SouthGobi Resources Ltd. (TSX:SGQ)(HKSE:1878) (the "Company"). The Company today
announced its financial and operating results for the three months ended March
31, 2014. All figures are in U.S. Dollars unless otherwise stated.
Significant Events and Highlights
The Company's significant events and highlights for the three months ended March
31, 2014 and subsequent period to May 12, 2014 are as follows:
-- Coal prices in China continue to adversely affect the Company's margins
and liquidity. As at the date hereof, the Company expects to be able to
pay the interest due under the China Investment Corporation ("CIC")
convertible debenture on May 19, 2014. The Company is actively seeking
additional sources of financing to maintain liquidity to fund its
operations and meet its obligations. See section "Liquidity and Capital
Resources" of this announcement and section 11 "Risk Factors" of the
Company's Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") for the three months ended March 31,
2014 which is available at www.sedar.com.
-- Production increased to 0.64 million tonnes of raw coal in the first
quarter of 2014 compared to production of 0.02 million tonnes of raw
coal in the first quarter of 2013. The increase in production primarily
related to the operations at the Ovoot Tolgoi Mine being fully curtailed
for most of the first quarter of 2013. Operations at the Ovoot Tolgoi
Mine resumed on March 22, 2013 after having been fully curtailed since
the end of the second quarter of 2012.
-- Sales volumes increased to 0.39 million tonnes in the first quarter of
2014 compared to 0.28 million tonnes in the first quarter of 2013.
Revenue increased to $5.1 million in the first quarter of 2014 compared
to $4.4 million in the first quarter of 2013 primarily due to higher
sales volumes.
-- Government of Mongolia changed the royalty regime effective April 1,
2014. Under the new "flexible tariff" royalty regime, the royalty per
tonne for export coal sales will be calculated based on the actual
contracted sales price per tonne, whereby the contracted sales price
includes the costs of transporting the coal to the Mongolia-China
border. The Company expects that its royalty per tonne calculated under
the new "flexible tariff" royalty regime will decrease compared to the
prior reference price royalty regime.
OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS
Summary of Operational Data
Three months ended
March 31,
--------------------------
2014 2013
--------------------------
Sales Volumes, Prices and Costs
Premium semi-soft coking coal
Coal sales (millions of tonnes) - 0.08
Average realized selling price (per tonne) (i) $ - $ 45.81
Standard semi-soft coking coal
Coal sales (millions of tonnes) 0.29 -
Average realized selling price (per tonne) (i) $ 22.00 $ -
Thermal coal
Coal sales (millions of tonnes) 0.10 0.20
Average realized selling price (per tonne) (i) $ 12.07 $ 13.67
Total
Coal sales (millions of tonnes) 0.39 0.28
Average realized selling price (per tonne) (i) $ 19.54 $ 22.75
Raw coal production (millions of tonnes) 0.64 0.02
Direct cash costs of product sold (per tonne)
(ii) $ 10.43 $ 10.22
Mine administration cash costs of product sold
(per tonne) (ii) $ 3.80 $ 1.46
Total cash costs of product sold (per tonne)
(ii) $ 14.23 $ 11.68
Other Operational Data
Production waste material moved (millions of
bank cubic meters) 2.55 0.4
Strip ratio (bank cubic meters of waste material
per tonne of coal produced) 4.02 26.21
Lost time injury frequency rate (iii) - -
(i) Average realized selling price excludes royalties and selling fees.
(ii) A non-International Financial Reporting Standards ("IFRS") financial
measure, refer to "Non-IFRS Financial Measures" section. Cash costs of
product sold exclude idled mine asset cash costs.
(iii) Per 200,000 man hours.
Overview of Operational Data
Raw coal production was 0.64 million tonnes in the first quarter of 2014 with a
strip ratio of 4.02 compared to raw coal production of 0.02 million tonnes in
the first quarter of 2013 with a strip ratio of 26.21. Raw coal production
decreased in the first quarter of 2014 compared to the fourth quarter of 2013
(1.73 million tonnes) as first quarter 2014 contracted sales tonnages were lower
than the fourth quarter of 2013.
The Company resumed operations at the Ovoot Tolgoi Mine on March 22, 2013 after
having been fully curtailed since the end of the second quarter of 2012.
Therefore, there was only limited production of 0.02 million tonnes in the first
quarter of 2013 with a strip ratio of 26.21. The Company's strip ratio of 26.21
in the first quarter of 2013 is due to a higher proportion of waste material
being mined over the limited operating period and is not indicative of the
Company's strip ratio moving forward.
Mining activities continued in a safe and cost effective manner in the first
quarter of 2014. The Company ended the first quarter of 2014 without a lost time
injury.
Summary of Financial Results
Three months ended
March 31,
--------------------------
$ in thousands, except per share information 2014 2013
------------ ------------
Revenue (i),(ii) $ 5,137 $ 4,398
Cost of sales (ii) (18,366) (21,305)
Gross loss excluding idled mine asset costs (10,202) (494)
Gross loss including idled mine asset costs (13,229) (16,907)
Other operating expenses (1,073) (431)
Administration expenses (2,237) (3,733)
Evaluation and exploration expenses (172) (273)
Loss from operations (16,711) (21,344)
Finance costs (5,025) (4,996)
Finance income 1,007 775
Income tax recovery - 1,916
Net loss (20,755) (23,666)
Basic loss per share $ (0.11) $ (0.13)
Diluted loss per share $ (0.11) $ (0.13)
(i) Revenue is presented net of royalties and selling fees.
(ii) 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 Company's condensed consolidated interim financial statements
for further analysis regarding the Company's reportable operating
segments.
Overview of Financial Results
The Company recorded a $16.7 million loss from operations in the first quarter
of 2014 compared to a $21.3 million loss from operations in the first quarter of
2013 and a $20.8 million net loss in the first quarter of 2014 compared to a
$23.7 million net loss in the first quarter of 2013. The first quarter 2014 loss
from operations was negatively impacted by $7.3 million of coal stockpile
impairments (2013: $1.1 million) and $3.0 million of idled mine asset costs
(2013: $16.4 million). The Company's loss from operations was $6.4 million in
the first quarter of 2014 excluding the impact of the above noted items (2013:
$3.8 million).
Revenue was $5.1 million in the first quarter of 2014 compared to $4.4 million
in the first quarter of 2013. The Company sold 0.39 million tonnes of coal in
the first quarter of 2014 at an average realized selling price of $19.54 per
tonne compared to sales of 0.28 million tonnes from stockpile in the first
quarter of 2013 at an average realized selling price of $22.75. Revenue
increased in the first quarter of 2014 compared to the first quarter of 2013
primarily due to higher sales volumes. The average realized selling price was
impacted by the product mix in the first quarter of 2014. The first quarter of
2014 product mix primarily included Standard semi-soft coking coal and thermal
coal compared to a mix of Premium semi- soft coking coal and thermal coal in the
first quarter of 2013.
Sales volume is generally lower in the first quarter of each year due to the
seasonal holidays of Mongolian Tsagaan Sar and Chinese New Year, which result in
border closures at the Shivee Khuren-Ceke crossing at the Mongolia-China border
("Shivee Khuren Border Crossing") and a general decrease in the level of
economic activity at the Shivee Khuren Border Crossing. Coal prices in China
declined in the first quarter of 2014 after slightly improving in the fourth
quarter of 2013.
The Company's revenue is presented net of royalties and selling fees. The
Company is subject to a base royalty in Mongolia of 5% on all export coal sales.
In addition, effective January 1, 2011, the Company is subject to an additional
sliding scale royalty of up to 5%. During the first quarter of 2014, the royalty
was calculated using a set reference price per tonne published by the Government
of Mongolia.
Based on the reference prices for the first quarter of 2014, the Company was
subject to an average 7% royalty based on a weighted average reference price of
$68.76 per tonne. The Company's effective royalty rate for the first quarter of
2014, based on the Company's average realized selling price of $19.54 per tonne,
was 25% or $4.81 per tonne compared to 6% or $1.37 per tonne in the first
quarter of 2013. During a trial period from October 1, 2012 to March 31, 2013,
the royalty was determined using the actual contracted sales price per tonne,
not the reference price. Therefore, the Company's first quarter 2013 royalty per
tonne was lower than the royalty per tonne in the first quarter of 2014.
The Government of Mongolia changed the royalty regime effective April 1, 2014.
Under the new "flexible tariff" royalty regime, the royalty per tonne for export
coal sales will be calculated based on the actual contracted sales price per
tonne, whereby the contracted sales price includes the costs of transporting the
coal to the Mongolia-China border. If transportation costs are not included in
the contracted sales price between a buyer and seller, the following costs are
required to be included in the contracted sales price for purposes of
calculating the royalty per tonne: transportation costs and costs associated
with transportation such as customs documentation fees, insurance, loading and
unloading costs. In the event the actual contracted sales price calculated as
described above differs by more than 10% from the contracted sales price of coal
products with the same classification and quality being exported by other legal
entities in Mongolia through the same border crossing, the calculated contracted
sales price shall be deemed non-market under Mongolian tax law and the royalty
per tonne will be calculated based on a reference price that will be determined
by the Government of Mongolia.
The Company currently sells coal from the Ovoot Tolgoi Mine at the mine-gate and
the coal is exported through the Shivee Khuren Border Crossing. The Company's
average realized selling price excludes transportation costs. The Company
expects that its royalty per tonne calculated under the new "flexible tariff"
royalty regime will decrease compared to the prior reference price royalty
regime.
Cost of sales was $18.4 million in the first quarter of 2014 compared to $21.3
million in the first quarter of 2013. Cost of sales comprises operating
expenses, share-based compensation expense, equipment depreciation, depletion of
mineral properties, coal stockpile inventory impairments 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 Non-IFRS Financial Measures
section) during the period.
Three months ended
March 31,
--------------------------
$ in thousands 2014 2013
------------ ------------
Operating expenses $ 5,564 $ 3,221
Share-based compensation expense 15 -
Depreciation and depletion 2,479 549
Impairment of coal stockpile inventories 7,281 1,121
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Cost of sales from mine operations 15,339 4,891
Cost of sales related to idled mine assets 3,027 16,414
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Cost of sales $ 18,366 $ 21,305
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Operating expenses in cost of sales were $5.6 million in the first quarter of
2014 compared to $3.2 million in the first quarter of 2013. Operating expenses
were higher in the first quarter of 2014 compared to the first quarter of 2013
primarily due to higher sales volumes.
Total cash costs of product sold were $14.23 per tonne in the first quarter of
2014 compared to $11.68 per tonne in the first quarter of 2013. The increase in
total cash costs per tonne sold primarily relates to increased mine
administration cash costs per tonne sold. Mine administration cash costs per
tonne sold were $3.80 per tonne in the first quarter of 2014 compared to $1.46
per tonne in the first quarter of 2013. The increase in mine administration cash
costs per tonne sold primarily related to the majority of these costs being
allocated to costs of sales related to idled mine assets, rather than operating
expenses, during the first quarter of 2013 prior to the recommencement of mining
operations at the Ovoot Tolgoi Mine on March 22, 2013.
Cost of sales in the first quarter of 2014 and 2013 included coal stockpile
impairments of $7.3 million and $1.1 million, respectively, to reduce the
carrying value of the Company's coal stockpiles to their net realizable value.
The coal stockpile impairments recorded in both the first quarter of 2014 and
2013 reflect the challenging coal market conditions and primarily related to the
Company's higher-ash products.
Cost of sales related to idled mine asset costs primarily consisted of period
costs, which were expensed as incurred and primarily included depreciation
expense. Cost of sales related to idled mine assets in the first quarter of 2014
included $3.0 million related to depreciation expenses for idled equipment
(2013: $11.2 million). Idled mine asset costs decreased in the first quarter of
2014 compared to the first quarter of 2013 as a result of the recommencement of
mining operations at the Ovoot Tolgoi Mine on March 22, 2013. However, the first
quarter 2014 production plan did not fully utilize the Company's existing mining
fleet, therefore, idled mine asset costs continued to be incurred throughout the
first quarter of 2014.
Other operating expenses were $1.1 million in the first quarter of 2014 compared
to $0.4 million in the first quarter of 2013.
Three months ended
March 31,
-----------------------------
$ in thousands 2014 2013
-------------- -------------
Foreign exchange loss/(gain) $ (764) $ 366
Impairment loss on available-for-sale
financial asset 1,766 -
Other 71 65
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Other operating expenses $ 1,073 $ 431
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The Company recognized an impairment loss of $1.8 million in the first quarter
of 2014 related to its investment in Aspire Mining Limited ("Aspire") (2013:
$0.9 million unrealized gain recorded in other comprehensive income). The
Company's investment in Aspire is accounted for as an available-for-sale
financial asset. In 2012, the Company determined that objective evidence of
impairment in the Company's investment in Aspire existed. Therefore, the Company
recorded an impairment loss in the first quarter of 2014 as a result of declines
in the fair value of the Company's investment in Aspire during the first quarter
of 2014.
Administration expenses were $2.2 million in the first quarter of 2014 compared
to $3.7 million in the first quarter of 2013.
Three months ended
March 31,
--------------------------
$ in thousands 2014 2013
------------ ------------
Corporate administration $ 659 $ 918
Legal and professional fees 686 1,418
Salaries and benefits 729 1,162
Share-based compensation recovery 131 148
Depreciation 32 87
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Administration expenses $ 2,237 $ 3,733
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Administration expenses were lower in the first quarter of 2014 compared to the
first quarter of 2013 primarily due to lower legal and professional fees. Legal
and professional fees in the first quarter of 2013 included $0.9 million of fees
related to the internal and tripartite committees referred to in section
"Regulatory Issues and Contingencies". The tripartite committee substantially
completed the investigative phase of its activities during 2013, therefore
additional legal and professional fees were not incurred in the first quarter of
2014. Refer to section "Regulatory Issues and Contingencies" for further
analysis.
Corporate administration and salaries and benefits were also lower in the first
quarter of 2014 compared to the first quarter of 2013 which reflects the
Company's cost-cutting initiatives and workforce reductions throughout 2013.
Evaluation and exploration expenses were $0.2 million in the first quarter of
2014 compared to $0.3 million in the first quarter of 2013. The Company
continued to minimize evaluation and exploration expenditures in the first
quarter of 2014 in order to preserve the Company's financial resources.
Evaluation and exploration activities and expenditures in the first quarter of
2014 were limited to ensuring that the Company met the Mongolian Minerals Law
requirements in respect of its mining and exploration licenses.
Finance costs were $5.0 million in both the first quarter of 2014 and 2013.
Finance costs in the first quarter of 2014 and 2013 primarily consisted of $4.9
million of interest expense on the $250.0 million CIC convertible debenture.
Finance income was $1.0 million in the first quarter of 2014 compared to $0.8
million in the first quarter of 2013. Finance income for the first quarter of
2014 and 2013 primarily consisted of $1.0 million and $0.7 million of unrealized
gains on the fair value change of the embedded derivatives in the CIC
convertible debenture, respectively. The fair value of the embedded derivatives
in the CIC convertible debenture is driven by many factors including: the
Company's common share price, U.S. Dollar and Canadian Dollar exchange rates and
share price volatility.
Income tax expense was $nil in the first quarter of 2014 compared to a recovery
of $1.9 million in the first quarter of 2013. As at December 31, 2013, the
Company's deferred income tax asset was derecognized. The income tax recovery in
the first quarter of 2013 related to the Company's Mongolian tax loss carry
forwards and deductible temporary differences.
Summary of Quarterly Operational Data
2014 2013
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Quarter Ended 31-Mar 31-Dec 30-Sep 30-Jun 31-Mar
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Sales Volumes, Prices and
Costs
Premium semi-soft coking
coal
Coal sales (millions of
tonnes) - 0.21 0.04 0.21 0.08
Average realized selling
price (per tonne) (i) $ - $ 37.54 $ 37.50 $ 32.46 $ 45.81
Standard semi-soft coking
coal
Coal sales (millions of
tonnes) 0.29 1.40 0.87 - -
Average realized selling
price (per tonne) (i) $ 22.00 $ 24.49 $ 21.67 $ - $ -
Thermal coal
Coal sales (millions of
tonnes) 0.10 0.11 0.03 0.11 0.20
Average realized selling
price (per tonne) (i) $ 12.07 $ 12.60 $ 13.07 $ 13.98 $ 13.67
Total
Coal sales (millions of
tonnes) 0.39 1.72 0.94 0.32 0.28
Average realized selling
price (per tonne) (i) $ 19.54 $ 25.30 $ 22.05 $ 26.26 $ 22.75
Raw coal production
(millions of tonnes) 0.64 1.73 1.13 0.17 0.02
Direct cash costs of
product sold (per tonne)
(ii) $ 10.43 $ 11.13 $ 9.41 $ 11.49 $ 10.22
Mine administration cash
costs of product sold
(per tonne) (ii) $ 3.80 $ 1.39 $ 2.20 $ 7.14 $ 1.46
Total cash costs of
product sold (per tonne)
(ii) $ 14.23 $ 12.52 $ 11.61 $ 18.63 $ 11.68
Other Operational Data
Production waste material
moved (millions of bank
cubic meters) 2.55 3.77 1.57 2.71 0.40
Strip ratio (bank cubic
meters of waste material
per tonne of coal
produced) 4.02 2.18 1.39 15.55 26.21
Lost time injury frequency
rate (iii) - - - - -
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2012
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Quarter Ended 31-Dec 30-Sep 30-Jun
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Sales Volumes, Prices and
Costs
Premium semi-soft coking
coal
Coal sales (millions of
tonnes) 0.03 - 0.42
Average realized selling
price (per tonne) (i) $ 47.86 $ - $ 67.46
Standard semi-soft coking
coal
Coal sales (millions of
tonnes) - 0.01 0.36
Average realized selling
price (per tonne) (i) $ - $ 49.91 $ 49.74
Thermal coal
Coal sales (millions of
tonnes) - 0.31 0.28
Average realized selling
price (per tonne) (i) $ - $ 15.87 $ 34.10
Total
Coal sales (millions of
tonnes) 0.03 0.32 1.06
Average realized selling
price (per tonne) (i) $ 47.86 $ 16.98 $ 52.86
Raw coal production
(millions of tonnes) - - 0.27
Direct cash costs of
product sold (per tonne)
(ii) $ 11.67 $ 9.56 $ 16.52
Mine administration cash
costs of product sold
(per tonne) (ii) $ 5.08 $ 3.75 $ 1.33
Total cash costs of
product sold (per tonne)
(ii) $ 16.75 $ 13.31 $ 17.85
Other Operational Data
Production waste material
moved (millions of bank
cubic meters) - - 1.16
Strip ratio (bank cubic
meters of waste material
per tonne of coal
produced) - - 4.31
Lost time injury frequency
rate (iii) 0.1 0.2 0.2
--------------------------------------------------------
(i) Average realized selling price excludes royalties and selling fees.
(ii) A non-IFRS financial measure, refer to "Non-IFRS Financial Measures"
section. Cash costs of product sold exclude idled mine asset cash
costs.
(iii) Per 200,000 man hours.
Summary of Quarterly Financial Results
$ in thousands,
except per share
information 2014 2013
-------------------------------------------------------
Quarter Ended 31-Mar 31-Dec 30-Sep 30-Jun 31-Mar
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Financial Results
Revenue (i), (ii) $ 5,137 $ 32,457 $ 15,652 $ 6,129 $ 4,398
Cost of sales (ii) (18,366) (40,359) (33,486) (17,477) (21,305)
Gross profit/(loss)
excluding idled mine
asset costs (10,202) (4,141) (13,323) (5,593) (494)
Gross profit/(loss)
including idled mine
asset costs (13,229) (7,900) (17,834) (11,348) (16,908)
Other operating
expenses (1,073) (109,682) (1,003) (14,925) (431)
Administration
expenses (2,237) (3,668) (4,204) (4,024) (3,733)
Evaluation and
exploration expenses (172) (489) (186) (221) (273)
Loss from operations (16,711) (121,740) (23,227) (30,518) (21,344)
Finance costs (5,025) (5,167) (5,382) (5,617) (4,996)
Finance income 1,007 1,301 124 3,366 775
Income tax
recovery/(expense) - (13,109) (13,377) (415) 1,915
Net income/(loss) (20,755) (138,730) (41,928) (33,140) (23,666)
Basic income/(loss)
per share $ (0.11) $ (0.75) $ (0.23) $ (0.18) $ (0.13)
Diluted loss per
share $ (0.11) $ (0.75) $ (0.23) $ (0.18) $ (0.13)
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$ in thousands,
except per share
information 2012
---------------------------------
Quarter Ended 31-Dec 30-Sep 30-Jun
------------------------------------------------------
Financial Results
Revenue (i), (ii) $ 1,186 $ 3,804 $ 46,575
Cost of sales (ii) (32,229) (31,454) (41,884)
Gross profit/(loss)
excluding idled mine
asset costs (12,601) (8,719) 20,277
Gross profit/(loss)
including idled mine
asset costs (31,043) (27,650) 4,690
Other operating
expenses (19,282) (18,315) (1,344)
Administration
expenses (6,080) (5,178) (7,497)
Evaluation and
exploration expenses (508) (958) (2,099)
Loss from operations (56,913) (52,101) (6,250)
Finance costs (4,718) (5,164) (4,006)
Finance income (116) 12,947 26,875
Income tax
recovery/(expense) 5,040 (2,383) (867)
Net income/(loss) (56,564) (46,413) 15,955
Basic income/(loss)
per share $ (0.31) $ (0.26) $ 0.09
Diluted loss per
share $ (0.31) $ (0.26) $ (0.04)
------------------------------------------------------
(i) Revenue is presented net of royalties and selling fees.
(ii) 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 Company's condensed consolidated interim financial statements
for further analysis regarding the Company's reportable operating
segments.
FINANCIAL POSITION AND LIQUIDITY
Liquidity and Capital Resources
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.
The Company anticipates that coal prices in China will remain under pressure in
2014, which will continue to impact the Company's margins and liquidity. The
Company is in discussions with various parties regarding a potential loan;
however, there is no guarantee that an agreement will be reached. As of the date
hereof, the Company expects to be able to secure such funding in order to pay
the interest due under the CIC convertible debenture on May 19, 2014. If it does
not do so, or if it fails to secure additional capital or otherwise restructure
or refinance its business in order to address its cash requirements through
March 31, 2015, then the Company is unlikely to have sufficient capital
resources or cash flows from mining operations in order to satisfy its ongoing
obligations and future contractual commitments, including cash interest payments
due on the CIC convertible debenture. As a result, the Company may not be able
to continue as a going concern. Therefore, the Company is actively seeking
additional sources of financing to continue operating and meet its objectives.
Several adverse conditions and material uncertainties cast significant doubt
upon the going concern assumption. The Company had cash of $9.9 million and
working capital of $28.9 million at March 31, 2014. 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 March 31, 2015 and will
be able to realize its assets and discharge its liabilities in the normal course
of operations as they come due; however, in order to continue as a going
concern, the Company must generate sufficient operating cash flows, secure
additional capital or otherwise pursue a strategic restructuring, refinancing or
other transaction to provide it with additional liquidity. If the Company fails
to generate sufficient operating cash flows, secure additional capital or
otherwise restructure or refinance its business in order to pay the interest due
under the CIC convertible debenture on May 19, 2014, or if it fails to generate
sufficient operating cash flows, secure additional capital or otherwise
restructure or refinance its business in order to address its cash requirements
through March 31, 2015, it will not have adequate liquidity to fund its
operations and meet its obligations (including its debt payment obligations), it
may not be able to continue as a going concern. Refer to section 11 "Risk
Factors" of the Company's MD&A for the three months ended March 31, 2014 which
is available at www.sedar.com for further analysis. If for any reason, the
Company is unable to secure the additional sources of financing and continue as
a going concern, then this could result in adjustments to the amounts and
classifications of assets and liabilities in the Company's consolidated
financial statements and such adjustments could be material.
While the Company intends to secure additional sources of financing as soon as
possible, a continued delay in securing additional financing could ultimately
result in an event of default of the $250.0 million CIC convertible debenture,
which if not cured within applicable cure periods in accordance with the terms
of such debenture, may result in the principal amount owing and all accrued and
unpaid interest becoming immediately due and payable upon notice to the Company
by CIC.
The Company is focused on securing additional sources of financing and continues
to minimize uncommitted capital expenditures while preserving the Company's
growth options. Factors that impact the Company's liquidity are being closely
monitored and include, but are not limited to, 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.
Cash Position and Liquidity
As at March 31, 2014, the Company had cash of $9.9 million compared to cash of
$21.8 million as at December 31, 2013. Working capital (excess current assets
over current liabilities) was $28.9 million as at March 31, 2014 compared to
$41.7 million as at December 31, 2013. As at May 12, 2014, the Company had cash
of $10.8 million.
As at March 31, 2014, the Company's gearing ratio was 0.20 (December 31, 2013:
0.19), which was calculated based on the Company's long term liabilities to
total assets. As at March 31, 2014, the Company is not subject to any externally
imposed capital requirements.
Mongolian IAAC Investigation
In the first quarter of 2013, the Company was subject to orders imposed by
Mongolia's Independent Authority against Corruption (the "IAAC") which placed
restrictions on certain of the Company's Mongolian assets. The orders were
imposed on the Company in connection with the IAAC's investigation of the
Company. The Mongolian State Investigation Office (the "SIA") also continues to
enforce the orders on the Company.
The orders placing restrictions on certain of the Company's Mongolian assets
could ultimately result in an event of default of the Company's CIC convertible
debenture. Following a review by the Company and its advisers, it is the
Company's view that this does not result in an event of default as defined under
the CIC convertible debenture terms. However, if an event of default of the CIC
convertible debenture occurs that remains uncured for ten business days, the
principal amount owing and all accrued and unpaid interest will become
immediately due and payable upon notice to the Company by CIC.
The orders relate to certain items of operating equipment and infrastructure and
the Company's Mongolian bank accounts. The orders related to the operating
equipment and infrastructure restricts the sale of these items; however, the
orders do not restrict the use of these items in the Company's mining
activities. The orders related to the Company's Mongolian bank accounts restrict
the use of in-country funds. While the orders restrict the use of in-country
funds pending outcome of the investigation, they are not expected to have any
material impact on the Company's activities.
Ovoot Tolgoi Mine Impairment Analysis
Unchanged from the assessment made as at December 31, 2013, the Company
determined that an indicator of impairment existed for its Ovoot Tolgoi Mine
cash generating unit as at March 31, 2014. The impairment indicator was the
continued weakness in the Company's share price during the first quarter of 2014
and the fact that the market capitalization of the Company, as at March 31,
2014, was less than the carrying value of its net assets.
Therefore, the Company conducted an impairment test whereby the carrying value
of the Company's Ovoot Tolgoi Mine cash generating unit was compared to its
"value in use" using a discounted future cash flow valuation model. The
Company's Ovoot Tolgoi Mine cash generating unit carrying value was $414.6
million as at March 31, 2014.
Key estimates and assumptions incorporated in the valuation model included the
following:
-- Long term real selling price of $109 per tonne for semi-soft coking coal
FOB Australia;
-- Life-of-mine coal production and operating costs; and
-- A discount rate of 12.8% based on an analysis of market, country and
company specific factors.
Key sensitivities in the valuation model are as follows:
-- For each 1% increase/(decrease) in the long term real selling price of
semi-soft coking coal FOB Australia, the calculated fair value of the
cash generating unit increases/(decreases) by approximately
$34.0/($34.0) million; and
-- For each 1% increase/(decrease) in the discount rate, the calculated
fair value of the cash generating unit (decreases)/increases by
approximately ($41.0)/$46.0 million.
The impairment analysis did not result in the identification of an impairment
loss and no charge was required as at March 31, 2014. The Company believes that
the estimates and assumptions incorporated in the impairment analysis are
reasonable; however, the estimates and assumptions are subject to significant
uncertainties and judgments.
REGULATORY ISSUES AND CONTINGENCIES
Regulatory Issues
Governmental and Regulatory Investigations
The Company is subject to investigations by the IAAC and the SIA regarding
allegations against the Company and some of its former employees. The IAAC
investigation concerns possible breaches of Mongolia's anti-corruption laws,
while the SIA investigation concerns possible breaches of Mongolia's money
laundering and taxation laws.
While the IAAC investigation into allegations of possible breaches of Mongolian
anti-corruption laws has been suspended, the Company has not received formal
notice that the IAAC investigation is completed. The IAAC has not formally
accused any current or former Company employees of breach of Mongolia's
anti-corruption laws.
A report issued by the experts appointed by the SIA on June 30, 2013 and again
in January 2014 has recommended that the accusations of money laundering as
alleged against the Company's three former employees be withdrawn. However, to
date, the Company has not received notice or legal document confirming such
withdrawal as recommended by the experts appointed by the SIA.
A third investigation ordered by the SIA and conducted by the National Forensic
Center ("NFC") into alleged violations of Mongolian taxation law was concluded
at the end of January 2014. The Company has received notice that the report with
conclusions of the investigations by the NFC have been provided to the
Prosecutor General of Mongolia. The Company has been advised that the
Prosecutor General has issued criminal charges against the three former
employees and the Company's Mongolian subsidiary SouthGobi Sands LLC may be held
liable as "civil defendant" for alleged violations of Mongolian taxation law.
The case was transferred to a Court of Justice for review by a judge in April
2014. On May 12, 2014, the Company was advised that the appointed judge has
concluded that the investigation on the case was incomplete and has ordered to
return the case to the General Prosecutor for additional investigation.
The likelihood or consequences of an outcome or any action taken against
SouthGobi Sands LLC as "civil defendant" are uncertain and unclear at this time
but could include financial or other penalties, which could be material, and
which could have a material adverse effect on the Company.
The Company, including its Mongolian subsidiary SouthGobi Sands LLC, has
prepared its financial statements in compliance with IFRS, and lodged all its
tax returns in the required format under Mongolian tax law. During the
investigative period, which has been ongoing since May 2012, the Company devoted
considerable internal resources in reviewing and responding to the allegations
raised through the investigations by the relevant authorities. The Company views
these allegations as unfounded and will vigorously defend itself against any
potential claim.
At this point, the three former employees remain designated as "accused" in
connection with the allegations of tax evasion, and continue to be subject to a
travel ban. SouthGobi Sands LLC remains designated as a "civil defendant" in
connection with the tax evasion allegations, and may potentially be held
financially liable for the alleged criminal misconduct of its former employees
under Mongolian Law.
The SIA also continues to enforce administrative restrictions, which were
initially imposed by the IAAC investigation, on certain of the Company's
Mongolian assets, including local bank accounts, in connection with its
continuing investigation of these allegations. While the orders restrict the use
of in-country funds pending the outcome of the investigation, they are not
expected to have a material impact on the Company's activities in the short
term, although they could create potential difficulties for the Company in the
medium to long term. The Company will continue to take all appropriate steps to
protect its ability to conduct its business activities in the ordinary course.
Internal Investigations
Through its Audit Committee (comprised solely of independent directors), the
Company has conducted an internal investigation into possible breaches of law,
internal corporate policies and codes of conduct arising from the allegations
which have been raised through the investigations in Mongolia. The Chair of the
Audit Committee has also participated in a tripartite committee, comprised of
the Audit Committee Chairs of the Company and Turquoise Hill and a
representative of Rio Tinto, which focused on the investigation of a number of
those allegations, including possible violations of anti-corruption laws. The
tripartite committee substantially completed the investigative phase of its
activities during the third quarter of 2013. There have been no significant
developments in respect of the internal investigations since the completion of
the investigative phase during the third quarter of 2013.
The investigations referred to above could result in one or more Mongolian,
Canadian, United States or other governmental or regulatory agencies taking
civil or criminal action against the Company, its affiliates or its current or
former employees. The likelihood or consequences of such an outcome are unclear
at this time but could include financial or other penalties, which could be
material, and which could have a material adverse effect on the Company.
Contingencies
Class Action Lawsuit
On or about January 6, 2014, Siskinds LLP, a Canadian law firm, filed a proposed
securities class action (the "Ontario Action") against the Company, certain of
its former senior officers and current directors, and its former auditors,
Deloitte LLP, in the Ontario Superior Court of Justice in relation to the
Company's restatement of financial statements as previously disclosed in the
Company's public filings.
The plaintiff seeks leave to bring a claim under applicable Canadian securities
legislation and seeks certification of a class action with respect to a class of
persons who purchased shares of the Company between March 30, 2011 and November
7, 2013, alleging that the financial reporting of the Company during that period
contained misrepresentations giving rise to liability at common law and under
applicable Canadian securities legislation. The Ontario Action also seeks
general damages against all defendants in the sum of Cdn$30 million, without
particulars as to how such amount was determined, or such other amount that the
Court deems appropriate. Assuming that leave is granted, the action is certified
as a class proceeding, and there is a finding of liability, the actual quantum
of damages will depend upon the evidence which is adduced in the court
proceedings.
Named in the Ontario Action as individual defendants are the Company's former
Chief Executive Officer, Alexander Molyneux, the Company's former Chief
Financial Officers, Messrs. Terry Krepiakevich and Matthew O'Kane, and the
members of its Audit Committee, Messrs. Andre Deepwell, Pierre Lebel and Gordon
Lancaster, each of whom held those positions during the period at issue.
The Company disputes and will vigorously defend itself against these claims
through independent Canadian litigation counsel retained by the Company and the
other defendants for this purpose. Due to the inherent uncertainties of
litigation, it is not possible to predict the final outcome of the Ontario
Action or determine the amount of any potential losses, if any. However, in the
opinion of management of the Company, at March 31, 2014 a provision for this
matter is not required.
PROCESSING INFRASTRUCTURE
Dry Coal Handling Facility
Following an extensive review that commenced in the fourth quarter of 2013, the
Company concluded in the first quarter of 2014 that it does not plan to either
complete or use the dry coal handling facility ("DCHF") at the Ovoot Tolgoi Mine
in the foreseeable future. As a result of the review and subsequent impairment
assessment, the Company recorded a $66.9 million non-cash impairment in the
fourth quarter of 2013 to reduce the carrying value of the DCHF to its
recoverable amount. The DCHF had a carrying value of $11.2 million at March 31,
2014. The Company continues to use mobile screens for initial dry processing of
its higher-ash coals. The use of mobile screens at stockpile areas closer to the
pits has enabled the Company to realize a cost benefit compared to hauling the
coal to the central DCHF and operating the rotary breaker. This provides a lower
cost solution without adversely impacting the coal quality of the coal planned
to be mined over the next year.
As coal markets improve and production from the Ovoot Tolgoi Mine increases in
line with its anticipated annual capacity of 9 million tonnes run-of-mine
production, the Company will review the use of the DCHF as part of its existing
assets and continue developing beneficiation capabilities to maximize value from
its product.
Wet Washing Facility
In 2011, the Company entered into an agreement with Ejinaqi Jinda Coal Industry
Co. Ltd. ("Ejin Jinda"), a subsidiary of China Mongolia Coal Co. Ltd. to
toll-wash coals from the Ovoot Tolgoi Mine. The agreement has a duration of five
years from commencement of the contract and provides for an annual wet washing
capacity of approximately 3.5 million tonnes of input coal. The facility is
located approximately 10km inside China from the Shivee Khuren Border Crossing,
approximately 50km from the Ovoot Tolgoi Mine. Ejin Jinda will charge the
Company a single toll washing fee which will cover their expenses, capital
recovery and profit. Ejin Jinda will also transport coal from the Ovoot Tolgoi
Mine to the wet washing facility under a separate transportation agreement.
To date, commercial operations at the wet washing facility have not commenced.
Pursuant to the terms of the agreement, the Company prepaid $33.6 million of
toll washing fees in 2011. As at March 31, 2014, the prepaid toll washing fees
have a carrying value of $3.4 million following an impairment loss recorded in
the fourth quarter of 2013. The Company identified the results of a trial sample
from the wet washing facility and the delay in starting the commercial
operations at the wet washing facility as indicators of impairment for the
prepaid toll washing fees.
The Company's objective continues to be the implementation of an effective and
profitable wet washing solution, and the Company is cooperating with Ejin Jinda
in reviewing the utilization of the wet washing facility.
TRANSPORTATION INFRASTRUCTURE
On August 2, 2011, the State Property Committee of Mongolia awarded the tender
to construct a paved highway from the Ovoot Tolgoi Complex to the Shivee Khuren
Border Crossing to consortium partners NTB LLC and SouthGobi Sands LLC (together
referred to as "RDCC LLC"). SouthGobi Sands LLC holds a 40% interest in RDCC
LLC.
On October 26, 2011, RDCC LLC signed a concession agreement with the State
Property Committee of Mongolia. RDCC LLC has the right to conclude a 17 year
build, operate and transfer agreement under the Mongolian Law on Concessions.
Construction of the paved highway was substantially complete by the end of 2013.
The 2014 construction program commenced in the second quarter of 2014. Subject
to the Company having available financial resources to fund its portion of the
remaining construction costs, the remaining construction work and commissioning
of the paved highway is expected to be completed by the end of the third quarter
of 2014. RDCC LLC is presently in discussions with the relevant Mongolian
authorities to postpone the July 2014 deadline for commissioning of the paved
highway in accordance with the concession agreement and facilitate the planned
commissioning of the paved highway by the end of the third quarter of 2014.
The paved highway will have an intended carrying capacity upon completion in
excess of 20 million tonnes of coal per year.
OUTLOOK
Excess supply within the coking coal markets in first quarter of 2014 continued
with further erosion of spot coking coal prices in the international market.
Chinese domestic coal prices declined due to weaker market conditions in the
Chinese steel sector, the impact of the Chinese Lunar New Year on demand and the
supply overhang in the international market. The Mongolian coal industry
continues to face strong competition from seaborne and domestic Chinese coal
producers.
The outlook for Mongolian coal exports remains dependent on China. Demand at the
beginning of 2014 has been seasonally weak with the impact of the Chinese New
Year lasting longer than expected and prices have again declined after rising in
the fourth quarter of 2013. Mongolian exports in the first quarter of 2014 were
down 3.3 million tonnes (53%) compared to the fourth quarter of 2013 and down
0.4 million tonnes (12%) compared to the first quarter of 2013. Price declines
were approximately 15-20% depending on quality compared to the fourth quarter of
2013. The demand for coal however in the first month of the second quarter of
2014 has improved albeit from a very low base. Coal production in the second
quarter of 2014 will be paced to meet contracted sales volumes.
The Company anticipates that coal prices in China will remain under pressure in
2014, which will continue to impact the Company's margins and liquidity. The
Company continues to strive for further cost reductions and where possible delay
expenditures. As at the date hereof, the Company expects to be able to make the
$7.9 million cash interest payment on the CIC convertible debenture on May 19,
2014. However, in the event a loan or other financing arrangement is not secured
by May 19, 2014, and even if such loan is secured, if the Company does not
secure additional funding to address its cash requirements through March 31,
2015, the Company is unlikely to have sufficient capital resources and does not
expect to generate sufficient cash flows from mining operations in order to
satisfy its ongoing obligations and future contractual commitments. Therefore,
the Company is actively seeking additional sources of financing to continue
operating and meet its objectives.
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 March 31, 2015 and will be able to realize its assets and discharge its
liabilities in the normal course of operations as they come due; however, in
order to continue as a going concern, the Company must generate sufficient
operating cash flows, secure additional capital or otherwise pursue a strategic
restructuring, refinancing or other transaction to provide it with additional
liquidity. If the Company fails to generate sufficient operating cash flows,
secure additional capital or otherwise restructure or refinance its business as
described above, it will not have adequate liquidity to fund its operations and
meet its obligations (including its debt payment obligations) and it may not be
able to continue as a going concern. Refer to section "Liquidity and Capital
Resources".
While the Company intends to secure additional sources of financing as soon as
possible, a continued delay in securing additional financing could ultimately
result in an event of default of the $250.0 million CIC convertible debenture,
which if not cured within applicable cure periods in accordance with the terms
of such debenture, may result in the principal amount owing and all accrued and
unpaid interest becoming immediately due and payable upon notice to the Company
by CIC.
Longer term and assuming the Company's immediate liquidity challenges are
resolved, the Company remains well positioned, with a number of key competitive
strengths, including:
-- Strategic location - The Ovoot Tolgoi Mine is located approximately 40km
from China, which represents the 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 in
China.
-- Large resource base - The Company's aggregate coal resources (including
reserves) include measured and indicated resources of 533 million tonnes
and inferred resources of 302 million tonnes.
-- Several growth options - The Company has several growth options
including an anticipated increase to 9 million tonnes annual run-of-mine
capacity at the Ovoot Tolgoi Mine as well as greenfield options with the
Soumber Deposit and Zag Suuj Deposit, located approximately 20km east
and approximately 150km east of the Ovoot Tolgoi Mine, respectively.
-- Flexible product offering - Most of the Company's coal resources have
coking properties, including a mixture of semi-soft coking coals and
hard coking coals. The Company is currently studying options to supply
washed coal to the market to further improve its market position and
access to end customers.
Objectives
The Company's objectives for 2014 and the medium term are as follows.
-- Secure additional and immediate sources of financing - The Company is
focused on securing additional and immediate sources of financing and
continues to minimize uncommitted capital expenditures while preserving
the Company's growth options.
-- Drive operational excellence - The Company is focused on further
improving operational efficiency in delivering production to meet market
requirements and to further reduce operating and administrative costs.
-- Continue to develop regional infrastructure - Subject to the Company
having available financial resources to fund its portion of the
construction costs, the Company's priority is to complete the
construction of the paved highway from the Ovoot Tolgoi Mine to the
Shivee Khuren Border Crossing as part of the existing consortium.
Construction of the paved highway was substantially complete by the end
of 2013 with the remaining construction work and commissioning expected
to be completed by the third quarter of 2014.
-- Deliver value through marketing by improving the Company's access to
market and end customers and the overall quality of its product -
Subject to available financial resources, implement an effective
business structure and beneficiation process based on wet washing that
is capable of delivering a sustainable and profitable product mix to the
Chinese market and expand the Company's customer base further inland in
China.
-- Progress growth options - Subject to available financial resources, the
Company plans to further the development of the Soumber Deposit, while
staying compliant with all government requirements in relation to its
licenses and agreements.
-- Operating in a socially responsible manner - The Company is focused on
maintaining its vigilance on health, safety and environmental
performance.
-- Re-establish the Company's reputation - The Company's vision is to be a
respected and profitable Mongolian coal company. To achieve this, the
Company will continue to work on re-establishing good working
relationships with all external stakeholders.
NON-IFRS FINANCIAL MEASURES
Cash Costs
The Company uses cash costs to describe its cash production costs. Cash costs
incorporate all production costs, which include direct and indirect costs of
production, with the exception of idled mine asset costs and non-cash expenses
which are excluded. Non-cash expenses include share-based compensation expense,
impairments of coal stockpile inventories, depreciation and depletion of mineral
properties.
The Company uses this performance measure to monitor its operating cash costs
internally and believes this measure provides investors and analysts with useful
information about the Company's underlying cash costs of operations. The Company
believes that conventional measures of performance prepared in accordance with
IFRS do not fully illustrate the ability of its mining operations to generate
cash flows. The Company reports cash costs on a sales basis. This performance
measure is commonly utilized in the mining industry.
The cash costs of product sold may differ from cash costs of product produced
depending on the timing of coal stockpile inventory turnover and impairments of
coal stockpile inventories from prior periods.
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Condensed Consolidated Interim Statements of Comprehensive Income
(Unaudited)
(Expressed in thousands of U.S. Dollars, except for share and per share
amounts)
Three months ended
March 31,
----------------------------
2014 2013
------------- -------------
Revenue $ 5,137 $ 4,398
Cost of sales (18,366) (21,305)
----------------------------------------------------------------------------
Gross loss (13,229) (16,907)
Other operating expenses (1,073) (431)
Administration expenses (2,237) (3,733)
Evaluation and exploration expenses (172) (273)
----------------------------------------------------------------------------
Loss from operations (16,711) (21,344)
Finance costs (5,025) (4,996)
Finance income 1,007 775
Share of losses of joint venture (26) (17)
----------------------------------------------------------------------------
Loss before tax (20,755) (25,582)
Current income tax expense - (1)
Deferred income tax recovery - 1,917
----------------------------------------------------------------------------
Net loss attributable to equity holders of the
Company (20,755) (23,666)
----------------------------------------------------------------------------
Other comprehensive income/(loss) to be
reclassified to profit or loss in subsequent
periods
Change in value of available-for-sale
financial asset, net of tax (514) 930
Net comprehensive loss attributable to equity
holders of the Company $ (21,269) $ (22,736)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic loss per share $ (0.11) $ (0.13)
Diluted loss per share $ (0.11) $ (0.13)
Condensed Consolidated Interim Statements of
Financial Position
(Unaudited)
(Expressed in thousands of U.S. Dollars)
As at
------------------------------
March 31, December 31,
2014 2013
--------------- -------------
Assets
Current assets
Cash $ 9,915 $ 21,837
Trade and other receivables 910 2,578
Inventories 40,838 40,288
Prepaid expenses and deposits 10,082 11,506
----------------------------------------------------------------------------
Total current assets 61,745 76,209
Non-current assets
Property, plant and equipment 392,447 399,395
Long term investments 28,589 30,602
----------------------------------------------------------------------------
Total non-current assets 421,036 429,997
----------------------------------------------------------------------------
Total assets $ 482,781 $ 506,206
----------------------------------------------------------------------------
Equity and liabilities
Current liabilities
Trade and other payables $ 24,637 $ 31,241
Deferred revenue 940 997
Current portion of convertible debenture 7,233 2,301
----------------------------------------------------------------------------
Total current liabilities 32,810 34,539
Non-current liabilities
Convertible debenture 93,335 94,302
Decommissioning liability 2,692 2,308
----------------------------------------------------------------------------
Total non-current liabilities 96,027 96,610
----------------------------------------------------------------------------
Total liabilities 128,837 131,149
Equity
Common shares 1,067,843 1,067,839
Share option reserve 51,350 51,198
Investment revaluation reserve - 514
Accumulated deficit (765,249) (744,494)
----------------------------------------------------------------------------
Total equity 353,944 375,057
----------------------------------------------------------------------------
Total equity and liabilities $ 482,781 $ 506,206
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net current assets $ 28,935 $ 41,670
Total assets less current liabilities $ 449,971 $ 471,667
REVIEW OF INTERIM RESULTS
The condensed consolidated interim financial statements for the Company for the
three months ended March 31, 2014, were reviewed by the Audit Committee of the
Company.
The Company's results for the quarter ended March 31, 2014, are contained in the
unaudited Condensed Consolidated Interim Financial Statements and MD&A,
available on the SEDAR website at www.sedar.com and the Company's website at
www.southgobi.com.
ABOUT SOUTHGOBI RESOURCES
SouthGobi Resources is listed on the Toronto and Hong Kong stock exchanges, in
which Turquoise Hill Resources Ltd., also publicly listed in Toronto and New
York, has a 56% shareholding. Turquoise Hill took management control of
SouthGobi in September 2012 and made changes to the board and senior management.
Rio Tinto has a majority shareholding in Turquoise Hill.
SouthGobi Resources is focused on exploration and development of its
metallurgical and thermal coal deposits in Mongolia's South Gobi Region. It has
a 100% shareholding in SouthGobi Sands LLC, the Mongolian registered company
that holds the mining and exploration licenses in Mongolia and operates the
flagship Ovoot Tolgoi coal mine. Ovoot Tolgoi produces and sells coal to
customers in China.
Forward-Looking Statements: This document includes forward-looking statements.
Forward-looking statements include, but are not limited to: the Company's
expectations of sufficient liquidity and capital resources to meets its ongoing
obligations and future contractual commitments; including the Company's ability
to secure additional and immediate funding, to meet its obligations under the
CIC convertible debenture as the same become due, the estimates and assumptions
included in the Company's impairment analysis; the ability to preserve liquidity
and continue on a sustainable basis; the Company's expectation that its royalty
per tonne calculated under the new "flexible tariff" royalty regime will
decrease compared to the prior reference price royalty regime; the ability of
the Company to meet the targeted annual capacity of run-of-mine production; the
ability of the Company to successfully review the utilization of the wet washing
facility and enhance the quality of its coal products through wet washing; the
possibility of the CIC convertible debenture and all accrued and unpaid interest
becoming immediately due; the continued pressure on the coal prices in China,
and the related impact on the Company's margins and liquidity; the outcome of
the issues described in the section "Regulatory Issues and Contingencies";
statements regarding the outlook for 2014; statements regarding the Company's
objectives for 2014 and beyond; the statement that completion of the paved
highway is expected by the end of the third quarter of 2014; the statement that
the capacity of the paved highway is in excess of 20 million tonnes of coal per
year; and other statements that are not historical facts. When used in this
document, the words such as "plan", "estimate", "expect", "intend", "may", and
similar expressions are forward-looking statements. Although the Company
believes that the expectations reflected in these forward-looking statements are
reasonable, such statements involve risks and uncertainties and no assurance can
be given that actual results will be consistent with these forward-looking
statements. Important factors that could cause actual results to differ from
these forward-looking statements are disclosed under the heading "Risk Factors"
in the Company's MD&A for the year ended December 31, 2013 and the three months
ended March 31, 2014 which are available at www.sedar.com.
FOR FURTHER INFORMATION PLEASE CONTACT:
Investors Relations
SouthGobi Resources
Galina Rogova
+852-2839-9208
galina.rogova@southgobi.com
Media Relations
SouthGobi Resources
Altanbagana Bayarsaikhan
+976 70070710
altanbagana.bayarsaikhan@southgobi.com
www.southgobi.com
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