Southgobi Announces Third Quarter 2024 Unaudited Financial and Operating Results
R E S O U R C E S
November 14, 2024
SOUTHGOBI ANNOUNCES THIRD QUARTER 2024 UNAUDITED FINANCIAL AND OPERATING RESULTS
HONG KONG – SouthGobi Resources Ltd. (Hong Kong Stock Exchange (“HKEX”): 1878, TSX Venture Exchange (“TSX-V”): SGQ) (the “Company” or “SouthGobi”) today announces its financial and operating results for the three and nine months ended September 30, 2024. All figures are in U.S. dollars (“USD”) unless otherwise stated.
SIGNIFICANT EVENTS AND HIGHLIGHTS
The Company’s significant events and highlights for the three months ended September 30, 2024 and the subsequent period to November 14, 2024 are as follows:
- Operating Results – The Company has been increasing the scale of its mining operations since 2023, as well as implementing various coal processing methods, including screening, wet washing and dry coal processing, which have resulted in improved coal quality and enhanced production volume and growth of coal export volume into China during the quarter.
In response to the market demand for different coal products, the Company focused on expanding the categories of coal products in its portfolio, including mixed coal, wet washed coal and dry processed coal. In addition, the Company has experienced success with processing its inventory of F-grade coal products through cost-effective screening procedures. As a result of the improvement in the quality of the processed F-grade coal, the Company was able to meet the import coal quality standards established by Chinese authorities and has been exporting this product to China for sale since the first quarter of 2024, further enhancing the Company’s coal export volume.
The Company recorded sales volume of 2.1 million tonnes for the third quarter of 2024 compared to 1.2 million tonnes for the third quarter of 2023, while the Company recorded an average realised selling price of $67.8 per tonne for the third quarter of 2024 compared to $85.6 per tonne for the third quarter of 2023. The decrease in the average realised selling price was mainly due to changes in the Company’s product mix and decreased pricing for processed coal.
- 1 -
- Build-Operate-Transfer Agreement – On July 15, 2024, the Company’s wholly-owned Mongolian subsidiary, Southgobi Sands LLC (“SGS”), entered into a Build-Operate-Transfer agreement (the “BOT Agreement”) with Tangshan Shenzhou Manufacturing Group Co., Ltd (“Tangshan”), pursuant to which Tangshan will be responsible for the construction, operation, and quality management of a new dry coal separation system, including key machinery (collectively, the “Dry Coal Separation System”) at the Company’s Ovoot Tolgoi Mine in Mongolia, which will be a stand-alone plant separate from the Company’s existing dry processing plant. Tangshan will also be responsible for the construction of all related facilities for the Dry Coal Separation System. Under the BOT Agreement, SGS has the right to supervise and manage the overall work of coal quality assurance and operation, including, but not limited to, the supervision and management of operational safety, production planning, and operations management.
The total consideration payable by the Company over the term of the BOT Agreement is approximately $10.9 million, together with certain additional processing volume-based fees. Subject to the terms as set out therein, the BOT Agreement is effective from July 15, 2024 until October 1, 2029.
- Financial Results – The Company recorded a $27.7 million profit from operations for the third quarter of 2024 compared to $46.3 million profit from operations for the third quarter of 2023. The decrease was mainly due to changes in the Company’s product mix and decreased pricing for processed coal.
- Additional Tax and Tax Penalty Imposed by the Mongolian Tax Authority (“MTA”) – On July 18, 2023, SGS received an official notice (the “Notice”) issued by the MTA stating that the MTA had completed a periodic tax audit (the “Audit”) on the financial information of SGS for the tax assessment years between 2017 and 2020, including transfer pricing, royalty, airpollution fee and unpaid tax payables. As a result of the Audit, the MTA notified SGS that it is imposing a tax penalty against SGS in the amount of approximately $75.0 million. The penalty mainly relates to the different view on the interpretation of tax law between the Company and the MTA. Under Mongolian law, the Company had a period of 30 days from the date of receipt of the Notice to file an appeal in relation to the Audit. Subsequently the Company engaged an independent tax consultant in Mongolia to provide tax advice and support to the Company and filed an appeal letter in relation to the Audit with the MTA in accordance with Mongolian laws on August 17, 2023.
On February 8, 2024, SGS received notice from the Tax Dispute Resolution Council (“TDRC”) which stated that, after the TDRC’s review, the TDRC issued a decision in relation to SGS’ appeal of the Audit, and ordered that the audit assessments set forth in the Notice of July 18, 2023 be sent back to the MTA for review and re-assessment.
On February 22, 2024, SGS received another notice from the MTA stating that the MTA anticipated commencing the re-assessment process on or about March 7, 2024 and the duration of such process will be approximately 45 working days.
- 2 -
On May 15, 2024, SGS received a notice (the “Revised Notice”) from the MTA regarding the re-assessment result on the Audit. The re-assessed amount of the tax penalty is approximately $80.0 million (the “Re-assessment Result”). In accordance with applicable Mongolian laws, SGS is entitled to file an appeal to the TDRC regarding the Re-assessment Result within a 30-day period from the date of receiving the Revised Notice.
On June 12, 2024, following consultation with its independent tax consultant in Mongolia, SGS submitted an appeal letter to the TDRC regarding the Re-assessment Result on the Audit, in accordance with applicable Mongolian laws.
As at September 30, 2024, the Company recorded an additional tax and tax penalty in the amount of $85.1 million, which consists of a tax penalty payable of $75.0 million and a provision of additional late tax penalty of $10.1 million. To date, the Company has paid the MTA an aggregate of $1.7 million in relation to the aforementioned tax penalty. According to Mongolian tax law, the MTA has the legal authority to demand payment from the Company irrespective of any potential appeal process that may change the aforesaid tax penalty. Based on the advice from tax professionals and the best estimate of Company management, in the event that the Company’s appeal is successful in future, it is probable that the Company may recover approximately $46.0 million which represents a portion of the tax penalty payable to the MTA. However, there are inherent uncertainties surrounding the development and outcome of the appeal. The Company cannot determine with any virtual certainty the recoverability or exact recoverable amount of the tax penalty paid in future. If any subsequent event occurs that may impact the amount of the additional tax and tax penalty, an adjustment would be recognised in profit or loss and the carrying amount of the tax liabilities shall be adjusted.
- Going Concern – 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” of this press release for details.
- 3 -
OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS
Summary of Operational Data
Three months ended Nine months ended September 30, September 30, 2024 2024
2023 2023
Sales Volumes, Prices and Costs
Premium semi-soft coking coal
0.10 0.75
Coal sales (millions of tonnes) 0.64 1.54
$ 116.48 $ 108.49
Average realised selling price (per tonne) $ 100.33 $ 106.67 Standard semi-soft coking coal/premium thermal coal
1.09 1.65
Coal sales (millions of tonnes) 0.18 0.24
$ 72.54 $ 73.89
Average realised selling price (per tonne) $ 68.43 $ 68.28 Standard thermal coal
0.24 0.48
Coal sales (millions of tonnes) – –
$ 37.20 $ 39.52
Average realised selling price (per tonne) $ – $ – Processed coal
0.68 1.48
Coal sales (millions of tonnes) 0.33 0.85
$ 63.65 $ 65.50
Average realised selling price (per tonne) $ 66.03 $ 74.94 Total
2.11 4.36
Coal sales (millions of tonnes) 1.15 2.63
| Average realised selling price (per tonne) | $ 85.57 | $ 93.05 |
| $ 67.77 $ 73.25 | ||
| Raw coal production (millions of tonnes) | 1.18 | 2.71 |
2.75 6.01
| Cost of sales of product sold (per tonne) | $ | 42.23 | $ | 46.22 | ||||
| $ | 52.77 | $ | 52.86 | |||||
| Direct cash costs of product sold (per tonne)(i) | $ | 32.26 | $ | 32.02 | ||||
| $ | 41.74 | $ | 40.57 |
Mine administration cash costs of product sold
| (per tonne)(i) | $ | 0.82 | $ | 1.23 | ||||
| $ | 0.94 | $ | 1.38 | |||||
| Total cash costs of product sold (per tonne)(i) | $ | 33.08 | $ | 33.25 | ||||
| $ | 42.68 | $ | 41.95 |
Other Operational Data
Production waste material moved
15.04 41.99
(millions of bank cubic meters) 7.34 17.90 Strip ratio (bank cubic meters of waste
5.48 6.99
material per tonne of coal produced) 6.24 6.61
0.00 0.07
Lost time injury frequency rate (ii) 0.21 0.15
(i) A Non-International Financial Reporting Standards (“non-IFRS”) financial measure. Refer to “Non-IFRS Financial Measures” section. 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.
- 4 -
Overview of Operational Data
The Company recorded an average realised selling price of $67.8 per tonne in the third quarter of 2024 compared to $85.6 per tonne in the third quarter of 2023, the decrease was mainly due to
for the third quarter of 2024 consisted of approximately 5% of premium semi-soft coking coal, 51% of standard semi-soft coking coal/premium thermal coal, 12% of standard thermal coal and 32% of processed coal compared to approximately 56% of premium semi-soft coking coal, 15% of standard semi-soft coking coal/premium thermal coal and 29% of processed coal in the third quarter of 2023.
The Company’s unit cost of sales of product sold was $52.8 per tonne in the third quarter of 2024 compared to $42.2 per tonne in the third quarter of 2023. The increase was due to the Company expanding into certain categories of processed coal with higher production costs.
For the nine months ended September 30, 2024
The Company sold 4.4 million tonnes for the first nine months of 2024 as compared to 2.6 million tonnes for the first nine months of 2023. The Company recorded an average realised selling price of $73.3 per tonne for the first nine months of 2024 compared to $93.1 per tonne for the first nine months of 2023, the decrease was mainly due to changes in the Company’s product mix and decreased pricing for processed coal.
The Company’s unit cost of sales of product sold was $52.9 per tonne for the first nine months of 2024 compared to $46.2 per tonne for the first nine months of 2023. The increase was due to the Company expanding into certain categories of processed coal with higher production costs.
For the nine months ended September 30, 2024, the Company had a lost time injury frequency rate of 0.07.
- 5 -
Summary of Financial Results
Three months ended Nine months ended September 30, September 30, 2024 2024
$ in thousands, except per share information 2023 2023
$ 143,748 $ 318,738
Revenue (i) $ 97,979 $ 243,002
(111,354) (230,469)
Cost of sales (i) (48,569) (121,550)
32,544 88,529
Gross profit excluding idled mine asset costs (ii) 49,491 121,579
32,394 88,269
Gross profit 49,410 121,452
(294) (2,504)
Other operating expenses, net (413) (5,178)
(3,400) (9,827)
Administration expenses (1,846) (6,558)
(1,003) (1,048)
Evaluation and exploration expenses (808) (900)
- –
Additional tax and tax penalty – (74,990)
27,697 74,890
Profit from operations 46,343 33,826
(10,679) (30,873)
Finance costs (13,266) (36,732)
733 379
Finance income 4,915 5,038
133 2,021
Share of earnings of joint ventures 809 1,739
(1) 9
Share of earning/(loss) of an associate – –
(7,844) (26,220)
Current income tax expenses (9,452) (27,299)
Net profit/(loss) attributable to equity holders
10,039 20,206
of the Company 29,349 (23,428)
$ 0.034 $ 0.068
Basic and diluted earnings/(loss) per share $ 0.099 $ (0.079)
(i) Revenue and cost of sales related to the Company’s Ovoot Tolgoi Mine within the Coal Division operating segment. Refer to note 3 of the condensed consolidated interim 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.
- 6 -
Overview of Financial Results
The Company recorded a $27.7 million profit from operations for the third quarter of 2024 compared to $46.3 million profit from operations for the third quarter of 2023. The decrease was mainly due to
Revenue was $143.7 million for the third quarter of 2024 compared to $98.0 million for the third quarter of 2023. The financial results were impacted by increased sales volume, as a result of expansion of its sales network, diversification of its customer base and expansion of the categories of coal products in its portfolio.
Cost of sales was $111.4 million for the third quarter of 2024 compared to $48.6 million for the third quarter of 2023. The increase in cost of sales was mainly due to increased sales and the Company expanding into certain categories of processed coal with higher production costs.
Cost of sales consists of operating expenses, share-based compensation expense, equipment depreciation, depletion of mineral properties, royalties and idled mine asset costs. Operating expenses in cost of sales reflect the total cash costs of product sold (a Non-IFRS financial measure, refer to “Non-IFRS Financial Measures” section of this press release for further analysis) during the quarter.
Three months ended September 30, 2024
$ in thousands 2023
$ 90,046
Operating expenses $ 38,044
–
Share-based compensation expense 1
5,451
Depreciation and depletion 1,361
15,707
Royalties 9,082
| Cost of sales from mine operations | $ | 111,204 $ | 48,488 |
| Cost of sales related to idled mine assets | 150 | 81 | |
| Cost of sales | $ | 111,354 $ | 48,569 |
Operating expenses in cost of sales were $90.0 million for the third quarter of 2024 compared to $38.0 million for the third quarter of 2023. The overall increase in operating expenses was due to the increased sales and the Company expanding into certain categories of processed coal with higher production costs.
Cost of sales related to idled mine assets for the third quarter of 2024 included $0.2 million related to depreciation expenses for idled equipment (third quarter of 2023: less than $0.1 million).
- 7 -
Other operating expenses were $0.3 million for the third quarter of 2024 (third quarter of 2023: $0.4 million).
Three months ended
$ 1,942
Management fee $ 1,754
(9)
Reversal of provision for doubtful trade and other receivables (2)
(1,562)
Foreign exchange gain, net (1,246)
(12)
Reversal of impairment loss on materials and supplies inventories (81)
–
Rental income from short term leases (12)
(65)
Gain on contract offsetting arrangement –
Other operating expenses, net $ 294 $ 413
Administration expenses were $3.4 million for the third quarter of 2024 (third quarter of 2023: $1.8 million). The change was mainly due to higher daily administration fees and increased salaries and benefits as a result of expansion of operations.
Three months ended September 30,
| $ in thousands | 2024 | 2023 | |
| Corporate administration | $ | 1,135 $ | 593 |
| Legal and professional fees | 527 | 478 | |
| Salaries and benefits | 1,634 | 671 | |
| Share-based compensation expense | – | 1 | |
| Depreciation | 104 | 103 | |
| Administration expenses | $ | 3,400 $ | 1,846 |
The Company continued to minimise evaluation and exploration expenditures in the third quarter of 2024 in order to preserve the Company’s financial resources. Evaluation and exploration activities and expenditures in the third quarter of 2024 were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining licenses.
Finance costs were $10.7 million and $13.3 million for the third quarter of 2024 and 2023 respectively, which primarily consisted of interest expense on the $250.0 million Convertible Debenture.
- 8 -
For the nine months ended September 30, 2024
The Company recorded a $74.9 million profit from operations in the first nine months of 2024 compared to a $33.8 million profit from operations in the first nine months of 2023. The turnaround result was mainly due to an additional tax and tax penalty of $75.0 million imposed by MTA was recorded in the second quarter of 2023.
Revenue was $318.7 million in the first nine months of 2024 compared to $243.0 million in the first nine months of 2023. The financial results were impacted by increased sales volume, as a result of expansion of its sales network, diversification of its customer base and expansion of the categories of coal products in its portfolio.
Cost of sales were $230.5 million in the first nine months of 2024 compared to $121.6 million in the first nine months of 2023, as follows:
Nine months ended September 30, 2024
$ in thousands 2023
$ 182,900
Operating expenses $ 87,440 Share-based compensation expense 4
11,016
Depreciation and depletion 3,729
36,275
Royalties 30,250
| Cost of sales from mine operations | $ | 230,209 $ | 121,423 |
| Cost of sales related to idled mine assets | 260 | 127 | |
| Cost of sales | $ | 230,469 $ | 121,550 |
Operating expenses in cost of sales were $182.9 million in the first nine months of 2024 compared to $87.4 million in the first nine months of 2023. The overall increase in operating expenses was due to the increased sales and the Company expanding into certain categories of processed coal with higher production costs.
Cost of sales related to idled mine assets in the first nine months of 2024 included $0.3 million related to depreciation expenses for idled equipment (first nine months of 2023: $0.1 million).
- 9 -
Other operating expenses were $2.5 million in the first nine months of 2024 (first nine months of 2023: $5.2 million). The change was mainly due to decreased net foreign exchange loss.
Nine months ended
$ 4,326
Management fee $ 3,650 Provision/(reversal of provision) for doubtful trade
(32)
and other receivables 178
(980)
Foreign exchange loss/(gain), net 1,211
(262)
Gain on disposal of items of property, plant and equipment, net –
(86)
Reversal of impairment loss on materials and supplies inventories (262)
–
Rental income from short term leases (53)
–
Penalty on late settlement of trade payables 454
(462)
Gain on contract offsetting arrangement –
Other operating expenses, net $ 2,504 $ 5,178
Administration expenses were $9.8 million in the first nine months of 2024 (first nine months of 2023: $6.6 million). The change was mainly due to increase in daily administration expenses, legal and professional fees and salaries and benefits as a result of expansion of operations.
Nine months ended September 30,
| $ in thousands | 2024 | 2023 | |
| Corporate administration | $ | 2,760 $ | 1,870 |
| Legal and professional fees | 2,117 | 1,489 | |
| Salaries and benefits | 4,532 | 2,823 | |
| Share-based compensation expense | 45 | 9 | |
| Depreciation | 373 | 367 | |
| Administration expenses | $ | 9,827 $ | 6,558 |
The Company continued to minimise evaluation and exploration expenditures in the first nine months of 2024 in order to preserve the Company’s financial resources. Evaluation and exploration activities and expenditures in the first nine months of 2024 were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining licenses.
Finance costs were $30.9 million and $36.7 million in the first nine months of 2024 and 2023 respectively, which primarily consisted of interest expense on the $250.0 million Convertible Debenture.
- 10 -
Summary of Quarterly Operational Data
2024 2023 2022 Quarter Ended 30-Sep 30-Jun 31-Mar 31-Dec 30-Sep 30-Jun 31-Mar 31-Dec
Sales Volumes, Prices and Costs
Premium semi-soft coking coal Coal sales (millions of tonnes) 0.10 0.29 0.36 0.54 0.64 0.57 0.33 0.06 Average realised selling price (per tonne) $ 116.48 $ 102.61 $ 111.01 $ 107.59 $ 100.33 $ 103.33 $ 124.72 $ 65.82 Standard semi-soft coking coal/ premium thermal coal Coal sales (millions of tonnes) 1.09 0.28 0.28 0.29 0.18 0.05 0.01 0.01 Average realised selling price (per tonne) $ 72.54 $ 77.04 $ 76.07 $ 72.41 $ 68.43 $ 67.09 $ 73.52 $ 64.69 Standard thermal coal Coal sales (millions of tonnes) 0.24 0.12 0.12 – – – – –
$ 37.20
Average realised selling price (per tonne) $ 36.10 $ 47.91 $ – $ – $ – $ – $ – Processed coal Coal sales (millions of tonnes) 0.68 0.51 0.29 0.13 0.33 0.26 0.26 0.40 Average realised selling price (per tonne) $ 63.65 $ 73.04 $ 56.65 $ 77.23 $ 66.03 $ 82.99 $ 78.19 $ 65.94 Total
2.11
Coal sales (millions of tonnes) 1.20 1.05 0.96 1.15 0.88 0.60 0.47 Average realised selling price (per tonne) $ 67.77 $ 77.55 $ 79.52 $ 92.93 $ 85.57 $ 95.34 $ 104.11 $ 65.90
Raw coal production (millions of tonnes) 2.75 2.01 1.25 1.34 1.18 0.97 0.56 0.57
$ 52.77
Cost of sales of product sold (per tonne) $ 61.32 $ 43.36 $ 38.17 $ 42.23 $ 47.76 $ 51.59 $ 41.81 Direct cash costs of product sold (per tonne) (i) $ 41.74 $ 47.15 $ 30.70 $ 26.20 $ 32.26 $ 33.79 $ 28.95 $ 25.65 Mine administration cash costs of product sold (per tonne) (i) $ 0.94 $ 2.42 $ 1.08 $ 1.83 $ 0.82 $ 1.60 $ 1.48 $ 1.86 Total cash costs of product sold (per tonne) (i) $ 42.68 $ 49.57 $ 31.78 $ 28.03 $ 33.08 $ 35.39 $ 30.43 $ 27.51
Other Operational Data
Production waste material moved (millions of bank cubic meters) 15.04 14.59 12.36 7.81 7.34 7.73 2.83 2.68 Strip ratio (bank cubic meters of waste material per tonne of coal produced) 5.48 7.27 9.87 5.85 6.24 7.93 5.07 4.67 Lost time injury frequency rate (ii) 0.00 0.00 0.22 0.22 0.21 0.23 0.00 0.00
(i) A non-IFRS financial measure. Refer to 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.
- 11 -
Summary of Quarterly Financial Results
The Company’s condensed consolidated interim financial statements are reported under International Accounting Standard (“IAS Standards”) 34 – “Interim Financial Reporting” using accounting policies in compliance with the IFRS Accounting Standards issued by the International Accounting Standards Board and Interpretations of the IFRS Interpretations Committee (“IFRS Accounting Standards”). The following table provides highlights, extracted from the Company’s annual and interim consolidated financial statements, of quarterly results for the past eight quarters.
$ in thousands, except per share information 2024 2023 2022 Quarter Ended 30-Sep 30-Jun 31-Mar 31-Dec 30-Sep 30-Jun 31-Mar 31-Dec
Financial Results
Revenue (i) $ 143,748 $ 92,821 $ 82,169 $ 88,504 $ 97,979 $ 83,243 $ 61,780 $ 30,487
| Cost of sales(i) | (111,354) | (73,582) | (45,533) | (36,645) | (48,569) | (42,027) | (30,954) | (19,652) |
| Gross profit excluding idled mine asset costs(ii) | 32,544 | 19,303 | 36,682 | 51,908 | 49,491 | 41,227 | 30,861 | 10,891 |
| Gross profit including idled mine asset costs | 32,394 | 19,239 | 36,636 | 51,859 | 49,410 | 41,216 | 30,826 | 10,835 |
| Other operating income/(expenses), net | (294) | (1,157) | (1,053) | 4,308 | (413) | (4,001) | (764) | (1,066) |
| Administration expenses | (3,400) | (3,014) | (3,413) | (3,879) | (1,846) | (2,656) | (2,056) | (2,111) |
| Evaluation and exploration expenses | (1,003) | (23) | (22) | (91) | (808) | (28) | (64) | (26) |
| Additional tax and tax penalty | – | – | – | (10,153) | – | (74,990) | – | – |
| Profit/(loss) from operations | 15,045 | 32,148 | 42,044 | 46,343 | (40,459) | 27,942 | 7,632 |
27,697
| Finance costs | (10,679) | (10,322) | (11,021) | (12,334) | (13,266) | (11,558) | (11,914) | (11,190) |
| Finance income | 733 | 722 | 73 | 40 | 4,915 | 44 | 85 | 1,589 |
| Share of earnings of joint ventures | 133 | 1,055 | 833 | 1,101 | 809 | 428 | 502 | 143 |
| Share of earning/(loss) of an associate | – | 10 | 4 | – | – | – | – |
(1)
| Current income tax expenses | (7,844) | (8,585) | (9,791) | (6,519) | (9,452) | (9,087) | (8,760) | (2,751) |
| Net profit/(loss) | 10,039 | (2,085) | 12,252 | 24,336 | 29,349 | (60,632) | 7,855 | (4,577) |
| Basic and diluted earnings/(loss) per share | $ 0.034 $ (0.007) $ | 0.041 $ | 0.082 $ | 0.099 $ (0.205) $ | 0.027 $ (0.016) |
(i) Revenue and cost of sales relate to the Company’s Ovoot Tolgoi Mine within the Coal Division operating segment. Refer to note 3 of the condensed consolidated interim 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.
- 12 -