SouthGobi Resources (TSE:SGQ)(HK:1878) announced Monday it swung to a profit on record first quarter coal sales and higher selling prices.
For the first three months of the year, the Mongolia-focused coal
producer posted a profit of $3.1 million, versus a net loss of $46.6
million in the year ago period. Finance costs fell to $1.5 million in
the latest period, from $45.6 million a year earlier, when the company
was hit by a $36.8 million unrealized loss on the fair value change of
its convertible debentures.
SouthGobi’s focus is the exploration, development and sale of
Permian-age metallurgical and thermal coal deposits in Mongolia’s South
Ovoot Tolgoi, its flagship coal mine, produces and sells coal to customers in China, the largest consumer of coal in the world.
First quarter revenue almost doubled to $40.2 million, on the record
sale of 0.84 million tonnes of coal - up 84 percent from a year earlier
as the company's customer base expanded.
Quarterly average selling price amounted to $56.79 per tonne, 13
percent higher than a year ago - and the highest quarterly average since
the start of mining operations, the company said.
The company reported a record profit margin of 56 percent in the latest quarter, versus 38 percent in the first quarter of 2011.
SouthGobi produced 1.07 million tonnes of raw coal with a strip ratio
of 2.07 compared to production of 1.11 million tonnes of raw coal with a
strip ratio of 3.47 a year earlier.
The below-trend strip ratio in the latest quarter was a function of
the mine plan and will be normalized over the life-of-mine, the company
Direct cash costs of product sold were $10.80 per tonne, compared to
$18.91 per tonne a year earlier, with the decline due to the lower strip
During the quarter, SouthGobi commissioned the dry coal-handling
facility at the Ovoot Tolgoi Mine, which has the capacity to process
nine million tonnes of run-of-mine coal per year, and announced a deal
to sell its Tsagaan Tolgoi deposit to Modun Resources for $30.0 million.
The Modun transaction is subject to Modun shareholder approval and
regulatory approvals, and is expected to be completed by year-end.
In April, Aluminum Corp. of China (Chalco) agreed to buy a controlling stake in SouthGobi Resources from Ivanhoe Mines (TSE:IVN)(NYSE:IVN) in a deal worth as much as C$925 million
Ivanhoe agreed to tender its entire 57.6 percent stake in SouthGobi
to the Chinese aluminum giant's offer to buy up to 60 percent of the
Mongolian miner at C$8.48 per share.
Under the proposed deal with Chalco, SouthGobi will have the right to
offer up to 100 percent of its salable coal to Chalco, and Chalco will
have the obligation to purchase the coal at market prices for a period
of 24 months.
Shortly after, SouthGobi announced the Mineral Resources Authority of
Mongolia requested the suspension of some of its mining and exploration
licenses for its Ovoot Tolgoi coal mine.
SouthGobi said late last month that the suspension would be initiated
to allow the government to review the proposed change of ownership.
As of today, the company said it has not received any official
notification and has no reason to believe SouthGobi's licenses are not
in good standing. It cautioned, however, that any official notification
received would require a suspension of operations.
As a result of this uncertainty, concern over whether SouthGobi will
be able to deliver contracted volumes in the second quarter of 2012 has
in some cases led customers to reduce their coal purchase requirements,
and the company said it is unable to provide any guidance into the
Recently, it has also been reported in the media that a bill
regarding foreign investment in Mongolia proceeded through first reading
in the State Great Khural is now under review. The bill, in its current
version, contains a clause requiring 51 percent Mongolian ownership of
SouthGobi is the closest major coking coal producer in the world to
China. The Ovoot Tolgoi Mine is approximately 40 kilometres from China.
The company is approximately 50 kilometres from existing railway
infrastructure, which is approximately one tenth the distance to rail of
Tavan Tolgoi coal producers in Mongolia.
In 2012, the company sees continued growth at the Ovoot Tolgoi Mine,
as well as the continued development of the roads around the mine, with
currently undeveloped resources at the Soumber Deposit and the Zag Suuj
Deposit expected to provide additional growth in the future, SouthGobi
During the quarter, the company released updated NI 43-101 compliant
resource and reserve estimates, which increased overall measured plus
indicated resources by 35 percent to 492.6 million tonnes and inferred
resources by 42 percent to 244.0 million tonnes.
Proven and probable reserves for the Ovoot Tolgoi Mine were boosted by 65 percent to 175.7 million tonnes.
As at quarter end, the coal miner had $125.1 million in cash and equivalents.