SouthGobi Resources announces fourth quarter and full year 2016 financial and operating results and updated resource estimate and newly declared reserve estimate in respect of Ovoot Tolgoi
(firmenpresse) - HONG KONG, CHINA -- (Marketwired) -- 03/31/17 -- SouthGobi Resources Ltd. (TSX: SGQ)(HKSE: 1878) (the "Company" or "SouthGobi") today announces its financial and operating results for the quarter and the year ended December 31, 2016. All figures are in U.S. dollars ("USD") unless otherwise stated.
Significant Events and Highlights
The Company''s significant events and highlights for the year ended December 31, 2016 and the subsequent period to March 31, 2017 are as follows:
OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS
Summary of Annual Operational Data
Overview of Annual Operational Data
The Company ended 2016 without any lost time injury. As at December 31, 2016, the Company had a lost time injury frequency rate of nil per 200,000 man hours based on a rolling 12 month average.
The market conditions remained difficult in the first half of 2016 despite a modest recovery in the second half of 2016 following the implementation of China''s national policy of restricting coal production described above. The overall price for coal improved in China in 2016, but these improvements were negatively impacted by certain coal sale contracts negotiated at a time of lower coal prices. In addition, the depreciation of the Renminbi against the USD hindered the positive impact of increased coal prices.
The Company managed to increase its sales volume from 1.07 million tonnes in 2015 to 3.91 million tonnes in 2016; however, the average realized selling price decreased from $17.66 per tonne in 2015 to $16.44 per tonne in 2016 which was mainly a result of the product mix as well as the depreciation of the Renminbi against the USD. The product mix for 2016 consisted of approximately 7% of Premium semi-soft coking coal, 64% of Standard semi-soft coking coal and 29% of thermal coal compared to approximately 21% of Premium semi-soft coking coal, 55% of Standard semi-soft coking coal and 24% of thermal coal in 2015.
The Company''s production in 2016 was higher than 2015 as a result of ramping up production to meet the expected increase in sales, yielding 3.38 million tonnes for 2016 as compared to 1.95 million tonnes for 2015.
The Company''s unit cost of sales of product sold decreased to $22.26 per tonne for the year ended December 31, 2016 from $59.52 per tonne in the year ended December 31, 2015. The decrease was mainly driven by the increased sales and the related economies of scale while less coal stockpile inventory impairment was recorded for the year 2016.
Summary of Annual Financial Results
Overview of Annual Financial Results
The Company recorded a $38.1 million loss from operations in 2016 compared to a $166.9 million loss from operations in 2015. Although the general coal market remained difficult in 2016, the 2016 results were an improvement when compared to 2015 and were principally attributable to increased coal sales as well as decrease of impairment of property, plant and equipment from $92.7 million in 2015 to $1.2 million in 2016.
Revenue was $58.5 million in 2016 compared to $16.0 million in 2015. The Company sold 3.91 million tonnes of coal in 2016 as compared to 1.07 million tonnes in 2015.
The Company''s revenue is presented after deduction of royalties and selling fees. The Company''s effective royalty rate for 2016, based on the Company''s average realized selling price of $16.44 per tonne, was 7.0% or $1.14 per tonne compared to 12.7% or $2.25 per tonne based on the average realized selling price of $17.66 per tonne in 2015.
Royalty regime in Mongolia
The royalty regime in Mongolia is evolving and has been subject to change since 2012.
On January 1, 2015, the "flexible tariff" royalty regime ended and royalty payments reverted to the previous regime which is based on a set reference price per tonne published monthly by the Government of Mongolia. The Company and other Mongolian coal producers are actively engaging the Mongolian authorities to seek the continuation of the "flexible tariff" regime.
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 in which transportation cost to the Mongolia border should have been included. If such transportation cost was not included in the contract, the relevant transportation costs, custom documentation fees, insurance and loading cost 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. No contracts of the Company were deemed as "non-market" during 2016.
Cost of sales was $87.0 million in 2016 compared to $63.7 million in 2015. Cost of sales comprises operating expenses, share-based compensation expense, equipment depreciation, depletion of mineral properties, coal stockpile inventory impairments 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 Measures" for further analysis) during the year.
Operating expenses in cost of sales were $41.5 million in 2016 compared to $18.3 million in 2015. The overall increase in operating expenses was primarily the result of the net effect of (i) increased sales volume from 1.07 million tonnes in 2015 to 3.91 million tonnes in 2016; (ii) reduced impairment of coal stockpile inventories and (iii) continued focus on cost saving initiatives.
Cost of sales in 2016 and 2015 included coal stockpile impairments of $7.4 million and $14.6 million, respectively, to reduce the carrying value of the Company''s coal stockpiles to their net realizable value. The coal stockpile impairments recorded in both years reflected the challenging coal market conditions and primarily related to the Company''s higher-ash content products.
Cost of sales related to idled mine asset costs primarily consisted of periodic costs, which were expensed as incurred and included mainly depreciation expense. Cost of sales related to idled mine assets in 2016 included $12.1 million related to depreciation expenses for idled equipment (2015: $22.5 million). The drop of cost of sales related to idled mine assets was mainly due to the increase in production during 2016 which results a higher utilization rate for the machinery and related assets.
Other operating expenses were negligible in 2016 compared to $19.0 million in 2015.
A foreign exchange gain of $5.4 million (2015: $0.9 million) was recorded as a result of the significant depreciation of MNT against USD during the fourth quarter of 2016. The key underlying driver of the forex gain are that most trade and other payables and the Tax Penalty are denominated in MNT.
The Company made a provision for doubtful trade and other receivables of $2.6 million (2015: $0.2 million) for the long aged receivables. As at December 31, 2016, the Company had gross receivables of $19.2 million due from the Customer. Of this amount approximately $12.0 million is expected to be settled in due course in exchange for the 240 Units in Mongolia. See section "Overview" for details. The 240 Units are located in Ulaanbaatar, Mongolia and were constructed in 2013. The total saleable area of the residential units is approximately 13,790 square meter. The size of each residential unit ranges from 42 square meter to 94 square meter. The balance outstanding from December 31, 2016, after deducting the $12.0 million, was to be paid by March 31, 2017 pursuant to the same agreement related to the residential real estate transaction. To March 31, 2017, the Company has collected $3.5 million from the Customer and on March 27, 2017 entered into a deferral agreement to extend the payment due date on the remaining uncollected balance to May 10, 2017.
In 2015, the Company recognized an expense for the provision of the Tax Penalty of $18.0 million.
Mining services at the Tavan Tolgoi deposit were provided in connection with settlement of the Tax Penalty at a net cost of $1.0 million in 2016 (Direct mining costs and depreciation totaling $3.1 million, net of service revenue of $2.1 million) (refer to "Governmental and Regulatory Investigations" of section "Regulatory Issues and Contingencies" for details), with no similar amount incurred in 2015.
Refer to "Settlement of Lawsuit Notice from a Former Fuel Supplier" and "Settlement of Claim by Former Chief Executive Officer" of section "Regulatory Issues and Contingencies" for details of the settlement of civil claims with MTLLC of $2.4 million and with Mr. Molyneux of $0.29 million, respectively.
Administration expenses were $7.9 million in 2016 as compared to $7.5 million in 2015. The increase in corporate administration and salaries and benefits was mainly due to the operations of the new subsidiary in China, which was incorporated in June 2016 to expand the sales channels of coal in China.
Evaluation and exploration expenses were $0.4 million in 2016 as compared to $0.1 million in 2015. The Company continued to minimize evaluation and exploration expenditures in 2016 in order to preserve the Company''s financial resources. Evaluation and exploration activities and expenditures in 2016 were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining and exploration licenses.
Given the difficult market conditions, the associated delays in projects and the commissioning of equipment, the Company recorded $92.7 million of impairment charges to reduce various items of property, plant and equipment to their recoverable amounts for the year ended December 31, 2015. In particular, after conducting an impairment test on the Ovoot Tolgoi Mine cash generating unit, the Company recorded a $76.7 million impairment charge in 2015 (refer to "Ovoot Tolgoi Mine Impairment Analysis" of section "Liquidity and Capital Resources" for details). After a further review of the dry coal handling facility ("DCHF") in the fourth quarter of 2015 related to the new mine plan, the Company concluded that there was no longer a plan to restart the DCHF project or to utilize the facility. As a result, the Company recorded an $8.5 million impairment charge in 2015 to reduce the carrying value of the DCHF to $nil as at December 31, 2015. For the year ended December 31, 2016, the Company again identified impairment indicators for the Ovoot Tolgoi Mine cash generating unit and conducted an impairment test. Following the slight market recovery in 2016 as well as the successful implementation of the Company''s business plan, no general impairment charges and no impairment reversal was determined. A specific impairment charge of $1.2 million was made for the year ended December 31, 2016 on the deposits related to pending purchases of property, plant and equipment.
Finance costs were $22.3 million and $21.4 million in 2016 and 2015 respectively, which primarily consisted of interest expense on the $250.0 million CIC Convertible Debenture.
Finance income was $0.2 million in 2016 compared to $1.3 million in 2015, which primarily related to unrealized gains on the change in fair value of the embedded derivatives in the CIC Convertible Debenture ($0.2 million and $1.1 million for 2016 and 2015, respectively). The fair value of the embedded derivatives in the CIC Convertible Debenture is driven by many factors including: the Company''s common share price, the USD and Canadian Dollar exchange rates and share price volatility.
Summary of Quarterly Operational Data
Overview of Quarterly Operational Data
The Company maintained a strong safety record and completed the fourth quarter of 2016 without any lost time injury.
Although market conditions and prices for coal improved in China in the fourth quarter of 2016, the impact of these conditions was partially offset by the Company being required to sell coal pursuant to the sales agreements which were negotiated at a time of lower coal prices, and the depreciation of the Renminbi against the USD. The Company sold 1.08 million tonnes of its coal products during the fourth quarter of 2016 compared to 0.21 million tonnes for the fourth quarter of 2015. The Company also improved the pacing of production to meet demand, such that production was 1.21 million tonnes for the fourth quarter of 2016 as compared to 0.62 million tonnes for the fourth quarter of 2015.
Summary of Quarterly Financial Results
The Company''s consolidated financial statements are reported under IFRS issued by the International Accounting Standards Board ("IASB"). The following table provides highlights from the Company''s consolidated financial statements of quarterly results for the past eight quarters.
Overview of Quarterly Financial Results
The Company recorded an $11.4 million loss from operations in the fourth quarter of 2016 compared to a $105.1 million loss from operations in the fourth quarter of 2015. The operations for the three months ended December 31, 2016 improved given the improved market conditions in China.
Revenue was $19.0 million in the fourth quarter of 2016 compared to $2.9 million in the fourth quarter of 2015. The Company sold 1.08 million tonnes of coal at an average realized selling price of $19.55 per tonne in the fourth quarter of 2016 compared to sales of 0.21 million tonnes at an average realized selling price of $17.19 per tonne in the fourth quarter of 2015. Revenue increased in the fourth quarter of 2016 compared to the fourth quarter of 2015 as a combined result of the higher sales volumes as well as the improved average selling price.
The Company''s revenue is presented after deduction of royalties and selling fees. The Company''s effective royalty rate for the fourth quarter of 2016, based on the Company''s average realized selling price of $19.55 per tonne, was 7.0% or $1.36 per tonne while the Company''s effective royalty rate was 13.8% or $2.38 per tonne based on the average realized selling price of $17.19 per tonne in the fourth quarter of 2015. The difference in the effective royalty rate was mainly driven by the change in the royalty regime which has been based on the actual contract price since February 2016 (refer to "Royalty regime in Mongolia" in this announcement for details).
Cost of sales was $22.8 million in the fourth quarter of 2016 compared to $12.1 million in the fourth quarter of 2015. Cost of sales comprises operating expenses, share-based compensation expense, equipment depreciation, depletion of mineral properties, coal stockpile inventory impairments 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 Measures" for further analysis) during the period.
Operating expenses included in cost of sales were $12.1 million in the fourth quarter of 2016 as compared to $1.8 million in the fourth quarter of 2015. The overall increase in operating expenses was primarily the net effect of (i) the increase in sales volume from 0.21 million tonnes in the fourth quarter of 2015 to 1.08 million tonnes in the fourth quarter of 2016; (ii) reduced impairment of coal stockpile inventories and (iii) continued focus on cost saving initiatives.
The depreciation and depletion portion of cost of sales increased to $9.1 million in the fourth quarter of 2016 from $0.9 million in the fourth quarter of 2015. The increase was mainly due to the increase in sales volume.
Cost of sales in the fourth quarter of 2016 and the fourth quarter of 2015 included coal stockpile impairments of $0.1 million and $5.5 million, respectively, to reduce the carrying value of the Company''s coal stockpiles to their net realizable value. The coal stockpile impairments recorded in both periods reflected the challenging coal market conditions and primarily related to the Company''s higher-ash content products. The lower balance for the fourth quarter of 2016 was mainly due to the recovery of coal market as evidenced by a higher selling price.
Idled mine asset costs in the fourth quarter of 2016 included depreciation expense for idled mine equipment of $1.5 million (2015: $3.9 million).
Other operating expenses were $3.8 million in the fourth quarter of 2016 (2015: $1.1 million).
The foreign exchange gain of $2.3 million for the fourth quarter of 2016 (2015: $0.4 million) was recorded as a result of a significant depreciation of the MNT against the USD. The key underlying drivers of the foreign exchange gain are that most trade and other payables and the Tax Penalty are denominated in MNT.
Mining services at the Tavan Tolgoi deposit were provided in connection with settlement of the Tax Penalty at a net cost of $1.0 million for the fourth quarter of 2016 (Direct mining costs and depreciation totaling $3.1 million, net of service revenue of $2.1 million) (refer to "Governmental and Regulatory Investigations" of section "Regulatory Issues and Contingencies" for details), with no similar amount incurred for the fourth quarter of 2015.
The Company made a provision for doubtful trade and other receivables of $2.6 million in the fourth quarter of 2016 (2015: negligible) for the long aged receivables.
Refer to "Settlement of Lawsuit Notice from a Former Fuel Supplier" of section "Regulatory Issues and Contingencies" for details of the settlement of civil claims with MTLLC of $2.4 million.
In the fourth quarter of 2015, the Company also recognized an impairment charge of $0.7 million in respect of obsolete materials and supplies inventories as the Company continued to operate below capacity in 2015 (2016: nil).
Administration expenses were $2.4 million in the fourth quarter of 2016 as compared to $2.2 million in the fourth quarter of 2015. The increase in corporate administration and salaries and benefits was mainly due to the operations of a new subsidiary in China which was incorporated in June 2016 to expand the sales channels of coal in China.
Evaluation and exploration expenses were $0.2 million in the fourth quarter of 2016 as compared to $0.1 million in the fourth quarter of 2015. The Company continued to minimize evaluation and exploration expenditures in order to preserve the Company''s financial resources. Evaluation and exploration activities and expenditures in the fourth quarter of 2016 were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining and exploration licenses.
Given the difficult market conditions and the associated delays in projects and the commissioning of equipment, the Company recorded $92.7 million of impairment charges to reduce various items of property, plant and equipment to their recoverable amounts in the fourth quarter of 2015. In particular, after conducting an impairment test on the Ovoot Tolgoi Mine cash generating unit, the Company recorded a $76.7 million impairment charge in 2015. A further review has been performed on DCHF in the fourth quarter of 2015 related to the new mine plan. The Company concluded that there is no longer a plan to restart the DCHF project or utilize the facility. As a result, the Company recorded an $8.5 million impairment charge in 2015 to reduce the carrying value of the DCHF to $nil as at December 31, 2015. For the year ended December 31, 2016, the Company again identified impairment indicators for the Ovoot Tolgoi Mine cash generating unit and conducted an impairment test. Following the slight market recovery in 2016 as well as the successful implementation of the Company''s business plan, no general impairment charge and no impairment reversal was determined. A specific impairment charge of $1.2 million was made in the fourth quarter of 2016 on the deposits related to pending purchases of property, plant and equipment.
Finance costs were $5.6 million in the fourth quarter of 2016 compared to $5.7 million in the fourth quarter of 2015, which primarily consisted of interest expense on the CIC Convertible Debenture.
Finance income was $0.5 million in the fourth quarter of 2016 compared to $0.6 million in the fourth quarter of 2015, which primarily consisted of unrealized gains on the fair value change of the embedded derivatives in the CIC Convertible Debenture. The fair value of the embedded derivatives in the CIC Convertible Debenture is driven by many factors, including the Company''s common share price, the USD and Canadian Dollar exchange rates and share price volatility.
UPDATED RESOURCE AND RESERVE ESTIMATE - OVOOT TOLGOI MINE
Resource
The term "resource" is utilized to quantify coal contained in seams occurring within specified limits of thickness and depth from surface considered by the Qualified Person to have reasonable prospects for eventual economic extraction. For a complete description of a resource, refer to "mineral resource" under the heading "DEFINITIONS AND OTHER INFORMATION - Glossary of Geological and Mining Terms" in the Company''s Annual Information Form dated March 31, 2017. The resource estimates presented are on an in-place basis, i.e., without adjustment for mining losses or coal recovery. Minimum seam thickness and maximum parting thickness are considered and coal intervals not meeting these criteria are not included in the reported resources.
In accordance with National Instrument 43 - 101 of the Canadian Securities Administrators ("NI 43-101"), DMCL has made reference to the GSC Paper 88-21 during the classification, estimation and reporting of coal resources for the Ovoot Tolgoi deposit. The exercise of resource classification is initially made based on the Geology-Type of the coal deposits as defined in the GSC Paper 88-21. According to the level of confidence of coal resource existence and data density, the resources are further classified into three categories respectively: Measured, Indicated and Inferred. These were considered by the Qualified Person during the classification of the resources at the Ovoot Tolgoi deposit.
As a consequence of material changes in some key assumptions underlying the analysis of its resources subsequent to the last detailed review of the project in 2016, particularly those relating to ongoing changes in coal market conditions in China, geologic analysis, optimized mining strategy and processing strategy, the Company has updated its resource and reserve estimate for the Ovoot Tolgoi deposit.
The resource estimate presented in this announcement is materially different from the previous estimate made in the 2016 Technical Report due to the following factors:
Resources have been estimated for the Ovoot Tolgoi deposit as of December 31, 2016, including Measured Resources of 201.9 million tonnes ("Mt"), Indicated Resources of 100.3 Mt and Inferred Resources of 89.0 Mt.
Resource categorization was completed on a Seam Group basis. The resource categorization also took into account the continuity and confidence in drill hole intersections along each section.
The updated estimate of resources at the Ovoot Tolgoi deposit is summarized in the following table.
Resources have been estimated as of December 31, 2016 using the Minex™ models provided by SGS. The key assumptions used for the resource estimation are:
The updated resource estimate for the Ovoot Tolgoi deposit was prepared for the Company by DMCL, which has been engaged to prepare a technical report in compliance with NI 43-101 reflecting the updated resource estimate, which the Company expects to file on SEDAR within 45 days of this announcement.
Reserves
The Company previously reported 175.7 million tonnes of proven and probable reserves in respect of the Ovoot Tolgoi deposit based on the 2012 Technical Report. Subsequently, the total resources estimated for the Ovoot Tolgoi deposit in the 2016 Technical Report significantly decreased from the 2012 Technical Report principally due to the exclusion of previously estimated underground resources, which were assessed as not having a reasonable prospect for eventual economic extraction. In response to the declining coal prices and weak coal transaction conditions in China, the previously established underground resource at the Ovoot Tolgoi Deposit was not considered to be reasonably economically viable in the 2016 Technical Report, significantly reducing the Company''s reported resources, which, together with the reclassification of the Geology Type of the deposit from "Complex" to "Severe", eliminated the Company''s mineable reserves that had previously been established for the Ovoot Tolgoi deposit.
In late 2016, the Company and DMCL engaged in a comprehensive review of all relevant information including technical data, mining strategy, pit optimization, mine design, production scheduling, coal processing strategy, sales strategy, coal prices and recovering coal transaction conditions, in order to prepare and update its resources and reserve estimates and prepare a new mine plan. This process resulted in re-estimation of reserves by DMCL which appears in the table below.
The reserve estimate presented below is materially different from the previous estimate made in the 2016 Technical Report due to the following factors:
The above estimate of Reserves at the Ovoot Tolgoi deposit have been estimated as of December 31, 2016 based on the resource model provided by SGS. Measured and Indicated Resources are inclusive of those Mineral Resources modified to produce the Reserves, ie, Reserves are not additional to Resources.
The key assumptions used for the reserve estimation are:
The updated reserve estimate for the Ovoot Tolgoi deposit was prepared by DMCL which has been engaged by the Company to prepare a technical report reflecting the updated reserve estimate in compliance with NI 43-101, which the Company expects to file on SEDAR within 45 days.
Mining Operations
Mining Method
The mining method employed at the Ovoot Tolgoi deposit could be described as open pit terrace mining utilizing large scale hydraulic excavators and shovels and trucks. Terrace mining is utilized where coal seams dip steeply and operating machinery on the coal seam roof and floor is not possible, due to the steep seam dips. Terraces, or benches, are excavated along fixed horizontal horizons and these benches intersect both coal and waste. Coal and waste are mined separately on each bench with dozers being used, as needed, to push coal or waste down to the excavator for loading onto trucks. This mining method allows large scale open pit mining to occur productively in steeply dipping coal seam environments. All waste is dumped ex-pit, as the steep dips preclude in-pit dumping.
The open pit limits extend across the Ovoot Tolgoi Mining Licence boundary into the adjacent lease held by MAK. As described previously, the Company and MAK have a cooperation agreement in place to allow mining across the boundary, which stipulates that SGS is responsible for removal of MAK waste but MAK is responsible for mining of MAK coal. Accordingly, the current reserve estimate does not include any coal within the MAK lease that must be extracted as part of the Company mining operation. Therefore in the current mine plan, no revenue has been assumed for the MAK coal whereas costs have been assumed for stripping off the MAK waste.
Technical Report
The technical report for the Ovoot Tolgoi deposit that is currently being prepared by DMCL will contain details of the new mine plan for Ovoot Tolgoi and will include information with respect to (i) processing and recovery operations, (ii) infrastructure, permitting and compliance, and (iii) capital and operating costs.
It is expected that the mine plan in the DMCL technical report will include a processing strategy marked by wet washing facilities comprised of a wet wash plant equipped with the customized jig washing circuit and deep de-watering equipment. It is further expected that such processing strategy will be multi-phased and expanded over time.
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.
Turquoise Hill Loan Facility
On May 25, 2014, the Company announced it obtained the TRQ Loan in the form of a $10 million revolving credit facility to meet its short term working capital requirements. The terms and conditions of this facility were filed on SEDAR () on June 2, 2014. The key commercial terms of the facility were: an original maturity date of August 30, 2014 (subsequently extended as described below); an interest rate of one month US dollar LIBOR Rate in effect plus 11% per annum; a commitment fee of 35% of interest rate payable quarterly in arrears on undrawn principal amount of facility and a front end fee of $0.1 million.
During 2014 to 2016, the due date of the TRQ Loan, was extended several times and the maximum amount of the facility was reduced to $3.8 million.
On May 16, 2016, the Company and Turquoise Hill entered into the May 2016 Deferral Agreement, whereby Turquoise Hill agreed to a limited deferral of repayment of all remaining amounts and obligations owing under the TRQ Loan to December 29, 2017 in accordance with the schedule of repayment set out below:
Unless otherwise agreed by Turquoise Hill, under certain circumstances, including the non-payment of interest amounts as the same become due, amounts outstanding under the TRQ Loan 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 TRQ Loan. Subject to notice and cure periods, certain events of default under the TRQ Loan will result in acceleration of the indebtedness under such loan at the option of Turquoise Hill.
At December 31, 2016, the outstanding principal and accrued interest under this facility amounted to $2.2 million and $0.7 million, respectively (at December 31, 2015, the outstanding principal and accrued interest under the facility amounted to $3.4 million and $0.6 million, respectively).
To date, the Company has made all payments due under the May 2016 Deferral Letter Agreement.
Short-term bridge loan
On October 27, 2015, the Company executed a $10 million bridge loan agreement with an independent Asian based private equity fund. The interest rate is 8% per annum with interest payable upon the repayment of loan principal.
The Company repaid the first tranche of the short-term bridge loan with interest of $5.0 million up to August 11, 2016. During June and July 2016, the Company drew the second tranche of $5.0 million, of which $1.5 million has been matured in March and $3.5 million will mature in April 2017. In December 2016, $1.5 million was repaid for the short-term bridge loan and a further $1.8 million and $1.6 million was subsequently repaid in January 2017 and March 2017, respectively.
As at December 31, 2016, the outstanding balance for the short-term bridge loan was $3.3 million (December 31, 2015: $4.9 million) and the Company owed accrued interest of $0.1 million (December 31, 2015: $0.1 million). A loan arrangement fee of 5% of the loan principal drawn was charged, totaling $0.3 million for the loans drawn during June and July 2016 and amortized throughout the loan term. For the year ended December 31, 2016, $0.2 million of loan arrangement fee was amortized (2015: nil).
Under certain circumstances, including the non-payment of interest amounts as the same become due, amounts outstanding under the short-term bridge loan 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 short-term bridge loan. Subject to notice and cure periods, certain events of default under the short-term bridge loan will result in acceleration of the indebtedness under the short-term bridge loan at the option of the lender.
Bank loan
On May 6, 2016, the Company entered into a $2.0 million loan agreement with a Mongolian bank. The key commercial terms of the loan are as follows:
As at December 31, 2016, the outstanding balance for the bank loan was $2.0 million (2015: nil) and the Company owed accrued interest of $0.1 million (2015: nil).
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, 2017 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 working capital deficiency (excess current liabilities over current assets) of $59.4 million as at December 31, 2016 compared to $42.3 million of working capital deficiency as at December 31, 2015. Included in the working capital deficiency at December 31, 2016 are significant obligations, which come due in the short-term, including the agreement to pay $19.7 million to CIC from January to May 2017, pursuant to the interest deferral agreement (refer to "CIC Convertible Debenture" of section "Liquidity and Capital Resources"). Although the Company has been in discussions with CIC for a further deferral, there can be no assurance that a favorable outcome can be reached.
Further, the trade and other payables of the Company have continued to accumulate due to liquidity constraints. The aging profile of trade and other payables has worsened as compared to December 31, 2015, as follows:
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 may impact the mining operations of the Company and result in potential lawsuits and/or bankruptcy proceedings being filed against the Company. No such lawsuits or proceedings are pending as at March 31, 2017.
The Company also has other current liabilities, which require settlement in the short-term, including: the remaining cash payments of $3.0 million due in connection with the Tax Penalty owing to the Government of Mongolia; the MTLLC settlement in the amount of $7.9 million, which is included in trade and other payables, due between March and June 2017; the $3.4 million balance of the short-term bridge loan due in April 2017 (repaid in January and March 2017); the $2.9 million balance of the TRQ Loan payable in monthly payments with the balance due in December 2017; and the bank loan of $2.0 million due in May 2017.
The Company is also party to a commercial arbitration in Hong Kong with First Concept, involving an $11.5 million amount received as a coal supply contract prepayment, whereby First Concept is seeking to recover its deposit rather than completing the contracted coal purchases. An arbitration decision, which would compel the Company to repay First Concept or alternatively, which would compel First Concept to take the coal will impact the liquidity of the Company.
In order to address the continuing difficult coal market conditions in China, the Company has initiated a plan to change the existing product mix to higher value and higher margin outputs by washing certain grades of coal commencing in 2017 in order to produce more premium semi-soft coking coal and to initiate more processing of the lower grades of coal in order to reduce the ash content and improve the selling price and margins on its thermal coal product. The Company has also completed a new mine plan, which incorporates the coal washing and processing systems and contemplates significantly higher volumes of production in order to complement the Company''s new product mix and sales volume targets. Such plans will involve the need for a significant level of stripping activities over the next two years and require certain capital expenditures to achieve the designed production outputs. Such expenditures will require the Company to seek additional financing in the form of finance leases, debt or equity. The Company has entered into an agreement for a finance lease on the new wash plant facility but will need financing to complete the thermal coal processing facilities.
There is no guarantee that the Company will be able to successfully execute the measures mentioned above and secure other sources of financing. If it fails to do so, or is unable to secure additional capital or otherwise restructure or refinance its business in order to address its cash requirements through December 31, 2017, then the Company is unlikely to have sufficient capital resources or cash flows from mining operations in order to satisfy its current ongoing obligations and future contractual commitments. 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.
Unless the Company acquires additional sources of financing and/or funding in the short term, the ability of the Company to continue as a going concern is threatened. If the Company is unable to continue as a going concern, it may be forced to seek relief under applicable bankruptcy and insolvency legislation.
Continuing delay in securing additional financing could ultimately result in an event of default of the CIC Convertible Debenture, the TRQ Loan and the bank loan, which if not cured within applicable cure periods in accordance with the terms of respective instruments, may result in the principal amounts owing and all accrued and unpaid interest becoming immediately due and payable upon notice to the Company by CIC, Turquoise Hill and the lender of the bank loan, respectively.
Factors that impact the Company''s liquidity are being closely monitored and include, but are not limited to, 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, 2016, the Company''s gearing ratio was 0.37 (2015: 0.33), which was calculated based on the Company''s long term liabilities to total assets. As at December 31, 2016 and December 31, 2015, the Company is not subject to any externally imposed capital requirements.
As at March 31, 2017, the Company had $5.3 million of cash.
CIC Convertible Debenture
In November 2009, the Company entered into a financing agreement with a wholly owned subsidiary of 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, 2016, CIC owned, through its indirect wholly owned subsidiary, approximately 19.4% of the issued and outstanding common shares of the Company.
On July 13, 2016, the Company executed a deferral agreement with CIC which covered outstanding deferred cash interest obligations and associated costs of $18.8 million as of July 13, 2016 and the cash interest payment of $8.1 million due on November 19, 2016. Pursuant to the deferral agreement, the Company originally agreed to repay $1.3 to $1.4 million monthly from July to November 2016 and repay $20.7 million on December 19, 2016. In consideration for the deferred payments, the Company agreed to pay a deferral fee at a rate of 6.4% per annum to CIC.
In November 2016, the Company and CIC agreed to delay the share issuance portion of the interest settlement of $4 million, subsequently the shares of $4 million were issued to CIC on January 11, 2017.
On December 29, 2016, the Company executed the December 2016 Deferral Agreement with CIC for a revised repayment schedule on the $20.7 million of cash interest and associated costs originally due on December 19, 2016 ("December 2016 Deferral Amounts"). The key repayment terms of the December 2016 Deferral Agreement are: (i) the Company is required to repay $6.8 million of the cash interest and associated deferral fee costs in five monthly amounts during the period from December 2016 to April 2017; and (ii) the Company is required to repay $14.3 million of cash interest and associated costs on May 19, 2017.
At any time before the December 2016 Deferral Amounts are 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 of directors proposes to replace either or both such officers with nominees selected by the Board, provided that the directors acted honestly and in good faith with a view to the best interests of the Company in the selection of the applicable replacements.
To date, the Company has made all payments due under the December 2016 Deferral Agreement.
Under certain conditions, including the non-payment of interest amounts as the same become due, 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.
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, 2016. The impairment indicator was the uncertainty of future coal prices in China.
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 price, sales volumes and washing assumptions, operating cost and life of mine coal production assumptions as at December 31, 2016. The Company''s Ovoot Tolgoi Mine cash generating unit carrying value was $169.3 million as at December 31, 2016.
Key estimates and assumptions incorporated in the valuation model included the following:
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, 2016. The Company also conducted an impairment analysis in the prior year and an impairment loss of $76.7 million was charged to other operating expense as at December 31, 2015. 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
Governmental and Regulatory Investigations
In 2014, the Company was subject to investigations by Mongolia''s Independent Authority Against Corruption (the "IAAC") regarding allegations of breaches of Mongolia''s anti-corruption laws (the "Anti-Corruption Case"), and tax evasion and money laundering (the "Tax Evasion Case").
While the IAAC has not made any formal accusations against any current or former employee of the Company or the Company under the Anti-Corruption Case, administrative penalties were imposed on certain of the Company''s Mongolian assets in connection with the investigation, including certain funds held in bank accounts in Mongolia totaling $1.2 million (the "Restricted Funds"). The Company has been informed that the Anti-Corruption Case has been suspended; however, it has not received formal notice that the investigation is completed.
With respect to the Tax Evasion Case, on December 30, 2014, the Capital City Prosecutor''s Office (Ulaanbaatar, Mongolia) dismissed the allegations of money laundering as not having been proven during the investigation; however, proceedings in respect of tax evasion by former employees of the Company proceeded and culminated in February 2015, when the Company received the written verdict (the "Tax Verdict") of the Mongolian Second District Criminal Court. The Tax Verdict pronounced the three former employees of SGS guilty and declared SGS to be financially liable as a "civil defendant" for a penalty (the "Tax Penalty") of MNT 35.3 billion (approximately $18.2 million on February 1, 2015). Following the refusal of the Supreme Court of Mongolia to hear the case on appeal in June 2015, the Tax Verdict entered into force. The Tax Verdict is, however, not immediately payable and enforceable against SGS absent further actions prescribed by the laws of Mongolia. However, the Company made a corresponding provision for the court case penalty of $18.0 million in the second quarter of 2015 given the Tax Verdict had entered into force.
On October 6, 2015, the Company was informed by its Mongolian banks (where the Restricted Funds were held) that they had received an official request from the Court Decision Implementing Agency of Mongolia ("CDIA") to transfer the Restricted Funds according to the court decision. $1.2 million was transferred to CDIA from the frozen bank accounts in October and November 2015.
Following the submission by the Company of various proposals to resolve the dispute giving rise to the Tax Verdict, in May 2016, the Resolution 258 of the Government of Mongolia was issued, which approved the Company''s proposal to partially settle the Tax Penalty by way of certain cash payments in 2016 and 2017 and by the Company performing certain mining operations at the Tavan Tolgoi deposit on behalf of Erdenes. Subsequently to this Resolution, the Company made cash payments of $2.4 million during 2016 as a partial settlement of the Tax Penalty.
In compliance with the Resolution 258, in November 2016, the Company entered into an agreement with Erdenes under which the Company agreed to perform certain mining operations equivalent to MNT 20.3 billion (approximately $8.1 million) in the West Tsankhi section of the Tavan Tolgoi deposit during the period from November 2016 to February 2017. As at December 31, 2016, the Company had performed mining operations consisting of drilling and blasting of rock mass, stripping and loading topsoil, selective excavation and loading coal, and creating overburden stockpiles at the Tavan Tolgoi deposit equivalent to MNT 5.2 billion (approximately $2.1 million).
As of the date hereof the Company has completed the mining operations at the Tavan Tolgoi deposit equivalent to MNT 20.3 billion (approximately $8.1million) as set out in the agreement with Erdenes.
The Company has provided $9.1 million for the court case penalty at December 31, 2016. The decrease from $18.0 million as at June 30, 2015 is as a result of subsequent transfers from frozen bank accounts of $1.2 million, additional cash payments by the Company in 2016 of $2.4 million, the provision of mining services at the Tavan Tolgoi deposit in 2016 of $2.1 million and the foreign exchange adjustments.
The Company is required to make further cash payments of $3.0 million in 2017 to complete repayment to the balance of the penalty owing.
As described above, the Company is working with the relevant authorities in Mongolia to resolve the dispute giving rise to the tax verdict in a manner that is appropriate having regard to the Company''s limited financial resources and supportive of a positive environment for foreign investment in Mongolia. Should the Company fail to meet the terms of the agreed repayment plan and to receive a discharge of the judgment from the applicable Mongolian court, this may result in an event of default under the CIC Convertible Debenture and CIC would have the right to declare the full principal and accrued interest owing thereunder immediately due and payable. Such an event of default under the CIC Convertible Debenture or the Company''s inability to pay the penalty could result in voluntary or involuntary proceedings involving the Company, including bankruptcy.
Internal Investigations
Through its Audit Committee (comprised solely of independent directors), the Company conducted an internal investigation into possible breaches of law, internal corporate policies and codes of conduct arising from allegations raised in the context of investigations by Mongolian authorities. The former Chair of the Audit Committee also participated in a tripartite committee, comprised of the Audit Committee Chairs of the Company and Turquoise Hill and a representative of Rio Tinto plc., focused on the investigation of a number of those allegations, including possible violations of anti-corruption laws. The tripartite committee substantially completed the investigative stage of its activities during the third quarter of 2013. There have been no significant developments in respect of the internal investigations since the completion of the investigation phase during the third quarter of 2013.
The investigations referred to above could result in one or more Mongolian, Canadian, United States or other governmental or regulatory agencies taking civil or criminal action against the Company, its affiliates or its current or former employees. The likelihood or consequences of such an outcome are unclear at this time but could include financial or other penalties, which could be material, and which could have a material adverse effect on the Company.
The Company, through the Board and management, has taken a number of steps to address issues noted during the investigations and to focus on ongoing compliance by all employees with all applicable laws, internal corporate policies and codes of conduct, and with the Company''s disclosure controls and procedures and internal controls over financial reporting.
In the opinion of management of the Company, at December 31, 2016 a provision for this matter is not required.
Mongolian IAAC Investigation
In the first quarter of 2013, the Company was subject to orders imposed by the IAAC which placed restrictions on certain of the Company''s Mongolian assets. The orders were imposed on the Company in connection with the IAAC''s investigations of the Company as described above under "Governmental and Regulatory Investigations" and continued to be enforced by the Mongolian State Investigation Office. The restrictions on the assets were reaffirmed in the Tax Verdict and form part of the Tax Penalty payable by the Company.
The orders related to certain items of operating equipment and infrastructure and the Company''s Mongolian bank accounts ("Restricted Funds"). The orders related to the operating equipment and infrastructure restricts the sale of these items; however, the orders do not restrict the use of these items in the Company''s mining activities. The orders related to the Company''s Mongolian bank accounts restricted the use of in-country funds but did not have any material impact on the Company''s activities. The Restricted Funds were transferred to the Court Decision Implementing Agency of Mongolia as partial payment of the Tax Verdict in October and November 2015. See "Governmental and Regulatory Investigations" above.
Following a review by the Company and its advisers, it is the Company''s view that the orders placing restrictions on certain of the Company''s Mongolian assets did not result in an event of default as defined under the terms of the CIC Convertible Debenture. However, the enforcement of the orders could ultimately result in an event of default of the Company''s CIC Convertible Debenture, which if it remains uncured for ten business days, would result in the principal amount owing and all accrued and unpaid interest will become immediately due and payable upon notice to the Company by CIC.
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 consolidated financial statements as previously disclosed in the Company''s public filings.
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 Ontario Court 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 Ontario 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 initiated the Corporation''s Appeal to appeal this portion of the decision of the Ontario Court.
On his part, the plaintiff initiated the Individual''s Appeal whereby 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 was brought as of right to the Ontario Court of Appeal.
By Order dated September 12, 2016, the Corporation Appeal was transferred to the Ontario Court of Appeal to be heard together with the Individuals'' Appeal. The Corporation Appeal was perfected on October 25, 2016 in the Ontario Court of Appeal.
Both the Individuals'' Appeal and the Corporation Appeal will now be verbally argued together. The appeals have been scheduled to be heard by the Ontario Court of Appeal in June 2017.
The Company disputes and is vigorously defending itself against the plaintiff''s claims through independent Canadian litigation counsel retained by the Company and the other defendants 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 at December 31, 2016 is 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 coals 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 these $18.5 million will be required to be paid. Accordingly, the Company has determined a provision for this matter at December 31, 2016 is not required.
Mining Prohibition in Specified Areas Law
In July 2009, Mongolia promulgated the Law on Prohibiting Mineral Exploration and Extraction Near Water Sources, Protected Areas and Forests (the "Mining Prohibition in Specified Areas Law"). Pursuant to the Mining Prohibition in Specified Areas Law, the Government of Mongolia has defined the boundaries of certain areas in which exploration and mining is purportedly prohibited. A list of licenses has been prepared that overlap with the prohibited areas described in the law based on information submitted by water authority agencies, forest authority agencies and local authorities for submission to the Government of Mongolia.
In order to address the issues facing its implementation, in February 2015 the Parliament of Mongolia adopted an amendment to the Law on Implementation of the Mining Prohibition in Specified Areas Law (the "Amended Law on Implementation"). The Amended Law on Implementation provides an opportunity for license holders covered within the scope of application of the Mining Prohibition in Specified Areas Law to continue their mining operations subject to advance placement of funds to cover 100% of the future environmental rehabilitation costs. A model contract and a specific Government regulation on this requirement will be adopted by the Government. The license holders must also apply within 3 months after the amendment to the Law on Implementation comes into effect for permission to MRAM to resume activities. The Company considered the development projects may be affected, but not the operating mines. The Company submitted its application with respect to its mining licenses before the deadline set on June 16, 2015 but has not yet received any communication from MRAM on the status of its application.
Pursuant to the Mongolian Law "To prohibit mineral exploration and mining operations at headwaters of rivers, water protection zones and forested areas", the government administrative agency has notified the Company that special license area 12726A is partly overlapping with a water reservoir. The Company has inspected the area together with the Cadastral Division of the Mineral Resource Authority as well as through the cadastral registration system of the Ministry of Environment, it is determined that 29 hectares of Sukhait Bulag is partly overlapping with a water reservoir, of which has been partly handed over. (Resolution No.6/7522 issued on September 29, 2015 by the Head of Cadastral Division of the Mineral Resource Authority).
In accordance with Article 22.3 of Law of Mongolia on Water, 5,602.96 hectares of land, including Sukhaityn Bulag, Uvur Zadgai, and Zuun Shand pertaining to exploration license 9443X, which was converted to mining license MV-0125436 in January 2016, is overlapping with protected area boundary. It has been officially handed over to the local administration. (Resolution No.688 issued on September 24, 2015 by the Head of Cadastral Division of the Mineral Resource Authority) In connection with the nullification of Annex 2 of government order No.194 "On determining boundary" issued on June 5, 2012, area around the water reservoir located at MV-016869 license area and Soumber exploration license 9449X, which was converted to mining license MV-020451 in January 2016, has been annulled from the Specified Area Law.
Therefore, mining license 12726A and MV-016869 and exploration licenses 9443X, 9449X were removed from the list of licenses that overlaps with the prohibited areas described in the law.
There has been limited development of the law during 2016 while two exploration licenses of the Company (13779X and 5267X) were converted to mining licenses (MV-020676 and MV-020675) in November 2016. The Company will continue to monitor the developments and ensure that it follows the necessary steps in the Amended Law on Implementation to secure its operations and licenses and is fully compliant with Mongolian law.
Special Needs Territory in Umnugobi
On February 13, 2015, the entire Soumber mining license and a portion of SGS'' exploration license No.9443X (9443X was converted to mining license MV-025436 in January 2016) (the "License Areas") were included into a special protected area (to be further referred as Special Needs Territory "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 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 is 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.
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. The arbitral proceedings (the "Arbitration") are deemed to have commenced on June 24, 2015, as the date when the respondent received the Notice.
The Company firmly rejects the allegations of First Concept in the Notice as lacking any merit. The Arbitration was held in the fourth quarter of 2016 and the decision is not expected until the second quarter of 2017.
There can be no assurance, howev
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Datum: 31.03.2017 - 08:30 Uhr
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