SouthGobi Resources sees downturn in sales due to customs clearance issue
SouthGobi Resources Ltd, a mining company listed on Toronto and Hong Kong stock exchanges, has experienced a downturn in sales due to the delay in the customs clearance process at the Shivee Khuren - Ceke border crossing, according to its first quarter report.
The company exports its coal through Shivee Khuren (Ceke) border crossing, the permanent border crossing which allows for distribution of Ovoot Tolgoi coal to customers in China.
SouthGobi owns and operates its flagship Ovoot Tolgoi coal mine, it has said it plans to export 5.5 million tons of coal and 800,000 tons of concentrated coal in 2018.
Although sales were down in the first quarter, the company enjoyed higher average selling price of coal due to improved market conditions and higher coal prices in China. The company experienced an increase in the average selling price of coal from 24.52 USD per ton in the first quarter of 2017 to 43.02 USD per ton in the first quarter of 2018.
However, the volume of coal sales has decreased from 1.11 million tons in the first quarter of 2017 to 0.56 million tons in the first quarter of 2018 as a result of the delay in the customs clearance process at the Ceke border, which the company has been experiencing since July 2017.
Despite this, SouthGobi recorded a gross profit of 6.7 million USD in the first quarter of 2018 compared to 1.5 million USD in the first quarter of 2017. The company was operating at a loss of 4.1 million USD in the first quarter of 2017 while it saw a profit from operations of 2.9 million USD in the first quarter of 2018.
As a result of improved market conditions and prices for coal in China, the overall financial results improved when compared to the first quarter of 2017, which was principally attributable to the higher average selling price achieved during the quarter.
Earlier this in year in February, SouthGobi Sands, a subsidiary of the company, fulfilled its obligations to pay off 35.3 billion MNT under the tax verdict that was reached by a criminal court.
The company was found guilty of evading 230 billion MNT in taxes and being involved in money laundering. The laundering charges were dropped by prosecutors and the verdict for the fine was cut to 35.3 billion MNT.
In 2015, SouthGobi Sands was at risk of insolvency after the ruling by the court. At the time of the verdict in 2015, SouthGobi reported that it had 3.3 million USD in cash and another 1.2 million USD, and said that it will “likely be unable to meet its obligations, which could result in voluntary or involuntary insolvency proceedings.”
Despite concern over insolvency, the company has been able to fully pay off its obligations and has said it will “continue to comply with the laws of Mongolia and to contribute to Mongolia’s society, economy, and environment as a whole.”
With the implementation of the One Belt, One Road program in China, SouthGobi believes it is well positioned to capture the resulting business opportunities between Mongolia and China given the potential strategic support from its largest shareholders (CIC and Cinda), which are both state-owned-enterprises in China, and its operational record for the past 10 years in Mongolia.
Based on the assumption that the company will successfully launch its processing facilities in the coming months, SouthGobi expects to produce and sell higher volumes of higherquality coal products to the Chinese market at improved margins.