Bulletin
Investor Alert

New York Markets Open in:

March 30, 2020, 10:47 a.m. EDT

SouthGobi Resources announces fourth quarter and full year 2019 unaudited financial and operating results and postpones filing of 2019 audited consolidated financial statements and annual filings

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

or Cancel Already have a watchlist? Log In

HONG KONG, March 30, Mar 30, 2020 (GLOBE NEWSWIRE via COMTEX) -- SouthGobi Resources Ltd. (Toronto Stock Exchange ("TSX"): SGQ, Hong Kong Stock Exchange ("HKEX"): 1878) (the "Company" or "SouthGobi") today announces its unaudited financial and operating results for the quarter and the year ended December 31, 2019. All figures are in U.S. dollars ("USD") unless otherwise stated.

For the reason set forth below under the heading "Review of Unaudited Annual Results", the audit process for the Company's annual results for the year ended 2019 has not been completed by the Company's auditors (the "Auditors") as of the date of this press release. Accordingly, the Company cautions that the financial results for its financial year ended December 31, 2019 disclosed herein are unaudited and have not been agreed upon with the Auditors as required under Rule 13.49(2) of the Hong Kong Stock Exchange Listing Rules. The unaudited financial results of the Company for the financial year ended December 31, 2019 disclosed herein were reviewed by the Audit Committee of the Company and approved and authorized for issue by the Board on March 30, 2020.

The Company is postponing the filing of its audited consolidated financial statements for its financial year ended December 31, 2019, the accompanying Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") and its Annual Information Form for the financial year ended December 31, 2019 (collectively, the "2019 Annual Filings"), as a result of the Auditors being unable to complete the audit process for the Company's annual results for the year ended 2019 prior to the filing deadline for the 2019 Annual Filings of March 30, 2020. In deciding to postpone the filing of the 2019 Annual Filings, the Company is relying upon the Canadian Securities Administrators' blanket relief, which, in light of recent developments relating to the Coronavirus Disease 2019 ("COVID-19") pandemic and their impact on capital market participants, provides a 45-day extension for certain periodic filings normally required to be made by reporting issuers on or before June 1, 2020 under applicable Canadian securities laws.

Until such time as the Company files its 2019 Annual Filings, shareholders and potential investors of the Company are advised to exercise caution when dealing in the securities of the Company.

Significant Events and Highlights

The Company's significant events and highlights for the year ended December 31, 2019 and the subsequent period to March 30, 2020 are as follows:

On March 28, 2020, the Company learned that 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 is permitted to be exported during this trial period. As of the date hereof, the Company has not received any formal communication from the Mongolian State Emergency Commission regarding the details of the re-opening of the border crossings on a trial basis, including the estimated length of the trial period and the proposed limitations on the coal export volume into China during this trial period. There can be no guarantee, however, that the Company will be able to continue exporting coal to China during this trial period, or the border crossings between Mongolia and China will be fully reopened in a timely manner or at all and, if the border crossing is fully re-opened in the future, the border crossings would not be the subject of additional closures as a result of COVID-19 in the future.

The border closure has had, and will continue to have an adverse impact on the Company's sales and cash flows in the first and second quarter of 2020. In order to address the financial impact of the border closures and preserve its working capital, the Company ceased major mining operations (including coal mining activities), reduced production to only coal-blending activities and placed approximately half of its workforce on furlough effective as of February 2020 until further notice. The Company anticipates that its existing coal inventories are sufficient to satisfy expected sales demand for a period of at least 2 months as of the date hereof. The Company will continue to closely monitor the development of the COVID-19 pandemic and the impact it has on coal exports to China and its operations as a whole.

Based on a preliminary review of the information and operational data of the Company currently available, the Company expects to record a net loss between $13 million to $18 million for the three months ending March 31, 2020. The anticipated net loss is 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 in February 2020 and the Company being unable to export coal into China as a result. As at March 30, 2020, the Company had $1.5 million of cash. In the event that the Company's ability to export coal into the Chinese market continues to be restricted or limited as a result of the restrictions 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.

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 from November 2019 to June 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 on June 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") dated November 19, 2019 between SouthGobi Sands LLC ("SGS"), a subsidiary of the Company, 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 of January 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 into China (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 from June 2019 to November 2019. The Company executed the Amended and Restated Cooperation Agreement with CIC on April 23, 2019.

Pursuant to their terms, both the 2019 Deferral Agreement and the Amended and Restated Cooperation Agreement became effective on June 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.

On February 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 on January 19, 2020 and February 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 on February 14, 2020 to CIC under the Amended and Restated Cooperation Agreement. The 2020 February Deferral Agreement became effective on March 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 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 anticipates that a deferral will likely be required in respect of the monthly payments due and payable in the period between April 2020 and June 2020 under the 2019 Deferral Agreement and Amended and Restated Cooperation Agreement, the Company and CIC have agreed to discuss in good faith a deferral of these payments on a monthly basis as they become due. There can be no assurance, however, that a favorable outcome will be reached either at all or on favorable terms.

? 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 March 10, 2020, the Company agreed with CIC (the "2020 March Deferral Agreement") that the $2.0 million which was due and payable to CIC on March 19, 2020 under the 2019 Deferral Agreement (the "2020 March Deferral Amount") will be deferred until June 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 on March 19, 2020. The 2020 March Deferral Agreement became effective on March 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.

The Company expects that the freezing of bank accounts in Mongolia will have an adverse impact on its ability to make payment transactions to carry out operations and business affairs in Mongolia in the ordinary course. The Company is liaising with First Concept to resolve the issue. There can be no assurance, however, that any resolution can be successfully reached either at all or on favorable terms. As at December 31, 2019, the outstanding amount payable to First Concept amounted to $5.6 million (December 31, 2018: $12.5 million), which is due and payable as of the date hereof.

The seizure of the frozen funds by the CDIA may constitute an event of default under the CIC Convertible Debenture and the 2019 Deferral Agreement, which could result in the automatic termination of the deferral periods under the 2019 Deferral Agreement and the acceleration of all principal, interest and other amounts owing under the CIC Convertible Debenture and the 2019 Deferral Agreement becoming immediately due and payable, in each case without the necessity of any demand upon or notice to the Company by CIC. Furthermore, if First Concept is successful in enforcing the Outstanding Settlement Deed Payments and the Waived Costs (as defined below) against SGS, this may represent an event of default under the CIC Convertible Debenture. Either of these events would 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.

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 in Mongolia. The Company owned a 100% interest in the Soumber Deposit.

The Company believes the cancelation 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 October 4, 2019, SGS filed a claim against MRAM and the Ministry of Environment and Tourism of Mongolia in the Administration Court of the Capital City (the "Administration Court") seeking an order to restore the Soumber Licenses. The Company anticipates that the Administration Court will issue its ruling before the end of the second quarter of 2020. 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.

On March 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 on March 30, 2019. Please refer to the Company's MD&A for the three months ended March 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 ended December 31, 2016 and December 31, 2017 (the "Prior Restatement"), as disclosed in the Company's audited annual consolidated financial statements and related management's discussion and analysis for the year ended December 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.

Ms. Lan Cheng: Ms. Cheng did not stand for re-election at the Company's annual and special meeting of shareholders (the "AGM") held on May 30, 2019 and ceased to be a non-executive director following the conclusion of the AGM.

Mr. Ben Niu: On May 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 on March 11, 2020.

Mr. Jianmin Bao: On March 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 in connection with the CIC Convertible Debenture in 2009.

In addition, the current import restrictions on F-grade coal by Chinese authorities will further affect the short term cash inflow and may in turn undermine the execution of the operation plan. If the import restrictions on F-grade coal continue for an indefinite period, or the Company is unable to secure additional capital financing, or otherwise restructure or refinance its business in order to address its cash requirements through December 31, 2020, then the Company is unlikely to have sufficient cash flows from mining operations in order to satisfy its current ongoing obligations and future contractual commitments.

Further, the closure of the border resulted from the COVID-19 pandemic has had, and will continue to have, an adverse impact on the Company's sales and cash flows in the first and second quarter of 2020. 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. If the Company is unable to continue as a going concern, it may be forced to seek relief under applicable bankruptcy and insolvency legislation. See section Liquidity and Capital Resources of this press release for details. As at March 30, 2020, the Company had $1.5 million of cash.

OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS

The Company cautions that the financial results for its financial year ended December 31, 2019 set forth below are unaudited and have not been agreed upon with the Auditors.

Summary of Annual Operational Data







                                                                      Year ended
                                                                      December 31,
                                                                      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)                 $ 14.84   $ 14.90
        Mine administration cash costs of product sold (per tonne)    $ 1.08    $ 1.50
        Total cash costs of product sold (per tonne)                  $ 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                                 0.06      0.05
        


Overview of Annual Operational Data

As at December 31, 2019, the Company had a lost time injury frequency rate of 0.06 per 200,000 man hours based on a rolling 12-month average.

The Company experienced a decrease in the average selling price of coal in 2019 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's Inner Mongolia subsidiary and selling to third party customers within China. The product mix for 2019 consisted of approximately 18% of premium semi-soft coking coal, 63% of standard semi-soft coking coal/premium thermal coal, 17% of washed coal and 2% of standard thermal coal compared to approximately 21% of premium semi-soft coking coal, 45% of standard semi-soft coking coal/premium thermal coal, 5% of washed coal and 28% of standard thermal coal in 2018.

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 $28.7 per tonne in 2018 to $22.6 per tonne in 2019. The decrease was mainly driven by a higher amount of impairment of coal stockpile inventories being recorded in 2018 (2018:impairment of $5.4 million)(2019:reversal of impairment of $1.8 million).

Summary of Annual Financial Results







                                                                        Year ended
                                                                        December 31,
        $ in thousands, except per share information                    2019         2018
        Revenue                                                         $ 129,712    $ 103,804
        Cost of sales                                                     (84,400 )    (79,835 )
        Gross profit excluding idled mine asset costs                     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   )
        


Overview of Annual 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) the 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.

Revenue was $129.7 million in 2019 compared to $103.8 million in 2018. The Company's effective royalty rate for 2019, based on the Company's average realized selling price of $34.9 per tonne, was 8.9% or $3.1 per tonne, compared to 7.9% or $3.0 per tonne in 2018 (based on the average realized selling price of $37.1 per tonne in 2018).

Royalty expenses were $11.6 million in 2019 compared to $8.2 million in 2018. The increase in royalty expenses was mainly due to the new royalty regime introduced by the Government of Mongolia in the third quarter of 2019.

Royalty regime in Mongolia

The royalty regime in Mongolia is evolving and has been subject to change since 2012.

On February 1, 2016, the Government of Mongolia issued a resolution in connection with the royalty regime. From February 1, 2016 onwards, royalties are to be calculated based on the actual contract price including transportation costs to the Mongolia border. If such transportation costs have not been included in the contract, the relevant transportation costs, customs documentation fees, insurance and loading costs should be estimated for the calculation of royalties. In the event that the calculated sales price as described above differs from the contract sales price of other entities in Mongolia (same quality of coal and same border crossing) by more than 10%, the calculated sales price will be deemed to be "non-market" under Mongolian tax law and the royalty will then be calculated based on a reference price as determined by the Government of Mongolia.

On September 4, 2019, the Government of Mongolia issued a further resolution in connection with the royalty regime. From September 1, 2019 onwards, in the event that the contract sales price is less than the reference price as determined by the Government of Mongolia by more than 30%, then the royalty payable will be calculated based on the Mongolian government's reference price instead of the contract sales price.

Cost of sales was $84.4 million in 2019 compared to $79.8 million in 2018. The increase in cost of sales in 2019 was mainly due to the effect of (i) increased sales volume; and (ii) a reversal of impairment of coal stockpile inventories of $1.8 million was recorded for 2019 as compared to $5.4 million of impairment being recorded in 2018. Cost of sales consists of operating expenses, share-based compensation expense, equipment depreciation, depletion of mineral properties, royalties, coal stockpile inventory impairment/(reversal of 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 year.







                                                                          Year ended December 31,
        $ 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 $59.5 million in 2019 compared to $45.6 million in 2018. The overall increase in operating expenses was primarily due to the combined effect of: (i) increased sales volume from 2.8 million tonnes in 2018 to 3.7 million tonnes in 2019; and (ii) higher inventory carrying costs given less deferred stripping cost was capitalized in 2019.

Cost of sales in 2019 included a reversal of impairment of coal stockpile inventories of $1.8 million, to increase the carrying value of the Company's coal stockpiles to the lower of the cost and the net realizable value. The reversal of impairment of coal stockpile inventories recorded in 2019 reflected the enhancement in the wash plant capacity and its continuous operation at the expected level. A coal stockpile impairment of $5.4 million was recorded in 2018 to reduce the carrying value of the Company's stockpile to their net realizable value. The coal stockpile impairments recorded primarily related to the Company's higher-ash content products.

Cost of sales related to idled mine assets in 2019 included $4.0 million related to depreciation expenses for idled equipment (2018:$12.9 million).

Other operating expenses were $5.6 million in 2019 (2018:$23.6 million), as follows:







                                                                             Year ended December 31,
        $ 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 $0.5 million in 2019 (2018:$20.9 million) for certain long aged receivables based on its expected credit loss model.

Administration expenses were $9.4 million in 2019 as compared to $10.5 million in 2018, as follows:







                                         Year ended December 31,
        $ 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 $0.5 million and $0.4 million in 2019 and 2018, respectively. The Company continued to minimize evaluation and exploration expenditures in 2019 in order to preserve the Company's financial resources. Evaluation and exploration activities and expenditures in 2019 were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining licenses.

Finance costs were $28.0 million and $28.6 million in 2019 and 2018, respectively, which primarily consisted of interest expense on the $250.0 million CIC Convertible Debenture.

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)                 $  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)    $  1.29   $  1.09   $  1.39   $  1.41    $  2.19   $  1.24   $  1.00   $  1.24
        Total cash costs of product sold (per tonne)                  $  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                3.61      4.36      5.34      4.91       5.54      4.56      5.18      2.88
        cubic meters)
        Strip ratio (bank cubic meters of waste material per tonne of    2.44      3.61      4.01      4.76       2.97      4.11      5.26      7.55
        coal produced)
        Lost time injury frequency rate                                  0.08      0.08      0.06      0.00       0.00      0.00      0.06      0.13
        


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 $37.3 per tonne in the fourth quarter of 2018 to $33.0 per tonne in the fourth quarter of 2019. The product mix for the fourth quarter of 2019 consisted of approximately 39% of premium semi-soft coking coal, 41% of standard semi-soft coking coal/premium thermal coal and 20% of washed coal compared to approximately 27% of premium semi-soft coking coal, 44% of standard semi-soft coking coal/premium thermal coal, 16% of washed coal and 13% of standard thermal coal in the fourth quarter of 2018.

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 $23.7 per tonne in the fourth quarter of 2019 from $30.8 per tonne in the fourth quarter of 2018. The decrease was mainly driven by a higher amount of impairment of coal stockpile inventories being recorded in the fourth quarter of 2018 (fourth quarter of 2018:$5.4 million)(fourth quarter of 2019:$nil).

Summary of Quarterly Financial Results

The Company's annual financial statements are reported under International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board (the "IASB"). The following table provides highlights, extracted from the Company's annual and interim financial statements, of quarterly results for the past eight quarters:







        
        $ 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                                       $  32,113     $  28,309     $  32,479     $  36,811      $  33,814     $   26,277      $   19,278      $   24,435
        Cost of sales                                    (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   )
        


Overview of Quarterly Financial Results

The Company recorded a $5.3 million profit from operations in the fourth quarter of 2019 compared to a $1.2 million profit from operations in the fourth quarter of 2018. The improvement in overall financial results was principally attributable to the Company recognizing a lower amount of impairment charges and provisions during the fourth quarter of 2019 as compared to the fourth quarter in 2018. In particular, during the fourth quarter of 2018, an impairment charge of $5.4 million was recorded on coal stockpile inventories (fourth quarter of 2019:$nil).

Revenue was $32.1 million in the fourth quarter of 2019 compared to $33.8 million in the fourth quarter of 2018. The Company's effective royalty rate for the fourth quarter of 2019, based on the Company's average realized selling price of $33.0 per tonne, was 14.7% or $4.8 per tonne, compared to 9.9% or $3.7 per tonne in the fourth quarter of 2018 (based on the average realized selling price of $37.3 per tonne in the fourth quarter of 2018). The increase was mainly attributed to the new Mongolian royalty regime which became effective in September 2019. Please see section Royalty Regime in Mongolia of this press release for details.

Cost of sales was $23.4 million in the fourth quarter of 2019 compared to $28.0 million in the fourth quarter of 2018. The decrease in cost of sales was mainly due to a lower amount of impairment of coal stockpile inventories being made during the fourth quarter of 2019 (fourth quarter of 2018:$5.4 million)(fourth quarter of 2019:nil).

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 December 31,
        $ 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 $14.8 million in the fourth quarter of 2019 compared to $15.1 million in the fourth quarter of 2018, as the sales volume in both quarters were at similar levels.

Cost of sales in the fourth quarter of 2018 included coal stockpile impairment of $5.4 million to reduce the carrying value of the Company's coal stockpiles to their net realizable value. The coal stockpile impairment recorded in the fourth quarter of 2018 primarily related to the Company's higher-ash content products.

Cost of sales related to idled mine assets in the fourth quarter of 2019 included $1.3 million related to depreciation expenses for idled equipment (fourth quarter of 2018:$1.5 million).

Other operating expenses were $1.6 million in the fourth quarter of 2019 (fourth quarter of 2018:$2.9 million).







                                                                             Three months ended December 31,
        $ 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 $1.4 million in the fourth quarter of 2019 as compared to $1.6 million in the fourth quarter of 2018. The decrease in salaries and benefits was mainly due to the overprovision of staff bonus for past periods.







                                         Three months ended December 31,
        $ 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 $0.4 million for the fourth quarter of 2019 (fourth quarter of 2018:negligible). The Company continued to minimize evaluation and exploration expenditures in 2019 in order to preserve the Company's financial resources. Evaluation and exploration activities and expenditures in the fourth quarter of 2019 were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining licenses.

Finance costs were $7.1 million in the fourth quarter of 2019 compared to $10.9 million in the fourth quarter of 2018, which primarily consisted of interest expense on the CIC Convertible Debenture.

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.

Bank Loan

On May 15, 2018, SGS obtained a bank loan (the "2018 Bank Loan") in the principal amount of $2.8 million from a Mongolian bank (the "Bank") with the key commercial terms as follows:

As at December 31, 2019, the outstanding principal balance of the 2018 Bank Loan was $2.8 million (December 31, 2018: $2.8 million) and the accrued interest owed by the Company was negligible (December 31, 2018: negligible).

Costs reimbursable to Turquoise Hill Resources Ltd ("Turquoise Hill")

Prior to the completion of a private placement with Novel Sunrise Investments Limited ("Novel Sunrise") on April 23, 2015, Rio Tinto plc ("Rio Tinto") was the Company's ultimate parent company. In the past, Rio Tinto sought reimbursement from the Company for the salaries and benefits of certain Rio Tinto employees who were assigned by Rio Tinto to work for the Company, as well as certain legal and professional fees incurred by Rio Tinto in relation to the Company's prior internal investigation and Rio Tinto's participation in the tripartite committee. Subsequently Rio Tinto transferred and assigned to Turquoise Hill its right to seek reimbursement for these costs and fees from the Company.

As at December 31, 2019, the amount of reimbursable costs and fees claimed by Turquoise Hill (the "TRQ Reimbursable Amount") amounted to $8.1 million (such amount is included in the aging profile of trade and other payables set out below). On October 12, 2016, the Company received a letter from Turquoise Hill, which proposed an arrangement for regular payments of the outstanding TRQ Reimbursable Amount. On February 21, 2020, the Company received communication from Turquoise Hill advising that Turquoise Hill wishes to re-engage in discussions with the Company regarding a repayment plan for the outstanding TRQ Reimbursable Amount. No agreement on repayment has been reached between the Company and Turquoise Hill as of the date of this press release.

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 December 31, 2020 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 transactions to provide it with additional liquidity.

Several adverse conditions and material uncertainties cast significant doubt upon the going concern assumption. The Company had a deficiency in assets of $49.2 million as at December 31, 2019 compared to a deficiency in assets of $48.1 million as at December 31, 2018 while the working capital deficiency (excess current liabilities over current assets) reached $114.7 million as at December 31, 2019 compared to a working capital deficiency of $203.1 million as at December 31, 2018.

Included in the working capital deficiency as at December 31, 2019 are significant obligations, which include the obligation to pay CIC under the 2019 Deferral Agreement, the 2020 February Deferral Agreement and the 2020 March Deferral Agreement approximately $74.0 million on or before June 20, 2020 in three instalments from April 2020 to June 2020. Further, pursuant to the terms of the CIC Convertible Debenture, the Company is also required to pay $8.1 million of anniversary cash interest on November 19, 2020. Although the Company intends to enter into discussion with CIC to further defer the payment due from April 2020 to June 2020, there can be no assurance that a favorable outcome will be reached.

The Company also has other current liabilities, which require settlement in the short-term, including: the $5.6 million owing to First Concept under the Settlement Deed and $31.8 million of unpaid taxes payable by SGS to the Mongolian government.

With respect to the amount owing under Settlement Deed, SGS received a notice on October 16, 2019 from First Concept claiming that the Company is in default under the Settlement Deed and demanding payment of the full amount of the Outstanding Settlement Deed Payments due under the Settlement Deed, otherwise First Concept intends to commence legal action against SGS pursuant to the Settlement Deed. On February 7, 2020, SGS was informed by its Mongolian banks that they received a request from the CDIA to freeze the respective bank accounts of SGS in Mongolia in relation to the enforcement of an arbitration award related to the Settlement Deed. Approximately $0.8 million in cash was frozen by the banks as at February 7, 2020 and such amount was subsequently transferred to the CDIA on March 6, 2020. The Company is liaising with First Concept to resolve the issue. There can be no assurance, however, that any resolution can be successfully reached either at all or on favorable terms. The seizure of the frozen funds by the CDIA may constitute an event of default under the CIC Convertible Debenture and the 2019 Deferral Agreement, which could result in the automatic termination of the deferral periods under the 2019 Deferral Agreement and the acceleration of all principal, interest and other amounts owing under the CIC Convertible Debenture and the 2019 Deferral Agreement becoming immediately due and payable, in each case without the necessity of any demand upon or notice to the Company by CIC. Furthermore, if First Concept is successful in enforcing the Outstanding Settlement Deed Payments and the Waived Costs (as defined below) against SGS, this may represent an event of default under the CIC Convertible Debenture. Either of these events would 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.

Further, the trade and other payables of the Company remain high due to liquidity constraints. The aging profile of the trade and other payables as at December 31, 2019 as compared to that as at December 31, 2018 is shown as follows:







                                       As at December 31,
                                       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
        


The Company may not be able to settle all trade and other payables on a timely basis, while continuing postponement in settling the 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 March 30, 2020. However, there can be no assurance that no such lawsuits or proceedings will be filed by the Company's creditors in the future and the Company's suppliers and contractors will continue to supply and provide services to the Company uninterrupted.

The current operation plan contemplates significant operational funding in the Company's mining operations as well as equipment maintenance in order to achieve the Company's revenue and cash flow targets. Such expenditures and other working capital requirements may require the Company to seek additional financing. There is no guarantee that the Company will be able to secure other sources of financing.

In addition, the current import restrictions on F-grade coal by Chinese authorities will further affect the short term cash inflow and may in turn undermine the execution of the operation plan. If the import restrictions on F-grade coal continue for an indefinite period, or the Company is unable to secure additional capital financing, or otherwise restructure or refinance its business in order to address its cash requirements through December 31, 2020, then the Company is unlikely to have sufficient cash flows from mining operations in order to satisfy its current ongoing obligations and future contractual commitments.

Further, the Company was informed that effective as of February 11, 2020, the Mongolian State Emergency Commission closed Mongolia's southern border with China in order to prevent the spread of COVID-19. Accordingly, the Company suspended coal exports to China since February 11, 2020 as a result of the border closure. On March 28, 2020, the Company learned that 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 is permitted to be exported during this trial period. As of the date hereof, the Company has not received any formal communication from the Mongolian State Emergency Commission regarding the details of the re-opening of the border crossings on a trial basis, including the estimated length of the trial period and the proposed limitations on the coal export volume into China during this trial period. There can be no guarantee, however, that the Company will be able to continue exporting coal into China during this trial period, or the border crossings between Mongolia and China will be fully reopened in a timely manner or at all and, if the border crossing is fully re-opened in the future, the border crossings would not be the subject of additional closures as a result of COVID-19 in the future. The border closure has had, and will continue to have an adverse impact on the Company's sales and cash flows in the first and second quarter of 2020. In order to address the financial impact of the border closures and preserve its working capital, the Company ceased major mining operations (including coal mining activities), reduced production to only coal-blending activities and placed approximately half of its workforce on furlough effective as of February 2020 until further notice. The Company anticipates that its existing coal inventories are sufficient to satisfy expected sales demand for a period of at least 2 months as of the date hereof. The Company will continue to closely monitor the development of the COVID-19 pandemic and the impact it has on coal exports to China and its operations as a whole.

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.

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 December 31, 2019 and December 31, 2018, the Company was not subject to any externally imposed capital requirements. As at March 30, 2020, the Company had $1.5 million of cash.

Impact of the COVID-19 Pandemic

The Company was informed that effective as of February 11, 2020, the Mongolian State Emergency Commission closed Mongolia's southern border with China in order to prevent the spread of COVID-19. Accordingly, the Company suspended coal exports to China since February 11, 2020 as a result of the border closure.

On March 28, 2020, the Company learned that 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 is permitted to be exported during this trial period. As of the date hereof, the Company has not received any formal communication from the Mongolian State Emergency Commission regarding the details of the re-opening of the border crossings on a trial basis, including the estimated length of the trial period and the proposed limitations on the coal export volume into China during this trial period. There can be no guarantee, however, that the Company will be able to continue exporting coal into China during this trial period, or the border crossings between Mongolia and China will be fully reopened in a timely manner or at all and, if the border crossing is fully re-opened in the future, the border crossings would not be the subject of additional closures as a result of COVID-19 in the future.

The border closure has had, and will continue to have an adverse impact on the Company's sales and cash flows in the first and second quarter of 2020. In order to address the financial impact of the border closures and preserve its working capital, the Company ceased major mining operations (including coal mining activities), reduced production to only coal-blending activities and placed approximately half of its workforce on furlough effective as of February 2020 until further notice. The Company anticipates that its existing coal inventories are sufficient to satisfy expected sales demand for a period of at least 2 months as of the date hereof. The Company will continue to closely monitor the development of the COVID-19 pandemic and the impact it has on coal exports to China and its operations as a whole.

Based on a preliminary review of the information and operational data of the Company currently available, the Company expects to record a net loss between $13 million to $18 million for the three months ending March 31, 2020. The anticipated net loss is 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 in February 2020 and the Company being unable to export coal into China as a result. As at March 30, 2020, the Company had $1.5 million of cash. In the event that the Company's ability to export coal into the Chinese market continues to be restricted or limited as a result of the restrictions 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.

CIC Convertible Debenture

In November 2009, the Company entered into a financing agreement with CIC for $500 million in the form of a secured, convertible debenture bearing interest at 8.0% (6.4% payable semi-annually in cash and 1.6% payable annually in the Company's shares) with a maximum term of 30 years. The CIC Convertible Debenture is secured by a first ranking charge over the Company's assets and certain subsidiaries. The financing was used primarily to support the accelerated investment program in Mongolia and for working capital, repayment of debt, general and administrative expenses and other general corporate purposes.

On March 29, 2010, the Company exercised its right to call for the conversion of up to $250.0 million of the CIC Convertible Debenture into approximately 21.5 million shares at a conversion price of $11.64 (CAD$11.88). As at December 31, 2019, CIC owned approximately 23.8% of the issued and outstanding Common Shares.

On June 12, 2017, the Company executed the June 2017 Deferral Agreement with CIC for a revised repayment schedule on the $22.3 million of cash interest and associated costs originally due under the CIC Convertible Debenture on May 19, 2017. The key repayment terms of the June 2017 Deferral Agreement are: (i) the Company was required to repay on average $2.2 million of the cash interest and associated costs monthly during the period from May 2017 to October 2017; and (ii) the Company was required to repay $9.7 million of cash interest and associated costs on November 19, 2017.

On April 23, 2019, the Company executed 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 PIK Interest and associated costs due and payable to CIC on November 19, 2018 under the CIC Convertible Debenture and the June 2017 Deferral Agreement; and (ii) $27.9 million of cash and PIK Interest payments payable to CIC under the CIC Convertible Debenture from April 23, 2019 to and including May 19, 2020. 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 on June 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 from November 2019 to June 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 on June 20, 2020. The Company agreed to pay a deferral fee at a rate of 6.4% per annum in consideration of the Deferral.

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 November 19, 2009 between SGS and CIC, be amended and restated to clarify the manner in which the service fee payable to CIC under the Cooperation Agreement is calculated, with effect as of January 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 into China (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 from June 2019 to November 2019. The Company executed the Amended and Restated Cooperation Agreement with CIC on April 23, 2019.

Pursuant to their terms, both the 2019 Deferral Agreement and the Amended and Restated Cooperation Agreement became effective on June 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.

On February 19, 2020, the Company and CIC entered into the 2020 February Deferral Agreement pursuant to which CIC agreed to grant the Company a deferral of: (i) the 2020 February Deferral Amounts; and (ii) approximately $0.7 million of the Management Fee which was due and payable on February 14, 2020 to CIC under the Amended and Restated Cooperation Agreement. The 2020 February Deferral Agreement became effective on March 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:

On March 10, 2020, the Company agreed with CIC that the 2020 March Deferral Amount will be deferred until June 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 on March 19, 2020. The 2020 March Deferral Agreement became effective on March 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.

Under certain conditions, including the non-payment of interest amounts as the same become due or the Common Shares being suspended or halted from trading on any stock exchange for a period of longer than five trading days, amounts outstanding under the CIC Convertible Debenture may be accelerated. Bankruptcy and insolvency events with respect to the Company or its material subsidiaries will result in an automatic acceleration of the indebtedness under the CIC Convertible Debenture. Subject to notice and cure periods, certain events of default under the CIC Convertible Debenture will result in acceleration of the indebtedness under such debenture at the option of CIC. Such other events of default include, but are not limited to, non-payment, breach of warranty, non-performance of obligations under the CIC Convertible Debenture, default on other indebtedness and certain adverse judgments.

Commercial Arbitration in Hong Kong

On June 24, 2015, First Concept served a notice of arbitration (the "Notice") on SGS in respect of a coal supply agreement dated May 19, 2014 as amended on June 27, 2014 (the "Coal Supply Agreement") for a total consideration of $11.5 million.

On January 10, 2018, the Company received a confidential partial ruling (final except as to costs) with respect to the commercial arbitration (the "Arbitration Award"). Pursuant to the Arbitration Award, SGS was ordered to repay the sum of $11.5 million (which SGS had received as a prepayment for the purchase of coal) to First Concept, together with accrued interest at a simple interest rate of 6% per annum from the date which the prepayment was made until the date of the Arbitration Award, and then at a simple interest rate of 8% per annum until full payment. The Arbitration Award is final, except as to costs which were reserved for a future award.

On November 14, 2018, the Company executed the Settlement Deed with First Concept in respect of the Arbitration Award. The Settlement Deed provides for the full and final satisfaction of the Arbitration Award as well as the settlement of the issue of costs relating to the Arbitration and any other disputes arising out of the Coal Supply Agreement. Pursuant to the Settlement Deed, which provides for the full and final satisfaction of the Arbitration Award as well as the settlement of the issue of costs relating to the Arbitration and any other disputes arising out of the Coal Supply Agreement, SGS agreed to pay to First Concept the sum of $13.9 million, together with simple interest thereon at the rate of 6% per annum from November 1, 2018 until full payment, in 12 monthly installments commencing in November 2018. Provided that SGS complies with the terms of the Settlement Deed, First Concept agreed to waive its costs in connection with the Arbitration and Arbitration Award and interest for the period from January 4, 2018 to October 31, 2018 (the "Waived Costs").

As of the date hereof, the Company has not paid the Outstanding Settlement Deed Payments due under the Settlement Deed. On October 16, 2019, SGS received a notice from First Concept claiming that the Company is default under the Settlement Deed and demanding payment of the full amount of the Outstanding Settlement Deed Payments due under the Settlement Deed, otherwise First Concept intends to commence legal action against SGS pursuant to the Settlement Deed. On February 7, 2020, SGS was informed by its Mongolian banks that they received a request from the CDIA to freeze the respective bank accounts of SGS in Mongolia in relation to the enforcement of the Arbitration Award. Approximately $0.8 million in cash has been frozen by the banks as at February 7, 2020 and such amount was subsequently being transferred to the CDIA on March 6, 2020.

The Company expects that the freezing of its bank accounts in Mongolia will have an adverse impact on its ability to make payments and to carry out its operations and business affairs in Mongolia in the ordinary course. The Company is liaising with First Concept to resolve the issue. There can be no assurance, however, that any resolution can be successfully reached either at all or on favorable terms.

The seizure of the frozen funds by the CDIA may constitute an event of default under the CIC Convertible Debenture and the 2019 Deferral Agreement, which could result in the automatic termination of the deferral periods under the 2019 Deferral Agreement and the acceleration of all principal, interest and other amounts owing under the CIC Convertible Debenture and the 2019 Deferral Agreement becoming immediately due and payable, in each case without the necessity of any demand upon or notice to the Company by CIC. Furthermore, if First Concept is successful in enforcing the Outstanding Settlement Deed Payments and the Waived Costs against SGS, this may represent an event of default under the CIC Convertible Debenture. Either of these events would 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.

The Company is of the view that SGS is not in default under the Settlement Deed as a default under the Settlement Deed is only triggered when there has been a failure to pay two or more consecutive monthly instalment payments.

As at December 31, 2019, the outstanding amount payable to First Concept amounted to $5.6 million (December 31, 2018: $12.5 million), which is due and payable as of the date hereof.

Ovoot Tolgoi Mine Impairment Analysis

The Company determined that an indicator of impairment existed for its Ovoot Tolgoi Mine cash generating unit as at December 31, 2019. The impairment indicators were the uncertainty of future coal prices in China and the lower than budgeted production.

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 "fair value less costs of disposal" ("FVLCTD") using a discounted future cash flow valuation model. The Company's cash flow valuation model takes into consideration the latest available information to the Company, including but not limited to, sales prices, sales volumes, coal washing capacity, operating costs and life of mine coal production estimates as at December 31, 2019. The resulting FVLCTD was $505 million as at December 31, 2019 while the cash generating unit carrying value of the Company's Ovoot Tolgoi Mine was $123 million, resulting in headroom of $382 million.

Key estimates and assumptions incorporated in the valuation model included the following:

Key sensitivities in the valuation model are as follows:

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 December 31, 2019. A decline of 19% in the long term price estimates, an increase of more than 35% in the post-tax discount rate, an increase of 29% in the cash mining cost estimates or an increase of 73% in Mongolian inflation rate may trigger an impairment charge on the cash generating unit. 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

Class Action Lawsuit

In January 2014, Siskinds LLP, a Canadian law firm, filed a class action (the "Class Action") against the Company, certain of its former senior officers and directors, and its former auditors, Deloitte LLP, in the Ontario Court in relation to the Company's restatement of certain financial statements previously disclosed in the Company's public fillings (the "Restatement").

To commence and proceed with the Class Action, the plaintiff was required to bring a preliminary leave motion and to certify the Class Action as a class proceeding (the "Leave Motion"). The Ontario Court rendered its decision on the Leave Motion on November 5, 2015 (the "November 5, 2015 Ontario Court Decision") and dismissed the plaintiff's Leave Motion as against each of the former senior officers and directors of the Company named in the Class Action on the basis that the "large volume of compelling evidence" proved the defense of reasonable investigation on the balance of probabilities and provided the basis for dismissing the Leave Motion as against them.

However, the Ontario Court allowed the Class Action to proceed under Part XXIII.1 of the Ontario Securities Act, permitting the plaintiff to commence and proceed with an action against the Company in respect of alleged misrepresentations affecting trades in the secondary market for the Company's securities arising from the Restatement. The Company appealed this portion of the decision of the Ontario Court (the "Corporation Appeal").

The plaintiff appealed that part of the November 5, 2015 Ontario Court Decision dismissing the action against former officers and directors of the Company (the "Individual's Appeal"). The Individual's Appeal was brought as of right to the Ontario Court of Appeal.

On September 18, 2017, the Ontario Court of Appeal dismissed the Corporation Appeal of the original Ontario lower court decision to permit the plaintiff to commence and proceed with the Class Action. Concurrently, the Ontario Court of Appeal allowed the Individual's Appeal of the original Ontario lower court decision to dismiss the plaintiff's leave motion against certain of the Company's former officers and directors and made an order granting leave for the plaintiff to proceed against such former officers and directors of the Company in relation to the Restatement. As a result, the plaintiff is now permitted to proceed with the Class Action against both the Company and the former officers and directors.

The Company filed an application for leave to appeal to the Supreme Court of Canada in November 2017. The leave to appeal to the Supreme Court of Canada was dismissed in June 2018.

On consent of the plaintiff, the former senior officers and directors, originally sued as defendants, were withdrawn from the Class Action in December 2018.

Counsel for the parties have appeared in two case conferences before the motions judge. A procedure to complete the production of documents and to fix the process and timing of steps leading up to the trial of the action has been settled in broad terms. The defence evidence of the relevant Company's officers and directors who were former defendants has been prepared, filed and cross examined upon. Both parties desire and are planning for an early trial.

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 December 31, 2019 was not required.

Toll Wash Plant Agreement with Ejin Jinda

In 2011, the Company entered into an agreement with Ejin Jinda, a subsidiary of China Mongolia Coal Co. Ltd. to toll-wash coal from the Ovoot Tolgoi Mine. The agreement had a duration of five years from commencement of the contract and provided for an annual wet washing capacity of approximately 3.5 million tonnes of input coal.

Under the original agreement with Ejin Jinda, which required the commercial operation of the wet washing facility to commence on October 1, 2011, the additional fees payable by the Company under the wet washing contract would have been $18.5 million. At each reporting date, the Company assesses the agreement with Ejin Jinda and has determined it is not probable that this $18.5 million will be required to be paid. Accordingly, the Company has determined a provision for this matter at December 31, 2019 is not required.

Special Needs Territory in Umnugobi

On February 13, 2015, the entire Soumber mining license and a portion of SGS' exploration license 9443X (9443X was converted to mining license MV-020436 in January 2016) (the "License Areas") were included into a special protected area (to be further referred as Special Needs Territory, the "SNT") newly set up by the Umnugobi Aimag's Civil Representatives Khural (the "CRKh") to establish a strict regime on the protection of natural environment and prohibit mining activities in the territory of the SNT.

On July 8, 2015, SGS and the Chairman of the CRKh, in his capacity as the respondent's representative, reached an agreement (the "Amicable Resolution Agreement") to exclude the License Areas from the territory of the SNT in full, subject to confirmation of the Amicable Resolution Agreement by the session of the CRKh. The parties formally submitted the Amicable Resolution Agreement to the appointed judge of the Administrative Court for her approval and requested a dismissal of the case in accordance with the Law of Mongolia on Administrative Court Procedure. On July 10, 2015, the judge issued her order approving the Amicable Resolution Agreement and dismissing the case, while reaffirming the obligation of CRKh to take necessary actions at its next session to exclude the License Areas from the SNT and register the new map of the SNT with the relevant authorities. Mining activities at the Soumber property cannot proceed unless and until the Company obtains a court order restoring the Soumber Licenses and until the License Areas are removed from the SNT.

On June 29, 2016, the Mongolian Parliament and CRKh election was held. As a result, the Company was aware that additional action may be taken in respect of the SNT; however, the Company has not yet received any indication on the timing of the next session of the CRKh.

Termination of Soumber Deposit Mining Licenses

On August 26, 2019, SGS received the Notice Letter from MRAM notifying that the Company's three mining licenses (MV-016869, MV-020436 and MV-020451) for the Soumber Deposit have been terminated by the Head of Cadastre Division of MRAM effective as of August 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 in Mongolia. The Company owned a 100% interest in the Soumber Deposit.

The Company believes the cancelation 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 October 4, 2019, SGS filed a claim against MRAM and the Ministry of Environment and Tourism of Mongolia in the Administration Court seeking an order to restore the Soumber Licenses. The Company anticipates that the Administration Court will issue its ruling before the end of the second quarter of 2020. 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.

Mongolian royalties

During 2017, the Company was ordered by the Mongolian tax authority to apply the "reference price" determined by the Government of Mongolia, as opposed to calculated sales price that is derived based on the actual contract price, in calculating the royalties payable to the Government of Mongolia. Although no official letter has been received by the Company in respect of this matter as of the date hereof, there can be no assurance that the Government of Mongolia will not disagree with the methodology employed by the Company in determining the calculated sales price and deem such price "non-market" under Mongolian tax law. Management believes that its interpretation of the relevant legislation is appropriate and the Company's positions related to the royalty will be sustained.

On September 4, 2019, the Government of Mongolia issued a further resolution in connection with the royalty regime. From September 1, 2019 onwards, in the event that the contract sales price is less than the reference price as determined by the Government of Mongolia by more than 30%, then the royalty payable will be calculated based on the Mongolian government's reference price instead of the contract sales price.

1 2
This Story has 0 Comments
Be the first to comment

Story Conversation

Commenting FAQs »
Link to MarketWatch's Slice.