of coal produced) | 2.44 | 3.61 | 4.01 | 4.76 | 2.97 | 4.11 | 5.26 | 7.55 | ||||||||||
Lost time injury frequency rate (ii) | 0.08 | 0.08 | 0.06 | 0.00 | 0.00 | 0.00 | 0.06 | 0.13 |
(i) | A non-IFRS financial measure, see section “Non-IFRS financial measures”. Cash costs of product sold exclude idled mine asset cash costs. |
(ii) | Per 200,000 man hours and calculated based on a rolling 12-month average. |
Overview of Quarterly Operational Data
For the fourth quarter of 2019, the Company had a lost time injury frequency rate of 0.08 per 200,000 man hours based on a rolling 12-month average.
The Company experienced a decrease in the average selling price of coal from
The Company sold 1.0 million tonnes for the fourth quarter of 2019 as compared to 0.9 million tonnes for the fourth quarter of 2018.
The Company’s production in the fourth quarter of 2019 was lower than the fourth quarter of 2018 as a result of management’s decision to pace production to meet expected sales, yielding 1.5 million tonnes for the fourth quarter of 2019 as compared to 1.9 million tonnes for the fourth quarter of 2018.
The Company’s unit cost of sales of product sold decreased to
Summary of Quarterly Financial Results
The Company’s annual financial statements are reported under International Financial Reporting Standards (“IFRS”) issued by the
$ in thousands, except per share information | 2019 | 2018 | ||||||||||||||||
31-Dec | 30-Sep | 30-Jun | 31-Mar | 31-Dec | 30-Sep | 30-Jun | 31-Mar | |||||||||||
Quarter Ended | (Restated) | (Restated) | (Restated) | |||||||||||||||
Financial Results | ||||||||||||||||||
Revenue (i) | $ | 32,113 | $ | 28,309 | $ | 32,479 | $ | 36,811 | $ | 33,814 | $ | 26,277 | $ | 19,278 | $ | 24,435 | ||
Cost of sales (i) | (23,446) | (15,518) | (22,031) | (23,405) | (28,027) | (17,110) | (16,979) | (17,719) | ||||||||||
Gross profit excluding idled mine asset costs | 9,971 | 13,664 | 11,318 | 14,357 | 7,305 | 13,195 | 6,079 | 10,250 | ||||||||||
Gross profit including idled mine asset costs | 8,667 | 12,791 | 10,448 | 13,406 | 5,787 | 9,167 | 2,299 | 6,716 | ||||||||||
Other operating expenses | (1,589) | (1,245) | (2,333) | (414) | (2,921) | (3,417) | (16,512) | (757) | ||||||||||
Administration expenses | (1,386) | (2,074) | (2,878) | (3,109) | (1,583) | (2,724) | (3,856) | (2,377) | ||||||||||
Evaluation and exploration expenses | (382) | (22) | (23) | (25) | (36) | (40) | (156) | (124) | ||||||||||
Profit/(loss) from operations | 5,310 | 9,450 | 5,214 | 9,858 | 1,247 | 2,986 | (18,225) | 3,458 | ||||||||||
Finance costs | (7,095) | (7,184) | (7,001) | (6,739) | (10,899) | (5,758) | (5,958) | (6,006) | ||||||||||
Finance income | 36 | 68 | 4,305 | 17 | 13 | 106 | 8 | 100 | ||||||||||
Share of earnings of a joint venture | 225 | 277 | 375 | 452 | 416 | 247 | 628 | 340 | ||||||||||
Income tax credit/(expense) | (659) | (468) | (801) | (1,439) | (1,023) | (267) | (1,609) | (929) | ||||||||||
Net profit/(loss) | (2,183) | 2,143 | 2,092 | 2,149 | (10,246) | (2,686) | (25,156) | (3,037) | ||||||||||
Basic and diluted earnings/(loss) per share | $ | (0.01) | $ | 0.01 | $ | 0.01 | $ | 0.01 | $ | (0.04) | $ | (0.01) | $ | (0.09) | $ | (0.01) |
(i) | Revenue and cost of sales relate to the Company’s Ovoot Tolgoi Mine within the Mongolian Coal Division operating segment. Refer to note 4 of the consolidated financial statements for further analysis regarding the Company’s reportable operating segments. |
(ii) | The financial results for the three months ended |
Overview of Quarterly Financial Results
The Company recorded a
Revenue was
Cost of sales was
Cost of sales consists of operating expenses, share-based compensation expense, equipment depreciation, depletion of mineral properties, royalties, coal stockpile inventory impairment and idled mine asset costs. Operating expenses in cost of sales reflect the total cash costs of product sold (a Non-IFRS financial measure, see section Non-IFRS financial measure for further analysis) during the quarter.
Three months ended | ||||||||
$ in thousands | 2019 | 2018 | ||||||
Operating expenses | $ | 14,754 | $ | 15,110 | ||||
Share-based compensation expense | 2 | 3 | ||||||
Depreciation and depletion | 2,649 | 2,626 | ||||||
Royalties | 4,737 | 3,333 | ||||||
Impairment of coal stockpile inventories | - | 5,437 | ||||||
Cost of sales from mine operations | 22,142 | 26,509 | ||||||
Cost of sales related to idled mine assets | 1,304 | 1,518 | ||||||
Cost of sales | $ | 23,446 | $ | 28,027 |
Operating expenses in cost of sales were
Cost of sales in the fourth quarter of 2018 included coal stockpile impairment of
Cost of sales related to idled mine assets in the fourth quarter of 2019 included
Other operating expenses were
Three months ended | ||||||||||
$ in thousands | 2019 | 2018 | ||||||||
Provision for doubtful trade and other receivables | $ | 60 | $ | 1,588 | ||||||
Impairment of properties for resale | - | 866 | ||||||||
Impairment of prepaid expenses | - | 134 | ||||||||
CIC management fee | 853 | 761 | ||||||||
Other taxes on foreign payments | 858 | 599 | ||||||||
Foreign exchange loss/(gain) | (228 | ) | 1,373 | |||||||
Loss/(gain) on disposal of properties for resale | (1 | ) | 179 | |||||||
Gain on disposal of property, plant and equipment | - | (2,167 | ) | |||||||
Provision/(reversal of provision) for commercial arbitration | 79 | (562 | ) | |||||||
Net reversal of impairment of items of property, plant and equipment | - | (346 | ) | |||||||
Adjustment on gain on settlement of trade payables | - | 564 | ||||||||
Others | (32 | ) | (68 | ) | ||||||
Other operating expenses | $ | 1,589 | $ | 2,921 |
Administration expenses were
Three months ended | ||||||||
$ in thousands | 2019 | 2018 | ||||||
Corporate administration | $ | 554 | $ | 308 | ||||
Professional fees | 408 | 52 | ||||||
Salaries and benefits | 208 | 1,184 | ||||||
Share-based compensation expense | 9 | 28 | ||||||
Depreciation | 207 | 11 | ||||||
Administration expenses | $ | 1,386 | $ | 1,583 |
Evaluation and exploration expenses were
Finance costs were
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Management
The Company has in place a planning, budgeting and forecasting process to help determine the funds required to support the Company’s normal operations on an ongoing basis and its expansionary plans.
On
- Maturity date set at 24 months from drawdown (subsequently extended for 12 months on
May 18 , 2020); - Interest rate of 15% per annum and interest is payable monthly; and
- Certain items of property, plant and equipment were pledged as security for the 2018 Bank Loan. As at
December 31, 2019 , the net carrying amount of the pledged items of property, plant and equipment was$0.4 million (December 31, 2018 :$2.6 million ).
As at
Costs reimbursable to Turquoise Hill Resources Ltd (“Turquoise Hill”)
Prior to the completion of a private placement with
As at
Going concern considerations
The Company’s consolidated financial statements have been prepared on a going concern basis which assumes that the Company will continue operating until at least
Several adverse conditions and material uncertainties cast significant doubt upon the Company’s ability to continue as a going concern and the going concern assumption used in the preparation of the Company’s consolidated financial statements. The Company had a deficiency in assets of
Included in the working capital deficiency as at
In addition, the Common Shares have been suspended from trading since
The Company also has current liabilities, including trade and other payables of
The Company may not be able to settle all trade and other payables on a timely basis, while continuing postponement in settling certain trade payables owed to suppliers and creditors may impact the mining operations of the Company and result in potential lawsuits and/or bankruptcy proceedings being filed against the Company. Except as disclosed elsewhere in this press release, no such lawsuits or proceedings are pending as at
Further, the Company was informed that effective as of
On
The border closure has had an adverse impact on the Company’s sales and cash flows in the first and second quarter of 2020. In order to mitigate the financial impact of the border closures and preserve its working capital, the Company temporarily ceased major mining operations (including coal mining), reduced production to only coal-blending activities and placed approximately half of its workforce on furlough from
There are significant uncertainties as to the outcomes of the above events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern and, therefore, the Company may be unable to realize its assets and discharge its liabilities in the normal course of business. Should the use of the going concern basis in preparation of the consolidated financial statements be determined to be not appropriate, adjustments would have to be made to write down the carrying amounts of the Company’s assets to their realizable values, to provide for any further liabilities which might arise and to reclassify non-current assets and non-current liabilities as current assets and current liabilities, respectively. The effects of these adjustments have not been reflected in the consolidated financial statements. If the Company is unable to continue as a going concern, it may be forced to seek relief under applicable bankruptcy and insolvency legislation.
Management of the Company has prepared a cash flow projection covering a period of 12 months from
Factors that impact the Company’s liquidity are being closely monitored and include, but are not limited to, impact of the COVID-19 pandemic, Chinese economic growth, market prices of coal, production levels, operating cash costs, capital costs, exchange rates of currencies of countries where the Company operates and exploration and discretionary expenditures.
As at
Impact of the COVID-19 Pandemic
The Company was informed that effective as of
On
The border closure has had an adverse impact on the Company’s sales and cash flows in the first and second quarter of 2020. In order to mitigate the financial impact of the border closures and preserve its working capital, the Company temporarily ceased major mining operations (including coal mining), reduced production to only coal-blending activities and placed approximately half of its workforce on furlough from
Based on a preliminary review of the information and operational data of the Company currently available, the Company expects to record a net loss for the three months ended
CIC Convertible Debenture
In
On
On
On
The key repayment terms of the 2019 Deferral Agreement are: (i) the Company agreed to pay a total of
At any time before the payment under the terms of the 2019 Deferral Agreement is fully repaid, the Company is required to consult with and obtain written consent from CIC prior to effecting a replacement or termination of either or both of its Chief Executive Officer and its Chief Financial Officer, otherwise this will constitute an event of default under the CIC Convertible Debenture, but CIC shall not withhold its consent if the Board proposes to replace either or both such officers with nominees selected by the Board, provided that the Board acted honestly and in good faith with a view to the best interests of the Company in the selection of the applicable replacements.
As a condition to agreeing to the Deferral, CIC required that the Cooperation Agreement dated
Pursuant to their terms, both the 2019 Deferral Agreement and the Amended and Restated Cooperation Agreement became effective on
In connection with the 2019 Deferral Agreement, the Company also announced that it intends to discuss a potential debt restructuring plan with respect to amounts owing to CIC which is mutually beneficial to the Company and CIC; and to form a special committee comprised of independent directors to ensure that the interests of its minority shareholders are fairly considered in the negotiation and review of any such restructuring; however, there can be no assurance that a favorable outcome will be reached. As of the date hereof, there has not been any significant progress in relations to the restructuring plan.
On
The principal terms of the 2020 February Deferral Agreement are as follows:
- Payment of the 2020 February Deferral Amounts will be deferred until
June 20, 2020 , while the Management Fee will be deferred until they are repaid by the Company. - As consideration for the deferral of these amounts, the Company agreed to pay CIC: (i) a deferral fee equal to 6.4% per annum on the 2020 February Deferral Amounts, commencing on the date on which each such 2020 Deferral Amount would otherwise have been due and payable under the 2019 Deferral Agreement; and (ii) a deferral fee equal to 2.5% per annum on the Management Fee, commencing on the date on which the Managements Fee would otherwise have been due and payable under the Amended and Restated Cooperation Agreement.
- The Company agreed to provide CIC with monthly updates regarding its operational and financial affairs.
- As the Company anticipated prior to agreeing to the 2020 February Deferral Agreement that a deferral was likely required in respect of the monthly payments due and payable in the period between
April 2020 andJune 2020 under the 2019 Deferral Agreement and Amended and Restated Cooperation Agreement, the Company and CIC agreed to discuss in good faith a deferral of these payments on a monthly basis as they become due. - The Company agreed to comply with all of its obligations under the 2019 Deferral Agreement and the Amended and Restated Cooperation Agreement, as amended by the 2020 February Deferral Agreement.
- The Company and CIC agreed that nothing in the 2020 February Deferral Agreement prejudices CIC’s rights to pursue any of its remedies at any time pursuant to the 2019 Deferral Agreement and Amended and Restated Cooperation Agreement, respectively.
On
On
On
On
On
The principal terms of the 2020 November Deferral Agreement are as follows:
- Payment of the 2020 November Deferral Amounts will be deferred until
August 31, 2023 . - CIC agreed to waive its rights arising from any default or event of default under the CIC Convertible Debenture as a result of trading in the Common Shares being halted on the TSX beginning as of
June 19, 2020 and suspended on the HKEX beginning as ofAugust 17, 2020 , in each case for a period of more than five trading days. - As consideration for the deferral of the 2020 November Deferral Amounts, the Company agreed to pay CIC: (i) a deferral fee equal to 6.4% per annum on the 2020 November Deferral Amounts payable under the CIC Convertible Debenture and the 2020 June Deferral Agreement, commencing on the date on which each such 2020 November Deferral Amount would otherwise have been due and payable under the CIC Convertible Debenture or the
June 2020 Deferral Agreement, as applicable; and (ii) a deferral fee equal to 2.5% per annum on the 2020 November Deferral Amounts payable under the Amended and Restated Cooperation Agreement, commencing on the date on which the Management Fee would otherwise have been due and payable under the Amended and Restated Cooperation Agreement. - The 2020 November Deferral Agreement does not contemplate a fixed repayment schedule for the 2020 November Deferral Amounts and related deferral fees. Instead, the Company and CIC would agree to assess in good faith the Company’s financial condition and working capital position on a monthly basis and determine the amount, if any, of the 2020 November Deferral Amounts and related deferral fees that the Company is able to repay under the CIC Convertible Debenture, the
June 2020 Deferral Agreement or the Amended and Restated Cooperation Agreement, having regard to the working capital requirements of the Company’s operations and business at such time and with the view of ensuring that the Company’s operations and business would not be materially prejudiced as a result of any repayment. - Commencing as of
November 19, 2020 and until such time as theNovember 2020 PIK Interest is fully repaid, CIC reserves the right to require the Company to pay and satisfy the amount of theNovember 2020 PIK Interest, either in full or in part, by way of issuing and delivering PIK interest shares in accordance with the CIC Convertible Debenture provided that, on the date of issuance of such shares, the Common Shares are listed and trading on at least one stock exchange. - If at any time before the 2020 November Deferral Amounts and related deferral fees are fully repaid, the Company proposes to appoint, replace or terminate one or more of its Chief Executive Officer, its Chief Financial Officer or any other senior executive(s) in charge of its principal business function or its principal subsidiary, then the Company must first consult with, and obtain written consent from CIC prior to effecting such appointment, replacement or termination.
Commercial Arbitration in
On
On
On
On
As at
On
On
Ovoot Tolgoi Mine Impairment Analysis
The Company determined that an indicator of impairment existed for its
Therefore, the Company conducted an impairment test whereby the carrying value of the Company’s
Key estimates and assumptions incorporated in the valuation model included the following:
- Coal resources and reserves as estimated by an independent third party engineering firm;
- Sales price estimates from an independent market consulting firm;
- Forecasted sales volumes in line with production levels as reference to the mine plan;
- Life-of-mine coal production, strip ratio, capital costs and operating costs; and
- A post-tax discount rate of 11% based on an analysis of the market, country and asset specific factors.
Key sensitivities in the valuation model are as follows:
- For each 1% increase/(decrease) in the long term price estimates, the calculated fair value of the cash generating unit increases/(decreases) by approximately
$20.3 /(20.2) million; - For each 1% increase/(decrease) in the post-tax discount rate, the calculated fair value of the cash generating unit (decreases)/increases by approximately
$(28.7) /31.4 million; - For each 1% increase/(decrease) in the cash mining cost estimates, the calculated fair value of the cash generating unit (decreases)/increases by approximately
$(13.3) /13.4 million; and - For each 1% increase/(decrease) in Mongolian inflation rate, the calculated fair value of the cash generating unit (decreases)/increases by approximately
$(4.5) /4.5 million.
The impairment analysis did not result in the identification of an impairment loss or an impairment reversal and no charge or reversal was required as at
REGULATORY ISSUES AND CONTINGENCIES
Class Action Lawsuit
In
To commence and proceed with the Class Action, the plaintiff was required to seek leave of the Court under the Ontario Securities Act (“Leave Motion”) and certify the action as a class proceeding under the Ontario Class Proceedings Act (“Certification Motion”). The Ontario Court rendered its decision on the Leave Motion on
Both the plaintiffs and the Company appealed the Leave Motion decision to the
The Company filed an application for leave to appeal to the
In
Since
The Company firmly believes that it has a strong defense on the merits and will continue to vigorously defend itself against the Class Action through independent Canadian litigation counsel retained by the Company for this purpose. Due to the inherent uncertainties of litigation, it is not possible to predict the final outcome of the Class Action or determine the amount of potential losses, if any. However, the Company has judged a provision for this matter as at
Toll Wash Plant Agreement with EjinJinda
In 2011, the Company entered into an agreement with Ejin Jinda, a subsidiary of
Under the original agreement with Ejin Jinda, which required the commercial operation of the wet washing facility to commence on
Special Needs Territory in Umnugobi
On
On
On
Termination of Soumber Deposit Mining Licenses
On
According to the Notice Letter, the Soumber Licenses have been terminated pursuant to Clause 56.1.5 of Article 56 of the Minerals Law, Clauses 4.2.1 and 4.2.5 of Article 4 and Clause 28.1.1 of Article 28 of the General Administrative Law and a decision order of a working group established under an order of the Minister of Environment and Tourism (
The Company believes the cancellation of the Soumber Licenses is without merit. The Company is not aware of any failure on its part to fulfill its environmental reclamation duties as they relate to the Soumber Deposit. On
Mongolian royalties
During 2017, the Company was ordered by the Mongolian tax authority to apply the “reference price” determined by the Government of
On
Restrictions on Importing F-Grade Coal into
As a result of import restrictions established by Chinese authorities at the Ceke border, the Company has been barred from transporting its F-grade coal products into
TRANSPORTATION INFRASTRUCTURE
On
For the three months ended and the year ended
PLEDGE OF ASSETS
As at
PURCHASE, SALE OR REDEMPTION OF LISTED SECURITIES OF THE COMPANY
The Company did not redeem its listed securities, nor did the Company or any of its subsidiaries purchase or sell such securities during the year ended
COMPLIANCE WITH CORPORATE GOVERNANCE
The Company has, throughout the year ended
Pursuant to code provision A.2.7 of the Corporate Governance Code, the chairman of the board should at least annually hold meetings with the non-executive directors (including independent non-executive directors) without the executive directors present. The Company does not have a Chairman since the conclusion of the AGM held on
SECURITIES TRANSACTIONS BY DIRECTORS
The Company has adopted policies regarding Directors’ securities transactions in its Corporate Disclosure, Confidentiality and Securities Trading Policy that have terms that are no less exacting than those set out in the Model Code for Securities Transactions by Directors of Listed Issuers contained in Appendix 10 to the Hong Kong Listing Rules.
In response to a specific enquiry made by the Company on each of the directors, all directors confirmed that they had complied with the required standards as set out in the Model Code and the Company’s Corporate Disclosure, Confidentiality and Securities Trading Policy throughout the year ended
OUTLOOK
Looking forward, market conditions in
In the long run, the Company remains cautiously optimistic regarding the Chinese coal market as coal is still considered to be the primary energy source which
The Company’s objectives for the medium term are as follows:
- Enhance product mix – The Company will focus on improving the product mix and increase production of higher quality coal by: (i) washing lower quality coal in the Company’s coal wash plant; (ii) blending lower quality coal with higher quality coal; and (iii) improving mining operations and employing enhanced mining technique and equipment.
- Expand customer base – The Company will endeavor to increase sales volume, expand its sales network and diversify its customer base so as to enhance the pricing competency of the Company.
- Optimize cost structure – The Company will aim to reduce its production costs and optimize its cost structure through innovation, training and productivity enhancement.
- Operate in a socially responsible manner – The Company will continue to maintain the highest standards in health, safety and environmental performance in a corporate socially responsible manner.
Going forward, the Company will continue to focus on creating shareholders value by leveraging its key competitive strengths, including:
- Strategic location –
The Ovoot Tolgoi Mine is located approximately 40km fromChina , which represents the Company’s main coal market. The Company has an infrastructure advantage, being approximately 50km from a major Chinese coal distribution terminal with rail connections to key coal markets inChina . - A large resources and reserves base – The Ovoot Tolgoi Deposit has mineral reserves of 114.1 million tonnes, while the aggregate coal resources include measured and indicated mineral resources of 194.6 million tonnes and inferred resources of 32.1 million tonnes.
- Bridge between
Mongolia andChina – The Company is well positioned to capture the resulting business opportunities betweenChina andMongolia under the Belt and Road Initiative. The Company will seek potential strategic support from its two largest shareholders (i.e., CIC and Cinda), which are both state-owned-enterprises inChina , and its strong operational record for the past twelve years inMongolia , being one of the largest enterprises and taxpayers inMongolia .
NON-IFRS FINANCIAL MEASURES
Cash Costs
The Company uses cash costs to describe its cash production and associated cash costs incurred in bringing the inventories to their present locations and conditions. Cash costs incorporate all production costs, which include direct and indirect costs of production, with the exception of idled mine asset costs and non-cash expenses which are excluded. Non-cash expenses include share-based compensation expense, impairment of coal stockpile inventories, depreciation and depletion of property, plant and equipment and mineral properties. The Company uses this performance measure to monitor its operating cash costs internally and believes this measure provides investors and analysts with useful information about the Company’s underlying cash costs of operations. The Company believes that conventional measures of performance prepared in accordance with IFRS do not fully illustrate the ability of its mining operations to generate cash flows. The Company reports cash costs on a sales basis. This performance measure is commonly utilized in the mining industry.
Consolidated Statement of Comprehensive Income
(Expressed in thousands of USD, except for share and per share amounts)
Year ended | |||||||
2019 | 2018 | ||||||
Revenue | $ | 129,712 | $ | 103,804 | |||
Cost of sales | (84,400) | (79,835) | |||||
Gross profit | 45,312 | 23,969 | |||||
Other operating expenses | (5,581) | (23,607) | |||||
Administration expenses | (9,447) | (10,540) | |||||
Evaluation and exploration expenses | (452) | (356) | |||||
Profit/(loss) from operations | 29,832 | (10,534) | |||||
Finance costs | (28,010) | (28,578) | |||||
Finance income | 4,417 | 184 | |||||
Share of earnings of a joint venture | 1,329 | 1,631 | |||||
Profit/(loss) before tax | 7,568 | (37,297) | |||||
Current income tax expense | (3,367) | (3,828) | |||||
Net profit/(loss) attributable to equity holders of the Company | 4,201 | (41,125) | |||||
Other comprehensive loss to be reclassified to | |||||||
profit or loss in subsequent periods | |||||||
Exchange difference on translation of foreign operation | (5,129) | (13,020) | |||||
Net comprehensive loss attributable to equity holders of the Company | $ | (928) | $ | (54,145) | |||
Basic and diluted earnings/(loss) per share | $ | 0.02 | $ | (0.15) |
Consolidated Statement of Financial Position
(Expressed in thousands of USD)
As at | |||||||
2019 | 2018 | ||||||
Assets | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 7,164 | $ | 6,959 | |||
Restricted cash | 862 | 872 | |||||
Trade and other receivables | 1,778 | 5,046 | |||||
Notes receivables | - | 2,500 | |||||
Inventories | 52,237 | 47,109 | |||||
Prepaid expenses | 2,312 | 3,295 | |||||
Total current assets | 64,353 | 65,781 | |||||
Non-current assets | |||||||
Property, plant and equipment | 137,221 | 138,901 | |||||
Inventories | 9,332 | - | |||||
Properties for resale | - | 4,093 | |||||
Investments in joint ventures | 17,521 | 18,831 | |||||
Total non-current assets | 164,074 | 161,825 | |||||
Total assets | $ | 228,427 | $ | 227,606 | |||
Equity and liabilities | |||||||
Current liabilities | |||||||
Trade and other payables | $ | 87,013 | $ | 99,576 | |||
Provision for commercial arbitration | 5,593 | 12,508 | |||||
Deferred revenue | 16,057 | 12,658 | |||||
Interest-bearing borrowings | 2,835 | 4,138 | |||||
Lease liabilities | 460 | 83 | |||||
Current portion of convertible debenture | 67,106 | 139,901 | |||||
Total current liabilities | 179,064 | 268,864 | |||||
Non-current liabilities | |||||||
Lease liabilities | 108 | 30 | |||||
Convertible debenture | 89,868 | - | |||||
Decommissioning liability | 8,605 | 6,852 | |||||
Total non-current liabilities | 98,581 | 6,882 | |||||
Total liabilities | 277,645 | 275,746 | |||||
Equity | |||||||
Common shares | 1,098,634 | 1,098,634 | |||||
Share option reserve | 52,589 | 52,542 | |||||
Capital reserve | 396 | 396 | |||||
Exchange reserve | (23,228) | (18,099) | |||||
Accumulated deficit | (1,177,609) | (1,181,613) | |||||
Total deficiency in assets | (49,218) | (48,140) | |||||
Total equity and liabilities | $ | 228,427 | $ | 227,606 | |||
Net current liabilities | $ | (114,711) | . | $ | (203,083) | ||
Total assets less current liabilities | $ | 49,363 | $ | (41,258) | |||
SELECTED INFORMATION FROM THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Additional information required by the HKEX and not disclosed elsewhere in this press release is as follows. All amounts are expressed in thousands of USD and shares and options in thousands, unless otherwise indicated.
1. BASIS OF PREPARATION
1.1 Corporate information and liquidity
The Company’s consolidated financial statements have been prepared on a going concern basis which assumes that the Company will continue operating until at least
Several adverse conditions and material uncertainties cast significant doubt upon the Company’s ability to continue as a going concern and the going concern assumption used in the preparation of the Company’s consolidated financial statements. The Company had a deficiency in assets of
Included in the working capital deficiency as at
In addition, the Common Shares have been suspended from trading since
The Company also has current liabilities, including trade and other payables of
The Company may not be able to settle all trade and other payables on a timely basis, and as a result continuing postponement in settling certain trade and other payables owed to suppliers and creditors may impact the mining operations of the Company and may result in potential lawsuits and/or bankruptcy proceedings being filed against the Company. Except as disclosed elsewhere in these consolidated financial statements, no such lawsuits or proceedings were pending as at
Further, the Company was informed that effective as of
On
The border closure has had an adverse impact on the Company’s sales and cash flows in the first and second quarter of 2020. In order to mitigate the financial impact of the border closures and preserve its working capital, the Company temporarily ceased major mining operations (including coal mining), reduced production to only coal-blending activities and placed approximately half of its workforce on furlough from
There are significant uncertainties as to the outcomes of the above events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern and, therefore, the Company may be unable to realize its assets and discharge its liabilities in the normal course of business. Should the use of the going concern basis in preparation of the consolidated financial statements be determined to be not appropriate, adjustments would have to be made to write down the carrying amounts of the Company’s assets to their realizable values, to provide for any further liabilities which might arise and to reclassify non-current assets and non-current liabilities as current assets and current liabilities, respectively. The effects of these adjustments have not been reflected in the consolidated financial statements. If the Company is unable to continue as a going concern, it may be forced to seek relief under applicable bankruptcy and insolvency legislation.
Management of the Company has prepared a cash flow projection covering a period of 12 months from
Factors that impact the Company’s liquidity are being closely monitored and include, but are not limited to, impact of COVID-19 pandemic, Chinese economic growth, market prices of coal, production levels, operating cash costs, capital costs, exchange rates of currencies of countries where the Company operates and exploration and discretionary expenditures.
As at
1.2 Statement of compliance
The consolidated financial statements, including comparatives, have been prepared in accordance with the IFRS issued by the IASB.
The consolidated financial statements of the Company for the year ended
1.3 Basis of presentation
The consolidated financial statements have been prepared on a historical cost basis except for certain financial assets and financial liabilities which are measured at fair value.
1.4 Adoption of new and revised standards and interpretations
The following new IFRS standards and interpretations were adopted by the Company on
IFRS 16 | Leases |
IFRIC 23 | Uncertainty over Income Tax Treatments |
Amendments to IFRS 9 | Prepayment Features and Negative Compensation |
Amendments to IAS 19 | Plan Amendment, Curtailment or Settlement |
Amendments to IAS 28 | Long-term Interests in Associates and Joint Ventures |
Amendments to IFRS 3, IFRS 11, IAS 12 and IAS 23 | Annual Improvements to IFRSs 2015 - 2017 Cycle |
The Company has adopted IFRS 16 retrospectively from
There have been no other new IFRSs or IFRIC interpretations that is not yet effective that would be expected to have a material impact on the Company, except those disclosed in the Company’s annual consolidated financial statements for the year ended
Adjustments recognized on adoption of IFRS 16
On adoption of IFRS 16, the Company recognized lease liabilities in relation to leases which had previously been classified as ‘operating leases’ under the principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of
For leases previously classified as finance leases, the Company recognized the carrying amount of the lease asset and lease liability immediately before transition as the carrying amount of the right-of-use asset and lease liability at the date of initial application. The measurement principles of IFRS 16 are only applied after that date. The remeasurements to the lease liabilities were recognized as adjustments to the related right-of-use assets immediately after the date of initial application.
Operating lease commitments disclosed as at | $ | 1,393 | |||
Discounted using the lessee's incremental borrowing rate of at the date of initial application | $ | 1,118 | |||
Add: finance lease liabilities recognized as at | 113 | ||||
Less: short-term leases recognized on a straight-line basis as expense | (20) | ||||
Lease liability recognized as at | $ | 1,211 | |||
Of which are: | |||||
Current lease liabilities | $ | 631 | |||
Non-current lease liabilities | 580 | ||||
$ | 1,211 |
Other right-of-use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognized in the consolidated statement of financial position as at
The recognized right-of-use assets relate to the buildings:
As at | ||||||
2019 | 2019 | |||||
Buildings | $ | 605 | $ | 1,159 | ||
Total right-of-use assets | $ | 605 | $ | 1,159 |
The change in accounting policy affected the following items in the balance sheet as at
- Property, plant and equipment – increase by
$1,159 - Trade and other payables – decrease by
$9 - Prepaid expenses – decrease by
$267 - Lease liabilities – increase by
$1,098
The net impact on accumulated deficit on
In applying IFRS 16 for the first time, the Company has used the following practical expedients permitted by the standard:
- The use of a single discount rate to a portfolio of leases with reasonably similar characteristics;
- Reliance on previous assessments on whether leases are onerous;
- The accounting for operating leases with a remaining lease term of less than 12 months as at
January 1, 2019 as short-term leases; and - The use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.
The Company has also elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date the Company relied on its assessment made applying IAS 17 and IFRIC 4 Determining whether an Arrangement contains a Lease.
The Company’s leasing activities and how these are accounted for
The Company leases various office spaces and premises. Rental contracts are typically made for fixed periods of 3 to 5 years but may have extension options as described below. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes.
Until the 2018 financial year, leases of property, plant and equipment were classified as either finance or operating leases. Payments made under operating leases (net of any incentives received from the lessor) were charged to profit or loss on a straight line basis over the period of the lease.
From
Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:
- Fixed payments (including in-substance fixed payments), less any lease incentives receivable;
- Variable lease payment that are based on an index or a rate;
- Amounts expected to be payable by the lessee under residual value guarantees;
- The exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and
- Payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.
The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee’s incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions.
Right-of-use assets are measured at cost comprising the following:
- The amount of the initial measurement of lease liability;
- Any lease payments made at or before the commencement date less any lease incentives received;
- Any initial direct costs; and
- Restoration costs.
Payments associated with short-term leases and leases of low-value assets are recognized on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. There is no extension or termination option included in the leases across the Company.
2. SEGMENTED INFORMATION
The Company’s one reportable operating segment is its Coal Division. The Company’s Chief Executive Officer (chief operating decision maker) reviews the Coal Division’s discrete financial information in order to make decisions about resources to be allocated to the segment and to assess its performance. The division is principally engaged in coal mining, development and exploration in
During the year ended
The carrying amounts of the Company’s assets, liabilities, reported income or loss and revenues analyzed by operating segment are as follows:
Coal Division | Total | |||||
Year ended | ||||||
Segment results | $ | 35,350 | $ | 35,350 | ||
Reconciliation: | ||||||
Finance income | 4,293 | |||||
Finance costs | (23,858) | |||||
Corporate and other unallocated expenses (i) | (8,217) | |||||
Profit before tax | $ | 7,568 | ||||
Segment assets | ||||||
Property, plant and equipment | $ | 136,371 | $ | 136,371 | ||
Investments in joint ventures | 17,521 | 17,521 | ||||
Inventories | 61,569 | 61,569 | ||||
Other segment assets (ii) | 11,599 | 11,599 | ||||
Reconciliation: | ||||||
Elimination of intersegment receivables (iii) | (599,479) | |||||
Corporate and other unallocated assets (iii) | 600,846 | |||||
Total assets | $ | 228,427 | ||||
Segment liabilities | ||||||
Trade and other payables | $ | 74,344 | $ | 74,344 | ||
Deferred revenue | 16,057 | 16,057 | ||||
Provision for commercial arbitration | 5,593 | 5,593 | ||||
Interest-bearing borrowings | 2,835 | 2,835 | ||||
Decommissioning liability | 8,605 | 8,605 | ||||
Other segment liabilities (iv) | 596,697 | 596,697 | ||||
Reconciliation: | ||||||
Elimination of intersegment payables (iv) | (599,479) | |||||
Corporate and other unallocated liabilities (v) | 172,993 | |||||
Total liabilities | $ | 277,645 | ||||
Coal Division | ||||||
Year ended | ||||||
Other segment information | ||||||
Segment revenues | $ | 129,712 | ||||
Reversal of impairment on assets (vi) | $ | (1,069) | ||||
Depreciation and amortization | $ | 22,596 | ||||
Share of earnings of a joint venture | $ | 1,329 | ||||
Finance costs | $ | 4,152 | ||||
Finance income | $ | 124 | ||||
Current income tax charge | $ | 3,367 | ||||
Coal Division | Total | |||||
Year ended | ||||||
Segment results | $ | (11,503) | $ | (11,503) | ||
Reconciliation: | ||||||
Finance income | 137 | |||||
Finance costs | (22,209) | |||||
Corporate and other unallocated expenses (i) | (3,722) | |||||
Loss before tax | $ | (37,297) | ||||
Segment assets | ||||||
Property, plant and equipment | $ | 138,455 | $ | 138,455 | ||
Investments in joint ventures | 18,831 | 18,831 | ||||
Inventories | 47,109 | 47,109 | ||||
Other segment assets (ii) | 18,805 | 18,805 | ||||
Reconciliation: | ||||||
Elimination of intersegment receivables (iii) | (583,988) | |||||
Corporate and other unallocated assets (iii) | 588,394 | |||||
Total assets | $ | 227,606 | ||||
Segment liabilities | ||||||
Trade and other payables | $ | 85,079 | $ | 85,079 | ||
Deferred revenue | 12,658 | 12,658 | ||||
Provision for commercial arbitration | 12,508 | 12,508 | ||||
Interest-bearing borrowings | 4,138 | 4,138 | ||||
Decommissioning liability | 6,852 | 6,852 | ||||
Other segment liabilities (iv) | 586,982 | 586,982 | ||||
Reconciliation: | ||||||
Elimination of intersegment payables (iv) | (583,988) | |||||
Corporate and other unallocated liabilities (v) | 151,517 | |||||
Total liabilities | $ | 275,746 | ||||
Coal Division | ||||||
Year ended | ||||||
Other segment information | ||||||
Segment revenues | $ | 103,804 | ||||
Impairment charge on assets (vi) | $ | 28,356 | ||||
Depreciation and amortization | $ | 36,668 | ||||
Share of earnings of a joint venture | $ | 1,631 | ||||
Finance costs | $ | 6,369 | ||||
Finance income | $ | 47 | ||||
Current income tax charge | $ | 3,828 |
(i) | The corporate and other unallocated expenses mainly included the wages and salaries of |
(ii) | Other segment assets mainly included cash and cash equivalents and restricted cash of |
(iii) | The corporate and other unallocated assets mainly included the intersegment receivables which are intercompany in nature. |
(iv) | Other segment liabilities mainly included the intersegment payables which are financing in nature. |
(v) | The corporate and other unallocated liabilities mainly included the convertible debenture and trade and other payables of |
(vi) | The impairment charge/(reversal of impairment) on assets for the year ended |
3. REVENUE
Revenue represents the value of goods sold which arises from the trading of coal.
4. EXPENSES BY NATURE
The Company’s profit/(loss) before tax is arrived at after charging/(crediting):
Year ended | ||||||||
2019 | 2018 | |||||||
Depreciation | $ | 15,726 | $ | 20,690 | ||||
Auditors' remuneration | 764 | 493 | ||||||
Employee benefit expense (including directors' remuneration) | ||||||||
Wages and salaries | $ | 9,790 | $ | 9,838 | ||||
Equity-settled share option expense | 47 | 79 | ||||||
Pension scheme contributions | 1,302 | 966 | ||||||
$ | 11,139 | $ | 10,883 | |||||
Lease payments under operating leases | $ | 128 | $ | 925 | ||||
Foreign exchange loss/(gain) | (706) | 643 | ||||||
Impairment/(net reversal of impairment) of coal stockpile inventories | (1,823) | 5,437 | ||||||
Royalties | 11,639 | 8,237 | ||||||
CIC management fee | 3,185 | 2,098 | ||||||
Other taxes on foreign payments | 1,881 | 599 | ||||||
Provision of commercial arbitration | 485 | 124 | ||||||
Provision for doubtful trade and other receivables | 501 | 20,892 | ||||||
Impairment of prepaid expenses | 253 | 134 | ||||||
Loss on disposal of properties for resale | 36 | 179 | ||||||
Gain on disposal of property, plant and equipment | (29) | (994) | ||||||
Net reversal of impairment of property, plant and equipment | - | (346) | ||||||
Penalty on late settlement of trade payables | - | 427 | ||||||
Gain on settlement of trade payables | - | (2,392) | ||||||
Impairment of properties for resale | - | 2,239 | ||||||
Mine operating costs and other | 56,701 | 44,070 | ||||||
Total operating expenses | $ | 99,880 | $ | 114,338 |
5. COST OF SALES
The Company’s cost of sales consists of the following amounts:
Year ended | ||||||||
2019 | 2018 | |||||||
Operating expenses | $ | 59,549 | $ | 45,604 | ||||
Share-based compensation expense | 9 | 4 | ||||||
Depreciation and depletion | 11,028 | 7,693 | ||||||
Royalties | 11,639 | 8,237 | ||||||
Impairment/(reversal of impairment) of coal stockpile inventories | (1,823) | 5,437 | ||||||
Cost of sales from mine operations | 80,402 | 66,975 | ||||||
Cost of sales related to idled mine assets (i) | 3,998 | 12,860 | ||||||
Cost of sales | $ | 84,400 | $ | 79,835 |
(i) | Cost of sales related to idled mine assets for the year ended |
Cost of inventories recognized as expense in cost of sales for the year ended
6. OTHER OPERATING EXPENSES
The Company’s other operating expenses consist of the following amounts:
Year ended | ||||||||
2019 | 2018 | |||||||
CIC management fee | $ | 3,185 | $ | 2,098 | ||||
Other taxes on foreign payments | 1,881 | 599 | ||||||
Provision for doubtful trade and other receivables | 501 | 20,892 | ||||||
Provision of commercial arbitration | 485 | 124 | ||||||
Impairment of prepaid expenses | 253 | 134 | ||||||
Loss on disposal of properties for resale | 36 | 179 | ||||||
Foreign exchange loss/(gain) | (706) | 643 | ||||||
Gain on disposal of property, plant and equipment | (29) | (994) | ||||||
Impairment of properties for resale | - | 2,239 | ||||||
Penalty on late settlement of trade payables | - | 427 | ||||||
Gain on settlement of trade payables | - | (2,392) | ||||||
Net reversal of impairment of items of property, plant and equipment | - | (346) | ||||||
Others | (25) | 4 | ||||||
Other operating expenses | $ | 5,581 | $ | 23,607 |
7. FINANCE COSTS AND INCOME
The Company’s finance costs consist of the following amounts:
Year ended | ||||||||
2019 | 2018 | |||||||
Interest expense on convertible debenture | $ | 23,751 | $ | 22,195 | ||||
Interest expense on borrowings | 742 | 2,788 | ||||||
Value added tax on interest from intercompany loan | 2,986 | 3,038 | ||||||
Finance costs on leased assets | 129 | - | ||||||
Loan arrangement fee | - | 21 | ||||||
Accretion of decommissioning liability | 402 | 536 | ||||||
Finance costs | $ | 28,010 | $ | 28,578 |
The Company’s finance income consists of the following amounts:
Year ended | ||||||||
2019 | 2018 | |||||||
Unrealized gain on embedded derivatives in convertible debenture | $ | 69 | $ | 137 | ||||
Interest income | 55 | 47 | ||||||
IFRS 9 adjustment on convertible debenture | 4,293 | - | ||||||
Finance income | $ | 4,417 | $ | 184 |
8. TAXES
8.1 Income tax recognized in profit or loss
The Canadian statutory tax rate was 27% (2018: 27%). A reconciliation between the Company’s tax expense and the product of the Company’s profit/(loss) before tax multiplied by the Company’s domestic tax rate is as follows:
Year ended | ||||||||
2019 | 2018 | |||||||
Profit/(loss) before tax | $ | 7,568 | $ | (37,297) | ||||
Statutory tax rate | 27% | 27% | ||||||
Income tax expense/(recovery) based on combined Canadian federal and | 2,044 | (10,071) | ||||||
provincial statutory rates | ||||||||
Lower effective tax rate in foreign jurisdictions | 186 | 1,222 | ||||||
Underprovision/(overprovision) in prior year | (258) | 261 | ||||||
Tax effect of tax losses and temporary differences not recognized | 8,314 | 6,394 | ||||||
Withholding tax on intercompany interest | 2,881 | 3,038 | ||||||
Profits or losses attributable to joint venture | 332 | 408 | ||||||
Income not subject to tax | (10,256) | (7,774) | ||||||
Non-deductible expenses | 124 | 10,350 | ||||||
Income tax expenses | $ | 3,367 | $ | 3,828 |
8.2 Unrecognized deductible temporary differences and unused tax losses
The Company’s deductible temporary differences and unused tax losses for which no deferred tax asset is recognized consist of the following amounts:
As at | ||||||||
2019 | 2018 | |||||||
Non-capital losses | $ | 163,632 | $ | 191,307 | ||||
Capital losses | 30,049 | 30,049 | ||||||
Foreign exchange and others | 487,102 | 477,656 | ||||||
Total unrecognized amounts | $ | 680,783 | $ | 699,012 |
8.3 Expiry dates
The expiry dates of the Company’s unused tax losses are as follows:
As at | |||||||
Expiry | |||||||
Equivalent | dates | ||||||
Non-capital losses | |||||||
$ | 159,892 | 2037 - 2039 | |||||
3,740 | 2024 | ||||||
$ | 163,632 | ||||||
Capital losses | |||||||
$ | 30,049 | indefinite | |||||
As at | ||||
Expiry | ||||
Equivalent | dates | |||
Non-capital losses | ||||
$ | 184,254 | 2036 - 2038 | ||
4,337 | 2021 | |||
2,715 | 2023 | |||
$ | 191,306 | |||
Capital losses | ||||
$ | 30,049 | indefinite | ||
9. EARNINGS/(LOSS) PER SHARE
The calculation of basic and diluted earnings/(loss) per share is based on the following data:
Year ended | |||||||||
2019 | 2018 | ||||||||
Net profit/(loss) | $ | 4,201 | $ | (41,125 | ) | ||||
Weighted average number of shares | 272,703 | 272,661 | |||||||
Basic and diluted earnings/(loss) per share | $ | 0.02 | $ | (0.15 | ) |
Potentially dilutive items not included in the calculation of diluted earnings per share for the year ended
10. TRADE AND OTHER RECEIVABLES
The Company’s trade and other receivables consist of the following amounts:
As at | ||||||||
2019 | 2018 | |||||||
Trade receivables | $ | 1,081 | $ | 2,710 | ||||
Other receivables | 697 | 2,336 | ||||||
Total trade and other receivables | $ | 1,778 | $ | 5,046 |
The aging of the Company’s trade and other receivables, based on invoice date and net of provisions, is as follows:
As at | ||||||||
2019 | 2018 | |||||||
Less than 1 month | $ | 1,623 | $ | 4,952 | ||||
1 to 3 months | 23 | 49 | ||||||
3 to 6 months | 132 | 45 | ||||||
Over 6 months | - | - | ||||||
Total trade and other receivables | $ | 1,778 | $ | 5,046 |
Overdue balances are reviewed regularly by senior management. The Company does not hold any collateral or other credit enhancements over its trade and other receivable balances.
The Company has determined that the loss allowance on its trade and other receivables was
Loss allowance for trade and other receivables | |||||
Opening loss allowance as at | $ | 20,005 | |||
Increase in loss allowance recognised in profit or loss during the year | 501 | ||||
Loss allowance included in specific provision made during the year ended | 1,791 | ||||
Exchange realignment | (321) | ||||
Loss allowance as at | $ | 21,976 | |||
Opening loss allowance as at | $ | 1,278 | |||
Increase in loan allowance recognised in profit or loss during the year | 19,119 | ||||
Reversal of loan allowance | (41) | ||||
Exchange realignment | (351) | ||||
Loss allowance as at | $ | 20,005 |
11. TRADE AND OTHER PAYABLES
Trade and other payables of the Company primarily 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, based on invoice date, was as follows:
As at | ||||||||
2019 | 2018 | |||||||
Less than 1 month | $ | 29,750 | $ | 34,927 | ||||
1 to 3 months | 13,165 | 16,336 | ||||||
3 to 6 months | 12,218 | 5,446 | ||||||
Over 6 months | 31,880 | 42,867 | ||||||
Total trade and other payables | $ | 87,013 | $ | 99,576 |
12. DEFERRED REVENUE
At
The movement of the Company’s deferred revenue is as follows:
Year ended | |||||||
2019 | 2018 | ||||||
Balance, beginning of year | $ | 12,658 | $ | 23,225 | |||
Revenue recognized that was included in the deferred revenue balance at beginning of the year | (12,385) | (8,056) | |||||
Derecognition of deferred revenue that was included in the balance at beginning of the year due to contract cancellation | - | (13,509) | |||||
Increase due to trade deposits received or receivable, excluding amounts recognized as revenue during the year | 16,155 | 12,757 | |||||
Exchange realignment | (371) | (1,759) | |||||
Balance, end of year | $ | 16,057 | $ | 12,658 |
The performance obligation related to the revenue from customers for contracts that are unsatisfied (or partially unsatisfied) are expected to be recognized within one year after the reporting dates. The Company applies the practical expedient and does not disclose information about any remaining performance obligation that is a part of contract that has original expected duration of one year or less.
13. INTEREST-BEARING BORROWINGS
The Company’s interest-bearing borrowings consist of the following amounts:
As at | ||||||
2019 | 2018 | |||||
Bank loan (i) | $ | 2,835 | $ | 3,543 | ||
Turquoise Hill Loan Facility | - | 595 | ||||
Total interest-bearing borrowings | $ | 2,835 | $ | 4,138 |
(i)
On
- Maturity date set at 24 months from drawdown (subsequently extended for 12 months on
May 18 , 2020); - Interest rate of 15% per annum and interest is payable monthly; and
- Certain items of property, plant and equipment were pledged as security for the 2018 Bank Loan. As at
December 31, 2019 , the net book value of the pledged items of property, plant and equipment was$439 (December 31, 2018 :$2,643 ).
As at
14. LEASE LIABILITIES
The Company leases certain of its mobile equipment and office premises for daily operations. These leases have remaining lease terms ranging from 1 to 3 years.
At
Present value of minimum lease payments | |||||||||||||
Minimum lease payments | |||||||||||||
As at | As at | ||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||
Amounts payable: | |||||||||||||
Within one year | $ | 509 | $ | 90 | $ | 460 | $ | 83 | |||||
In the second year | 101 | 25 | 108 | 24 | |||||||||
In the third to fifth year, inclusive | - | 6 | - | 6 | |||||||||
Total minimum finance lease payments | $ | 610 | $ | 121 | $ | 568 | $ | 113 | |||||
Future finance charges | (42) | (8) | |||||||||||
Total net lease finance payables | $ | 568 | $ | 113 | |||||||||
Portion classified as current liabilities | (460) | (83) | |||||||||||
Non-current portion | $ | 108 | $ | 30 |
15. CONVERTIBLE DEBENTURE
On
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 fair value through profit or loss and all changes in fair value are recorded in profit or loss. The difference between the debt host component and the principal amount of the loan outstanding is accreted to profit or loss over the expected life of the convertible debenture.
The embedded derivatives were valued upon initial measurement and subsequent periods using a Monte Carlo simulation valuation model. A Monte Carlo simulation model is a valuation model that relies on random sampling and is often used when modeling systems with a large number of inputs and where there is significant uncertainty in the future value of inputs and where the movement of the inputs can be independent of each other. Some of the key inputs used by the Company in its Monte Carlo simulation include: the floor and ceiling conversion prices, the Company’s common share price, the risk-free rate of return, expected volatility of the Company’s common share price, forward foreign exchange rate curves (between the CAD$ and
15.1 Partial conversion
On
15.2 Presentation
Based on the Company’s valuation as at
For the year ended
The movements of the amounts due under the convertible debenture are as follows:
Year ended | ||||||||
2019 | 2018 | |||||||
Balance, beginning of year | $ | 139,901 | $ | 116,374 | ||||
Interest expense on convertible debenture | 23,751 | 22,195 | ||||||
Decrease in fair value of embedded derivatives | (69) | (137) | ||||||
Fair value adjustment upon adoption of IFRS 9 | (4,293) | 1,469 | ||||||
Interest paid | (2,316) | - | ||||||
Balance, end of year | $ | 156,974 | $ | 139,901 |
The convertible debenture balance consists of the following amounts:
As at | ||||||||
2019 | 2018 | |||||||
Current convertible debenture | ||||||||
Interest payable | $ | 67,106 | $ | 46,096 | ||||
Debt host | - | 93,540 | ||||||
Fair value of embedded derivatives | - | 265 | ||||||
67,106 | 139,901 | |||||||
Non-current convertible debenture | ||||||||
Debt host | 89,672 | - | ||||||
Fair value of embedded derivatives | 196 | - | ||||||
89,868 | - | |||||||
Total convertible debenture | $ | 156,974 | $ | 139,901 |
16. ACCUMULATED DEFICIT AND DIVIDENDS
At
The Board did not recommend the payment of any final dividend for the year ended
EXTRACT OF INDEPENDENT AUDITOR’S REPORT
BDO was engaged to audit the consolidated financial statements of the Company. The section below sets out an extract of the independent auditor’s report regarding the consolidated financial statements of the Company for the year ended
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the “Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements” section of our auditor’s report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in
Material Uncertainty Related to Going Concern
We draw attention to Note 1 to the consolidated financial statements, which indicates that the Company’s current liabilities exceeded its current assets by
REVIEW OF RESULTS AND RELEASE OF AUDITED RESULTS
The annual results of the Company for the year ended
The figures in respect of the Company’s consolidated statement of financial position, consolidated statement of comprehensive income and the related notes thereto for the year ended
The Company’s results for the year ended
QUALIFIED PERSONS
Disclosure of a scientific or technical nature in respect of the Company’s material mineral projects was prepared by or under the supervision of the individuals set out in the table below, each of whom is a “Qualified Person” as that term is defined in National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”) of the Canadian Securities Administrators:
Property | Qualified Persons | Field of Expertise | Relationship to Company |
Ovoot Tolgoi | Dr. | Resources | Independent Consultant |
Ovoot Tolgoi | Reserves | Independent Consultant | |
Zag Suuj | Resources | Independent Consultant |
Disclosure of a scientific or technical nature relating to the
Disclosure of a scientific or technical nature relating to the Zag Suuj Deposit is derived from a technical report (the "Zag Suuj Technical Report") prepared in accordance with NI 43-101 on the Zag Suuj Deposit dated
ABOUT SOUTHGOBI
SouthGobi, listed on the
Contact:
Investor Relations
Office: | +852 2156 7030 ( |
+1 604 762 6783 ( | |
Email: kino.fu@southgobi.com | |
Website: www.southgobi.com |
Except for statements of fact relating to the Company, certain information contained herein constitutes forward-looking statements. Forward-looking statements are frequently characterized by words such as “plan”, “expect”, “project”, “intend”, “believe”, “anticipate”, "could", "should", "seek", "likely", "estimate" and other similar words or statements that certain events or conditions “may” or “will” occur. Forward-looking statements relate to management’s future outlook and anticipated events or results and are based on the opinions and estimates of management at the time the statements are made. Forward-looking statements in this press release include, but are not limited to, statements regarding:
- the Company continuing as a going concern and its ability to realize its assets and discharge its liabilities in the normal course of operations as they become due;
- adjustments to the amounts and classifications of assets and liabilities in the Company's consolidated financial statements and the impact thereof;
- the Company’s expectations of sufficient liquidity and capital resources to meet its ongoing obligations and future contractual commitments, including the Company’s ability to settle its trade payables, to secure additional funding and to meet its obligations under each of the CIC Convertible Debenture, the 2020 June Deferral Agreement, the 2020 May Deferral Agreement, the 2020 April Deferral Agreement, the 2020 March Deferral Agreement, the 2020 February Deferral Agreement, the 2020 November Deferral Agreement, the 2019 Deferral Agreement, the Amended and Restated Cooperation Agreement and the 2018 Bank Loan, as the same become due;
- the Company's anticipated financing needs, development plans and future production levels;
- the ability of the Company to successfully apply for a revocation of the CTO;
- the possibility of the TSX granting an extension to the deadline date for the Company to demonstrate that it has remedied the Delisting Criteria;
- the resumption of trading in the Common Shares on the TSX or HKEX;
- the Company entering into discussions with CIC regarding a potential debt restructuring plan with respect to the amounts owing to CIC;
- the results and impact of the
Ontario class action (as described under section Regulatory Issues and Contingencies of this press release under the heading entitled “Class Action Lawsuit"); - the estimates and assumptions included in the Company’s impairment analysis and the possible impact of changes thereof;
- the agreement with Ejin Jinda and the payments thereunder (as described under section Regulatory Issues and Contingencies of this press release under the heading entitled “Toll Wash Plant Agreement with Ejin Jinda”);
- the ability of the Company to successfully recover the balance of its doubtful trade and notes receivables;
- the ability of the Company to enhance the operational efficiency and output throughput of the washing facilities at Ovoot Tolgoi;
- the ability to enhance the product value by conducting coal processing and coal washing;
- the impact of the Company’s activities on the environment and actions taken for the purpose of mitigation of potential environmental impacts and planned focus on health, safety and environmental performance;
- the impact of the delays in the custom clearance process at the Ceke border on the Company’s operations and the restrictions established by Chinese authorities on the import of F-grade coal into
China ; - the impact of the COVID-19 pandemic and closure of Mongolia’s southern border with
China on the Company’s business, financial condition and operations; - the ability of the Company to successfully appeal MRAM’s decision to terminate the Soumber Licenses and the anticipated timing of the High Court’s ruling on the appeal;
- the ability of the Company to successfully negotiate an extension of the agreement with the third party contractor relating to the operation of the wash plant at the Ovoot Tolgoi mine site;
- the ability of the Company to successfully reinstate the Soumber Licenses;
- the future demand for coal in
China ; - future trends in the Chinese coal industry;
- the Company’s outlook and objectives for 2020 and beyond (as more particularly described under Outlook of this press release); and
- other statements that are not historical facts.
Forward-looking information is based on certain factors and assumptions described below and elsewhere in this press release, including, among other things: the current mine plan for the Ovoot Tolgoi mine; mining, production, construction and exploration activities at the Company’s mineral properties; the costs relating to anticipated capital expenditures; the capacity and future toll rate of the paved highway; plans for the progress of mining license application processes; mining methods; the Company's anticipated business activities, planned expenditures and corporate strategies; management’s business outlook, including the outlook for 2020 and beyond; currency exchange rates; operating, labour and fuel costs; the ability of the Company to successfully apply for a revocation of the CTO; the ability to remedy the Delisting Criteria of the TSX and to satisfy the Resumption Guidance of the HKEX; the ability of the Company to raise additional financing; the anticipated royalties payable under Mongolia’s royalty regime; the future coal market conditions in
Due to assumptions, risks and uncertainties, including the assumptions, risks and uncertainties identified above and elsewhere in this press release, actual events may differ materially from current expectations. The Company uses forward-looking statements because it believes such statements provide useful information with respect to the currently expected future operations and financial performance of the Company, and cautions readers that the information may not be appropriate for other purposes. Except as required by law, the Company undertakes no obligation to update forward-looking statements if circumstances or management’s estimates or opinions should change. The reader is cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this press release; they should not rely upon this information as of any other date.
The English text of this press release shall prevail over the Chinese text in case of inconsistencies.
Source:
2020 GlobeNewswire, Inc., source