SouthGobi Resources Announces Fourth Quarter and Full Year 2015 Financial and Operating Results and Update on Ovoot Tolgoi Resource Estimate
(firmenpresse) - HONG KONG, CHINA -- (Marketwired) -- 03/29/16 -- SouthGobi Resources Ltd. (TSX: SGQ)(HKSE: 1878) ("SouthGobi" or the "Company"). The Company today announced its financial and operating results for the quarter and the year ended December 31, 2015. All figures are in U.S. Dollars unless otherwise stated.
Significant Events and Highlights
The Company's significant events and highlights for the year ended December 31, 2015 and subsequent period to March 29, 2016 are as follows:
On March 3, 2015, the initial tranche of the private placement consisting of approximately US$3.5 million of Mandatory Convertible Units was closed. The Mandatory Convertible Units were converted into approximately 10.1 million Common Shares on April 23, 2015 at a conversion price of CAD$0.432 per Common Share.
On April 23, 2015, the Company successfully closed the second tranche of the Novel Sunrise private placement for gross proceeds of approximately $4.0 million through the issue of approximately 11.6 million Common Shares.
On July 27, 2015, CIC confirmed to the Company that, subject to certain conditions and limitations, it agreed to grant a further deferral of payment of the May 2015 cash interest installment until November 19, 2015 to allow the Company to execute its Funding Plan (as defined below in the section entitled "Going Concern").
On November 24, 2015, CIC confirmed to the Company that, subject to certain conditions and limitations, it had agreed to grant further deferral of payment of the May 2015 cash interest installment to be due and repayable between November 2015 and May 2016 while the cash interest payment due on November 19, 2015 of approximately $8.1 million shall be due and repayable on May 18, 2016.
On February 18, 2016, CIC confirmed to the Company that, subject to certain conditions and limitations, it had agreed to grant further deferral of a payment due on February 19, 2016 of $1 million to be due and repayable on February 29, 2016. It was subsequently paid in February 2016.
Mr. Enkh-Amgalan Sengee: Mr. Sengee tendered his resignation as President and Chief Executive Officer on March 13, 2015.
Mr. Ted Chan: Mr. Chan was initially appointed as an Executive Director of the Company on March 3, 2015. On July 26, 2015, following the appointment of Mr. Yulan Guo as Interim Chief Executive Officer, Mr. Chan ceased to be an Executive Director but remained as a Non-Executive Director of the Company until August 6, 2015, the date of the Company's Annual Meeting of Shareholders (the "AGM"), where Mr. Chan did not stand for election.
Mr. Jeffery Tygesen: Mr. Tygesen resigned as a Non-Executive Director on March 17, 2015.
Mr. Yulan Guo: Mr. Guo was initially appointed to the board of directors as a Non-Executive Director on May 15, 2015. On July 26, 2015, Mr. Guo was appointed as Interim Chief Executive Officer and an Executive Director of the Company and was re-elected as a director of the Company at the AGM. On September 1, 2015, Mr. Guo was appointed as Chief Financial Officer and ceased to be Interim Chief Executive Officer.
Mr. Ningqiao Li: Mr. Li was appointed to the board of directors as a Non-Executive Director on May 15, 2015 and was re-elected as a director of the Company at the AGM. On September 17, 2015, Mr. Li was appointed as an Executive Director and Executive Chairman of the board of directors.
Mr. Aminbuhe: On August 6, 2015, Mr. Aminbuhe was elected to the board of directors as Non-Executive Director following the conclusion of the AGM. On September 1, 2015, Mr. Aminbuhe was appointed as an Executive Director and Chief Executive Officer.
Mr. Bold Baatar: Mr. Baatar resigned as a Non-Executive Director on May 15, 2015.
Mr. Zhu Liu and Ms. Jin Lan Quan: On August 6, 2015, Mr. Liu and Ms. Quan were elected to the board of directors as Independent Non-Executive Directors following the conclusion of the AGM.
Mr. Kelly Sanders: On August 6, 2015, Mr. Sanders did not stand for the re-election at the AGM and ceased to be a Non-Executive Director.
Mr. Bertrand Troiano: Mr. Troiano stepped down as Chief Financial Officer of the Company following the conclusion of a two-year secondment from Rio Tinto plc ("Rio Tinto") which ended on July 31, 2015.
Mr. Andre Deepwell: Mr. Deepwell resigned as an Independent Non-Executive Director and Chairman of the Audit Committee on August 31, 2015.
Mr. Mao Sun: Mr. Sun was appointed as an Independent Non-Executive Director and Chairman of the Audit Committee on November 5, 2015.
Mr. Gordon Lancaster: Mr. Lancaster retired as an Independent Non-Executive Director on December 14, 2015.
Mr. Huiyi Wang: Mr. Wang was appointed as a Non-Executive Director on February 18, 2016.
OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS
Summary of Annual Operational Data(iv)
Overview of Annual Operational Data
The Company has operated under difficult market conditions throughout 2015 which have affected the Company's results in respect of sales prices and volumes. In 2015, the Company sold 1.07 million tonnes of coal compared to 2.04 million tonnes in 2014.
The Company's production in 2015 was higher than 2014, at 1.95 million tonnes compared to 1.57 million tonnes. On March 30, 2015, the Company resumed mining operations allowing the Company to position itself to meet its commitments under existing and expected new coal offtake contracts.
The cash cost of product sold per tonne was $17.07 for 2015, which significantly increased compared to $11.02 per tonne for 2014. The reason for the increase is primarily related to fewer costs being allocated to idled mine asset costs during the year. ($3.0 million for 2015 as compared to $5.6 million for 2014 in which the Company placed approximately half of its workforces on furlough for the second half of 2014.)
The Company maintained a strong safety record throughout 2015. As at December 31, 2015, the Company has a lost time injury frequency rate of 0.00 per 200,000 man hours based on a rolling 12 month average.
Summary of Annual Financial Results
Overview of Annual Financial Results
The Company recorded a $166.9 million loss from operations in 2015 compared to an $82.7 million loss from operations in 2014. The 2015 operations were impacted by continuing difficult market conditions which resulted in lower sales volumes and prices compared to 2014. The lower cost of sales and lower administration expense were offset by lower revenue generated, higher impairment losses and provisions in 2015.
Revenue was $16.0 million in 2015 compared to $24.5 million in 2014. The Company sold 1.07 million tonnes of coal at an average realized selling price of $17.66 per tonne in 2015, compared to sales of 2.04 million tonnes at an average realized selling price of $14.76 per tonne in 2014. The increase in the average realized selling price mainly resulted from differences in product mix in 2015 compared to 2014. The product mix in 2015 consisted of approximately 55% of Standard semi-soft coking coal and 21% of Premium semi-soft coking coal compared to approximately 43% of sales consisting of either Premium or Standard semi-soft coking coal in 2014.
The Company's revenue is presented after deduction of royalties and selling fees. The Company's effective royalty rate for 2015, based on the Company's average realized selling price of $17.66 per tonne, was 12.7% or $2.25 per tonne compared to 12.5% or $1.85 per tonne based on the average realized selling price of $14.76 per tonne in 2014.
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 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.
Cost of sales was $63.7 million in 2015 compared to $82.1 million in 2014. 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 Non-IFRS Financial Measures section for further analysis) during the period.
Operating expenses in cost of sales were $18.3 million in 2015 compared to $22.5 million in 2014. The overall decrease in operating expenses is primarily the result of the combined effect of (i) decreased sales volume from 2.04 million tonnes in 2014 to 1.07 million tonnes in 2015; and (ii) continued focus on cost saving initiatives, including the curtailment of mining operations in the first quarter of 2015. However the cost of sales per tonne is higher in 2015, which is mainly due to reduced production levels and the impairment of coal stockpile inventories during the year.
Cost of sales in 2015 and 2014 included coal stockpile impairments of $14.6 million and $16.3 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 reflect the challenging coal market conditions and primarily related to the Company's higher-ash products.
Cost of sales related to idled mine asset costs primarily consisted of period costs, which were expensed as incurred and included mainly depreciation expense. Cost of sales related to idled mine assets in 2015 included $22.5 million related to depreciation expenses for idled equipment (2014: $30.3 million).
Other operating expenses were $19.0 million in 2015 compared to $6.0 million in 2014.
Compared to 2014, the increase in other operating expenses is primarily related to the provision for the court case penalty (refer to "Governmental and Regulatory Investigations" of Regulatory Issues and Contingencies section for details) in 2015.
In 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 (2014: $3.0 million).
The Company recognized an impairment loss of $1.8 million in 2014 which was related to its investment in Aspire, which is accounted for as an available-for-sale financial asset and carried at its fair value. The Company disposed all of its investment in Aspire during 2014.
In 2014, the Company recognized an impairment loss of $3.4 million related to prepaid toll washing fees under the contract with Ejin Jinda. The impairment charge was a result of the continued delay in starting the commercial operations at the wet washing facility and the continued soft coal market in China.
A gain of $2.2 million was recorded from the disposal of mining licenses in 2014. In the second quarter of 2014, $1.8 million was recorded after the Company completed the sale of the Tsagaan Tolgoi mining license. A further $0.4 million was recorded in the fourth quarter of 2014 after the partial sale of exploration license 9449X.
Administration expenses were $7.5 million in 2015 compared to $8.9 million in 2014.
Administration expenses were lower in 2015 compared to 2014 which reflects the Company's cost reduction initiatives.
Evaluation and exploration expenses were $0.1 million in 2015 compared to $1.3 million in 2014. The Company continued to minimize evaluation and exploration expenditures in 2015 in order to preserve the Company's financial resources. Evaluation and exploration activities and expenditures in 2015 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 for the year ended December 31, 2015 (2014: $8.9 million). In particular, after conducting an impairment test on the Ovoot Tolgoi Mine cash generating unit, the Company recorded an $76.7 million impairment charge in 2015 (refer to "Ovoot Tolgoi Mine Impairment Analysis" of Financial Position and Liquidity section 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 is no longer a plan to restart the DCHF project or to utilize the facility. As a result of the impairment assessment, 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.
Finance costs were $21.4 million and $21.8 million in 2015 and 2014 respectively, which primarily consisted of the interest expense on the $250.0 million CIC Convertible Debenture.
Finance income was $1.3 million in 2015 compared to $1.6 million in 2014, primarily relating to unrealized gains on the change in fair value of the embedded derivatives in the CIC Convertible Debenture ($1.1 million and $1.6 million respectively for 2015 and 2014). The fair value of the embedded derivatives in the CIC Convertible Debenture is driven by many factors including: the Company's common share price, U.S. Dollar and Canadian Dollar exchange rates and share price volatility.
Income tax expense was negligible in 2015 compared to an expense of $0.6 million in 2014. In 2014, $0.5 million relate to taxes paid in respect of the sale of the Tsagaan Tolgoi mining license.
Summary of Quarterly Operational Data
Overview of Quarterly Operational Data
Due to difficult market conditions, the Company has paced production with existing and expected demand for its coal products. The coal market remained challenging in the fourth quarter of 2015. As a result the Company operated significantly below capacity during the quarter and its production decreased slightly from 0.71 million tonnes in the third quarter of 2015 to 0.62 million tonnes in the fourth quarter of 2015.
The Company maintained a strong safety record and completed the fourth quarter of 2015 without a lost time injury.
Summary of Quarterly Financial Results
The Company's financial statements are reported under IFRS issued by the International Accounting Standards Board ("IASB"). The following table provides highlights from the Company's financial statements of quarterly results for the past eight quarters.
Overview of Quarterly Financial Results
The Company recorded a $105.1 million loss from operations in the fourth quarter of 2015 compared to a $29.5 million loss from operations in the fourth quarter of 2014. Continuing difficult market conditions resulted in lower sales volumes in the fourth quarter of 2015 compared to the fourth quarter of 2014. This lower revenue and higher impairment charge was offset by a lower cost of sales and lower administration expenses in the fourth quarter of 2015 compared to the fourth quarter of 2014.
Revenue was $2.9 million in the fourth quarter of 2015 compared to $5.1 million in the fourth quarter of 2014. The Company sold 0.21 million tonnes of coal at an average realized selling price of $17.19 per tonne in the fourth quarter of 2015 compared to sales of 0.37 million tonnes at an average realized selling price of $15.04 per tonne in the fourth quarter of 2014. Revenue decreased in the fourth quarter of 2015 compared to the fourth quarter of 2014 as a result of the lower sales volumes. The average realized selling price in the fourth quarter of 2015 compared to the fourth quarter of 2014 was impacted by differences in product mix. The majority of the Company's sales in the fourth quarter of 2015 were of Standard semi-soft coking coal while Thermal coal product comprised the majority of sales in the fourth quarter of 2014.
The Company's revenue is presented after deduction of royalties and selling fees. The Company's effective royalty rate for the fourth quarter of 2015, based on the Company's average realized selling price of $17.19 per tonne, was 13.8% or $2.38 per tonne while the Company's effective royalty rate was 8.1% or $1.22 per tonne based on the average realized selling price of $15.04 per tonne in the fourth quarter of 2014. The difference in the effective royalty rate is mainly driven by the change from the flexible tariff royalty regime to previous regime which is based on a set reference price on January 1, 2015 (refer to "Royalty regime in Mongolia" of Overview of Operational Data and Financial Measures section for details).
Cost of sales was $12.1 million in the fourth quarter of 2015 compared to $19.8 million in the fourth quarter of 2014. 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 Non-IFRS Financial Measures section for further analysis) during the period.
Operating expenses included in cost of sales were $1.8 million in the fourth quarter of 2015 compared to $3.9 million in the fourth quarter of 2014. The overall decrease in operating expenses is primarily the result of both (i) decrease of sales volume from 0.37 million tonnes in the fourth quarter of 2014 to 0.21 million tonnes in the fourth quarter of 2015; and (ii) continued focus on cost saving initiatives.
Cost of sales in the fourth quarter of 2015 and the fourth quarter of 2014 included coal stockpile impairments of $5.5 million and $1.0 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 2015 and 2014 reflect the challenging coal market conditions.
Idled mine asset costs included in cost of sales decreased in the fourth quarter of 2015 compared to the fourth quarter of 2014 as a result of the mining operations' slowdown which commenced in June 2014 and then resumed on March 30, 2015. Idled mine asset costs in the fourth quarter of 2015 included $3.9 million related to depreciation expense for idled mine equipment (2014: $11.6 million).
Other operating expenses were $1.1 million in the fourth quarter of 2015 (2014: $3.4 million).
The Company's other operating expenses were lower in the fourth quarter of 2015 compared to the fourth quarter of 2014 primarily due to decreased impairment of prepaid expenses and deposits and materials and supplies inventories totaling $0.7 million in the fourth quarter of 2015 compared to $3.4 million in the fourth quarter of 2014.
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 (2014: $3.0 million).
Administration expenses were $2.2 million in the fourth quarter of 2015 compared to $1.9 million in the fourth quarter of 2014.
Administration expenses increased in the fourth quarter of 2015 compared to the fourth quarter of 2014 mainly due to higher legal and professional fees. The legal fees incurred in the fourth quarter of 2015 includes consultancy and advisory fees in relation to different financing projects as well as the TSX delisting hearing and lawsuits.
Evaluation and exploration expenses were $0.1 million in the fourth quarter of 2015 compared to $0.9 million in the fourth quarter of 2014. The Company continued to minimize evaluation and exploration expenditures in the fourth quarter of 2015 in order to preserve the Company's financial resources. Evaluation and exploration activities and expenditures in the fourth quarter of 2015 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 (2014: $8.6 million). In particular, after conducting an impairment test on the Ovoot Tolgoi Mine cash generating unit, the Company recorded an $76.7 million impairment charge in 2015 (refer to "Ovoot Tolgoi Mine Impairment Analysis" of Financial Position and Liquidity section for details). 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 to utilize the rotary breaker facility. As a result of the impairment assessment, 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.
Finance costs were $5.7 million and $6.4 million in the fourth quarters of 2015 and 2014 which primarily consisted of interest expense on the $250.0 million CIC Convertible Debenture. Further, $1.1 million of realized loss was recorded in relation to the disposal of Aspire shares in the fourth quarter of 2014.
Finance income was $0.6 million in the fourth quarter of 2015 compared to $0.3 million in the fourth quarter of 2014 and primarily consisted of unrealized gains on the fair value change of the embedded derivatives in the CIC Convertible Debenture ($0.4 million in the fourth quarter of 2015 and $0.3 million in the fourth quarter of 2014). The fair value of the embedded derivatives in the CIC Convertible Debenture is driven by many factors including: the Company's common share price, U.S. Dollar and Canadian Dollar exchange rates and share price volatility.
UPDATED RESOURCE ESTIMATE - OVOOT TOLGOI MINE
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 2012, particularly those relating to ongoing changes in coal market conditions and geologic analysis, the Company has updated its mineral resource estimate for the Ovoot Tolgoi Project, resulting in a decrease in estimated mineral resources from the previous estimate completed in 2012. The decrease is principally based on the exclusion of underground mineralization from the resources estimate and a reclassification of the geology type of certain zones in the mine based on detailed analysis of the results of additional drilling and mining activities since 2012.
In the context of current coal market conditions, and in particular, a significant decline in coal prices in China, the Company's principal market, underground mineralization is now assessed by the Company, in the absence of the availability and implementation of more efficient underground mining methods coupled with higher coal prices, as not having reasonable prospects for eventual economic extraction.
A reclassification of certain zones in the Ovoot Tolgoi deposit by the Company's independent mining consultants, RungePincock Minarco ("RPM"), from a degree of geological complexity that was previously characterized as "Complex" to "Severe" (as defined in Geological Survey of Canada Paper 88-21) has necessitated downgrading quantities of the previously estimated resources from the measured category to the indicated and inferred categories. The "Severe" classification requires much tighter data point spacing of drilling results to support the degree of confidence necessary for a categorization of resources as measured.
Updated resources have been estimated as of January 1, 2015 (and confirmed as at March 24, 2016). The exclusion of underground mineralization and the re-classification of certain geological zones has resulted in indicated resources of 170 million tonnes (Mt) and inferred resources of 78 Mt, compared to 133.3 Mt of measured resources, 59.9 Mt of indicated resources, and 24 Mt of inferred resources estimated in 2012.
The updated estimate of resources at the Ovoot Tolgoi deposit is summarized in the table below.
The criteria used to limit the resources are:
The updated mineral resource estimate for the Ovoot Tolgoi Project was prepared on the Company's behalf by RPM. RPM has been engaged to prepare a technical report reflecting the updated mineral resource estimate, which the Company expects to file on SEDAR within 45 days.
The Company previously reported 175.7 million tonnes of proven and probable reserves in respect of the Ovoot Tolgoi deposit based on a preliminary feasibility study completed in 2012. Since the previously reported estimate of reserves was derived from the 2012 resource estimate that has now been updated and revised as noted above, and a number of key assumptions upon which the 2012 reserve estimate was based have now materially changed, it is expected that, once all relevant factors have been fully analyzed such that an updated reserve estimate can be prepared, the reserves previously reported in respect of the Ovoot Tolgoi deposit will also be quantitatively reduced and qualitatively downgraded. Additional drilling will likely be required to establish the degree of confidence required to produce an updated estimate of reserves.
The Company is engaged in a comprehensive review of the mine plan's design parameters, mine design and project development schedule in order to reflect an updated production plan and current market conditions. The objective of this exercise is to optimize the Company's mine plan having regard to the change in circumstances since the 2012 preliminary feasibility study was prepared. Factors such as the decline in coal prices in China, decreased mining quantities resulting from smaller pit dimensions as a result of changed mining parameters and coal prices and the exclusion of coal identified in the previous studies as marginally economic due to coal price reductions can be expected to exert downward pressure on reserve quantities. These may be offset to some degree by an upgrading of some resources from the inferred category to the indicated category in the Sunset Pit area, a change to mine design with steeper pit walls resulting in less waste and a lower strip ratio and improved mining cash costs, simplified and lower cost coal processing and product marketing, and general cost reductions. However, there can be no assurance that the continuing optimization of the mine plan at the Ovoot Tolgoi Mine will ultimately provide the basis for an updated preliminary feasibility study that will support a new estimate of mineral reserves.
Any downward adjustments to the Company's mineral reserve estimates could materially affect the Company's development and mining plans, which could materially and adversely affect its business and results of operations.
FINANCIAL POSITION AND LIQUIDITY
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.
Novel Sunrise private placement
On February 24, 2015, the Company announced it had entered into a private placement agreement with Novel Sunrise providing for the subscription of up to 21.75 million Common Shares for gross proceeds of up to approximately $7.5 million.
On March 3, 2015, the initial tranche of the private placement consisting of approximately US$3.5 million of Mandatory Convertible Units was closed. The Mandatory Convertible Units were converted into approximately 10.1 million Common Shares on April 23, 2015 at a price of CAD$0.432 per Common Share.
On April 23, 2015, the Company successfully closed the second tranche of the Novel Sunrise private placement for gross proceeds of approximately $4.0 million through the issue of approximately 11.6 million Common Shares.
The issue price for both tranches of the private placement was set at CAD$0.432 ("Placing Price") and represented a discount of approximately 20% to the then 5-day volume-weighted average price per Common Share of approximately CAD$0.54, as of the date the Company received price protection from the TSX for the private placement. The Placing Price was determined with reference to the prevailing market price of the Common Shares and was negotiated on an arm's length basis between the Company's independent directors and Novel Sunrise.
Swiss Life GP private placement
On July 14, 2015, the Company announced it had successfully closed the private placement with Swiss Life GP, raising $2.9 million for the issuance of 5 million Common Shares.
Sales and purchase agreement between Novel Sunrise and Turquoise Hill
On February 24, 2015, the Company was advised by Novel Sunrise and Turquoise Hill that they had entered into a Sale and Purchase Agreement ("Novel SPA") for the purchase by Novel Sunrise of 48,705,155 Common Shares currently held by Turquoise Hill.
On April 23, 2015, the Company was advised that the Novel SPA, as initially announced by the Company on February 24, 2015, had received all the necessary approvals and closed. Pursuant to the Novel SPA, Novel Sunrise has purchased 48.7 million Common Shares from Turquoise Hill.
Novel Sunrise change in ownership
Novel Sunrise, the largest shareholder of the Company, announced on July 20, 2015 that Cinda acquired ownership and control of all of the outstanding voting (ordinary) shares of Novel Sunrise through Hope Rosy Limited, a wholly-owned subsidiary of Cinda.
Turquoise Hill Loan Facility
On May 25, 2014, the Company announced it had obtained a loan from Turquoise Hill in the form of a $10 million revolving credit facility from Turquoise Hill 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); 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 and 2015, the due date of the TRQ Loan was extended several times and the limit has been reduced to $3.8 million.
On October 27, 2015, Turquoise Hill signed a Deferral Letter Agreement with the Company, in which Turquoise Hill agreed to a limited and circumscribed deferral of repayment all remaining amounts and obligations now and hereafter owing under the TRQ Loan to April 22, 2016. The key terms and conditions are as follows:
At December 31, 2015, the outstanding principal and accrued interest under this facility amounted to $3.4 million and $0.6 million respectively (at December 31, 2014, the outstanding principal and accrued interest amounted to $3.8 million and $0.1 million respectively).
Under certain conditions, 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.
Interim Funding Loan Commitment
On June 17, 2015, the Company negotiated an interim loan ("Interim Loan") for up to $8 million from Mr. Wilson Chen (a former principal of Novel Sunrise), with immediate availability, intended to address funding obligations pending the closing of certain private placements. Mr. Chen was a related party of the Company when the Interim Loan was agreed to. Drawdowns under the Interim Loan are to be in the minimum amount of $2 million, with interest at LIBOR + 12% per annum, payable in cash on a quarterly basis in arrears, and maturing on June 18, 2016. The Interim Loan is unsecured and is subject to mandatory repayment upon completion of $30 million of equity or other debt financing.
The Company has not received any funds under the Interim Loan after multiple funding requests, and therefore the Company does not expect to receive any funds from such loan facility.
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 key commercial terms of the loan are as follows:
As at December 31, 2015, the outstanding balance for the short-term bridge loan was $4.9 million (2014: nil).
Cash Position and Liquidity
As at December 31, 2015, the Company had cash of $0.4 million compared to cash of $3.8 million as at December 31, 2014. The Company had a working capital deficiency (excess current liabilities over current assets) of $(42.3) million as at December 31, 2015 compared to $3.4 million in working capital as at December 31, 2014. As at March 29, 2016, the Company had cash of $0.7 million.
As at December 31, 2015, the Company's gearing ratio was 0.33 (December 31, 2014: 0.23), which was calculated based on the Company's long term liabilities to total assets. As at December 31, 2015, the Company is not subject to any externally imposed capital requirements.
Funding Plan
The Company, together with its strategic partner and significant shareholder, Novel Sunrise, continues to advance the Funding Plan, with the intention of improving cash flow for the Company and support its business strategy and operations in a difficult market, with the goal of positioning the Company with a strong future as a coal producer.
Subsequent to the change in ownership of Novel Sunrise, the Company held discussions with Cinda who confirmed to the Company its continuing support for the Funding Plan. Therefore the Company continues to advance of the Funding Plan, which includes expanding its customer base further inland in China, securing longer-term coal offtake arrangements, thereby allowing the Company to ramp up production to capacity and obtaining additional loans as required to meet existing obligations and expected further working capital requirements.
At present the Company has decided to advance the Funding Plan rather than additional equity placements.
While it is the Company's intention to continue to advance the Funding Plan, the Funding Plan is dynamic and subject to change based on a number of factors beyond its control. Such factors include but not limited to, China's economic growth and coal demand growth, market prices of coal, the availability of credit and market interest rates, and exchange rates of currencies of countries where the Company operates. There can be no assurance that the Company will be able to continue to execute the Funding Plan or to continue as a going concern.
TSX Financial Hardship Exemption Application and Status of Listing on TSX
Prior to completing the Novel Sunrise Private Placement, the TSX advised the Company that it took the view that the placement and the Novel SPA would be aggregated and considered as one transaction, having a material effect on control of the Company, which normally would require the approval of a majority of disinterested shareholders under the provisions of the TSX Company Manual.
The Company determined that its then financial circumstances and the time required to obtain shareholder approval required it to rely on the TSX's "financial hardship" exemption and proceed to close the Novel Sunrise Private Placement without first receiving shareholder approval of same.
On February 25, 2015, the TSX placed the Company on remedial delisting review as a consequence of its reliance on the hardship exemption.
On November 30, 2015, the TSX confirmed that it had completed its review of the Company and determined that the Company met TSX's continued listing requirements.
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, 2015. The impairment indicator was the continued weakness in the Company's share price during the year ended December 31, 2015 and the fact that the market capitalization of the Company, as at December 31, 2015, was significantly less than the carrying value of its net assets.
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, operating cost and life of mine coal production assumptions as at December 31, 2015. The resulting FVLCTD was $217.4 million as at December 31, 2015.
Key estimates and assumptions incorporated in the valuation model included the following:
Key sensitivities in the valuation model are as follows:
The impairment analysis resulted in the identification of an impairment loss and $76.7 million of impairment loss was charged to other operating expense for the year ended 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. The Company also recorded impairments to specific assets, prior to the impairment test, in the amount of $16.0 million during the year ended December 31, 2015.
The Company is engaged in a comprehensive review of the Ovoot Tolgoi mine plan's design parameters, mine design and project development schedule in order to reflect an updated production plan and current market conditions. The objective of this exercise is to optimize the Company's mine plan having regard to the change in circumstances since the 2012 preliminary feasibility study was prepared. Factors such as the decline in coal prices in China, decreased mining quantities resulting from smaller pit dimensions as a result of changed mining parameters and coal prices and the exclusion of coal identified in the previous studies as marginally economic due to coal price reductions can be expected to exert downward pressure on reserve quantities. These may be offset to some degree by an upgrading of some resources from the inferred category to the indicated category in the Sunset Pit area, a change to mine design with steeper pit walls resulting in less waste and a lower strip ratio and improved mining cash costs, simplified and lower cost coal processing and product marketing, and general cost reductions. However, there can be no assurance that the continuing optimization of the mine plan at the Ovoot Tolgoi Mine will ultimately provide the basis for an updated preliminary feasibility study that will support a new estimate of mineral reserves.
Any downward adjustments to the Company's mineral reserve estimates could materially affect the Company's development and mining plans, which could materially and adversely affect its business and results of operations.
REGULATORY ISSUES AND CONTINGENCIES
Governmental and Regulatory Investigations
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 the Restricted Funds held in bank accounts in Mongolia. 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 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 MNT35.3 billion (approximately $18.2 million on February 1, 2015).
On February 18, 2015, the Company appealed the Tax Verdict on the grounds that it has prepared its financial statements, including those of SGS, in compliance with IFRS, and lodged all its tax returns in the required format under Mongolian tax law. The hearing of the appeal by the 10th Appeal Court for Criminal Case of Mongolia (the "Court of Appeal") took place on March 25, 2015 and a panel of three appointed judges upheld the Tax Verdict and dismissed the appeal by the Company (the "Appeal Verdict"). It is the view of the Company that there is a lack of evidence to support both the Tax Verdict and the Appeal Verdict. The Company received the written version Appeal Verdict on April 10, 2015. The Company lodged a final appeal with the Supreme Court of Mongolia on April 22, 2015. In accordance with Mongolia's criminal procedure law, SGS filed the appeal with the Supreme Court of Mongolia through the Second District Criminal Court of Justice.
On April 29, 2015 the Second District Criminal Court refused to advance SGS's appeal to the Supreme Court. Following an immediate protest by SGS, the Second District Criminal Court delivered SGS's appeal to the Supreme Court of Mongolia.
On May 20, 2015, SGS was informed that the Supreme Court had refused to hear the appeal and had returned the appeal to the Second District Criminal Court of Justice. The Supreme Court based its decision on a restrictive reading of Article 342 of the Criminal Procedure Law of Mongolia which stipulates that "the defendant, person acquitted, the victim, and their respective defense counsel have the right to lodge a complaint to the Supreme Court". The Supreme Court concluded that the omission of a specific reference to a civil defendant in Article 342, in and of itself denies SGS, in such capacity, the right to lodge an appeal to the Supreme Court.
In its decision, the Supreme Court did not address other provisions of the Criminal Procedure Law and the Law on Courts of Mongolia, which provide that civil defendants have standing to appeal to the Supreme Court and that no judicial proceedings or decisions in Mongolia are outside of the scope of supervision by the Supreme Court.
On May 21, 2015, SGS sent an official letter of protest to the Presiding Justice of the Criminal Chamber of the Supreme Court (the "Presiding Justice"), challenging the decision to refuse to hear the tax case on appeal. On June 2, 2015, SGS received a formal response from the Presiding Justice, confirming the Supreme Court's refusal to hear the tax case. In the letter, the Presiding Justice reaffirmed the restrictive interpretation of Article 342 of the Criminal Procedure Law.
With the refusal by the Supreme Court to hear the case on appeal, the Tax Verdict has entered into force. The Tax Verdict is, however, not immediately payable and enforceable against SGS absent further actions prescribed by the laws of Mongolia. In particular, SGS has not received a copy of the bailiff's resolution on execution of the Tax Verdict, as required under the Law of Mongolia on Execution of Court Decisions in order for any judgment execution process to happen. 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 has 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 CDIA to transfer the Restricted Funds to CDIA according to the court decision. $1.2 million was transferred to CDIA from the frozen bank accounts in October and November 2015.
While the Company had various additional legal avenues available to it to continue defending itself, it has decided to and is currently seeking to resolve amicably the dispute giving rise to the Tax Verdict in a manner that is both appropriate having regard to the Company's limited financial resources and supportive of a positive environment for foreign investment in Mongolia. There can be no assurance, however, that any such resolution can be successfully negotiated by the Company either at all or on favourable terms, or that the terms of any resolution to which the Government would be prepared to agree would not be materially adverse to the Company. In such case, this may result in an event of default under each of the CIC Convertible Debenture and the TRQ Loan and CIC and Turquoise Hill would each have the right to declare the full principal and accrued interest owing to such party immediately due and payable. Such an event of default under the CIC Convertible Debenture, the TRQ Loan 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, 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.
In the opinion of management of the Company, at December 31, 2015 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 investigation of the Company as described above under "Governmental and Regulatory Investigations" and continued to be enforced by the Mongolian State Investigation Office (the "SIA"). 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. 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 CDIA as partial payment of the Tax Verdict in October and November 2015
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 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 the Class Action against the Company, certain of its former senior officers and current directors, and its former auditors, Deloitte LLP, in the Ontario Court in relation to the Company's restatement of financial statements as previously disclosed in the Company's public filings.
For more details in respect of the class action lawsuit, refer to the Company's Management Discussion and Analysis for the quarter ended March 31, 2014 available on SEDAR at , and, in particular, the sub-section on "Contingencies - Class Action Lawsuit" of the "Regulatory Issues and Contingencies".
To commence and proceed with the Class Action, the plaintiff was required to bring the preliminary leave motion and to certify the Class Action as a class proceeding (the "Certification Motion"). The 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 former and current directors of the Company named in the Class Action on the basis that the "large volume of compelling evidence" proved the defence of reasonable investigation on the balance of probabilities and provided the basis for dismissing the Leave Motion as against them.
The Ontario Court granted the Certification Motion against the Company on the basis that, at this stage, the plaintiff met the low legal standard of "reasonable possibility of success". In granting leave, however, the Court acknowledged the "... compelling evidence of the defendant company ... that may prevail at trial ...". The Ontario Court refused an award of costs for the Certification Motion to the plaintiff. The Company is seeking leave to appeal this decision. The plaintiff has also appealed this decision. The appeal by the plaintiff and, if leave to appeal is granted, the appeal by the Company, are scheduled to be heard in June 2016. Rulings are expected by the end of September 2016.
The Company disputes and is vigorously defending itself against these 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 any potential losses, if any. However, the Company has judged a provision for this matter at December 31, 2015 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 has a duration of five years from commencement of the contract and provides 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 period, 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 as part of the initial contract.
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 the Mineral Resource Authority of Mongolia ("MRAM") to resume activities. 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, 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 the 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 mining license 9449X has been annulled from the Specified Area Law.
Therefore, mining license 12726A, MV-016869 and exploration licenses 9443X, 9449X were removed from the list of licenses that is overlapping with the prohibited areas described in the law.
The potential impact of the Mining Prohibition in Specified Areas Law on the mineral exploration licenses 13779X and 5267X is unclear pending the adoption by the Government of the relevant regulations pursuant to the Amended Law on implementation. 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 whole of the Soumber mining license and a portion of SGS' exploration license No.9443X (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.
In March 2015, SGS filed a complaint with the 12th Court for Administrative Cases of First Instance (the "Administrative Court") seeking the annulment of CRKh's decision to the extent it impacted the License Areas. In parallel, SGS initiated negotiations with the CRKh in order to reach an acceptable solution.
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. 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 the Notice on SGS in respect of the Coal Supply Agreement. The arbitral proceedings (the "Arbitration") are deemed to have commenced on June 24, 2015, as the date when the respondent received the Notice.
According to the Notice, First Concept: alleged, inter alia, (i) that SGS had failed and/or wrongfully refused to sell any coal to First Concept; (ii) expressed its wish to have the dispute settled in an arbitration to be administered by the Hong Kong International Arbitration Centre; and (iii) sought the repayment of the prepayment, in the sum of $11.5 million, it made to SGS under the Coal Supply Agreement, as well as any and all damages that may be due to it.
Under the Coal Supply Agreement, SGS agreed to sell coal to First Concept between May 22, 2014 and May 31, 2015 for a total consideration of $11.5 million. It was also agreed that that First Concept would pre-pay the $11.5 million. While First Concept fulfilled its payment obligation under the contract, it totally failed to fulfill its obligation to collect and transport the coal. Pursuant to the Coal Supply Agreement that obligation fell squarely on First Concept, while SGS was only obliged to make the coal available at its stockpile. The sole reason for the lack of coal sales to First Concept was the continued failure of First Concept to complete the necessary legal requirements for collection and transportation of coal and to provide a pickup schedule in accordance with industry practice. Contrary to the allegation by First Concept that SGS "wrongfully refused" to sell the coal, SGS has repeatedly advised First Concept of its willingness, ability and readiness to make available the coal for collection at its stockpile. In fact, SGS, at all times during the term of the Coal Supply Agreement, had more than sufficient coal at its stockpile to meet its obligations.
The Company, therefore, firmly rejects the allegations of First Concept in the Notice as lacking any merit. On October 26, 2015, the Company received the Statement of Claim from First Concept and will vigorously defend itself in the Arbitration, including claiming the relevant fees and damages from First Concept. The trial dates of the Arbitration are scheduled to be held in the fourth quarter of 2016.
There can be no assurance, however, that the Company will prevail in the Arbitration. Should SGS be unsuccessful in the Arbitration, the Company may not be able to re-pay the sum of $11.5 million. In such case, 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 re-pay the sum of $11.5 million to First Concept could result in voluntary or involuntary proceedings involving the Company.
Notice of claim by former Chief Executive Officer
On June 30, 2015, the Company was served with a Notice of Civil Claim filed by the Company's former President and Chief Executive Officer, Alexander Molyneux, in the British Columbia Supreme Court. The claim relates to alleged breaches of Mr. Molyneux's employment agreement by the Company. In addition to the Company, Turquoise Hill, the Company's largest shareholder at the time of Mr. Molyneux's employment, was also named in the claim.
Mr. Molyneux acted as the Company's President (from April 2009) and Chief Executive Officer (from October 2009) until September 2012, when the Company terminated his employment.
Mr. Molyneux is seeking damages in excess of $1 million in his Notice of Claim. The Company considers the action is without merit. SouthGobi intends to vigorously defend the action and reserves its right to pursue all legal rights and remedies available to it in connection with the proceedings. The Company filed a response to Civil Claim and Counterclaim in September 2015. A trial date has not yet been set.
PROCESSING INFRASTRUCTURE
Transportation Infrastructure
On August 2, 2011, the State Property Committee of Mongolia awarded the tender to construct a paved highway from the Ovoot Tolgoi Mine to the Shivee Khuren Border Crossing (the "Paved Highway") to consortium partners NTB LLC and SGS (together referred to as "RDCC LLC"). The Company has an indirect 40% shareholding in RDCC LLC through its Mongolian subsidiary SGS.
On October 26, 2011, RDCC LLC signed a concession agreement with the State Property Committee of Mongolia. RDCC LLC has the right to conclude a 17 year build, operate and transfer agreement under the Mongolian Law on Concessions.
On May 8, 2015, the commercial operation of the Paved Highway commenced and sub
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Datum: 29.03.2016 - 14:45 Uhr
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"SouthGobi Resources Announces Fourth Quarter and Full Year 2015 Financial and Operating Results and Update on Ovoot Tolgoi Resource Estimate"
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