SouthGobi Resources' CEO Discusses Q1 2013 Results - Earnings Call Transcript

May.14.13 | About: SouthGobi Resources (SGQRF)

SouthGobi Resources Ltd. (OTC:SGQRF) Q1 2013 Earnings Call May 13, 2013 7:00 PM ET


Christina Pantin – IR

Ross Tromans – President and CEO

Bertrand Troiano – CFO


Terence Ortslan – TSO Associates

Daniel Mcconvey – Rossport Investments

Mike Plaster – Salman Partners

Terence Ortslan – TSO & Associates


Hello, my name is Colleen and I will be your conference operator today. Thank you for participating in the first quarter results conference call for SouthGobi Resources Limited. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Today’s conference call is being recorded and will be available for playback on the company’s website.

I would now like to turn the call to Christina Pantin, please proceed.

Christina Pantin

Thank you, Colleen. Good evening in North America and good morning in Hong Kong, welcome to SouthGobi’s first quarter results conference call. On the line today is Ross Tromans, SouthGobi’s President and Chief Executive Officer. We also have Bertrand Troiano, SouthGobi’s Chief Financial Officer joining this call for the first time since he came onboard last month. Ross is dialing in from another location while Bertrand is with us here in Hong Kong. So, if there is a delay please do bear with us.

Before we start, please note that today’s discussion may contain forward-looking statements. Please refer to SouthGobi’s May 13, 2013 press release. And the management’s discussion and analysis relating to SouthGobi’s first quarter results for the risks associated with the forward-looking statements that may be made in today’s discussion.

Ross, will now give you an overview of the key developments from the first quarter and Bertrand will take us through some of the detailed financial results. There will be time for questions at the end of the session. Please note that all amounts are in U.S. dollars unless stated otherwise.

And now, over to you Ross.

Ross Tromans

Thank you Christina. Hello everyone and thank you for joining us today. I would like to start first by welcoming Bertrand to SouthGobi and introducing him to the investment community. As you know, Bertrand, joined us last month and he brings a wealth of experience to the role.

Bertrand was most recently Finance Director or Rio Tinto Alcan’s business development, major project and technology group. In all, he has spent 13 years in finance roles in the mining and metals industry and his experience will be a great asset to the company. We’re delighted to have Bertrand as member of our senior executive team and you’ll be hearing from him in a short while.

Our first quarter ended on a promising note, as we resumed mining operations that are our flagship over tall growing lines on March 22. Safety is a very important factor in the way we operate and we therefore planned a phase in comprehensive re-induction of our employees to ensure that all staff will properly trained and prepared given that the mine had not been operating since last June.

I’m pleased to report that the ramp of operations at Ovoot Tolgoi took place safely and without any incidents. And we now have operated for over 520 days without a loss time injury which is a great achievement. We will continue to focus our attention on operating in the safe manner now that the mine is back up and running at two full shifts per day.

SouthGobi plans to produce 3.2 million tons of semi-soft coke and coal in 2013. The 2013 mine plan assumes a conservative resumption of operation, designed to achieve a cost effective approach that will allow operations to continue on a sustainable basis.

The rich standard production occurred nearly at the end of our first quarter which ended on 31, March. And this was clear light to have a significant influence on our financial results for the period.

Year-on-year comparisons were unfavorable due to the different operating realities and the effect of the production was held for most of the quarter, which resulted in lower sales volume and was coupled with a drop in the average realized selling price. Nonetheless, during the first quarter SouthGobi generated revenue through the sale of existing coal stockpiles.

What this quarter’s results did not show is the improvement we’ve seen in the movement of coal across the border. The last two months have seen monthly volumes of around 200,000 ton per month and whilst this has been respective existing stockpiles booked in previous financial quarters, it is an encouraging sign that the demand for our coal is there. We do however need to improve on this to meet our targets going forward.

As you recall from our fourth quarter results discussion, we were seeking direction from the Chinese latest transition that took place at the beginning of this year. Now that it is in place, we have found that economic activity post transition has been slower than expected. The Chinese steel industry, critical customers for our coal has been particularly affect, and as a result, demand and process for coke and coal have been negatively impacted.

Another challenge that we face this year is the royalties on coal set by the Government of Mongolia. In April, the government of Mongolia advised that the trial period of a royalty regime referencing contracted market prices for the different qualities of coal sold and not being extended beyond April 1, 2013. Effective from this day, royalties on all coal exported out of Mongolia will be based on the monthly reference price per ton published by the government of Mongolia.

This reference price does not reflect the market price for the different types of coal products and will impact Mongolian producer’s margins going forward if it is not changed. SouthGobi along with other coal producers in Mongolia continue to engage with the government in the hope of moving back to a royalty referencing actual prices.

Now, let me turn it over to Bertrand, for details on the quarter before I discuss further the outlook and objectives for 2013. Bertrand, over to you.

Bertrand Troiano

Thank you Ross. And I appreciate the warm welcome from you and the team at SouthGobi. SouthGobi recorded revenues of $3.3 million in the first quarter of 2013, down from $14.2 million in the first quarter of 2012, when our mine was operating under more normal conditions.

Revenue was generated through the sale of existing coal stockpiles and the decrease can be attributed primarily due to lower sales volumes and a lower average realized selling price. The company sold 80,000 tons of coal down from 840,000 tons in the same quarter in 2012. This quarter’s average realized selling price was $45.2 per ton compared with an average realized selling price of $56.79 per ton in the first quarter of 2012.

As Ross has already mentioned, first quarter 2013 sales volumes and selling prices were both negatively impacted by the continued softness of the inland China coke and coal markets which are closest to our operations. Cost of sales was $21.9 million in the first quarter compared to $17.5 million for the first three months ended March 31, 2012. Due to $16.4 million of idle mine costs in the first quarter of 2013, the company reported a gross loss of $18.6 million for the period.

Now managing our costs and cash flow remained a priority. The business now operates with a much leaner management structure and we have found ways to reduce our costs in other areas. For instance, administration cost in the first quarter of 2013 were $3.7 million, compared to $6.1 million in the fourth quarter of 2012 and $5.9 million in the first quarter of 2012.

This reduction can be attributable to lower legal and professional fees, salaries and benefits, and is indicative of the company’s efforts to improve its cost structure and adapt to the difficult market conditions currently.

We’re also continuing to minimize our exploration expenditures which were $300,000 in the first quarter of 2013, that is compared to $500,000 in the fourth quarter of 2012 and $5 million in the first quarter of 2012.

With the exception of the Sumber pre-feasibility study and some water exploration, our exploration expenditures in 2013 will be limited to what is required under the Mongolian Minerals Law.

Now, moving to liquidity. As of March 31, 2013, the company had cash of $24.8 million and working capital of $115.8 million. SouthGobi expects to have sufficient liquidity and capital resources to meet its ongoing obligations and future contractual commitments for at least 12 months from the end of March 31, 2013.

As part of the normal and current course of business, we’re looking at other contingencies to further strengthen our cash position. We do expect liquidity to remain sufficient based on existing capital resources and forecasting come from mining operations and we continue to minimize uncommitted capital expenditures and exploration expenditures in order to preserve the company’s financial resources.

As previously disclosed, SouthGobi faced restrictions of the same number of operating equipments, infrastructure and Mongolian bank accounts as a result of the ongoing government investigations. These restrictions and equipment and infrastructure do not limit the use of these items in the company’s mining activities and therefore SouthGobi does not expect these to have any material impact on the company’s activities.

And I’ll turn the discussion back to Ross, who will provide an update on some other developments from the first quarter and will run through our outlook and objectives for 2013 before we take your questions.

Ross Tromans

Thank you, Bertrand. I would like to remind you about a few pieces of news that we mentioned in end of the year results on 25, March which applied to this first quarter period.

On March 25, we announced updated NI 43-101-complaint resource estimates for the Sumber and Zag Suuj deposits which increased the company’s total midget and indicated resources to 533 million tons or an 8% increase and inferred resources to 302 million tons, a 24% increase.

SouthGobi received a Pre-Mining Agreement or PMA from the Mineral Resources Authority of Mongolia, pertaining to the same deposit which is about 20 kilometers east of our flagship Ovoot Tolgoi mine. This PMA complimented just in mine life, mining license.

Let me now say a word or two about the ongoing regulatory issues that some of you have been following since last year. There have been no significant developments in relation to the investigations by the Mongolian independent authority against corruption and the State Investigation office and remains that neither SouthGobi nor any of its employees have been charged in connection with these investigations.

The company is taking the investigation seriously and we have allocated significant time and resources to conduct our own internal investigation into possible breaches of law, internal corporate policies and codes of conduct arising from the allegations that are being raised. These investigations are ongoing but are not yet complete.

And now, onto the final and I believe the most important part of our discussion, which is our outlook and objectives. Despite not yet seeing the rise in demand and process for coal that we had expected, we believe that demand in the second half of 2013, should improve and this underscores our expectation that we’ll be in a more positive market position going forward.

In April, we produced 132,000 tons of coal which is in line with our strategy to produce 3.2 million tons this year. We are seeing reasonable demand for this product and are currently are in active negotiations with customers to finalized South’s contract for this coal, a process that will enable us to meet the company’s commercial objectives for the year ahead.

We expect to start total washing coals from the Ovoot Tolgoi mine in the second half of 2013, and once that commences it will enable us to develop a predominantly two product strategy of a premium and standard semi-soft product – coal product.

The premium product will be washed and the standard product will be a predominantly unwashed product. This capability to begin supplying a washed semi-soft product is now an important step in improving the company’s market position and access to end customers.

During our fourth quarter, I’ll outline for you six objectives for this year. They remain our key mission statements and I am already pleased to note that we have actively started on our first aim of reunion production in the safe sustainable manner. To run through the other key objectives briefly, infrastructure, we will continue to development operational infrastructure. In particular the construction of the paying plain car-way from Ovoot Tolgoi to the Chevy current board crossing has recommenced and completion is planned for late 2013.

Product development, we will continue to develop the company’s marketing plans on product mix and with addition of the toll-wash coal later in the year, say to expand our customer base.

Sumber deposit, we will substantially advance the feasibility, planning and physical preparation for our mine at Sumber in 2014. Reestablish our reputation, our vision is to be a respected and profitable Mongolian coal company and we will continue to focus on reestablishing good working relationships with all our external stakeholders including with you.

And finally, we will continue to focus on production, safety, environmental protection, operational excellence and community relations.

This concludes our first quarter results discussion. And at this time, I’m happy to take your questions. Let me first turn it back to Christina for some instructions.

Christina Pantin

Thank you Ross. Well, we appreciate that there may be many questions out there and to maximize participation, we ask that you please keep to two questions at a time. If you do have follow-ups, we will put you back in the queue. And just to remind, those who did not hear it, Bertrand and Ross are in two different locations, so if there is an occasional delay, please do bear with us.

And now, operator, please start the Q&A session.

Question-and-Answer Session


Thank you. (Operator Instructions). Our first question comes from Terence Ortslan of TSO Associates. Please go ahead.

Terence Ortslan – TSO Associates

Thank you very much. Two questions, one, on the reputation and reestablishing the dominance and the brand name and all, how much have you lost here in terms of that particular attribute with the customers and how is it going to affect our prices and the volumes going forward, number one? And how will that impact the pricing blend versus the government’s expectation of the number, put it this way on the pricing?

And the second question is on the Sumber deposition, given the lot we have in terms of loss of time here, what’s the estimated capital cost of this going forward and in terms of the quote really quote intensity to get – to meet the deadline for 2014, thank you.

Ross Tromans

Thank you. On the recitation one, I think obviously once you have production for wall and there were lot of uncertainty with regard to what was happening in South Gobi, it takes a little while to reestablish that. However, over the last six months, we have been spending time with cost and reclining them effectively are coming back and we’re changing.

And also, giving them an indication of what profit product quality and we were planning to bring back to the market. That’s going reasonably well, and I think because the market conditions such that it’s been a little bit slower than what we would have hoped. But it’s just the effective life.

The impact on the royalty side is that, the reference price is to quite a good quality coal. So less the quality coals or ones that meet the tough price criteria are disadvantaged from a royalty perspective under a reference pricing around the actual pricing. And this then causes a slightly higher percentage of the royalty take in the price. This is something that we need to deal with going forward and it’s been why the reasons we’ve been discussing with the government through the Mongolian Coal Association. They need to reflect the different qualities of coal that are produced in Mongolia and not just a reference to a particular product which may not necessarily be resemblance to all the coals.

Going forward, I think that we’ve tried to show people we’re coming back on a sustainable manner and that we are here for long-terms so the people have more confidence that we intend to be in the market and there are no intentions of pulling out what we had to before.

On the Sumber deposit, we are still going through pre-feasibility studies and evaluating all the options we have as to how we bring that on. It may not necessarily come on at high rate, it really depends on the economics and how the market is shaping up and also what is the most cost effective and capital effective way of bringing that mine back.

The markets were two way sword, you have the situation where – when the markets were very hot in terms of prices, then capital costs were also much higher because there was scarcity of resources. So I think we will find now that on a capital cost side, indirectly a little bit better than they used to be or be it offset by not as good market conditions. We still need to do a fair bit of work on the Sumber deposit before we got a definitive idea of what’s going to cost. Hope that answers your question.


Thank you. (Operator Instructions). Our next question comes from Daniel Mcconvey of Rossport Investments. Please go ahead.

Daniel Mcconvey – Rossport Investments

Hi, good-day. Two question, just on the relative to two mines to go. The coal market in the area, you set the same – the board is open but the market might be – appears to be soft and that what you would have hoped, just maybe if you could elaborate a little more on that?

Ross Tromans

Yeah, I think that there was a great expectation after the Chinese New Year the markets were going to come back. There were signs just prior to that that the prices and stabilized and there was – on a spot size that was starting to pick up a little bit.

What we found was that after the Chinese New Year, people were slow to come back instead of – and that’s all I can tell how things are going. So, it was, maybe two to three weeks slow pick-up. And from that we also saw that prices really didn’t come in on an international basis, didn’t really go up that actually came off slightly. So, that had an impact with people, then became a little bit concerned about what was happening, the transition of the Chinese leadership, was taking longer than expected in terms of putting policies in place.

So I think there was that period which is reflected in just general people’s opinion than of China that whilst the growth is going to be 7.5% to 8%, it is slower than what they expected.

For the Mongolian producers and certainly for the stakeholder, where we transport into China, it has been slower. However, you are now saying stockpiles run down and things are at least moving, the tonnage on a year-on-year basis is slightly down on the previous quarter from last year but not dramatically. So there is coal being moved.

Daniel Mcconvey – Rossport Investments

Okay, thank you. Second question, you have a fleet of trucks if I remember right, there was purchased year or so ago. And just in terms of options for raising capital. Is selling that fleet an option and in this market, you have tested it. I’m just wondering what kind of realization you would have on the price you paid if you did sell, what kind of discount it would be?

Ross Tromans

Certainly there are options to sell capital. I mean, there are restrictions under the CRC debentures to what on major items on what we can sell but there are parts that are available for sale.

It’s difficult to put a number on it because obviously if you’ve got the equipment in countries then dismantling and transportation and such can have an impact on the pricing. But certainly we’ve seen a reasonably robust inquiry right for equipment, whether that’s 25% down on the way the price or 30% it’s hard to say, it depends on whether the equipment has been used, what conditions and where you’re selling it. But there is a market.

Daniel Mcconvey – Rossport Investments

Okay, thank you. And thanks for doing the call.


Thank you. (Operator Instructions). Our next question comes from Mike Plaster, Salman Partners. Please go ahead.

Mike Plaster – Salman Partners

Hi, thanks very much. Just, I guess a couple from me as well. On the coal royalty calculation, are you able to tell us what the current reference price or prices are that would apply for your coal?

Ross Tromans

Sorry, I’m listing out – the prices are now on a monthly basis. And the royalty regime is on a month-to-month basis as well. So, we’re just going through mine and I think the number, and I told Joseph, because he spent the last couple of days. I think the numbers of that $72, around the $72 level. This is the first one that’s $74 and then they adjusted it down to $68 and then it went slightly up. Bertrand, do you know the number?

Bertrand Troiano

It’s approximately those are number Ross that we’re talking about $70 per ton.

Ross Tromans

Yeah. So, yeah, it’s a much higher number obviously than what people are selling at mine guide because that also improves the Chinese VAT which is a little bit unsafe. But it is what it is, that’s what’s being used.

Mike Plaster – Salman Partners

Okay. And just in terms of your own price realizations, I guess so you’re seeing signs of improvement or the realized prices that you’ve got for Q1, is that indicative of the current situation still?

Bertrand Troiano

It’s still around that level, I mean, the discussions we’re having there is a difference of opinion between ourselves and our customers who is seeking slightly lower prices but not hugely differently from what – from where they were in Q1, so there has been like I said, a lot of active discussions to where pricing is.

Mike Plaster – Salman Partners

Great, thanks very much.


Thank you. We have follow-up question from Terence Ortslan of TSO & Associates. Please go ahead.

Terence Ortslan – TSO & Associates

If I may, please thank you. Your financial resources, do you think that would be sufficient at this moment in time with the working capital that you may have to build up and so on to be able to put somewhere in the production and there will be no cash squeeze that was my first question?

Ross Tromans

Well, given the fact that we spent money on the quick – no we’re not running at a set of main com rate. We have existing cattle that we could divert to Sumber to allow us mine there.

With Sumber like I said it’s a little bit too early for us to be making too much comment because we need to do a bit more work on the feasibilities as to what’s the best way to bring that into sequence and how to integrate it with their existing mine. I mean, obviously cash is king at this stage and cattle ambers keeping our resources so that we can keep operating is very important. So we need to keep you informed as we go along.

Terence Ortslan – TSO & Associates

Okay. If I may ask, sorry about this, when do you expect to be able to make a decision on this perspective, seek the facts and figure on Sumber?

Ross Tromans

I would expect that over the next six months we’ll do a lot more work on that. Obviously we’ve started some work but it really is how we manage it best and how we integrate it coming forward and there is some – a lot of work we’re doing on that with their operations. So I would be saying, I would hope next quarter, we can give you a little bit better idea that realistically it’s kind of six months out.

Terence Ortslan – TSO & Associates

Okay, fair enough. How would you describe your landscape right now from your point of view in Mongolia, but what is the long-term strategy besides your operations, the (inaudible) is one item which has been changed and somewhat less radical than before, it’s an exception to industry needs rationalization in the country, through where you are and where the markets are, you may need just like the original plough was more of the neighboring country involvement to get the better price and the better markets and all. How are you going to play the corporate game here given the landscape as it’s now and you expect to change in Mongolia? Thank you.

Ross Tromans

I mean, the landscape is what it is. It obviously impacts how you can do things. And people say that you towards Mongolia. I mean, I think from our recently want to be restricted and profitable Mongolian coal companies, we recognize where we are, I’m sorry, I’m mine focused remains in Mongolia rather than other parts of the world.

We need to work with the government in understanding how they’re going forward and obviously they’re very interested in developing a sustainable mining industry that allows economic growth for the country. I think that the steps that have made with it the last changes are an improvement on what was before and gradual right, Mongolian hope base, re-writing of Mongolia as a country, which might be encourages more investment.

Now, we can’t change the market to the way we’re trying to. China obviously is very close, there is also Russia to a certain extent but not for our company. If the logistics were to change, dramatic would allow you get through China to international markets and maybe possibility. But I think that one is a big of a stretch case certainly in the next year or so.

So, I think we just need to work with China and work with customer to try to get more induced customers and try to capture more of some of the value proposition in the logistics change, is one way that we can improve going forward. Does that answer your question?


There are no further questions registered at this time. If you wish to conclude the conference call Mr. Tromans, please go ahead.

Ross Tromans

Well, if there are no more further questions I would like to thank you for joining us today. And I hope that over the next three months we get more of an opportunity to talk with each other and to open up a dialogue so you better understand our company. And thank you very much for participating. Thank you. Bye.


Thank you. This concludes today’s conference call. Please disconnect your lines at this time. We thank you for your participation.

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