SouthGobi Resources (TSE:SGQ)(HKSE:1878) posted a sharply lower second quarter profit Monday as sales volume and revenue declined due to the curtailment of mining operations amid a controversial takeover bid for the mining company.
its Ovoot Tolgoi Mine in Mongolia were "entirely curtailed" at the end
of the most recent quarter citing weak market conditions and regulatory
Aluminum Corp of China Ltd., also known as Chalco, plans to buy a 57.6 per cent stake in SouthGobi from Ivanhoe Mines
(TSE:IVN), which has triggered anxiety in Mongolia about Chinese
ownership of a major resource producer, prompting the passing of a
foreign investment law in Mongolia in May.
Mongolia has profited
from selling coal, copper and other minerals to China's booming
economy, but some in the sparsely populated North Asian nation are
uneasy about possible economic domination by their giant neighbour.
this month, Chalco, the Chinese aluminum giant, said it will extend
again its proportional takeover offer for up to 60 per cent of SouthGobi
stock by another 30 days. The proposed deal valued at $926 million, or
$8.48 per share, has the backing of Ivanhoe, which is SouthGobi’s
The deal remains subject to all statutory
and regulatory approvals, including Canadian and Chinese regulatory
approvals, and Chalco shareholder approval.
Sales volume in the
latest period declined, the company said, due to the "significant
uncertainty" surrounding SouthGobi's business resulting from the
proposed proportional takeover bid by Chalco, which resulted in the
Mineral Resources Authority of Mongolia announcing a request to suspend
exploration and mining activity on certain licenses, various
infrastructure constraints in Mongolia, and the softening of inland
China coking coal markets toward the end of the second quarter.
the three months that ended June 30, the Mongolian coal producer
recorded a profit of $0.2 million, compared to a net profit of $67.3
million a year ago, and $3.1 million in the first quarter.
the latest quarter, the company produced 0.27 million tonnes of raw coal
with a strip ratio of 4.31 compared to production of 0.87 million
tonnes of raw coal a year ago, with a strip ratio of 4.74.
halted its mining activities in the second quarter in a bid to manage
coal inventories and to maintain efficient working capital levels. As at
quarter end, mining activities had been fully curtailed, and because of
this, the miner suspended uncommitted capital and exploration
expenditures to preserve financial resources.
The company said
it sold 0.16 million tonnes of coal at an average realized selling price
of $62.56 per tonne, compared to sales of 1.05 million tonnes of coal
at a price of $54.06 per tonne in the second quarter of 2011.
of $8.4 million was down sharply from $47.3 million a year earlier. The
company said customers were reluctant to enter into significant sales
contracts due to infrastructure delays, uncertainty with respect to the
suspension of mining activities at Ovoot Tolgoi and the continued
softening of inland China coking coal markets.
Direct cash costs
of product sold, excluding idled mine costs, were $22.57 per tonne
compared to $26.77 per tonne a year earlier, as a result of a lower
strip ratio and reduced fuel prices.
noted today that it has not received any "official notification" to
suspend exploration and mining activity and "has no reason to believe
SouthGobi's licenses are not in good standing."
cautioned that any official notification received will require a
mandatory suspension of operations and could result in the impairment of
the company's property, plant and equipment.
Its total assets at quarter end came in at $846.5 million, and it had $61.6 million in cash and equivalents.
no official notification has been received to date, SouthGobi continues
to be impacted by the uncertainty over its licenses. Many government
bodies and regulatory authorities in Mongolia are reluctant to provide
approvals and permits," the company said in its statement.
to the uncertainty, the company said it anticipates its operations will
remain fully curtailed in the third quarter and that production volumes,
sales volumes and pricing for the full year cannot be estimated.
Ovoot Tolgoi Mine is approximately 40km from China, which is
approximately 190 kilometres closer than Tavan Tolgoi coal producers in
Mongolia and 7,000 to 10,000 kilometres closer than Australian and North
American coking coal producers.
The company is also
approximately 50km from existing railway infrastructure, which is
approximately one tenth the distance to rail of Tavan Tolgoi coal
producers in Mongolia.