SouthGobi Shares Drop on Debt Default Warning

Shares of SouthGobi Resources (TSX:SGQ) fell about 35 percent on Monday on the release of the company’s results for the fourth quarter of 2013, as well as for 2013 as a whole. 

While the integrated coal mining, development and exploration company managed to put out 3.06 million tonnes of raw coal for the full year, up 1.33 million tonnes from 2012, also increasing its sales volume from 1.98 million tonnes in 2012 to 3.26 million tonnes in 2013, its other results disappointed.

For instance, SouthGobi recorded a loss from operations of $196.8 million, up from $124.2 million the previous year, as well as a net loss of $237.5 million, a significant increase from 2012’s $97.5 million. Further, its revenue fell to $58.6 million from $78.1 million in 2012, “primarily due to lower average selling prices for the Company’s final coal products.”

Explaining those losses further, Ross Tromans, the company’s president and CEO, said in a recent Bloomberg Businessweek interview, “[l]iquidity issues in China affect how much people are buying. It’s noticeable that some of them don’t have as much liquidity as they’ve had in the past, and that’s had an impact because they’re also waiting for their customers to pay them.”

Unfortunately, SouthGobi’s hopes are not high that its situation will improve. Monday’s press release also states that the company “anticipates that coal prices in China will remain under pressure in 2014, which will continue to impact the company’s margins and liquidity.” Based on that outlook, SouthGobi predicts that it is not likely to have enough cash to “satisfy its ongoing obligations and future contractual commitments, including cash interest payments due” on a $250-million China Investment Corporation convertible debenture. A “continued delay in securing additional financing could ultimately result in an event of default” on that debenture.

The company assumes it will continue operating until the end of 2014; until then, it plans to look at “a range of financing options including loans and equity,” as per Bloomberg Businessweek. It will also try to “secure prepayments from customers and cut non-critical expenses to improve liquidity.”

A global issue

It’s hard to blame SouthGobi for its lackluster results. After all, according to Reuters, coal prices are down 70 percent from the all-time high they hit in 2008, largely due to weakened demand from emerging markets and “healthy mining output in export countries” like Australia, Colombia and South Africa.

China in particular is an emerging market where demand is flagging. The country adopted a “control coal” policy in 2013 in order to curb its smog problem by limiting its annual coal use to 4 billion metric tons (MT) by 2015. Recently, it tightened that goal even further — now, Bloomberg states, China plans to get less than 65 percent of its energy from coal in 2014. That equates to consumption of just 3.8 billion MT of the fuel.

For Mongolia-focused SouthGobi, that means what was once an asset — proximity to China — has now become a disadvantage, at least for the time being.

All, however, is not lost. Reuters notes that despite the current situation, analysts believe coal prices could begin to swing upwards as 2015 approaches. And, encouragingly, at close of day Tuesday, shares of SouthGobi were selling for $0.66 each, up from Monday’s low of $0.465.

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article. 

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Will China’s “Control Coal” Policy Impact the US?