SouthGobi Resources swings to Q1 profit on record sales

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 Gobi Region.
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 said.
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 ratio.
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 second quarter.
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 strategic assets.
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 said.
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.