TURQUOISE Hill Resources has entered into a share purchase agreement to sell a 29.95% stake in SouthGobi Resources to National United Resources Holdings Ltd (NUR), a Hong Kong-based public company listed on the main board of the Stock Exchange of Hong Kong Limited. After the sale Turquoise Hill will continue to hold more than 48 million shares of SouthGobi, representing a 26% holding.
Under the proposed transaction, approximately Can$12.8 million in cash will be received by Turquoise Hill at closing and deferred consideration of approximately Can$12.8 million will be payable to Turquoise Hill one year after the closing of the transaction.
SouthGobi is listed on the Toronto and Hong Kong stock exchanges, in which Turquoise Hill Resources, also publicly listed in Toronto and New York. Turquoise Hill took management control of SouthGobi in September 2012 and made changes to the board and senior management. Rio Tinto has a majority shareholding in Turquoise Hill.
SouthGobi is focused on exploration and development of its metallurgical and thermal coal deposits in Mongolia's South Gobi region. It has a 100% shareholding in SouthGobi Sands LLC, a Mongolian registered company that holds the mining and exploration licences in Mongolia and operates the flagship Ovoot Tolgoi coal mine. Ovoot Tolgoi produces and sells coal to customers in China.
In its second quarter report SouthGobi stated that it continues to operate under difficult market conditions with coal prices in China declining further in the quarter in response to excess seaborne and Chinese domestic supply. It says the decline in prices has been partially offset by an increase in sale volumes.
Production from Ovoot Tolgoi decreased to 550,000 tonnes of raw coal in the second quarter of 2014 compared to production of 640,000 tonnes in the previous quarter. However, during the second quarter the company shipped 910,000 tonnes. Revenue was recognized in respect of 630,000 tonnes with the remaining 280,000 tonnes expected to meet all revenue recognition requirements in the second half of 2014.
In light of the current market, the company continues to pace its production with current demand. As a result, SouthGobi operated significantly below its operating capacity in the second quarter. In June following a review of operations, it further reduced its production and placed about half of its workforce in furlough. This furlough was anticipated to remain in place until at least the end of August subject to market conditions.
On June 26, the Ovoot Tolgoi mine site experienced torrential rain and flooding which temporarily interrupted mining operations. The region was subject to further rainfall in July but the impact on the company's operations is not expected to be material.