戈壁dmcl

HongKongExchangesandClearingLimitedandTheStockExchangeofHongKongLimited(the"HongKongStockExchange")takenoresponsibilityforthecontentsofthisannouncement,makenorepresentationastoitsaccuracyorcompletenessandexpresslydisclaimanyliabilitywhatsoeverforanylosshowsoeverarisingfromorinrelianceuponthewholeoranypartofthecontentsofthisannouncement.
*Foridentificationpurposesonly1SOUTHGOBIRESOURCESLTD.
南戈壁資源有限公司*(AcompanycontinuedunderthelawsofBritishColumbia,Canadawithlimitedliability)(HongKongStockCode:1878)(TorontoStockCode:SGQ)OVERSEASREGULATORYANNOUNCEMENTThisannouncementismadebySouthGobiResourcesLtd.
(the"Company")pursuanttoRule13.
10BoftheRulesGoverningtheListingofSecuritiesontheHongKongStockExchange.
ThefollowingdocumentoftheCompanywaspublishedonthewebsiteoftheSEDARfilingsysteminCanada(www.
sedar.
com).
Itisenclosedheretoasoverseasregulatoryannouncement.
ForandonbehalfofSouthGobiResourcesLtd.
AllisonSnetsingerCorporateSecretaryHongKong,February5,2021Asatthedateofthisannouncement,theexecutivedirectoroftheCompanyisMr.
Dalanguerban;theindependentnon-executivedirectorsareMessrs.
YingbinIanHe,MaoSunandMs.
JinLanQuan;andthenon-executivedirectorsareMessrs.
JianminBao,ZhiweiChen,BenNiuandMs.
KaLeeKu.
SOUTHGOBIRESOURCESLTD.
AmendedandRestatedAnnualInformationFormFortheyearendedDecember31,2019Dated:February3,2021TABLEOFCONTENTSDEFINITIONSANDOTHERINFORMATION4CURRENCYANDEXCHANGERATES.
4DEFINEDTERMSANDABBREVIATIONS.
4CONVERSIONFACTORS11GLOSSARYOFGEOLOGICALANDMININGTERMS.
11FORWARDLOOKINGSTATEMENTS.
14CORPORATESTRUCTURE.
17NAME,ADDRESSANDINCORPORATION.
17INTERCORPORATERELATIONSHIPS.
17GENERALDEVELOPMENTOFTHEBUSINESS.
18OVERVIEW18CONTEXT18OUTLOOK.
36LEGALMATTERS.
37INTERNALINVESTIGATION37COMMERCIALARBITRATIONINHONGKONG38CLASSACTIONLAWSUIT.
39TOLLWASHPLANTAGREEMENTWITHEJINJINDA.
40SPECIALNEEDSTERRITORYINUMNUGOBI.
40TERMINATIONOFSOUMBERDEPOSITMININGLICENSES40COSTSREIMBURSABLETOTURQUOISEHILL.
41MONGOLIANROYALTIES41RESTRICTIONSONIMPORTINGF-GRADECOALINTOCHINA42RISKFACTORS42RISKSRELATINGTOTHECOMPANY'SABILITYTOCONTINUEASAGOINGCONCERN42RISKSRELATINGTOTHECOMMONSHARES44RISKSRELATINGTOTHEECONOMICOPERATIONOFTHECOMPANY'SOVOOTTOLGOIPROJECT46RISKSRELATINGTOTHECOMPANY'SPROJECTSINMONGOLIA.
47RISKSRELATINGTOTHECOMPANY'SBUSINESSANDINDUSTRY52DESCRIPTIONOFMATERIALPROPERTY64QUALIFIEDPERSONS64OVOOTTOLGOIDEPOSIT.
65SALESANDMARKETING81DIRECTANDINDIRECTEMPLOYEES.
82SOCIALANDENVIRONMENTALPOLICIES.
82ENVIRONMENTALPOLICY82HEALTHANDSAFETYPOLICY84HEALTHANDSAFETYTRAINING85COMMUNITYRELATIONS.
85CORPORATESOCIALRESPONSIBILITY86CORPORATECITIZENSHIPCOMMITTEE86DESCRIPTIONOFCAPITALSTRUCTURE.
87COMMONSHARES87PREFERREDSHARES.
88DIVIDENDSANDDISTRIBUTIONS.
88MARKETFORSECURITIES.
88DIRECTORSANDOFFICERS.
90BIOGRAPHICALINFORMATION.
90CEASETRADEORDERS,BANKRUPTCIES,PENALTIESORSANCTIONS92SHAREHOLDINGSOFDIRECTORSANDSENIORMANAGEMENT93COMMITTEESOFTHEBOARD.
93AUDITCOMMITTEEINFORMATION94CONFLICTSOFINTEREST96ETHICALBUSINESSCONDUCT96INTERESTOFMANAGEMENTANDOTHERSINMATERIALTRANSACTIONS.
97TRANSFERAGENTSANDREGISTRARS.
97MATERIALCONTRACTS.
98NOVELPRIVATEPLACEMENT.
98CONVERTIBLEDEBENTURE98CICMUTUALCOOPERATIONAGREEMENT104INTERESTSOFEXPERTS.
104INSURANCE105ADDITIONALINFORMATION.
105SCHEDULE"A"4DEFINITIONSANDOTHERINFORMATIONCurrencyandExchangeRatesInthisAnnualInformationForm,allfundsarequotedinUnitedStatesdollarsunlessotherwiseindicated.
Referencesto"$"and"US$"aretoUnitedStatesdollars,referencesto"Cdn$"aretoCanadiandollars,referencesto"HK$"aretoHongKongdollarsandreferencesto"MNT"aretotheMongolianTugrik.
Thefollowingtablereflectstheclosing,high,lowandaverageratesofexchangeforthepurchaseofoneUnitedStatesdollarusingCanadiandollarsfortheindicatedperiodsbelow,baseduponthenoonbuyingratespublishedbytheBankofCanada:(StatedinCanadiandollars)YearEndedDecember31201920182017Endofperiod1.
29881.
36421.
2545Highfortheperiod1.
36001.
36421.
3743Lowfortheperiod1.
29881.
22881.
2128Averagefortheperiod1.
32691.
29571.
2986TheBankofCanadanoonbuyingrateasofFebruary2,2021forthepurchaseofoneUnitedStatesdollarusingCanadiandollarswasCdn$1.
2818(oneCanadiandollaronthesamedateequalledUS$0.
7802).
Thefollowingtablereflectstheclosing,high,lowandaverageratesofexchangeforthepurchaseofoneHongKongdollarusingCanadiandollarsfortheindicatedperiodsbelow,baseduponthenoonbuyingratespublishedbytheBankofCanada:(StatedinCanadiandollars)YearEndedDecember31201920182017Endofperiod0.
16680.
17420.
1605Highfortheperiod0.
17360.
17420.
1766Lowfortheperiod0.
16650.
15710.
1552Averagefortheperiod0.
16940.
16530.
1667TheBankofCanadanoonbuyingrateasofFebruary2,2021forthepurchaseofoneHongKongdollarusingCanadiandollarswasCdn$0.
1654(oneCanadiandollaronthesamedateequalledHK$6.
0459).
DefinedTermsandAbbreviationsInthisAnnualInformationCircular,unlessthesubjectmatterorcontextisinconsistenttherewith,thefollowingtermsshallhavethemeaningssetforthbelow:5"2006MineralsLaw"meanstheMineralsLawofMongolia,enactedonJuly8,2006,andeffectivefromAugust26,2006,asthesamemaybeamendedorsupplementedfromtimetotime.
"2012TechnicalReport"meansthepreliminaryfeasibilitystudyandtechnicalreportontheOvootTolgoiDepositdatedMarch19,2012,preparedbyRungePincockMinarco.
"2016TechnicalReport"meansthetechnicalreportontheOvootTolgoiDepositdatedMay6,2016,preparedbyRungePincockMinarco.
"2018BankLoan"meansacreditfacilitygrantedbyaMongolianbanktoSGSintheprincipalamountof$2.
8millioninMay2018.
"Addendum"meanstheMarch2007addendumtotheEIAfortheOvootTolgoiDeposit.
"AnnualInformationForm"meansthisamendedandrestatedannualinformationformdatedFebruary3,2021"Articles"meanstheArticlesofContinuationoftheCompanydatedMay29,2007.
"ASTM"meansAmericanSocietyforTestingMaterials.
"AuditCommittee"meansacommitteeoftheBoardformedforthepurposeofoverseeingtheaccountingandfinancialreportingprocessesoftheCompanyandauditsofthefinancialstatementsoftheCompany.
"BDO"meansBDOLimited,theCompany'sexternalauditors.
"BCBCA"meanstheBusinessCorporationsAct(BritishColumbia),asthesamemaybeamendedorsupplementedfromtimetotime.
"Biluut"meanstheareadelineatedandidentifiedastheBiluutcoalfieldintheSoumberDeposit.
"Board"meanstheboardofdirectorsoftheCompany.
"CanadianSecuritiesAdministrators"meansthesecuritiesregulatorsofeachprovinceandterritoryofCanada.
"CDIA"meanstheCourtDecisionImplementingAgencyofMongolia.
"Ceke"meansthePRCcoaldistributionterminalattheShiveeKhurenBorderCrossing.
"CentralSoumber"meanstheareadelineatedandidentifiedastheCentralSoumbercoalfieldintheSoumberDeposit.
"CIC"meansChinaInvestmentCorporation,togetherwithitswhollyownedsubsidiariesandaffiliates.
"CIM"meanstheCanadianInstituteofMining,MetallurgyandPetroleum.
"Cinda"meansChinaCinda(HK)InvestmentsManagementCompanyLimited,awhollyownedsubsidiaryofChinaCindaAssetManagementCorporationLimited.
"ClassAction"meanstheclassactionlawsuitinCanadafiledagainsttheCompany,certainofitsformerseniorofficersanddirectors,andtheCompany'sformerauditorrelatingtotheRestatement.
6"CNAS"meansChinaNationalAccreditationServiceforConformityAssessment.
"CommonShares"meanscommonshareswithoutparvalueinthecapitaloftheCompany.
"Company"or"SouthGobi"meansSouthGobiResourcesLtd.
andincludes,asthecontextrequires,oneormoreofitssubsidiaries.
"CompensationandBenefitsCommittee"meansacommitteeoftheBoardformedtodischargetheBoard'sresponsibilitiesrelatingtocompensationandbenefitsofdirectorsandexecutiveofficersoftheCompany.
"ConvertibleDebenture"meanstheconvertibledebentureissuedbytheCompanytoCIConOctober26,2009andassignedbyCICtoCICSubcoonNovember19,2009.
"CSR"meanscorporatesocialresponsibility.
"DCCourt"meanstheKhan-UulDistrictCivilCourtofFirstInstanceinMongolia.
"DistrictCourt"meanstheFirstInstanceSecondDistrictCriminalCourtofJusticeofMongolia.
"DMCL"meansDragonMiningConsultingLimited.
"EastSoumber"meanstheareadelineatedandidentifiedastheEastSoumbercoalfieldintheSoumberDeposit.
"EjinJinda"meansEjinaqiJindaCoalIndustryCo.
Ltd.
"EIA"meansEnvironmentalImpactAssessment.
"EMP"meansEnvironmentalManagementPlan.
"EPP"meansEnvironmentalProtectionPlan.
"FIL"meansForeignInvestmentLawofMongolia.
"FirstConcept"meansFirstIndustrialGroupLimited.
"FormerEmployees"meansthethreeformeremployeesofSGSnamedasdefendantsintheTaxEvasionCase.
"GovernmentofMongolia"or"MongolianGovernment"meanstheexecutivebranchofthegovernmentofMongolia,whetherstate,regionalorlocal,andanyagency,authority,branch,department,regulatorybodyorotherentityexercisingexecutive,taxing,regulatoryoradministrativepowersoforpertainingtothegovernmentofMongolia,andallofficials,agentsandrepresentativesofeachoftheforegoing.
"GSCPaper88-21"meansPaper88-21oftheGeologicalSurveyofCanadatitled"AStandardizedCoalResource/ReserveReportingSystemforCanada",dated1989,asamended.
"HKEX"meansTheStockExchangeofHongKongLimited.
"IAAC"meanstheMongolianIndependentAuthorityAgainstCorruption.
7"ISO"meanstheInternationalOrganizationforStandardization.
"IVN"meansIvanhoeMinesLimited.
"Jargalant"meanstheareadelineatedandidentifiedastheJargalantcoalfieldintheSoumberDeposit.
"LandLawofMongolia"meansLawonLandofMongoliaenactedonJune7,2002,asthesamemaybeamendedorsupplementedfromtimetotime.
"LIBOR"meanstheLondonInterbankOfferedRate,theratechargedbyonebanktoanotherforlendingmoney.
"MAK"meansMongolynAltMAKLLC.
"MAK-Qinghua"meansthejointventurebetweenMAKandQinghua.
"MBGS"or"McElroyBryan"meansMcElroyBryanGeologicalServices.
"MEL"meansaMongolianmineralexplorationlicence.
"MineralDepositofStrategicImportance"means,underthe2006MineralsLaw,adepositthatmayhavethepotentialtoimpactnationalsecurity,ortheeconomicandsocialdevelopmentofMongoliaatthenationalandregionallevels,orthatisgenerating,orhasthepotentialtogenerate,morethan5%ofMongolia'sgrossdomesticproductinanygivenyear.
"MiningProhibitioninSpecifiedAreasLaw"meanstheLawonProhibitionagainstExplorationandMininginHeadwaterAreas,ProtectedZonesforWaterReservesandForestLandsofJuly16,2009,asthesamemaybeamendedorsupplementedfromtimetotime.
"MNT"meanstogrogortugrik,thelegalcurrencyofMongolia.
"MRAM"meanstheMineralResourcesandPetroleumAuthorityofMongolia.
"MTLLC"meansMagnaiTradeLLC,asupplieroffueltoSGS.
"NariinSukhaitMine"meansthecoalmineoperatedbyMak-QinghualocatedimmediatelynorthoftheSunriseFieldoftheOvootTolgoiMine.
"NI43-101"meansNationalInstrument43-101-StandardsofDisclosureforMineralProjectsoftheCanadianSecuritiesAdministrators.
"NI51-102"meansNationalInstrument51-102-ContinuousDisclosureofObligationsoftheCanadianSecuritiesAdministrators.
"NominatingandCorporateGovernanceCommittee"meansacommitteeoftheBoardformedtoassisttheBoardinfulfillingitsoversightresponsibilitieswithrespecttoappointmentandelectionofindividualstotheBoardanddevelopingcorporategovernanceguidelinesfortheCompany.
"Norwest"meansNorwestCorporationofSaltLakeCity,Utah.
8"NovelPrivatePlacement"meansthetwotrancheprivateplacementwithNovelSunrisepursuanttothetermsofaprivateplacementagreemententeredintobetweentheCompanyandNovelSunriseonFebruary24,2015.
"NovelSunrise"meansNovelSunriseInvestmentsLimited,aninvestmentholdingcompanyregisteredintheBritishVirginIslands.
"OntarioCourt"meanstheOntarioSuperiorCourtofJusticeinCanada.
"OTLLC"meansOyuTolgoiLLC(formerlyIvanhoeMinesMongoliaInc.
LLC),acompanyincorporatedunderthelawsofMongoliaandasubsidiaryofTurquoiseHill.
"OvootTolgoiDeposit"meanstheCompany'scoalexploration,developmentandproductionprojectsatOvootTolgoi,includingtheOvootTolgoiMineandtheOvootTolgoiUndergroundDeposit.
"OvootTolgoiMine"meanstheCompany'sopenpitcoalmineatOvootTolgoi,whichiscomprisedoftheSunriseandSunsetopenpitcoalmines.
"OvootTolgoiTechnicalReport"meansthetechnicalreportontheOvootTolgoiMinedatedMay15,2017,preparedbyDMCL.
"OvootTolgoiUndergroundDeposit"meanstheCompany'sundergrounddevelopmentprojectatOvootTolgoi.
"ParliamentofMongolia"meanstheStateGreatKhuralofMongolia.
"PMA"meansapre-miningagreement.
"PRC"or"China"meansthePeople'sRepublicofChina,andreferencesinthisAnnualInformationFormtothePRCorChinaexcludeHongKong,theMacauSpecialAdministrativeRegionofthePRCandTaiwan.
"PreferredShares"meanspreferredshareswithoutparvalueinthecapitaloftheCompany.
"PwC"meansPricewaterhouseCoopers,LLP(Vancouver).
"qualifiedperson"or"QP"meansa"qualifiedperson"assuchtermisdefinedinNI43-101.
"Renminbi"or"RMB"meansthelawfulcurrencyofthePRC.
"Restatement"meansthedecisionbytheBoardinNovember2013torestatetheCompany's2011and2012financialstatements.
"RioTinto"meansRioTintoplc,togetherwithitsdirectandindirectsubsidiaries.
"RungePincockMinarco"meansRungePincockMinarco,formerlyknownunderthetradename"Minarco-MineConsult"includingthetimesduringwhichitpublishedthe2012TechnicalReportandthe2016TechnicalReport.
"Sapphire"meansSapphireGeoLtd.
,acompanyestablishedunderthelawsofMongolia.
"SGS"meansSouthGobiSandsLLC,awhollyownedsubsidiaryoftheCompany.
9"Shareholders"meansholdersoftheCommonShares,and"Shareholder"meansanyoneholderoftheCommonShares.
"ShiveeKhurenBorderCrossing"meanstheShiveeKhuren-CekecrossingattheMongolia-PRCborder.
"SGQCoal"meansSGQCoalInvestmentPte.
Ltd.
,awhollyownedsubsidiaryoftheCompany.
"StrategicDepositsList"meansalistof15depositsdesignatedbytheParliamentofMongoliatobeMineralDepositsofStrategicImportance.
"Soumber"means,together,theareasdelineatedandidentifiedastheCentralSoumberandEastSoumbercoalfieldsintheSoumberDeposit.
"SoumberDeposit"meanstheCompany'scoalexplorationprojectlocatedapproximately20kmeastoftheSunrisePitcomprisedoftheCentralSoumber,EastSoumber,SouthBiluut,BiluutandJargalantfields.
"SouthBiluut"meanstheareadelineatedandidentifiedastheSouthBiluutcoalfieldintheSoumberDeposit.
"SunriseField"meanstheareaofthecoaldepositthatcomprisesboththesurfaceandundergroundresourcesintheareadelineatedandidentifiedastheSunriseFieldintheOvootTolgoiTechnicalReport.
"SunrisePit"meanstheareaofthecoaldepositdelineatedandidentifiedastheSunrisePitintheOvootTolgoiDeposit.
"SunsetField"meanstheareaofthecoaldepositthatcomprisesboththesurfaceandundergroundresourcesintheareadelineatedandidentifiedastheSunsetFieldintheOvootTolgoiTechnicalReport.
"SunsetPit"meanstheareaofthecoaldepositdelineatedandidentifiedastheSunsetPitintheOvootTolgoiDeposit.
"TAG"meansTheAmericasGroup.
"TananImpex"meansTananImpexCo.
Ltd.
"TaxEvasionCase"meanstheinvestigationsbyIAACregardingallegationsoftaxevasionandmoneylaunderingbytheFormerEmployeesandSGS.
"TaxPenalty"means,withrespecttotheTaxVerdict,liabilityoftheCompanyascivildefendantwithrespecttotheTaxEvasionCaseforamonetarypenaltyofapproximatelyUS$18.
2million.
"TaxVerdict"meanstheJanuary30,2015verdictoftheDistrictCourtfinding(i)theFormerEmployeesguiltyoftaxevasionandimposedsentencesontheFormerEmployeesrangingfrom5yearsand6monthsto5yearsand10monthsofimprisonmentinthecorrectionalfacilitiesofstrictregimeninMongolia,and(ii)theTaxPenalty.
"Tier2DepositsList"meansthelistof39depositsdesignatedbytheParliamentofMongoliaassubjecttofurtherinvestigationbytheGovernmentofMongoliainordertodetermineifoneormoreofsuchdepositsshouldbedesignatedasaMineralDepositofStrategicImportance.
"TRQ"or"TurquoiseHill"meansTurquoiseHillResourcesLtd.
,acorporationincorporatedunderthelawsoftheYukon.
10"TRQLoan"meanstheshareholderloanprovidedbyTRQtoSGSandSGQCoalasborrowersintheprincipalamountof$10million.
"TSX"meanstheTorontoStockExchange.
"UnitedStates"meanstheUnitedStatesofAmerica,itsterritories,itspossessionsandallareassubjecttoitsjurisdiction.
"VAT"meansvalueaddedtax.
"VoyageWisdom"meansVoyageWisdomLimited,acompanyownedbytheVWLShareholders.
"VWLShareholders"meansMessrs.
NingqiaoLi,AminbuheandYulanGuo,eachaformerdirectorand/orofficeroftheCompany.
"WaterLawofMongolia"meanstheLawofMongoliaonWaterenactedonMay17,2012,asthesamemaybeamendedorsupplementedfromtimetotime.
"ZagSuujProject"meanstheCompany'scoalexplorationprojectlocatedapproximately150kmeastoftheOvootTolgoiDeposit.
11ConversionFactorsForeaseofreference,thefollowingconversionfactorsareprovided:ImperialMeasure=MetricUnitMetricUnit=ImperialMeasure2.
47acres1hectare0.
4047hectares1acre3.
28feet1m0.
3048m1foot0.
62miles1km1.
609km1mile0.
032ounces(troy)1gram31.
1grams1ounce(troy)2.
205pounds1kilogram0.
454kilograms1pound1.
102tons(short)1tonne0.
907tonnes1ton0.
029ounces(troy)/ton1gram/tonne34.
28grams/tonne1ounce(troy)/tonGlossaryofGeologicalandMiningTermsad:airdriedbasis(inreferencetothemoisturecontentofcoalsamples).
ar:asreceivedbasis(inreferencetothemoisturecontentofcoalsamples).
cv:meanscalorificvalue.
fault:afractureinrockalongwhichtheadjacentrocksurfacesaredifferentiallydisplaced.
FSI:freeswellingindex(asameasureofcokingpropertiesofcoal).
ha:hectares.
indicatedmineralresource:thatpartofamineralresourceforwhichquantity,gradeorquality,densities,shapeandphysicalcharacteristicsareestimatedwithsufficientconfidencetoallowtheapplicationofmodifyingfactorsinsufficientdetailtosupportmineplanningandevaluationoftheeconomicviabilityofthedeposit.
Geologicalevidenceisderivedfromadequatelydetailedandreliableexploration,samplingandtestingandissufficienttoassumegeologicalandgradeorqualitycontinuitybetweenpointsofobservation.
Anindicatedmineralresourcehasalowerlevelofconfidencethanthatapplyingtoameasuredmineralresourceandmayonlybeconvertedtoaprobablemineralreserve.
inferredmineralresource:thatpartofamineralresourceforwhichquantityandgradeorqualityareestimatedonthebasisoflimitedgeologicalevidenceandsampling.
Geologicalevidenceissufficienttoimplybutnotverifygeologicalandgradeorqualitycontinuity.
Aninferredmineralresourcehasalowerlevelofconfidencethanthatapplyingtoanindicatedmineralresourceandmustnotbeconvertedtoamineralreserve.
Itisreasonablyexpectedthatthemajorityofinferredmineralresourcescouldbeupgradedtoindicatedmineralresourceswithcontinuedexploration.
kcal:kilocalorie.
km:kilometres.
km2:squarekilometres.
12lb:pound.
logged:measuredanddescribed.
m:metres.
measuredmineralresource:thatpartofamineralresourceforwhichquantity,gradeorquality,densities,shape,andphysicalcharacteristicsareestimatedwithconfidencesufficienttoallowtheapplicationofmodifyingfactorstosupportdetailedmineplanningandfinalevaluationoftheeconomicviabilityofthedeposit.
Geologicalevidenceisderivedfromdetailedandreliableexploration,samplingandtestingandissufficienttoconfirmgeologicalandgradeorqualitycontinuitybetweenpointsofobservation.
Ameasuredmineralresourcehasahigherlevelofconfidencethanthatapplyingtoeitheranindicatedmineralresourceoraninferredmineralresource.
Itmaybeconvertedtoaprovenmineralreserveortoaprobablemineralreserve.
metallurgiccoal:variousgradesofcoalsuitableformakingsteel,suchascokingcoal.
mineralreserve:theeconomicallymineablepartofameasuredorindicatedmineralresource.
Itincludesdilutingmaterialsandallowancesforlosses,whichmayoccurwhenthematerialisminedorextractedandisdefinedbystudiesatpre-feasibilityorfeasibilitylevelasappropriatethatincludeapplicationofmodifyingfactors.
Suchstudiesdemonstratethat,atthetimeofreporting,extractioncouldreasonablybejustified.
Thereferencepointatwhichmineralreservesaredefined,usuallythepointwheretheoreisdeliveredtotheprocessingplant,mustbestated.
mineralresource:isaconcentrationoroccurrenceofsolidmaterialofeconomicinterestinorontheEarth'scrustinsuchform,gradeorqualityandquantitythattherearereasonableprospectsforeventualeconomicextraction.
Thelocation,quantity,gradeorquality,continuityandothergeologicalcharacteristicsofamineralresourceareknown,estimatedorinterpretedfromspecificgeologicalevidenceandknowledge,includingsampling.
mm:millimetres.
Mt:milliontonnes.
PCD:polycrystalline.
preliminaryfeasibilitystudy,pre-feasibilitystudyorPFS:acomprehensivestudyofarangeofoptionsforthetechnicalandeconomicviabilityofamineralprojectthathasadvancedtoastagewhereapreferredminingmethod,inthecaseofundergroundmining,orthepitconfiguration,inthecaseofanopenpit,isestablishedandaneffectivemethodofmineralprocessingisdetermined.
Itincludesafinancialanalysisbasedonreasonableassumptionsonthemodifyingfactorsandtheevaluationofanyotherrelevantfactorswhicharesufficientforaqualifiedperson,actingreasonably,todetermineifallorpartofthemineralresourcemaybeconvertedtoamineralreserveatthetimeofreporting.
Apre-feasibilitystudyisatalowerconfidencelevelthanafeasibilitystudy.
probablemineralreserve:theeconomicallymineablepartofanindicated,andinsomecircumstances,ameasuredmineralresource.
Theconfidenceinthemodifyingfactorsapplyingtoaprobablemineralreserveislowerthanthatapplyingtoaprovenmineralreserve.
provenmineralreserve:theeconomicallymineablepartofameasuredmineralresource.
Aprovenmineralreserveimpliesahighdegreeofconfidenceinthemodifyingfactors.
13RC:reversecirculation.
ROM:run-of-mine.
seam:astratumorbedofcoalorothermineral;generallyappliedtolargedepositsofcoal.
splits:thedivisionofabedofcoalintotwoormorehorizontalsectionsbyinterveningrockstrata.
strike:thedirection,orcourseorbearing,ofaveinorrockformationmeasuredonalevelsurface.
thermalcoal:coalthatisusedprimarilyforitsheatingvalueandthattendsnottohavethecarbonizationpropertiespossessedbymetallurgiccoal.
14FORWARDLOOKINGSTATEMENTSExceptforstatementsoffactrelatingtotheCompanyanditssubsidiaries,certaininformationcontainedhereinconstitutesforward-lookingstatements.
Forward-lookingstatementsarefrequentlycharacterizedbywordssuchas"plan","expect","project","intend","believe","anticipate","could","should","seek","likely","estimate"andothersimilarwordsorstatementsthatcertaineventsorconditions"may"or"will"occur.
Forward-lookingstatementsrelatetomanagement'soutlookandanticipatedeventsorresultsandarebasedontheopinionsandestimatesofmanagementatthetimethestatementsaremade.
Forward-lookingstatementsinthisAnnualInformationForminclude,butarenotlimitedto,statementsregarding:theCompanycontinuingasagoingconcernanditsabilitytorealizeitsassetsanddischargeitsliabilitiesinthenormalcourseofoperationsastheybecomedue;adjustmentstotheamountsandclassificationsofassetsandliabilitiesintheCompany'sconsolidatedfinancialstatementsandtheimpactthereof;theCompany'sexpectationsofsufficientliquidityandcapitalresourcestomeetitsongoingobligationsandfuturecontractualcommitments,includingtheCompany'sabilitytosettleitstradepayables,tosecureadditionalfundingandtomeetitsobligationsundereachoftheConvertibleDebenture,the2020NovemberDeferralAgreement(asdefinedbelow),the2020JuneDeferralAgreement(asdefinedbelow),the2020MayDeferralAgreement(asdefinedbelow),the2020AprilDeferralAgreement(asdefinedbelow),the2020MarchDeferralAgreement(asdefinedbelow),the2020FebruaryDeferralAgreement(asdefinedbelow),the2019DeferralAgreement(asdefinedbelow),theAmendedandRestatedCooperationAgreement(asdefinedbelow)andthe2018BankLoan(asdefinedbelow),asthesamebecomedue;theCompany'santicipatedfinancingneeds,developmentplansandfutureproductionlevels;theabilityoftheCompanytosuccessfullyapplyforarevocationoftheCTO(asdefinedbelow);theresumptionoftradingintheCommonSharesontheTSXorHKEX;theCompanyenteringintodiscussionswithCICregardingapotentialdebtrestructuringplanwithrespecttotheamountsowingtoCIC;theresultsandimpactoftheClassAction;theimpactoftheinternalinvestigationconductedbytheSpecialCommittee(asdefinedbelow)ontheSuspiciousTransactions(asdefinedbelow);theestimatesandassumptionsincludedintheCompany'simpairmentanalysisandthepossibleimpactofchangesthereof;theagreementwithEjinJindaandthepaymentsthereunder;theabilityoftheCompanytosuccessfullyrecoverthebalanceofitsdoubtfultradeandnotesreceivables;theabilityoftheCompanytoenhancetheoperationalefficiencyandoutputthroughputofthewashingfacilitiesatOvootTolgoi;theabilityoftheCompanytoenhancetheproductvaluebyconductingcoalprocessingandcoalwashing;theimpactoftheCompany'sactivitiesontheenvironmentandactionstakenforthepurposeofmitigationofpotentialenvironmentalimpactsandplannedfocusonhealth,safetyandenvironmentalperformance;theimpactofthedelaysinthecustomclearanceprocessattheCekeborderontheCompany'soperationsandtherestrictionsestablishedbyChineseauthoritiesontheimportofF-gradecoalintoChina;theimpactoftheCoronavirusDisease2019("COVID-19")pandemicandclosureofMongolia'ssouthernborderwithChinaontheCompany'sbusiness,financialconditionandoperations;15theabilityoftheCompanytosuccessfullyappealthedecisionofMRAMtoterminatetheSoumberLicenses(asdefinedbelow)andtheanticipatedtimingoftheHighCourtoftheCapitalCity's(the"HighCourt")rulingontheappeal;theabilityoftheCompanytosuccessfullynegotiateanextensionoftheagreementwiththethirdpartycontractorrelatingtotheoperationofthewashplantattheOvootTolgoiminesite;theabilityoftheCompanytosuccessfullyreinstatetheSoumberLicenses;thefuturedemandforcoalinChina;futuretrendsintheChinesecoalindustry;theCompany'soutlookandobjectivesfor2020andbeyond;andotherstatementsthatarenothistoricalfacts.
Forward-lookinginformationisbasedoncertainfactorsandassumptionsdescribedbelowandelsewhereinthisAnnualInformationFormincluding,amongotherthings:thecurrentmineplanfortheOvootTolgoimine;mining,production,constructionandexplorationactivitiesattheCompany'smineralproperties;thecostsrelatingtoanticipatedcapitalexpenditures;thecapacityandfuturetollrateofthepavedhighway;plansfortheprogressofmininglicenseapplicationprocesses;miningmethods;theCompany'santicipatedbusinessactivities,plannedexpendituresandcorporatestrategies;management'sbusinessoutlook,includingtheoutlookfor2020andbeyond;currencyexchangerates;operating,labourandfuelcosts;theabilityoftheCompanytosuccessfullyapplyforarevocationoftheCTO;theabilitytoremedytheDelistingCriteria(asdefinedbelow)oftheTSXandtosatisfytheResumptionGuidance(asdefinedbelow)oftheHKEX;theabilityoftheCompanytoraiseadditionalfinancing;theanticipatedroyaltiespayableunderMongolia'sroyaltyregime;thefuturecoalmarketconditionsinChinaandtherelatedimpactontheCompany'smarginsandliquidity;theanticipatedimpactoftheCOVID-19pandemic;theassumptionthatthebordercrossingswithChinawillremainopenforcoalexports;theanticipateddemandfortheCompany'scoalproducts;futurecoalprices,andthelevelofworldwidecoalproduction.
WhiletheCompanyconsiderstheseassumptionstobereasonablebasedontheinformationcurrentlyavailabletoit,theymayprovetobeincorrect.
Forward-lookingstatementsaresubjecttoavarietyofrisksanduncertaintiesandotherfactorsthatcouldcauseactualeventsorresultstodiffermateriallyfromthoseprojectedintheforward-lookingstatements.
Theserisksanduncertaintiesinclude,amongotherthings:theuncertainnatureofminingactivities,actualcapitalandoperatingcostsexceedingmanagement'sestimates;variationsinmineralresourceandmineralreserveestimates;failureofplant,equipmentorprocessestooperateasanticipated;thepossibleimpactsofchangesinminelife,usefullifeordepreciationratesondepreciationexpenses;risksassociatedwith,orchangestoregulatoryrequirements(includingenvironmentalregulations)andtheabilitytoobtainallnecessaryregulatoryapprovals;thepotentialexpansionofthelistoflicensespublishedbytheGovernmentofMongoliacoveringareasinwhichexplorationandminingarepurportedlyprohibitedoncertainoftheCompany'smininglicenses;theGovernmentofMongoliadesignatinganyoneormoreoftheCompany'smineralprojectsinMongoliaasaMineralDepositofStrategicImportance;theriskthattheCompanyisunabletosuccessfullyapplyforarevocationoftheCTO;theriskthattheCompanyisunabletoremedytheDelistingCriteriawithinthedeadlineestablishedbytheTSXandtheCommonSharesbecomingdelistedfromtheTSX;theriskthattheCompanyisunabletofulfilltheconditionsoftheResumptionGuidanceandtheCommonSharesbecomingdelistedfromtheHKEX;theriskofcontinueddelaysinthecustomclearanceprocessattheCekeborder;therestrictionsestablishedbyChineseauthoritiesontheimportofF-gradecoalintoChina;theriskthatMongolia'ssouthernborderswithChinawillbethesubjectoffurtherclosures;thenegativeimpactoftheCOVID-19pandemiconthedemandforcoalandtheeconomygenerallyinChina;theriskthattheCOVID-19pandemicisnoteffectivelycontrolledinChinaandMongolia;theriskthattheCompany'sexistingcoalinventoriesareunabletosufficientlysatisfyexpectedsalesdemand;thepossibleimpactofchangestotheinputstothevaluationmodelusedtovaluetheembeddedderivativesintheConvertibleDebenture;theriskoftheCompanyfailingtosuccessfullynegotiatefavorablerepaymenttermsontheTRQ16ReimbursableAmount;theriskofCICacceleratingallamountsoutstandingundertheConvertibleDebentureandenforcingpaymentthereof;theriskoftheCompanyoritssubsidiariesdefaultingunderitsexistingdebtobligations,includingthe2020NovemberDeferralAgreement,the2020JuneDeferralAgreement,the2020MayDeferralAgreement,the2020AprilDeferralAgreement,the2020MarchDeferralAgreement,the2020FebruaryDeferralAgreement,the2019DeferralAgreement,theAmendedandRestatedCooperationAgreementandthe2018BankLoan;theimpactofamendmentsto,ortheapplicationof,thelawsofMongolia,ChinaandothercountriesinwhichtheCompanycarriesonbusiness;modificationstoexistingpracticessoastocomplywithanyfuturepermitconditionsthatmaybeimposedbyregulators;delaysinobtainingapprovalsandleaserenewals;theriskoffluctuationsincoalpricesandchangesinChinaandworldeconomicconditions;theoutcomeoftheClassActionandanydamagespayablebytheCompanyasaresult;theimpactoftheinternalinvestigationconductedbytheSpecialCommittee;theriskthattheCompanyisunabletosuccessfullynegotiateadebtrestructuringplanwithrespecttotheamountsowingtoCIC;theriskthatthecalculatedsalespricedeterminedbytheCompanyforthepurposesofdeterminingtheamountofroyaltiespayabletotheMongoliangovernmentisdeemedasbeing"non-market"underMongoliantaxlaw;customercreditrisk;cashflowandliquidityrisks;risksrelatingtotheCompany'sdecisiontosuspendactivitiesrelatingtothedevelopmentoftheCekeLogisticsParkproject,includingtheriskthatitsinvestmentpartnermayinitiatelegalactionagainsttheCompanyforfailingtocomplywiththeunderlyingagreementsgoverningprojectdevelopment;risksrelatingtotheabilityoftheCompanytoenhancetheoperationalefficiencyandtheoutputthroughputofthewashingfacilitiesatOvootTolgoi;risksrelatingtotheCompany'sabilitytosuccessfullyappealMRAM'sdecisiontoterminatetheSoumberLicensesanddelaysinreceivingtheHighCourt'srulingontheappeal;theriskthattheCompanyisunabletosuccessfullynegotiateanextensionoftheagreementwiththethirdpartycontractorrelatingtotheoperationofthewashplantattheOvootTolgoiminesiteandrisksrelatingtotheCompany'sabilitytoraiseadditionalfinancingandtocontinueasagoingconcern.
Pleaseseetheheadingentitled"RiskFactors"foradiscussionoftheseandotherrisksanduncertaintiesrelatingtotheCompanyanditsoperations.
ThislistisnotexhaustiveofthefactorsthatmayaffectanyoftheCompany'sforward-lookingstatements.
Duetoassumptions,risksanduncertainties,includingtheassumptions,risksanduncertaintiesidentifiedaboveandelsewhereinthisAnnualInformationForm,actualeventsmaydiffermateriallyfromcurrentexpectations.
TheCompanyusesforward-lookingstatementsbecauseitbelievessuchstatementsprovideusefulinformationwithrespecttothecurrentlyexpectedfutureoperationsandfinancialperformanceoftheCompany,andcautionsreadersthattheinformationmaynotbeappropriateforotherpurposes.
Exceptasrequiredbylaw,theCompanyundertakesnoobligationtoupdateforward-lookingstatementsifcircumstancesormanagement'sestimatesoropinionsshouldchange.
Thereaderiscautionednottoplaceunduerelianceontheforward-lookingstatements,whichspeakonlyasofthedateofthisAnnualInformationForm;theyshouldnotrelyuponthisinformationasofanyotherdate.
17CORPORATESTRUCTUREName,AddressandIncorporationTheCompanywasincorporatedonFebruary14,2002,pursuanttotheCompanyAct(BritishColumbia)underthename5119InvestmentsLtd.
TheCompanychangeditsnametoMXCapitalCorp.
onMarch28,2002,andthencontinuedundertheCanadaBusinessCorporationsActonNovember4,2002.
OnAugust26,2003,theCompanychangeditsnametoAsiaGoldCorp.
OnSeptember22,2003,theCompanyconsolidateditsCommonSharesonasixforonebasis.
OnMay29,2007,theCompanywascontinuedundertheBCBCA,changeditsnametoSouthGobiEnergyResourcesLtd.
andreorganizeditsauthorizedcapitaltocreateaclassofsharesseparatefromtheCommonShares,consistingofanunlimitednumberofPreferredShares.
OnJanuary1,2008,theCompanyamalgamatedwithIvanhoeResourcesLtd.
undertheBCBCAandcontinuedunderthenameSouthGobiEnergyResourcesLtd.
OnMay11,2010,theCompanychangeditsnametoSouthGobiResourcesLtd.
TheCompany'sprincipalplaceofbusinessislocatedatUnit1208-10,TowerOne,193PrinceEdwardRoadWest,GrandCenturyPlace,Mongkok,Kowloon,HongKong.
TheCompany'sregisteredandrecordsofficeislocatedat20thfloor–250HoweStreet,Vancouver,BritishColumbia,Canada,V6C3R8.
IntercorporateRelationshipsThefollowingsetsforththenameandjurisdictionofincorporationoftheCompanyanditsprincipalsubsidiaries:18GENERALDEVELOPMENTOFTHEBUSINESSOverviewTheCompanyisanintegratedcoalmining,developmentandexplorationcompanywith471employees,including419Mongolianemployees,asatDecember31,2019.
TheCompanyownstheOvootTolgoiMine,asignificantcoalprojectinMongolia.
TheCompanyalsoownstheZagSuujProject,adevelopmentproject.
TheseprojectsarelocatedintheUmnugobiAimag(SouthGobiProvince)ofMongolia,within150kmofeachotherandincloseproximitytotheMongolia-PRCborder.
TheCompanyholdsa100%interestintheOvootTolgoiMine.
TheCommonSharesarelistedfortradingontheTSXunderthesymbol"SGQ"andontheHKEXunderthestockcodesymbol"1878".
TheCompanyisauthorizedtoissueanunlimitednumberofCommonSharesandanunlimitednumberofPreferredShares.
AsatFebruary2,2021,272,702,835CommonShareswereissuedandoutstanding.
Therearealsoincentiveshareoptionsoutstandingtoacquireapproximately6,299,250unissuedCommonShareswithexercisepricesrangingfromCAD$0.
11toCAD$0.
13.
TherearecurrentlynoPreferredSharesissuedandoutstanding.
AsatFebruary2,2021,tothebestoftheCompany'sknowledge:CICholdsapproximately64.
8millionCommonSharesrepresentingapproximately23.
8%oftheissuedandoutstandingCommonShares;andNovelSunriseholdsapproximately46.
4millionCommonSharesrepresentingapproximately17%oftheissuedandoutstandingCommonShares.
VoyageWisdomholdsapproximately25.
8millionCommonSharesrepresentingapproximately9.
5%oftheissuedandoutstandingCommonShares.
ContextTheOvootTolgoiMine,strategicallylocatedapproximately40kmfromtheShiveeKhurenBorderCrossing,istheCompany'sflagshipasset.
TheOvootTolgoiMine,togetherwiththeOvootTolgoiUndergroundDeposit,formstheOvootTolgoiDeposit.
TheOvootTolgoiDepositisseparatedintotwodistinctareas,theSunriseandSunsetPits.
TheCompanycommencedopenpitminingatOvootTolgoi'sSunsetPitinApril2008andcommencedcoalsalesinSeptember2008.
InAugust2011,theCompanycommencedopenpitminingandsalesattheSunrisePit.
TheCompanycommencedminingattheOvootTolgoiMinein2008.
TheCompanysellsaportionofitscoalatthemine-gatetoChinesecustomers,whiletheremainingcoalinventoryistransportedtoChinaandsoldviaitsChinesesubsidiariesatthestockyardsinCeke(Ceke,ontheChinesesideoftheShiveeKhurenBorderCrossing,whichisamajorChinesecoaldistributionterminalwithrailconnectionstokeycoalmarketsinChina)orcertaindesignatedlocationsinChinaasrequestedbycustomers.
SaleableproductsfromtheOvootTolgoiMineprimarilyconsistsofSouthGobistandard("Standard")andSouthGobipremium("Premium")semi-softcokingcoalproducts.
Somehigherashcontentproductis19washedandsoldassemi-softcokingcoalproductwhilesomeoftheunwashedproductissoldasathermalcoalproduct,asandwhenthemarketallows.
TheOvootTolgoiMineiscoveredbytheOvootTolgoiMiningLicence(asdefinedherein),asingle9,282.
76hamininglicence,andacorrespondingpermittomine.
TheOvootTolgoiUndergroundDepositiscontiguousto,andlocateddirectlybelow,theOvootTolgoiMine.
TheZagSuujProjectislocatedapproximately150kmeastoftheOvootTolgoiMineandapproximately80kmnorthoftheMongolia-PRCborder.
ForadescriptionoftheOvootTolgoiMiningLicence,referto"DescriptionofMaterialProperty–OvootTolgoiDeposit–PropertyDescriptionandLocation"inthisAnnualInformationForm.
ThreeYearHistory.
2017InJanuary2017,SGSreceivedalawsuitnoticefromtheDCCourtinrelationtoaclaimfromMTLLCforMNT22.
2billion(approximatelyUS$8.
9million)consistingofMNT14.
6billionofoutstandingfuelsupplypaymentsandMNT7.
6billionoflatepaymentpenaltiesandassociatedinterestcosts.
FollowingSGS'successfulchallengetotheauthorityoftheDCCourttoheartheclaim,thematterwasreferredtoarbitration.
InFebruary2017,theCompanysignedasettlementagreementwithMTLLCpursuanttowhichSGSagreedtopayMTLLC$8.
0millioninequalmonthlyinstallmentsfromMarch2017toJune2017infullsatisfactionofthedebtoutstanding.
InJune2017,theCompanysignedatripartysettlementagreement(the"TripartySettlementAgreement")withMTLLCandICIC(anindependentfuelsupplieroftheCompany),pursuanttowhich:(i)MTLLCtransferredtoICICitsrighttoreceivepaymentfromtheCompanyoftheoutstandingbalanceofapproximately$8.
0millionowingunderthesettlementagreementwiththeCompany(the"OutstandingAmount")anditsrighttoenforcethearbitrationawardagainsttheCompany;and(ii)theCompanyandICICagreedtoarevisedpaymentscheduleforrepaymentoftheOutstandingAmount.
PursuanttotheTripartySettlementAgreement,theCompanyagreedtopayinterestontheOutstandingAmount,whichaccruesatamonthlyrateof1.
8%andwillbesettledonamonthlybasis.
TheCompanywasrequiredtorepay,onaverage,$1.
3millionmonthlyduringtheperiodfromJuly2017toNovember2017.
AsofthedateofthisAnnualInformationForm,theCompanyhasfulfilleditsobligationsundertheTripartySettlementAgreementandhasfullyrepaidtheOutstandingAmount.
InMarch2017,theCompanyreportedanupdatedmineralresourceestimateandanewmineralreserveestimateinrespectoftheOvootTolgoiMine,whichareincludedinthisAnnualInformationForminthesectionentitled"DescriptionofMaterialProperty–OvootTolgoiDeposit".
TheCompanyfiledtheOvootTolgoiTechnicalinMay2017underitsprofileonSEDARatwww.
sedar.
cominsupportofthesame.
InMay2017,Messrs.
YingbinIanHe(asanindependent,non-executivedirector)andWenYao(asanon-executivedirect)wereappointedtotheBoard.
InJune2017,theCompanyannouncedthatithadenteredintoanewdeferralagreement(the"June2017DeferralAgreement")withCICinrelationtoarevisedpaymentscheduleonthe$22.
3millionofcashinterestandassociatedcostsdueundertheConvertibleDebentureonMay19,2017.
OnJune30,2017,attheCompany's2017annualgeneralmeeting,thefollowingindividualswereelectedtotheBoard:Messrs.
Aminbuhe,YulanGuo,YingbinIanHe,ZhuLiu,MaoSun,WenYao,HuiyiWangandMs.
JinLanQuan.
FollowingthereconstitutionoftheBoardandappointmentofnewdirectors,thestrategicadvisoryboard,whichwasformedinSeptember2016,wasdissolvedandMr.
AbrahamJonker'sappointmenttothestrategicadvisoryboardconcluded.
20InJuly2017,Mr.
HuiyiWang,anon-executivedirector,resignedfromtheBoard.
InAugust2017,InnerMongoliaSouthGobiEnergyLtd.
("IMSGE"),asubsidiaryoftheCompany,enteredintoa$10millionloanagreementwithBeijingJinRuiTianChenAssetManagementCoLtd.
("JRTC")forfinancingthepurchaseofminingequipmenttoincreasetheproductioncapacityoftheCompany.
InJuly2018,theCompanyandJRTCenteredintoasupplementaryagreementinrespectoftheequipmentloanpursuanttowhichtheCompanyagreedto,amongotherthings,repaytheoutstandingprincipalandaccruedinterestowingundertheequipmentloaninaccordancewiththefollowingrepaymentschedule:(i)$0.
5milliononJuly9,2018;(ii)$0.
7milliononAugust3,2018and(iii)$1.
4milliononNovember3,2018.
InNovember2018,theCompanyandJRTCenteredintoanadditionalsupplementaryagreementinrespectoftheequipmentloanpursuanttowhichJRTCagreedtoreducetheinstallmentpaymentof$1.
4milliondueonNovember3,2018to$1.
2millionandtheCompanyagreedtorepaysuchamountbyNovember22,2018.
TheCompanyrepaid$1.
2milliontoJRTCinNovember2018and,asofthedatehereof,theequipmentloanwithJRTChasbeenfullyrepaid.
InOctober2017,theCompanyenteredintoaninvestmentagreementwithBeijingDeRongTaiInvestmentCo.
,Ltd.
("BDRT")inconnectionwiththeCompany'sdevelopmentoftheCekePortEco-friendlyBondedLogisticsParkproject(the"CekeLogisticParkProject").
TheproposaltodeveloptheCekeLogisticsParkProjectwasdriven,inpart,toaddresspotentialstricterrequirementsforcoalstoragefacilitiesattheCekeborder,whichmaybeadoptedbylocalgovernmentinthefuture.
Pursuanttotheinvestmentagreement,BDRTagreed,subjecttofulfilmentofcertainconditions,toinvestRMB231millionininstalmentsbyJuly30,2018inreturnfora30%interestinInnerMongoliaSouthGobiEnterpriseCo.
Ltd.
("IMSE"),whiletheCompanywillholdtheremaining70%interestinIMSE.
TheinvestmentagreementprovidedthatproceedsfromBDRT'sequityinvestmentwillbeusedbyIMSEfortheconstructionoftheCekeLogisticsParkProject.
IMSEistheprojectcompanythatholdsa100%interestintheCekeLogisticsParkProject.
AsofthedateofthisAnnualInformationFormandfurthertoitsfocusoncapitalpreservation,theCompanysuspendedindefinitelyallfurtherdevelopmentactivitiesrelatingtothepreviouslyannouncedCekeLogisticsParkProjectuntilfurthernotice.
OnNovember17,2017,theCompanyannouncedthatMr.
Aminbuhe,theChiefExecutiveOfficer,anexecutivedirectorandtheChairmanoftheboardofdirectorsoftheCompany,commencedleavefromhisroleastheCompany'sChiefExecutiveOfficerandthatMr.
BingWangwasappointedastheinterimChiefExecutiveOfficeronatemporarybasiswhileMr.
Aminbuheisonleave.
OnNovember17,2017,theCompanyreportedthatitlearnedthatMr.
AminbuhewasarrestedonOctober11,2017andwasbeingdetainedatRizhaoCityDetentionCenterinChinaasasuspectinafraudulentloancase.
TheBoardformedaSpecialCommitteeofindependentnon-executivedirectors,comprisedofMr.
MaoSun,Ms.
JinLanQuanandMr.
YingbinIanHe,toinitiateaformalinternalinvestigationintothechargesagainstMr.
Aminbuheandtheconnection,ifany,betweenthosechargesandtheCompanyandhisconductasChairmanandChiefExecutiveOfficeroftheCompany.
OnNovember22,2017,theBoardterminatedtheemploymentofMr.
AminbuheduetohisincapabilitytofulfilhisdailydutiesandresponsibilitiesastheChiefExecutiveOfficeroftheCompanyandremovedMr.
AminbuheastheChairmanoftheBoard.
OnNovember22,2017,theCompanyprovidedanupdateonitsinterestpaymentobligationstoCIC,statingthattheCompany:(i)didnotpaythe$9.
7millionofcashinterestandassociatedcostsdueonNovember19,2017toCICundertheJune2017DeferralAgreementandthe$8.
1millionofanniversarycashinterestdueonNovember19,2017toCICundertheConvertibleDebenture;and(ii)didnotissuethe$4.
0millionworthofPIKInterestSharesdueonNovember19,2017toCICundertheConvertibleDebenture.
In2017,theCompanysold4.
65MtofcoalandtheCompanycoalproductionreached6.
38Mt.
Since2016,theCompanyhasstarted,andexpectstocontinue,toengageindependentminingcontractorstoperform21someofthestrippingandminingactivitiesattheOvootTolgoiMine.
In2019,independentminingcontractorsaccountedforapproximately53%oftheCompany'sstrippingandminingvolume.
2018InJanuary2018,theCompanyreceivedaconfidentialpartialaward(finalexceptastocosts)(the"ArbitrationAward")withrespecttothearbitrationproceedinginHongKongrelatedtothedisputeconcerningacoalsupplyagreementbetweenSGSandFirstConcept.
PursuanttotheArbitrationAward,SGSwasorderedtorepaythesumof$11.
5million(whichSGShadreceivedasaprepaymentforthepurchaseofcoal)toFirstConcept,togetherwithaccruedinterestatasimpleinterestrateof6%perannumfromthedatewhichtheprepaymentwasmadeuntilthedateoftheArbitrationAward,andthenatasimpleinterestrateof8%perannumuntilfullpayment.
TheArbitrationAwardisfinal,exceptastocoststhatwerereservedforafutureaward.
InNovember2018,theCompanyannouncedthatSGSandFirstConcepthadexecutedadeedofsettlement(the"SettlementDeed")inrespectoftheArbitrationAward.
PursuanttotheSettlementDeed,whichprovidesforthefullandfinalsatisfactionoftheArbitrationAwardaswellasthesettlementoftheissueofcostsrelatingtotheArbitrationandanyotherdisputesarisingoutofthecoalsupplyagreement,SGSagreedtopayFirstConceptthesumof$13.
9million,togetherwithsimpleinterestthereonattherateof6%perannumfromNovember1,2018untilfullpayment,in12monthlyinstallmentscommencinginNovember2018.
ProvidedthatSGScomplieswiththetermsoftheSettlementDeed,FirstConceptagreedtowaiveitscostsinconnectionwiththeArbitrationandArbitrationAwardandinterestfortheperiodfromJanuary4,2018toOctober31,2018.
InFebruary2018,theCompanyannouncedthatSGSwasinformedbytheCDIAthattheenforcementprocedureinrelationtotheTaxVerdictrenderedagainstSGSinJanuary2015hasbeenterminatedandnopartyshallhaveanyrighttomakeanyfurtherclaimsinconnectionwiththeTaxVerdict.
AsofthedateofthisAnnualInformationForm,SGShasfulfilleditsobligationsundertheTaxVerdict.
TheCompanybeganconstructionofacoalwashplantattheOvootTolgoiminein2016,aspartofitsplantochangetheexistingproductmixtohighervalueandhighermarginoutputsbycommencingthewashingofcertaingradesofcoalinordertoproducemorepremiumsemi-softcokingcoal.
ThecommissioningofthewashplantattheOvootTolgoiminewascompletedduringthesecondquarterof2019.
TheCompanyenteredintoawashplantoperationcontractinJuly2019andthewashplanthasbeenoperatingsincethattime.
InApril2018,Messrs.
ZhiweiChenandXiaoxiaoLiwereappointedtotheBoardasnon-executivedirectors.
InMay2018,theCompanyannouncedthatitsprincipalplaceofbusinessinHongKongwouldbechangedtoUnit1208-10,TowerOne,193PrinceEdwardRoadWest,GrandCenturyPlace,Mongkok,Kowloon,HongKongwitheffectfromMay7,2018.
InMay2018,theCompanyprovidedanupdateonthestatusofitsongoinginternalinvestigationintothechargesagainstMr.
Aminbuhe,andreportedthat,tothebestofitsknowledge,theChineseauthoritieshadnotlaidchargesagainstMr.
Aminbuhe,madeanypublicstatementofthebasisforMr.
Aminbuhe'sarrestorsoughtinformationfromtheCompanyinrespectofthismatter.
TheCompanyfurtherreportedthatitwasnotawareofanydefinitiveinformationthatwouldsuggestthatMr.
Aminbuhe'sarrestisrelatedtoanymisconductdirectlyrelatedtohispositionasChairmanandChiefExecutiveOfficeroftheCompany.
Withtheassistanceofitsexternallegalcounsel,theSpecialCommitteeconductedanextensivereviewoftherecordsinvolvingorrelatingtoMr.
AminbuhewhichareintheCompany'spossession(includingcommunicationstoandfromMr.
Aminbuhe'semailaccountwiththeCompany,relevantpublicdisclosureandotherinternaldocuments),andinterviewedseveraldirectorsandseniorofficersoftheCompanywho22haddirectcontactwithMr.
AminbuheduringhistenureasChairmanandChiefExecutiveOfficeroftheCompany.
OnMay21,2018,theCompanyprovidedanupdateonitsinterestpaymentobligationstoCIC,statingthattheCompanydidnotpaytheUS$30.
3milliontotalinterestpaymentsandassociatedfeesthatweredueandpayabletoCIConMay19,2018.
Theoutstandinginterestpayableconsistedof:(i)cashinterestpaymentsandassociatedfeesintheaggregateamountofUS$26.
3million;and(ii)US$4.
0millionworthofPIKInterestShares,whichtheCompanywasobligedtoissuetoCICpursuanttotheConvertibleDebenture.
OnJune1,2018,theCompanyannouncedthefollowingchangestotheseniorManagementteam:(i)theappointmentofMr.
ShougaoWangasChiefExecutiveOfficer,(ii)theappointmentofMr.
WeiguoZhangasChiefFinancialOfficer,(iii)theappointmentofMr.
AimingGuoasChiefOperationOfficer,(iv)Mr.
BingWang,theCompany'sformerinterimChiefExecutiveOfficer,returnedtohispriorpositionasGeneralManager,SalesandMarketingoftheCompany,and(v)Mr.
YulanGuo,steppeddownastheChiefFinancialOfficerandlefttheCompanytopursueotherendeavours.
UponceasingtobetheChiefFinancialOfficer,Mr.
Guo'sdirectordesignationwaschangedfromExecutiveDirectortonon-executiveDirector.
OnJune28,2018,attheCompany's2018annualgeneralmeeting,thefollowingindividualswereelectedtotheBoard:Messrs.
ZhiweiChen,YingbinIanHe,XiaoxiaoLi,MaoSun,WenYao,Mses.
LanChengandJinLanQuan.
InJuly2018,Mr.
ShougaoWang,theCompany'sChiefExecutiveOfficer,wasappointedasanExecutiveDirectorandMr.
TaoZhangjoinedtheCompanyasaVicePresident.
InAugust2018,theCompanyandTurquoiseHillenteredintoadeferralagreement(the"August2018DeferralAgreement"),wherebyTurquoiseHillagreedtoalimiteddeferralofrepaymentofallremainingamountsandobligationsowingundertheTRQLoantoFebruary28,2019inaccordancewiththescheduleofrepaymentssetoutbelow:TheCompanyagreedtoeffectmonthlyrepaymentsonthelastbusinessdayofeachmonthinanamountof(i)$0.
1millionpermonthfromAugust2018toSeptember2018;(ii)$0.
2millionpermonthfromOctober2018toJanuary2019;and(iii)theremainingbalanceonFebruary28,2019(thepaymentsin(i),(ii)and(iii),the"Repayments");andInterestshallcontinuetoaccrueonalloutstandingobligationsatthe12-monthUSdollarLIBORrate.
AsofthedateofthisAnnualInformationForm,theprincipalandaccruedinterestowingtoTRQundertheAugust2018DeferralAgreementhavebeenfullyrepaid.
InSeptember2018,theCompanyannouncedthatIMSGEhadreceivedacourtsummons(the"Summons")fromtheEjinaqiPeople'sCourtofInnerMongoliaAutonomousRegionofChina(the"EjinaqiCourt")inrelationtoadisputeovercertaincoalsalescontractswithJiayuguanXiyuanTradingCo.
,Ltd.
("Xiyuan"),aformercustomerofIMSGE.
AccordingtotheSummons,XiyuanappliedtotheEjinaqiCourtclaimingthatIMSGEshouldrepayasumofRMB19.
4million(orapproximatelyUSD$2.
8million)toXiyuan,comprisedofRMB19.
1millionofcoalprepaymentsandRMB0.
3millionofinterest.
XiyuanalsoclaimedagainstEjinaqiFulemengEnergyIndustryCo.
,Ltd.
forjointliabilityoftheabovesums,asitallegedthatFLMactedasanagentforIMSGEtoreceivecoalprepaymentanddelivercoalonbehalfofIMSGE.
InJanuary2019,theCompanyreceivednoticethattheEjinaqiCourtrenderedajudgmentallowinganapplicationbyXiyuantovoluntarilywithdrawitslawsuitagainstIMSGE,andEjinaqiFulemengEnergyIndustryCo.
,Ltd.
Xiyuan'sapplicationcitedalackofevidence.
23OnNovember20,2018,theCompanyprovidedanupdateonitsinterestpaymentobligationstoCIC,statingthattheCompanydidnotpaytheUS$41.
8milliontotalinterestpaymentsandassociatedfeesthatweredueandpayabletoCIConNovember19,2018(the"OutstandingInterestPayable").
TheOutstandingInterestPayableconsistedof:(i)cashinterestpaymentsandassociatedfeesintheaggregateamountofUS$33.
8million;and(ii)US$8.
0millionworthofPIKinterestshareswhichtheCompanywasobligedtoissuetoCICpursuanttotheConvertibleDebenture.
OnDecember17,2018theCompanyannouncedthatthatithadlearnedofcertaininformationrelatingtopastconductengagedinbyformerseniorexecutiveofficersandemployeesoftheCompany("FormerManagementandEmployees")whichraisedsuspicionsofseriousfraud,misappropriationofCompanyassetsandothercriminalactsbytheFormerManagementandEmployeesrelatingtopriortransactions("SuspiciousTransactions")between2016andthefirsthalfof2018involvingtheCompany,IMSGEandcertaincoaltradingandtransportationcompanies,someofwhichareallegedlyrelatedtoorcontrolledbytheFormerManagementandEmployeesortheirrelatedpersons.
TheCompanyfiledareportwithlocalpoliceauthoritiesinChinainrespectofcertainoftheSuspiciousTransactionsand,onDecember17,2018,theBoardexpandedthemandateoftheSpecialCommitteetoincludeaformalinvestigation(the"FormalInvestigation")oftheSuspiciousTransactions,theimplicatedFormerManagementandEmployees,andtheirimpact,ifany,onthebusinessandaffairsoftheCompany.
TheSpecialCommitteeengagedBlake,Cassels&GraydonLLPasindependentCanadianlegalcounselandErnst&Young(China)AdvisoryLimited(the"ForensicAccountant"),asforensicaccountants,toassistintheformalinvestigation.
TheSpecialCommitteeandtheForensicAccountantjointlyengagedZhongLunLawFirm,asindependentChineselegalcounsel.
SubsequenttotheannouncementmadebytheCompanyonDecember17,2018inrelationtotheSuspiciousTransactions,theCommonSharesweresuspendedfromtradingontheTSX,andhaltedfromtradingontheHKEX,ineachcaseeffectiveasofDecember17,2018(the"TradingSuspension").
OnDecember23,2018,theCompanyannouncedthatitwasindefaultunderthetermsoftheConvertibleDebenture,asaresultoftheCompanyhavingbeensuspendedfromtradingontheTSX,andhaltedfromtradingontheHKEX,foraperiodofmorethanfivetradingdayssinceDecember17,2018.
DuetotheimportrestrictionsestablishedbyChineseauthoritiesattheCekeborder,theCompanyhasbeenbarredfromtransportingitsF-gradecoalproductsintoChinaforsalesinceDecember15,2018.
TheCompany,togetherwithotherMongoliancoalcompanies,havebeenindiscussionswithChineseauthoritiesregardingapotentialamendmentorwithdrawaloftheseimportrestrictionstoallowfortheimportationofF-gradecoalintoChina;however,therecanbenoassurancethatafavorableoutcomewillbereached.
In2018,theCompanysold2.
78MtofcoalandtheCompanycoalproductionreached4.
34Mt.
2019InJanuary2019,theHKEXprovidedtheCompanywithcertainresumptionguidance,settingouttheconditionsthattheCompanymustsatisfyinorderfortradingoftheCommonSharestoresumeontheHKEX.
Pursuanttotheresumptionguidance,theCompanywasrequiredto:(i)conductaforensicinvestigation(the"ForensicInvestigation")oftheSuspiciousTransactionsinvolvingtheFormerManagementandEmployees;(ii)disclosethefindingsoftheForensicInvestigationandtakeappropriateremedialactions;and(iii)informthemarketofallmaterialinformationinorderfortheCompany'sshareholdersandinvestorstoappraisetheCompany'sposition.
24OnMarch15,2019,theCompanyprovidedaquarterlyupdateonthestatusoftheFormalInvestigationintotheSuspiciousTransactionspursuanttoRules13.
09(2)(a)and13.
24AoftheHKEX'sListingRules,andreportedthat:(i)theForensicAccountanthadsubmittedadraftinvestigationreporttotheSpecialCommittee;and(ii)theSpecialCommitteewouldreviewthefindingsoftheinvestigationreportandworkwiththeCompany'sauditorsandlegalcounseltoassessthefinancialandlegalimplicationsandtoplanforanyfurtheractions.
OnMarch30,2019,theCompanyannouncedthattheSpecialCommitteeconcludedtheFormalInvestigationanddeliveredafinalreportsummarizingitskeyfindingstotheBoard,whichwasadoptedandapprovedatameetingheldonMarch30,2019.
TheFormalInvestigationconcentratedonthefollowingareasoffocus(the"AreasofFocus"):(i)thearrangementsoftheSuspiciousTransactions;(ii)therelationshipsbetweentheFormerManagementandEmployeesandcertaincoaltradingandtransportationcompanies;(iii)anyunidentifiedquestionabletransactionsrelatingtotheFormerManagementandEmployees;and(iv)thepotentialimpactof(i),(ii)and(iii)onthefinancialstatementsoftheCompanyanditssubsidiaries.
DuringthecourseoftheFormalInvestigation,certainincompleteaccounting/operationalrecordsofoneoftheCompaniesUnderInvestigation(asdefinedbelow)("CompanyA")wereidentifiedinCompanyemployeecomputers.
Asaresult,theSpecialCommitteeexpandedthescopeoftheAreaofFocusoftheFormalInvestigationtoinclude:(i)afundflowanalysisofCompanyA;and(ii)apriceanalysisofthedifferencebetweenCompanyA'spurchasepricesfromtheCompanyandsellingpricestodownstreamcustomers.
BasedontheAreasofFocus,theSpecialCommitteeexaminedandmadefindingsinrespectofanumberofmattersinconnectionwiththeFormalInvestigation,includingthefollowing:(i)allegationsthatMr.
Aminbuhe,theCompany'sformerChairmanandChiefExecutiveOfficer,controlledcertaincompaniestheCompanyhadbusinessdealings(the"CompaniesUnderInvestigation");(ii)uncollectablereceivablesfromcertainformercustomersandsuppliersoftheCompany;(iii)theimpactofthelawsuitfiledbyXiyuan;and(iv)allegationsofmisconductbytheFormerManagementandEmployees,including:(I)thegrantofaRMB5millionloan;(II)embezzlementofbankacceptancebillsofRMB12million;(III)endorsementofcommercialacceptancebillsofRMB71millionwhichwerenotsupportedbygenuinecommercialtransactions;(IV)prepaymentsofRMB8.
5millionforcoaltransportationserviceswhichwereneverreceivedbytheCompany;and(V)prepaymentofRMB16.
4millionforcoaltransportationserviceswhichwereneverreceivedbytheCompany.
BasedontheinformationobtainedfromtheFormalInvestigation,theSpecialCommitteeconcludedthatfourmattersexaminedinconnectionwiththeFormalInvestigation,havinganaggregatevalueofapproximatelyRMB41million,involvedimproperconduct,fraudormisappropriationofassets(the"FraudulentTransactions")andthatonematterexaminedinconnectionwiththeFormalInvestigation,havinganaggregatevalueofapproximatelyRMB71million,involvedanaccountingreclassificationerror.
Fromanaccountingperspective,theCompanydoesnotanticipatethattheFraudulentTransactionswillhaveanyimpactonitsfinancialstatementsinthefutureastheCompanyhasalreadyrecordedtheappropriateprovisionsinthefinancialstatementsasatDecember31,2018,2017and2016andfortheyearsthenended.
BasedonthekeyfindingsofandinformationobtainedfromtheFormalInvestigation,theCompanyconsideredtheresultingfinancialimpactonthefinancialstatementsanddeterminedthatarestatementofpriorperiodfinancialinformationwasrequired,asreflectedanddisclosedintheCompany'sauditedannualconsolidatedfinancialstatementsandrelatedmanagement'sdiscussionandanalysisfortheyearendedDecember31,2018,copiesofwhichareavailableundertheCompany'sprofileonSEDARatwww.
sedar.
com.
Asummaryoftherequisiteadjustmentsonthefinancialstatementsforthefiscalyearsended2016and2017issetforthinthetablebelow.
25SummaryofAdjustments(inmillionsofUS$)YearendedDecember31,2016YearendedDecember31,2017StatementofComprehensiveIncomeIncrease/(Decrease)ofNetComprehensiveLoss4.
8(2.
1)StatementofFinancialPosition(Decrease)ofTotalAssets(4.
8)(7.
1)(Decrease)ofTotalLiabilities-(4.
4)IncreaseofDeficiencyinAssets4.
82.
7OnApril2,2019,theCompanyannouncedthattheBoardhadapprovedandadoptedadividendpolicyeffectivefromMarch27,2019.
OnApril23,2019,theCompanyexecutedadeferralagreement(the"2019DeferralAgreement")withCICinrelationtoadeferralandrevisedrepaymentscheduleinrespectof(i)$41.
8millionofoutstandingcashandpaymentinkindinterestandassociatedcostsdueandpayabletoCIConNovember19,2018undertheConvertibleDebentureandtheJune2017DeferralAgreement;and(ii)$27.
9millionofcashandPIKInterestpaymentspayabletoCICundertheConvertibleDebenturefromApril23,2019toandincludingMay19,2020(the"2019Deferral").
PursuanttoSection501(c)oftheTSXCompanyManual,the2019DeferralAgreementwasapprovedattheCompany'sadjournedannualandspecialmeetingofshareholdersonJune13,2019.
Thekeyrepaymenttermsofthe2019DeferralAgreementare:(i)theCompanyagreedtopayatotalof$14.
3millionovereightinstalmentsfromNovember2019toJune2020;(ii)theCompanyagreedtopaythePIKInterestcoveredbythe2019Deferralbywayofcashpayments,ratherthantheissuanceofCommonShares;and(iii)theCompanyagreedtopaytheremainingbalanceof$62.
6milliononJune20,2020.
TheCompanyagreedtopayadeferralfeeatarateof6.
4%perannuminconsiderationofthedeferredamounts.
Asaconditiontoagreeingtothe2019Deferral,CICrequiredthatthemutualco-operationagreement(the"CooperationAgreement")datedNovember19,2019betweenSGSandCIC,beamendedandrestated(the"AmendedandRestatedCooperationAgreement")toclarifythemannerinwhichtheservicefee(the"ManagementFee")payabletoCICundertheCooperationAgreementiscalculated,witheffectasofJanuary1,2017.
Specifically,theManagementFeeundertheAmendedandRestatedCooperationAgreementisdeterminedbasedonthenetrevenuesrealizedbytheCompanyandallofitssubsidiariesderivedfromsalesintoChina(ratherthanthenetrevenuesrealizedbytheCompanyanditsMongoliansubsidiariesascurrentlycontemplatedundertheCooperationAgreement).
AsconsiderationfordeferringpaymentoftheadditionalManagementFeepayabletoCICasaresultoftheAmendedandRestatedCooperationAgreement,theCompanyagreedtopaytoCICadeferralfeeattherateof2.
5%ontheoutstandingManagementFee.
PursuanttotheAmendedandRestatedCooperationAgreement,theCompanyagreedtopayCICthetotaloutstandingManagementFeeandrelatedaccrueddeferralfeeof$4.
2millionoversixinstalmentsfromJune2019toNovember2019.
TheCompanyexecutedtheAmendedandRestatedCooperationAgreementwithCIConApril23,2019.
Pursuanttotheirterms,boththe2019DeferralAgreementandtheAmendedandRestatedCooperationAgreementbecameeffectiveonJune13,2019,beingthedateonwhichthe2019DeferralAgreementwasapprovedbyshareholdersattheCompany'sadjournedannualandspecialmeetingofshareholders.
26Inconnectionwiththe2019DeferralAgreement,theCompanyalsoannouncedthatitintendstodiscussapotentialdebtrestructuringplanwithrespecttoamountsowingtoCICwhichismutuallybeneficialtotheCompanyandCIC;andtoformaspecialcommitteecomprisedofindependentdirectorstoensurethattheinterestsofitsminorityshareholdersarefairlyconsideredinthenegotiationandreviewofanysuchrestructuring;however,therecanbenoassurancethatafavorableoutcomewillbereached.
AsofthedateofthisAnnualInformationForm,therehasbeennosignificantprogressmadeinrelationstotherestructuringplan.
OnApril30,2019,theSpecialCommittee,withtheassistanceoftheForensicAccountant,completeditsassessmentofpotentialremedialactionsandpreventativemeasurestoimproveandstrengthentheCompany'scommitmenttoacultureofhonesty,integrityandaccountabilityandcompliancewiththehigheststandardsofprofessionalandethicalconductanddelivereditsreportsettingoutasetofrecommendedremedialactionsandpreventativemeasures(the"RemedialActionsandPreventativeMeasures")totheBoard,whichwasapprovedatameetingheldonApril28,2019.
TheRemedialActionsandPreventativeMeasureswereintendedtoremediatetheincidentsidentifiedintheFormalInvestigationandaddressdeficienciesintheimplementationoftheCompany'spracticesandprocedures.
Issuesidentifiedofnoteforthepurposesofsuchremediationincludedalackofpreventativemeasurestoavoidconflictsofinterests,theneedforadditionalemployeeoversightandtheneedtoenhancecompliancewithaccountingprotocolsanddocumentationretention.
PriortoapprovingtheRemedialActionsandPreventativeMeasures,theCompanyhadalreadytakenproactivestepstoaddresssomeoftheissuesraisedbytheFormalInvestigation,includingbutnotlimitedto:ceasingbusinessactivitieswithcompaniesallegedlycontrolledbytheCompany'sformermanagement,takingstepstodefendclaimsbythirdpartiesattemptingtolinktheCompanytotheaforementionedcompanies,andconsideringwhetherlegalrecourse,suchascollectionactions,canbetakeninrespectofcertainmatters.
ThefollowingisasummaryoftheRemedialActionsandPreventativeMeasureswhichwereadoptedandapprovedbytheBoardandtheactionsthattheCompanyhastakentoimplementtheRemedialActionsandPreventativeMeasures:27RemedialActionsandPreventativeMeasuresActionsbytheCompanyEnhancetheCompany'santi-fraudprogram,includingestablishinganinternalauditfunction,conductingroutineinternalauditsanddevelopingacommunicationandtrainingprogramforemployeestoeffectivelyestablishacultureofcompliancewithintheCompany,ensureexistingpolicies(suchasthewhistleblowerpolicy)workeffectivelyandsupporttheimplementationoftheRemedialActionsandPreventativeMeasuresTheCompanyestablishedanewinternalauditfunctionwhichreportsdirectlytotheAuditCommitteeonaregularbasis.
TheinternalauditfunctionisresponsiblefordesigningandimplementinganinternalauditprogramfortheCompanywhichincludesroutineinternalauditsandriskassessmentsoftheCompany'sexistinganti-fraudprogramandotherinternalcontrolsandprocedures.
Enhance"knowyourcustomer"proceduresrelatingtotheintakeofnewcustomersand/orgrantingofcredittocustomersTheCompanyimplementedimprovementstoitscustomercreditapprovalprocedures,whichincludeenhancedcustomerduediligenceproceduresandastrictercredit-approvalprocesswhichrequiresthatallcreditsalesbesubjecttopre-approvalbytheBoard.
TheCompanyisalsoconductingquarterlyreviewsoftheCompany'sexistingcreditterms.
Managementhasalsotakenproactivestepstoconveytoallemployeestheimportanceofadheringtostrictcustomercreditapprovalcontrolsandprocedures.
EnhancevendorduediligenceandmonitoringprocessestoscreenthirdpartiesTheCompanyintroducedenhancedvendorduediligencerequirementsthatmustbesatisfiedbeforeanewsupplierorserviceproviderwithacontractthatexceedsapre-establishedmonetarythresholdcanbeaddedtothepre-approvedlist.
TheCompanyalsoestablishedprocedurestoperiodicallyreviewthetermsofexistingcontractswithsuppliersorserviceprovidersthatexceedapre-establishedmonetarythresholdandtheCompany'slistofpre-approvedsuppliersandserviceproviders.
TheCompanyhascompletedtheprocessofreviewingallexistingvendorsandwillestablishapre-approvedlistofvendorswithwhichtheCompanyisauthorizedtotransact.
Formalizeaprocesstoperformroutinereconciliationofbalanceswithcustomersand/orsuppliersonaregularbasisTheCompanyimplementedimprovementstoitscontrols,policiesandguidelinesrelatingtothereconciliationofbalanceswithcustomers,suppliersandservicesproviderstoensurethatproperrecordsaremaintainedandroutinelyreconciled.
EnhancetheCompany'sFinancialDelegationofAuthoritydocumentrelatingtopaymentauthorizationandcontractapprovalprocessesTheCompanymadeenhancementstoitsFinancialDelegationofAuthoritypolicybyintroducingenhancedduediligencerequirementsandreviewproceduresifa28proposedtransactionexceedscertainpre-establishedmonetarythresholds.
IntroducesegregationofdutiesinrelationtooffsetarrangementstomitigatetheriskofcollusionwhichisdetrimentaltotheCompanyTheCompanystrengtheneditscontrolsandprocessesinconnectionwithoffsetarrangementswithdifferentcounterparties,includingrequirementstoconsultlegalcounselinadvanceofenteringintosucharrangements,documentthebusinessrationaleandobtainpre-approvalofsucharrangementsfrommanagement.
EnhancethestandardizationofhumanresourcesprocessandcontrolsacrossdifferentlocationsTheCompanystandardizeditshumanresourcespoliciesandproceduresrelatingtoemployeehiringandterminationanddataretentionrequirements.
EnsureITbackupanddocumentretentionprotocols,includingemployeereturnofCompany-issueddevicesandsubsequentarchivingTheCompanyimproveditspoliciesandproceduresrelatingtodataretentionrequirementsanduseofcomputerandtelecommunicationdevicesandtheestablishmentofformaldataretentionprotocolsandsystems.
MonitortheimplementationoftheRemedialActionsandPreventativeMeasuresbyestablishingaspecialtaskforce,comprisedofmanagersoftheCompany'svariousbusinessunitsandmembersoftheinternalauditfunction,whichwillbetaskedwiththisresponsibility,andwillconsidertheengagementofthirdpartyexpertstoconductareviewoftheresultsoftheimplementationandadviseonfurtherenhancementsifnecessaryTheCompanyappointedtheIndependentForensicAccountanttoassistmanagementwiththeimplementationoftheRemedialActionsandPreventativeMeasures,toconductanindependentreviewoftheimplementationresultsand,basedontheimplementationresults,toadvisetheCompanyonfurtherenhancementstoitsinternalcontrolsandproceduresifrequired.
TheCompany'sinternalauditfunctionisresponsibleforcarryingoutindependenttestingoftheRemedialActionsandPreventativeMeasuresimplemented.
ThetestingoftheRemedialActionsandPreventativeMeasureshavebeencompletedandenhancementsmade.
BasedontheRemedialActionsandPreventativeMeasuresthathavebeenimplemented,theBoardisoftheviewthattheCompanynowhasinplacerobustinternalcontrolsandprocedureswhichareadequatetopreventfutureoccurrenceoftheissueswhichwerethesubjectoftheFormalInvestigation.
Inaddition,theCompanyhasdevelopedatrainingprogramforemployeestosupporttheimplementationoftheRemedialActionsandPreventativeMeasures.
TheSpecialCommitteewasdissolvedbytheBoardonAugust22,2019.
OnMay30,2019,theCompanyannouncedthatithadfulfilledthetradingresumptionguidancetothesatisfactionoftheHKEX,andtheHKEXandtheTSXhadacceptedtheCompany'stradingresumptionapplication.
TradingintheCompany'scommonsharesontheTSXresumedpriortotheopeningoftradingonMay30,2019,andtradinginthecommonsharesoftheCompanyontheHKEXresumedpriortotheopeningoftradingonMay31,2019.
29OnMay30,2019,attheCompany's2019annualgeneralmeeting,thefollowingindividualswereelectedtotheBoard:Messrs.
ZhiweiChen,YingbinIanHe,XiaoxiaoLi,BenNiu,MaoSun,WenYao,Mses.
LanChengandJinLanQuan.
OnMay30,2019,Mr.
MaoSun,theinterimindependentLeadDirector,wasappointedasLeadDirector.
OnAugust26,2019,SGSreceivedaletter(the"NoticeLetter")fromMRAMnotifyingthattheCompany'sthreemininglicenses(MV-016869,MV-020436andMV-020451)(the"SoumberLicenses")fortheSoumberDeposithavebeenterminatedbytheHeadofCadastreDivisionofMRAMeffectiveasofAugust21,2019.
AccordingtotheNoticeLetter,theSoumberLicenseshavebeenterminatedpursuanttoClause56.
1.
5ofArticle56oftheMineralsLaw,Clauses4.
2.
1and4.
2.
5ofArticle4andClause28.
1.
1ofArticle28oftheGeneralAdministrativeLawandadecisionorderofaworkinggroupestablishedunderanorderoftheMinisterofEnvironmentandTourism(Mongolia).
Accordingtothisdecisionorder,theworkinggroupdeterminedthatSGShadviolateditsenvironmentalreclamationobligationswithrespecttotheSoumberDeposit.
TheSoumberDepositisanundevelopedcoaldepositcoveringapproximately22,263hectareslocatedapproximately20kilometerseastoftheCompany'sOvootTolgoicoalmineinMongolia.
TheCompanyowneda100%interestintheSoumberDeposit.
TheCompanybelievesthecancelationoftheSoumberLicensesiswithoutmerit.
TheCompanyisnotawareofanyfailureonitsparttofulfillitsenvironmentalreclamationdutiesastheyrelatetotheSoumberDeposit.
OnOctober4,2019,SGSfiledaclaimagainstMRAMandtheMinistryofEnvironmentandTourismofMongoliaintheAdministrationCourtseekinganordertorestoretheSoumberLicenses.
TheAdministrationCourtissuedtherulinginOctober2020andmadeanordertoacceptSGS'sclaimandrestoretheSoumberLicenses.
ThecasewastransferredtotheHighCourtforfinalruling.
TheCompanyanticipatesthattheHighCourtwillissueitsrulingbeforetheendofthefirstquarterof2021.
TheCompanywilltakeallsuchactions,includingadditionallegalactions,asitconsidersnecessarytoreinstatetheSoumberLicenses.
However,therecanbenoassurancethatafavorableoutcomewillbereached.
TheterminationoftheSoumberLicensesdoesnothaveanyimpactontheCompany'scurrentminingoperationsattheOvootTolgoiminesite.
OnOctober16,2019,SGSreceivedanoticefromFirstConceptclaimingthattheCompanyisindefaultundertheSettlementDeedanddemandingpaymentofthefullamountoftheOutstandingSettlementDeedPaymentsdueundertheSettlementDeed,otherwiseFirstConceptintendstocommencelegalactionagainstSGSpursuanttotheSettlementDeed.
AsatDecember31,2019,theoutstandingamountpayabletoFirstConceptamountedto$5.
6million.
OnNovember13,2019,theCompanyannouncedthatPwCresignedastheauditoroftheCompanywitheffectfromNovember13,2019,duetothenewrequirementoftherecognitionofoverseasauditorsundertheHongKong'sFinancialReportingCouncilOrdinance.
TheBoard,withtherecommendationfromtheauditcommittee,appointedBDOasthenewauditoroftheCompanywitheffectfromNovember13,2019tofillthecasualvacancycreatedbytheresignationofPwCandtoholdofficeuntiltheconclusionofthenextannualgeneralmeetingoftheCompany.
2020todateOnFebruary19,2019,theCompanyreportedthatSGSwasinformedbyitsMongolianbanksonFebruary7,2020thattheyreceivedarequestfromtheCDIAtofreezetherespectivebankaccountsofSGSinMongoliainrelationtotheenforcementoftheArbitrationAward.
Approximately$0.
8millionincashwasfrozenbythebanksasatFebruary7,2020andsuchamountwassubsequentlytransferredtotheCDIAonMarch6,2020.
30OnFebruary19,2020,theCompanyandCICenteredintoanagreement(the"2020FebruaryDeferralAgreement")pursuanttowhichCICagreedtogranttheCompanyadeferralof:(i)deferredcashinterestanddeferralfeesof$1.
3millionand$2.
0millionwhichweredueandpayabletoCIConJanuary19,2020andFebruary19,2020,respectively,underthe2019DeferralAgreement(collectively,the"2020FebruaryDeferralAmounts");and(ii)approximately$0.
7millionoftheManagementFeewhichwasdueandpayableonFebruary14,2020toCICundertheAmendedandRestatedCooperationAgreement.
The2020FebruaryDeferralAgreementbecameeffectiveonMarch10,2020,beingthedateonwhichtheCompanyobtainedtherequisiteacceptanceofthe2020FebruaryDeferralAgreementfromtheTSXasrequiredunderapplicableTSXrules.
Theprincipaltermsofthe2020FebruaryDeferralAgreementareasfollows:Paymentofthe2020FebruaryDeferralAmountswillbedeferreduntilJune20,2020,whiletheManagementFeewillbedeferreduntiltheyarerepaidbytheCompany.
Asconsiderationforthedeferraloftheseamounts,theCompanyagreedtopayCIC:(i)adeferralfeeequalto6.
4%perannumonthe2020FebruaryDeferralAmounts,commencingonthedateonwhicheachsuch2020DeferralAmountwouldotherwisehavebeendueandpayableunderthe2019DeferralAgreement;and(ii)adeferralfeeequalto2.
5%perannumontheManagementFee,commencingonthedateonwhichtheManagementsFeewouldotherwisehavebeendueandpayableundertheAmendedandRestatedCooperationAgreement.
TheCompanyagreedtoprovideCICwithmonthlyupdatesregardingitsoperationalandfinancialaffairs.
AstheCompanyanticipatesthatadeferralwilllikelyberequiredinrespectofthemonthlypaymentsdueandpayableintheperiodbetweenApril2020andJune2020underthe2019DeferralAgreementandAmendedandRestatedCooperationAgreement,theCompanyandCICagreedtodiscussingoodfaithadeferralofthesepaymentsonamonthlybasisastheybecomedue.
Therecanbenoassurance,however,thatafavorableoutcomewillbereachedeitheratalloronfavorableterms.
TheCompanyagreedtocomplywithallofitsobligationsunderthe2019DeferralAgreementandtheAmendedandRestatedCooperationAgreement,asamendedbythe2020FebruaryDeferralAgreement.
TheCompanyandCICagreedthatnothinginthe2020FebruaryDeferralAgreementprejudicesCIC'srightstopursueanyofitsremediesatanytimepursuanttothe2019DeferralAgreementandAmendedandRestatedCooperationAgreement,respectively.
OnFebruary19,2020,theCompanyreportedthateffectiveasofFebruary11,2020,theMongolianStateEmergencyCommissionclosedMongolia'ssouthernborderwithChinainordertopreventthespreadofCOVID-19.
Accordingly,theCompanysuspendedcoalexportstoChinabeginningasofFebruary11,2020asaresultoftheborderclosure.
OnMarch10,2020,theCompanyagreedwithCIC(the"2020MarchDeferralAgreement")thatthe$2.
0millionwhichwasdueandpayabletoCIConMarch19,2020underthe2019DeferralAgreement(the"2020MarchDeferralAmount")willbedeferreduntilJune20,2020.
Thetermsofthe2020MarchDeferralAgreementaresubstantiallythesameasthetermsofthe2020FebruaryDeferralAgreement,includingthattheCompanyagreedtopayCICadeferralfeeequalto6.
4%perannumonthe2020MarchDeferralAmount,commencingonMarch19,2020.
The2020MarchDeferralAgreementbecameeffectiveonMarch25,2020,beingthedateonwhichtheCompanyobtainedtherequisiteacceptanceofthe2020MarchDeferralAgreementfromtheTSXasrequiredunderapplicableTSXrules.
31OnMarch11,2020,Mr.
WenYao,anon-executivedirector,resignedfromtheBoard.
OnMarch18,2020,Mr.
JianminBaowaselectedasanon-executivedirectoroftheCompanybyCICpursuanttoacontractualnominationrightgrantedtoCICpursuanttoasecurityholders'agreementbyandamongtheCompany,CICandTurquoiseHillResourcesLtd.
OnMarch28,2020,theMongolian-Chineseborderwasre-openedforcoalexportonatrialbasis,withalimitimposedonthetotalvolumeofcoalthatwaspermittedtobeexportedduringthistrialperiod.
OnMarch30,2020,theCompanyannouncedthatMr.
DalanguerbanwasappointedastheCompany'sCEOandexecutivedirectorwitheffectfromMarch31,2020,followingtheresignationofMr.
ShougaoWangastheCompany'sCEOandexecutivedirector.
OnMarch30,2020,theCompanyannounceditsunauditedfinancialresultsforthefinancialyearendedDecember31,2019asrequiredpursuanttotherequirementsoftheHKEX.
DuetotheCOVID-19pandemic,theauditingprocessfortheannualresultsfortheyearendedDecember31,2019hadnotbeencompletedbyMarch30,2020duetotravelrestrictionsinforceinpartsofChinaandMongolia.
TheunauditedfinancialresultsoftheCompanyforthefinancialyearendedDecember31,2019werereviewedbytheAuditCommittee,andapprovedandauthorizedforissuebytheBoardonMarch30,2020.
TheCompanyalsoannouncedthatitwaspostponingthefilingofitsauditedconsolidatedfinancialstatementsforitsfinancialyearendedDecember31,2019(the"2019FinancialStatements"),theaccompanyingManagementDiscussion&Analysis("MD&A")anditsAnnualInformationFormforthefinancialyearendedDecember31,2019,asaresultoftheauditorsoftheCompanybeingunabletocompletetheauditprocessfortheCompany'sannualresultsfortheyearended2019priortothefilingdeadlineforthe2019FinancialStatementsofMarch30,2020andwouldberelyingupontheblanketrelieforderissuedbytheCanadianSecuritiesAdministratorsonMarch18,2020whichprovidedreportingissuerswitha45-dayextensionforfilingcertainperiodicfilingsnormallyrequiredtobefiledonorbeforeJune1,2020underapplicableCanadiansecuritieslaws.
OnApril10,2020,theCompanyagreedwithCIC(the"2020AprilDeferralAgreement")thatthe$2.
0millionofdeferredcashinterestanddeferralfeeswhichweredueandpayabletoCIConApril19,2020underthe2019DeferralAgreement(the"2020AprilDeferralAmount")willbedeferreduntilJune20,2020.
Thetermsofthe2020AprilDeferralAgreementaresubstantiallythesameasthetermsofthe2020FebruaryDeferralAgreement,includingthattheCompanyagreedtopayCICadeferralfeeequalto6.
4%perannumonthe2020AprilDeferralAmount,commencingonApril19,2020.
The2020AprilDeferralAgreementbecameeffectiveonApril29,2020,beingthedateonwhichtheCompanyobtainedtherequisiteacceptanceofthe2020AprilDeferralAgreementfromtheTSXasrequiredunderapplicableTSXrules.
OnApril28,2020,theCompanyreportedthatitscoalminingactivitieswouldremainsuspendedinMay2020andthatitsrevenue,liquidityandprofitabilitywillcontinuetobeadverselyimpacteduntilsuchtimeasthecoalexportsintoChinaareallowedtoresumeatnormallevels.
OnMay8,2020,theCompanyagreedwithCIC(the"2020MayDeferralAgreement")thatthedeferredcashinterestanddeferralfeesof$2.
0millionwhichweredueandpayabletoCIConMay19,2020underthe2019DeferralAgreement;andapproximately$0.
2millionofManagementFeeswhichweredueandpayableonMay15,2020toCICundertheAmendedandRestatedCooperationAgreement(collectively,the"2020MayDeferralAmount")willbedeferreduntilJune20,2020.
Thetermsofthe2020MayDeferralAgreementaresubstantiallythesameasthetermsofthe2020FebruaryDeferralAgreement,includingthattheCompanyagreedtopayCICadeferralfeeequalto6.
4%perannumonthedeferredcashinterestanddeferralfeescommencingonMay19,2020andadeferralfeeequalto2.
5%perannumonthedeferredManagementFeescommencingonMay15,2020.
The2020MayDeferralAgreementbecameeffectiveon32June8,2020,beingthedateonwhichtheCompanyobtainedtherequisiteacceptanceofthe2020MayDeferralAgreementfromtheTSXasrequiredunderapplicableTSXrules.
OnMay11,2020,theCompanyannouncedthatitobtained:(i)awaiverfromtheHKEXfromstrictcompliancewiththerequirementunderRule13.
46(2)(b)oftheHKEXlistingrulestolayits2019FinancialStatementsbeforeShareholdersatits2020annualgeneralmeetingofshareholders("2020AGM")within6monthsofitsfinancialyearend;and(ii)anorderdatedMay7,2020fromtheBritishColumbiaRegistrarofCompaniestoextendthetimetoconvenethe2020AGMuntilFebruary28,2021.
OnMay12,2020,theCompanyannouncedthatithadbeenadvisedbyitsauditorsthattheywouldnotbeinapositiontorenderanunmodifiedopiniononthe2019FinancialStatementspriortotheextendedfilingdeadlineofMay14,2020becausetheywerenotabletoobtainsufficientevidencetosupportmanagement'sgoingconcernassumptions.
Asaresult,theCompanywasunabletofile:(i)the2019FinancialStatements,accompanyingMD&AandCEOandCFOcertificatespriortothefilingdeadlineofMay14,2020;theAnnualInformationFormpriortothefilingdeadlineofMay14,2020;and(iii)itsinterimconsolidatedfinancialstatementsforthethreemonthperiodendedMarch31,2020andaccompanyingMD&AandCEOandCFOcertificatespriortothefilingdeadlineofMay15,2020(collectively,the"RequiredFilings").
TheCompanywasalsounabletofileits2019AnnualReportpriortothefilingdeadlineofMay15,2020asrequiredunderapplicableHKEXlistingrules.
OnMay13,2020,theCompanyappliedforamanagementceasetradeorder("MCTO"withtheapplicableCanadiansecuritiesregulatorsinconnectionwiththeanticipateddelayedfilingoftheRequiredFilings.
AMCTOwasissuedbytheBritishColumbiaSecuritiesCommission("BCSC"),theCompany'sprincipalsecuritiesregulatorinCanada,onMay15,2020.
OnJune2,2020,theCompanyreportedthatitreceivedaletterfromlegalcounseltoFirstConceptdemandingrepaymentoftheoutstandingsumsandinterestspursuanttoanenforcementorderissuedinJanuary2020inrelationtotheArbitrationAwardrelatedtoacoalsupplyagreementwithFirstConcept.
OnJune7,2020,SGSenteredintoasettlementagreementwithFirstConcept,pursuanttowhichSGSagreedtopaytoFirstConceptasettlementsumintheamountof$8.
0millioninfullandfinalsettlementofanyandallclaimswhichFirstConceptmayhaveagainstSGSinrelationtoArbitrationAward,thesubjectmatteroftheArbitrationAwardincludinganyclaimsforinterestsandcostsandthefeesandexpensesoftheArbitrationAward,andanyandallenforcementproceedingsandapplicationsinanyjurisdictions,andinrelationtothedeedofsettlementwithFirstConcept(the"FullSettlementSum").
TheFullSettlementSumwasfullysatisfiedbytheCompanyinJune2020andtheoutstandingpayabletoFirstConceptasofthedatehereofis$nil.
OnJune18,2020,theCompanyagreedwithCIC(the"2020JuneDeferralAgreement")thatthedeferredcashinterestanddeferralfeesintheaggregateamountofapproximately$74.
0million(the"2020JuneDeferralAmount")whichweredueandpayabletoCIConJune19,2020underthe2019DeferralAgreementandthepriordeferralagreementsenteredintoduringtheperiodbetweenFebruarytoMay2020willbedeferreduntilSeptember14,2020.
Thetermsofthe2020JuneDeferralAgreementaresubstantiallythesameasthetermsofthe2020FebruaryDeferralAgreement,includingthattheCompanyagreedtopayCICadeferralfeeequalto6.
4%perannumonthe2020JuneDeferralAmountcommencingonJune19,2020.
The2020JuneDeferralAgreementbecameeffectiveonJuly17,2020,beingthedateonwhichtheCompanyobtainedtherequisiteacceptanceofthe2020JuneDeferralAgreementfromtheTSXasrequiredunderapplicableTSXrules.
OnJune19,2020,theBCSCissuedageneral"failuretofile"ceasetradeorder("CTO")asaresultoftheCompany'sfailuretofiletheRequiredFilingspriortoextendedfilingdeadlineofJune15,2020,toprohibitthetradingbyanypersonofanysecuritiesoftheCompanyinCanada.
TradingintheCommonShareson33theTSXwashaltedasaresultoftheCTO.
TheCTOwillremainineffectuntilsuchtimeastheCompanymakesasuccessfulapplicationtotheBCSCtohavetheCTOrevoked.
WhiletheCompanyistakingsuchactionsasitconsidersnecessaryinordertoremedyitsfilingdefaultsassoonaspossible,therecanbenoassurancethattheCompanywillhavetheCTOliftedinatimelymanneroratall.
ForsolongastheCTOremainsineffect,itwillhaveasignificantadverseimpactontheliquidityoftheCommonSharesandshareholdersmaysufferasignificantdeclineortotallossinvalueofitsinvestmentintheCommonSharesasaresult.
OnJune30,2020,theCompanyreportedthattheHKEXgrantedawaivertotheCompanyfromtherequirementunderRule13.
46(2)(a)oftheHKEXlistingrulestosendtoitsmembersandotherholdersofitslistedsecuritiesacopyoftheannualreportincludingitsannualaccountnotlessthan21daysbeforethedateoftheCompany'sannualgeneralmeetingandinanyeventnotmorethanfourmonthsaftertheendofthefinancialyeartowhichtheyrelate,onthebasisthattheCompanywilldespatchthe2019AnnualReportonorbeforeJuly24,2020.
OnJuly24,2020,theCompanyreportedthatthepublicationofthe2019FinancialStatementsanddespatchofthe2019AnnualReportwouldbefurtherdelayed.
OnAugust5,2020,theCompanyannouncedthat,basedontheCompany'spreliminaryassessmentoftheoperationaldataandtheinformationcurrentlyavailableasofAugust5,2020,theCompanyexpectedtorecordanetlossintherangeof$16millionto$21millionforthefirsthalfof2020,ascomparedwithanetprofitof$4.
2millionforthefirsthalfof2019.
OnAugust12,2020,theCompanyreportedthat,duetothedelayinpublicationofthe2019FinancialStatements,theCompanyappliedforavoluntarytradingsuspensionontheHKEX,whichtookeffectonAugust17,2020.
OnSeptember2,2020,theCompanyreceivedaletterfromtheHKEXsettingoutthefollowingresumptionguidancefortheresumptionoftradingintheCommonSharesontheHKEX(the"ResumptionGuidance"):(i)publishalloutstandingfinancialresultsandaddressanyauditmodifications;(ii)informthemarketofallmaterialinformationfortheCompany'sshareholdersandinvestorstoappraiseitsposition;and(iii)announcequarterlyupdatesontheCompany'sdevelopmentsunderRules13.
24AoftheHKEXlistingrules,including,amongstotherrelevantmatters,itsbusinessoperations,itsresumptionplanandtheprogressofimplementation.
OnSeptember11,2020,theTSXnotifiedtheCompanythatitisreviewingtheeligibilityforcontinuedlistingoftheCommonSharesontheTSXpursuanttotheTSX'sRemedialReviewProcess("TSXDelistingReview").
TheCompanyhasbeengranteduntilJanuary11,2021toremedythefollowingdelistingcriteria,aswellasanyotherdelistingcriteriathatbecomeapplicableduringtheRemedialReviewProcess:(i)financialconditionand/oroperatingresults;(ii)adequateworkingcapitalandappropriatecapitalstructure;and(iii)disclosureissues(collectively,the"DelistingCriteria").
TheTSXContinuedListingCommitteehasscheduledameetingtobeheldonFebruary11,2021toconsiderwhetherornottosuspendtradinginanddelisttheCommonSharesontheTSX.
IftheCompanyfailstodemonstratetotheTSXthatithasremediedtheDelistingCriteriaonorbeforeFebruary16,2021,theCommonShareswillbedelistedfromtheTSX30daysfromsuchdate.
OnSeptember30,2020,theCompanywasnotifiedbytheHKEXofthefollowingadditionalconditionwhichmustbesatisfiedinorderfortradingintheCommonSharesontheHKEXtoresume:resolveissuesarisingfromtheCTOand/ortheTSXDelistingReview(asdefinedbelow),ortakestepstothesatisfactionoftheHKEXthattheCompanywillbeeligibleforaprimarylistingontheHKEX.
IftheCompanyfailstoremedytheissuescausingitstradingsuspension,fullycomplywiththeListingRulestotheHKEX's34satisfactionandresumetradinginitssharesontheHKEXbyFebruary16,2022,theHKEX'sListingDivisionwillrecommendtotheHKEX'sListingCommitteethatitproceedwiththecancellationoftheCompany'sHKEXlisting.
UnderRules6.
01and6.
10oftheListingRules,theHKEXalsohastherighttoimposeashorterspecificremedialperiod,whereappropriate.
OnNovember13,2020,Mr.
XiaoxiaoLi,anon-executivedirector,resignedfromtheBoard.
OnNovember19,2020,theCompanyandCICenteredintoanagreement(the"2020NovemberDeferralAgreement")pursuanttowhichCICagreedtogranttheCompanyadeferralof:(i)deferredcashinterestanddeferralfeesofapproximately$75.
2millionwhichweredueandpayabletoCIConorbeforeSeptember14,2020,underthe2020JuneDeferralAgreement;(ii)semi-annualcashinterestpaymentsintheaggregateamountof$16.
0millionpayabletoCIConNovember19,2020andMay19,2021;(iii)$4.
0millionworthofPIKInterestshares("2020NovemberPIKInterest")issuabletoCIConNovember19,2020undertheConvertibleDebenture;and(iv)theManagementFeeswhichpayabletoCIConNovember14,2020,February14,2021,May15,2021,August14,2021andNovember14,2021undertheAmendedandRestatedCooperationAgreement(collectively,the"2020NovemberDeferralAmounts").
Theeffectivenessofthe2020NovemberDeferralAgreementandtherespectivecovenants,agreementsandobligationsofeachpartyunderthe2020NovemberDeferralAgreementweresubjecttotheCompanyobtainingtherequisiteapprovalofthe2020NovemberDeferralAgreementfromtheCompany'sshareholdersinaccordancewithapplicableTSXrules.
OnOctober29,2020,theCompanyobtainedanorderfromtheBCSCwhichpartiallyrevokedtheCTOto,amongstotherthings,permittheCompanytoexecutethe2020NovemberDeferralAgreement.
Theprincipaltermsofthe2020NovemberDeferralAgreementareasfollows:Paymentofthe2020NovemberDeferralAmountswillbedeferreduntilAugust31,2023.
CICagreedtowaiveitsrightsarisingfromanydefaultoreventdefaultundertheConvertibleDebentureasaresultoftradingintheCommonSharesbeinghaltedontheTSXbeginningasofJune19,2020andsuspendedontheHKEXbeginningasofAugust17,2020,ineachcaseforaperiodofmorethanfivetradingdays.
Asconsiderationforthedeferralofthe2020NovemberDeferralAmounts,theCompanyagreedtopayCIC:(i)adeferralfeeequalto6.
4%perannumonthe2020NovemberDeferralAmountspayableundertheConvertibleDebentureandthe2020JuneDeferralAgreement,commencingonthedateonwhicheachsuch2020NovemberDeferralAmountwouldotherwisehavebeendueandpayableundertheConvertibleDebentureortheJune2020DeferralAgreement,asapplicable;and(ii)adeferralfeeequalto2.
5%perannumonthe2020NovemberDeferralAmountspayableundertheAmendedandRestatedCooperationAgreement,commencingonthedateonwhichtheManagementFeewouldotherwisehavebeendueandpayableundertheAmendedandRestatedCooperationAgreement.
The2020NovemberDeferralAgreementdoesnotcontemplateafixedrepaymentscheduleforthe2020NovemberDeferralAmountsandrelateddeferralfees.
Instead,theCompanyandCICwouldagreetoassessingoodfaiththeCompany'sfinancialconditionandworkingcapitalpositiononamonthlybasisanddeterminetheamount,ifany,ofthe2020NovemberDeferralAmountsandrelateddeferralfeesthattheCompanyisabletorepayundertheConvertibleDebenture,theJune2020DeferralAgreementortheAmendedandRestatedCooperationAgreement,havingregardtotheworkingcapitalrequirementsoftheCompany'soperationsandbusinessatsuchtimeandwiththeviewofensuringthattheCompany'soperationsandbusinesswouldnotbemateriallyprejudicedasaresultofanyrepayment.
35CommencingasofNovember19,2020anduntilsuchtimeastheNovember2020PIKInterestisfullyrepaid,CICreservestherighttorequiretheCompanytopayandsatisfytheamountoftheNovember2020PIKInterest,eitherinfullorinpart,bywayofissuinganddeliveringPIKinterestsharesinaccordancewiththeConvertibleDebentureprovidedthat,onthedateofissuanceofsuchshares,theCommonSharesarelistedandtradingonatleastonestockexchange.
Ifatanytimebeforethe2020NovemberDeferralAmountsandrelateddeferralfeesarefullyrepaid,theCompanyproposestoappoint,replaceorterminateoneormoreofitsChiefExecutiveOfficer,itsChiefFinancialOfficeroranyotherseniorexecutive(s)inchargeofitsprincipalbusinessfunctionoritsprincipalsubsidiary,thentheCompanymustfirstconsultwith,andobtainwrittenconsentfromCICpriortoeffectingsuchappointment,replacementortermination.
OnNovember26,2020,theCompanyreportedthatitsauditorscompletedtheirauditofthe2019FinancialStatementsandtheCompanyfiledits2019FinancialStatementsandaccompanyMD&AandCEOandCFOcertificationsasrequiredunderapplicableCanadiansecuritieslaws.
OnDecember4,2020,theCompanyannouncedthatitobtainedtherequisiteapprovalsfromtheTSXtoextendthetimewithinwhichtoholdthe2020AGMinordertopermittheCompanytoconvenethe2020AGMonorbeforeJanuary21,2021.
OnDecember8,2020,theannouncedthefollowingadditionalconditionwhichmustbesatisfiedinorderfortradingintheCommonSharesontheHKEXtoresume:demonstratecompliancewithRule13.
24oftheHKEXlistingruleswhichrequiresthatanissuercarryoutabusinesswithasufficientlevelofoperationsandassetsofsufficientvaluetosupportitsoperationstowarrantthecontinuedlistingoftheissuer'ssecurities.
OnDecember9,2020,Ms.
KaLeeKuwasappointedasanon-executiveDirector.
OnJanuary21,2021,the2020NovemberDeferralAgreementwasapprovedattheCompany'sannualandspecialmeetingofshareholders.
Asaresult,the2020NovemberDeferralAgreement,togetherwiththedeferralandwaiverthereunderinfavouroftheCompany,becameeffectiveasofthesamedate.
SinceMarch28,2020,theCompanyhasexperiencedacontinuousimprovementinthevolumeofcoalexportedtoChina.
DuringtheperiodbetweenApriltoOctober2020,anaggregateof1.
9milliontonnesofcoalwasexportedbytheCompanyfromMongoliatoChina,ascomparedtoanaggregateof2.
0milliontonnesofcoalduringthesameperiodinthe2019calendaryear.
TheborderclosurehashadanadverseimpactontheCompany'ssalesandcashflowsinthefirstandsecondquarterof2020.
Inordertomitigatethefinancialimpactoftheborderclosuresandpreserveitsworkingcapital,theCompanytemporarilyceasedmajorminingoperations(includingcoalmining),reducedproductiontoonlycoal-blendingactivitiesandplacedapproximatelyhalfofitsworkforceonfurloughfromFebruary2020.
SinceAugust2,2020,theCompanyhasresumeditsminingoperations,whichincludesmining,blendingandwashingofcoal.
AsatOctober31,2020,SGSemployed208employeesattheOvootTolgoiMinesite(December31,2019:383employees).
TheCompanyproduced1.
1milliontonnesfromAugusttoOctober2020,ascomparedto1.
3milliontonnesfromAugusttoOctober2019.
TherewereafewCOVID-19casesreportedinUlaanbaatar(beingthecapitalcityofMongolia)onNovember11,2020.
Asaresult,theMongolianlocalauthoritieshavetakencertainprecautionarystepstominimizefurthertransmissionandannouncedalockdownofUlaanbaataruntilDecember14,2020.
AlthoughtheCompany'sminingoperationsandtheexportofcoalfromMongoliatoChinacontinuesasofthedatehereof,therecanbenoguaranteethattheCompanywillbeabletocontinueexportingcoaltoChina,orthebordercrossingswouldnotbethesubjectofadditionalclosuresasaresultofCOVID-19inthefuture.
TheCompanywill36continuetocloselymonitorthedevelopmentoftheCOVID-19pandemicandtheimpactithasoncoalexportstoChinaandwillreactpromptlytopreservetheworkingcapitaloftheCompany.
OutlookLookingforward,marketconditionsinChinaareexpectedtobechallengingforcoalcompanies,asthereareanumberprevailinguncertainties,includingtheriskthattheCOVID-19pandemicanditsnegativeimpactontheChineseeconomy,becomesprotracted,thepossibilitythatthebordercrossingsbetweenMongoliaandChinabecomethesubjectofadditionalclosuresandthecontinuedrestrictionsonimportingF-gradecoalintoChina.
TheCompanywillcontinuetocloselymonitorthesedevelopmentsandtheresultingimpactstheyhaveoncoalexportstoChinaandwilltakeallnecessaryactionstomitigatethepotentialoperationalandfinancialimpactsontheCompany.
Inthelongrun,theCompanyremainscautiouslyoptimisticregardingtheChinesecoalmarketascoalisstillconsideredtobetheprimaryenergysourcewhichChinawillrelyonintheforeseeablefuture.
TheexpectedbenefitfromthereducingsupplyoflowqualitycoalisanticipatedtobeoffsetbytheuncertaincircumstancesoftheChinesemacroeconomicenvironment.
TheCompany'sobjectivesforthemediumtermareasfollows:Enhanceproductmix–TheCompanywillfocusonimprovingtheproductmixandincreaseproductionofhigherqualitycoalby:(i)improvingminingoperationsandemployingenhancedminingtechniquesandequipment;(ii)washinglowerqualitycoalintheCompany'scoalwashplant;(iii)blendinglowerqualitycoalwithhigherqualitycoal;and(iv)adoptingotherprocessingoptionsavailabletotheCompany.
Expandcustomerbase–TheCompanywillendeavortoincreasesalesvolume,expanditssalesnetworkanddiversifyitscustomerbasesoastoenhancethepricingcompetencyoftheCompany.
Optimizecoststructure–TheCompanywillaimtoreduceitsproductioncostsandoptimizeitscoststructurethroughinnovation,ongoingtraining,productivityenhancementandengagingthirdpartycontractminingcompanies.
Operateinasociallyresponsiblemanner–TheCompanywillcontinuetomaintainthehigheststandardsinhealth,safetyandenvironmentalperformanceinacorporatesociallyresponsiblemanner.
Goingforward,theCompanywillcontinuetofocusoncreatingshareholdersvaluebyleveragingitskeycompetitivestrengths,including:Strategiclocation–TheOvootTolgoiMineislocatedapproximately40kmfromChina,whichrepresentstheCompany'smaincoalmarket.
TheCompanyhasaninfrastructureadvantage,beingapproximately50kmfromamajorChinesecoaldistributionterminalwithrailconnectionstokeycoalmarketsinChina.
Alargeresourcesandreservesbase–TheOvootTolgoiDeposithasmineralreservesof114.
1milliontonnes,whiletheaggregatecoalresourcesincludemeasuredandindicatedmineralresourcesof194.
6milliontonnesandinferredresourcesof32.
1milliontonnes.
BridgebetweenMongoliaandChina–TheCompanyiswellpositionedtocapturetheresultingbusinessopportunitiesbetweenChinaandMongoliaundertheBeltandRoadInitiative.
TheCompanywillseekpotentialstrategicsupportfromitstwolargestshareholders(i.
e.
,CICandCinda),whichare37bothstate-owned-enterprisesinChina,anditsstrongoperationalrecordforthepasttwelveyearsinMongolia,beingoneofthelargestenterprisesandtaxpayersinMongolia.
LEGALMATTERSInternalInvestigationOnNovember17,2017,theCompanyreportedthatitlearnedthatMr.
Aminbuhe,theChairmanandChiefExecutiveOfficeroftheCompany,wasarrestedonOctober11,2017andwasbeingdetainedatRizhaoCityDetentionCenterinChinaasasuspectinafraudulentloancase.
TheBoardformedtheSpecialCommittee,comprisedofMr.
MaoSun,Ms.
JinLanQuanandMr.
YingbinIanHe(allofwhomareindependentnon-executivedirectors),toinitiateaformalinternalinvestigationintothechargesagainstMr.
Aminbuheandtheconnection,ifany,betweenthosechargesandtheCompanyandhisconductasChairmanandChiefExecutiveOfficeroftheCompany.
OnNovember22,2017,theBoardterminatedtheemploymentofMr.
AminbuheduetohisincapabilitytofulfilhisdailydutiesandresponsibilitiesastheChiefExecutiveOfficeroftheCompanyandremovedMr.
AminbuheastheChairmanoftheBoard.
InMay2018,theCompanyprovidedanupdateonthestatusofitsongoinginternalinvestigationintothechargesagainstMr.
Aminbuhe,andreportedthat,tothebestofitsknowledge,theChineseauthoritieshadnotlaidchargesagainstMr.
Aminbuhe,madeanypublicstatementofthebasisforMr.
Aminbuhe'sarrestorsoughtinformationfromtheCompanyinrespectofthismatter.
TheCompanyfurtherreportedthatitwasnotawareofanydefinitiveinformationwhichwouldsuggestthatMr.
Aminbuhe'sarrestisrelatedtoanymisconductdirectlyrelatedtohispositionasChairmanandChiefExecutiveOfficeroftheCompany.
Withtheassistanceofitsexternallegalcounsel,theSpecialCommitteeconductedanextensivereviewoftherecordsinvolvingorrelatingtoMr.
AminbuhewhichareintheCompany'spossession(includingcommunicationstoandfromMr.
Aminbuhe'semailaccountwiththeCompany,relevantpublicdisclosureandotherinternaldocuments),andinterviewedseveraldirectorsandseniorofficersoftheCompanywhohaddirectcontactwithMr.
AminbuheduringhistenureasChairmanandChiefExecutiveOfficeroftheCompany.
OnDecember17,2018theCompanyannouncedthatthatithadlearnedofcertaininformationrelatingtopastconductengagedinbyformerseniorexecutiveofficersandemployeesoftheCompany("FormerManagementandEmployees")whichraisedsuspicionsofseriousfraud,misappropriationofCompanyassetsandothercriminalactsbytheFormerManagementandEmployeesrelatingtopriortransactions("SuspiciousTransactions")between2016andthefirsthalfof2018involvingtheCompany,IMSGEandcertaincoaltradingandtransportationcompanies,someofwhichareallegedlyrelatedtoorcontrolledbytheFormerManagementandEmployeesortheirrelatedpersons.
TheCompanyfiledareportwithlocalpoliceauthoritiesinChinainrespectofcertainoftheSuspiciousTransactionsand,onDecember17,2018,theBoardexpandedthemandateoftheSpecialCommitteetoincludeaFormalInvestigationoftheSuspiciousTransactions,theimplicatedFormerManagementandEmployees,andtheirimpact,ifany,onthebusinessandaffairsoftheCompany.
TheSpecialCommitteeengagedBlake,Cassels&GraydonLLPasindependentCanadianlegalcounselandErnst&Young(China)AdvisoryLimited,asforensicaccountants,toassistintheformalinvestigation.
TheSpecialCommitteeandtheForensicAccountantjointlyengagedZhongLunLawFirm,asindependentChineselegalcounsel.
OnMarch30,2019,theCompanyannouncedthattheSpecialCommitteeconcludedtheFormalInvestigationanddeliveredafinalreportsummarizingitskeyfindingstotheBoard,whichwasadoptedandapprovedatameetingheldonMarch30,2019.
AsummaryofthematerialfindingsoftheSpecialCommitteeinrespectoftheSuspiciousTransactionthatwereinvestigatedpursuanttotheFormal38InvestigationissetoutinthesectionofthisAnnualInformationFormentitled"GeneralDevelopmentoftheBusiness–Overview–2019".
BasedonthekeyfindingsofandinformationobtainedfromtheFormalInvestigation,theCompanyconsideredtheresultingfinancialimpactonthefinancialstatementsanddeterminedthatarestatementofpriorperiodfinancialinformationwasrequired,asreflectedanddisclosedintheCompany'sauditedannualconsolidatedfinancialstatementsandrelatedmanagement'sdiscussionandanalysisfortheyearendedDecember31,2018,copiesofwhichareavailableundertheCompany'sprofileonSEDARatwww.
sedar.
com.
Asummaryoftherequisiteadjustmentsonthefinancialstatementsforthefiscalyearsended2016and2017issetoutinthesectionofthisAnnualInformationFormentitled"GeneralDevelopmentoftheBusiness–Overview–2019".
OnApril30,2019,theSpecialCommittee,withtheassistanceoftheForensicAccountant,completeditsassessmentofpotentialremedialactionsandpreventativemeasurestoimproveandstrengthentheCompany'scommitmenttoacultureofhonesty,integrityandaccountabilityandcompliancewiththehigheststandardsofprofessionalandethicalconductanddelivereditsreportsettingoutasetofrecommendedRemedialActionsandPreventativeMeasurestotheBoard,whichwasapprovedatameetingheldonApril28,2019.
AsummaryoftheRemedialActionsandPreventativeMeasureswhichwereadoptedandapprovedbytheBoardandtheactionsthattheCompanyhastakentoimplementtheRemedialActionsandPreventativeMeasuresissetoutinthesectionofthisAnnualInformationFormentitled"GeneralDevelopmentoftheBusiness–Overview–2019".
BasedontheRemedialActionsandPreventativeMeasuresthathavebeenimplemented,theBoardisoftheviewthattheCompanynowhasinplacerobustinternalcontrolsandprocedureswhichareadequatetopreventfutureoccurrenceoftheissueswhichwerethesubjectoftheFormalInvestigation.
Inaddition,theCompanyhasdevelopedatrainingprogramforemployeestosupporttheimplementationoftheRemedialActionsandPreventativeMeasures.
TheSpecialCommitteewasdissolvedbytheBoardonAugust22,2019.
CommercialArbitrationinHongKongOnJune24,2015,FirstConceptservedanoticeofarbitrationonSGSinrespectofacoalsupplyagreementdatedMay19,2014asamendedonJune27,2014foratotalconsiderationof$11.
5million.
OnJanuary10,2018,theCompanyreceivedaconfidentialpartialaward(finalexceptastocosts)withrespecttothearbitrationproceedinginHongKongrelatedtothedisputeconcerningacoalsupplyagreementbetweenSGSandFirstConcept.
PursuanttotheArbitrationAward,SGSwasorderedtorepaythesumof$11.
5million(whichSGShadreceivedasaprepaymentforthepurchaseofcoal)toFirstConcept,togetherwithaccruedinterestatasimpleinterestrateof6%perannumfromthedatewhichtheprepaymentwasmadeuntilthedateoftheArbitrationAward,andthenatasimpleinterestrateof8%perannumuntilfullpayment.
TheArbitrationAwardisfinal,exceptastocoststhatwerereservedforafutureaward.
OnNovember14,2018,theCompanyexecutedtheSettlementDeedwithFirstConceptinrespectoftheArbitrationAward.
TheSettlementDeedprovidesforthefullandfinalsatisfactionoftheArbitrationAwardaswellasthesettlementoftheissueofcostsrelatingtotheArbitrationandanyotherdisputesarisingoutoftheCoalSupplyAgreement.
PursuanttotheSettlementDeed,whichprovidesforthefullandfinalsatisfactionoftheArbitrationAwardaswellasthesettlementoftheissueofcostsrelatingtotheArbitrationandanyotherdisputesarisingoutoftheCoalSupplyAgreement,SGSagreedtopaytoFirstConceptthesumof$13.
9million,togetherwithsimpleinterestthereonattherateof6%perannumfromNovember1,2018untilfullpayment,in12monthlyinstalmentscommencinginNovember2018.
ProvidedthatSGS39complieswiththetermsoftheSettlementDeed,FirstConceptagreedtowaiveitscostsinconnectionwiththeArbitrationandArbitrationAwardandinterestfortheperiodfromJanuary4,2018toOctober31,2018.
OnOctober16,2019,SGSreceivedanoticefromFirstConceptclaimingthattheCompanyisdefaultundertheSettlementDeedanddemandingpaymentofthefullamountoftheOutstandingSettlementDeedPaymentsdueundertheSettlementDeed,otherwiseFirstConceptintendstocommencelegalactionagainstSGSpursuanttotheSettlementDeed.
AsatDecember31,2019,theoutstandingamountpayabletoFirstConceptamountedto$5.
6million(December31,2018:$12.
5million).
OnFebruary7,2020,SGSwasinformedbyitsMongolianbanksthattheyreceivedarequestfromtheCDIAtofreezetherespectivebankaccountsofSGSinMongoliainrelationtotheenforcementoftheArbitrationAward.
Approximately$0.
8millionincashhasbeenfrozenbythebanksasatFebruary7,2020andsuchamountwassubsequentlytransferredtotheCDIAonMarch6,2020.
OnJune7,2020,SGSenteredintoasettlementagreementwithFirstConcept,pursuanttowhichSGSagreedtopaytoFirstConcepttheFullSettlementSumof$8.
0millioninfull.
TheFullSettlementSumwasfullysatisfiedbytheCompanyinJune2020andtheoutstandingpayabletoFirstConceptasofthedatehereofis$nil.
ClassActionLawsuitInJanuary2014,SiskindsLLP,aCanadianlawfirm,filedtheClassActionagainsttheCompany,certainofitsformerseniorofficersanddirectors,anditsformerauditors(the"FormerAuditors"),intheOntarioCourtinrelationtotheCompany'srestatementofcertainfinancialstatementspreviouslydisclosedintheCompany'spublicfillings(the"Restatement").
TocommenceandproceedwiththeClassAction,theplaintiffwasrequiredtoseekleaveoftheCourtundertheOntarioSecuritiesAct("LeaveMotion")andcertifytheactionasaclassproceedingundertheOntarioClassProceedingsAct("CertificationMotion").
TheOntarioCourtrendereditsdecisionontheLeaveMotiononNovember5,2015,dismissingtheactionagainsttheformerseniorofficersanddirectorsandallowingtheactiontoproceedagainsttheCompanyinrespectofallegedmisrepresentationaffectingtradesinthesecondarymarketfortheCompany'ssecuritiesarisingfromtheRestatement.
TheactionagainsttheFormerAuditorswassettledbytheplaintiffontheeveoftheLeaveMotion.
BoththeplaintiffsandtheCompanyappealedtheLeaveMotiondecisiontotheOntarioCourtofAppeal.
OnSeptember18,2017,theOntarioCourtofAppealdismissedtheCompany'sappealoftheLeaveMotiontopermittheplaintifftocommenceandproceedwiththeClassAction.
Concurrently,theOntarioCourtofAppealgrantedleavefortheplaintifftoproceedwiththeiractionagainsttheformerseniorofficersanddirectorsinrelationtotheRestatement.
TheCompanyfiledanapplicationforleavetoappealtotheSupremeCourtofCanadainNovember2017,buttheleavetoappealtotheSupremeCourtofCanadawasdismissedinJune2018.
InDecember2018,thepartiesagreedtoaconsentCertificationOrder,wherebytheactionagainsttheformerseniorofficersanddirectorswaswithdrawnandtheClassActionwouldonlyproceedagainsttheCompany.
SinceDecember2018,counselsforthepartieshaveproceededwiththeactionasfollows:(1)twocaseconferencesbeforethemotionsjudge;(2)productionofcertaindocumentsbytheCompanytotheplaintiffs;40(3)reviewofthosedocumentsbyplaintiffs'counselfromMay2020toNovember2020;and(4)settingdownexaminationsfordiscoveryforFebruaryandMarch2021.
TheCompanyisurginganearlytrial.
TheCompanyfirmlybelievesthatithasastrongdefenseonthemeritsandwillcontinuetovigorouslydefenditselfagainsttheClassActionthroughindependentCanadianlitigationcounselretainedbytheCompanyforthispurpose.
Duetotheinherentuncertaintiesoflitigation,itisnotpossibletopredictthefinaloutcomeoftheClassActionordeterminetheamountofpotentiallosses,ifany.
However,theCompanyhasjudgedaprovisionforthismatterasatDecember31,2019wasnotrequired.
TollWashPlantAgreementwithEjinJindaIn2011,theCompanyenteredintoanagreementwithEjinJinda,asubsidiaryofChinaMongoliaCoalCo.
Ltd.
totoll-washcoalsfromtheOvootTolgoiMine.
Theagreementhadadurationoffiveyearsfromcommencementofthecontractandprovidedforanannualwetwashingcapacityofapproximately3.
5milliontonnesofinputcoal.
UndertheoriginalagreementwithEjinJinda,whichrequiredthecommercialoperationofthewetwashingfacilitytocommenceonOctober1,2011,theadditionalfeespayablebytheCompanyunderthewetwashingcontractwouldhavebeen$18.
5million.
Ateachreportingdate,theCompanyassessestheagreementwithEjinJindaandhasdetermineditisnotprobablethatthese$18.
5millionwillberequiredtobepaid.
Accordingly,theCompanyhasdeterminedaprovisionforthismatteratDecember31,2019isnotrequired.
SpecialNeedsTerritoryinUmnugobiOnFebruary13,2015,theentireSoumbermininglicenseandaportionofSGS'explorationlicense9443X(9443XwasconvertedtomininglicenseMV-020436inJanuary2016)(the"LicenseAreas")wereincludedintoaspecialprotectedarea(tobefurtherreferredasSpecialNeedsTerritory,the"SNT")newlysetupbytheUmnugobiAimag'sCivilRepresentativesKhural(the"CRKh")toestablishastrictregimeontheprotectionofnaturalenvironmentandprohibitminingactivitiesintheterritoryoftheSNT.
OnJuly8,2015,SGSandtheChairmanoftheCRKh,inhiscapacityastherespondent'srepresentative,reachedanagreement(the"AmicableResolutionAgreement")toexcludetheLicenseAreasfromtheterritoryoftheSNTinfull,subjecttoconfirmationoftheAmicableResolutionAgreementbythesessionoftheCRKh.
ThepartiesformallysubmittedtheAmicableResolutionAgreementtotheappointedjudgeoftheAdministrativeCourtforherapprovalandrequestedadismissalofthecaseinaccordancewiththeLawofMongoliaonAdministrativeCourtProcedure.
OnJuly10,2015,thejudgeissuedherorderapprovingtheAmicableResolutionAgreementanddismissingthecase,whilereaffirmingtheobligationofCRKhtotakenecessaryactionsatitsnextsessiontoexcludetheLicenseAreasfromtheSNTandregisterthenewmapoftheSNTwiththerelevantauthorities.
MiningactivitiesattheSoumberpropertycannotproceedunlessanduntiltheCompanyobtainsacourtorderrestoringtheSoumberLicensesanduntiltheLicenseAreasareremovedfromtheSNT.
OnJune29,2016,theMongolianParliamentandCRKhelectionwasheld.
Asaresult,theCompanywasawarethatadditionalactionmaybetakeninrespectoftheSNT;however,theCompanyhasnotyetreceivedanyindicationonthetimingofthenextsessionoftheCRKh.
TerminationofSoumberDepositMiningLicensesOnAugust26,2019,SGSreceivedtheNoticeLetterfromMRAMnotifyingthattheSoumberLicenseshavebeenterminatedbytheHeadofCadastreDivisionofMRAMeffectiveasofAugust21,2019.
41AccordingtotheNoticeLetter,theSoumberLicenseshavebeenterminatedpursuanttoClause56.
1.
5ofArticle56oftheMineralsLaw,Clauses4.
2.
1and4.
2.
5ofArticle4andClause28.
1.
1ofArticle28oftheGeneralAdministrativeLawandadecisionorderofaworkinggroupestablishedunderanorderoftheMinisterofEnvironmentandTourism(Mongolia).
Accordingtothisdecisionorder,theworkinggroupdeterminedthatSGShadviolateditsenvironmentalreclamationobligationswithrespecttotheSoumberDeposit.
TheSoumberDepositisanundevelopedcoaldepositcoveringapproximately22,263hectareslocatedapproximately20kilometerseastoftheCompany'sOvootTolgoicoalmineinMongolia.
TheCompanyowneda100%interestintheSoumberDeposit.
TheCompanybelievesthecancellationoftheSoumberLicensesiswithoutmerit.
TheCompanyisnotawareofanyfailureonitsparttofulfillitsenvironmentalreclamationdutiesastheyrelatetotheSoumberDeposit.
OnOctober4,2019,SGSfiledaclaimagainstMRAMandtheMinistryofEnvironmentandTourismofMongoliaintheAdministrationCourtseekinganordertorestoretheSoumberLicenses.
TheAdministrationCourtissuedtherulinginOctober2020andmadeanordertoacceptSGS'sclaimandrestoretheSoumberLicenses.
ThecasewastransferredtotheHighCourtforfinalruling.
TheCompanyanticipatesthattheHighCourtwillissueitsrulingbeforetheendofthefirstquarterof2021.
TheCompanywilltakeallsuchactions,includingadditionallegalactions,asitconsidersnecessarytoreinstatetheSoumberLicenses.
However,therecanbenoassurancethatafavorableoutcomewillbereached.
TheterminationoftheSoumberLicensesdoesnothaveanyimpactontheCompany'scurrentminingoperationsattheOvootTolgoiminesite.
CostsreimbursabletoTurquoiseHillPriortothecompletionoftheNovelPrivatePlacement,RioTintowastheCompany'sultimateparentcompany.
Inthepast,RioTintohassoughtreimbursementfromtheCompanyforthesalariesandbenefitsofcertainRioTintoemployeeswhowereassignedbyRioTintotoworkfortheCompany,aswellascertainlegalandprofessionalfeesincurredbyRioTintoinrelationtotheCompany'spriorinternalinvestigationandRioTinto'sparticipationinthetripartitecommittee.
SubsequentlyRioTintotransferredandassignedtoTurquoiseHillitsrighttoseekreimbursementforthesecostsandfeesfromtheCompany.
AsatDecember31,2019,theamountofreimbursablecostsandfeesclaimedbyTurquoiseHill(the"TRQReimbursableAmount")amountedto$8.
1million(suchamountisincludedintheagingprofileoftradeandotherpayablessetoutbelow).
OnOctober12,2016,theCompanyreceivedaletterfromTurquoiseHill,whichproposedanarrangementforregularpaymentsoftheoutstandingTRQReimbursableAmount.
OnNovember12,2020,theCompanyreceivedcommunicationfromTurquoiseHilladvisingthatTurquoiseHillwishestore-engageindiscussionswiththeCompanyregardingarepaymentplanfortheoutstandingTRQReimbursableAmount.
NoagreementonrepaymenthasbeenreachedbetweentheCompanyandTurquoiseHillasofthedateofthisAnnualInformationForm.
MongolianroyaltiesDuring2017,theCompanywasorderedbytheMongoliantaxauthoritytoapplythe"referenceprice"determinedbytheGovernmentofMongolia,asopposedtocalculatedsalespricethatisderivedbasedontheactualcontractprice,incalculatingtheroyaltiespayabletotheGovernmentofMongolia.
AlthoughnoofficialletterhasbeenreceivedbytheCompanyinrespectofthismatterasofthedatehereof,therecanbenoassurancethattheGovernmentofMongoliawillnotdisagreewiththemethodologyemployedbytheCompanyindeterminingthecalculatedsalespriceanddeemsuchprice"non-market"underMongoliantaxlaw.
ManagementbelievesthatitsinterpretationoftherelevantlegislationisappropriateandtheCompany'spositionsrelatedtotheroyaltywillbesustained.
42OnSeptember4,2019,theGovernmentofMongoliaissuedafurtherresolutioninconnectionwiththeroyaltyregime.
FromSeptember1,2019onwards,intheeventthatthecontractsalespriceislessthanthereferencepriceasdeterminedbytheGovernmentofMongoliabymorethan30%,thentheroyaltypayablewillbecalculatedbasedontheMongoliangovernment'sreferencepriceinsteadofthecontractsalesprice.
RestrictionsonImportingF-GradeCoalintoChinaAsaresultofimportrestrictionsestablishedbyChineseauthoritiesattheCekeborder,theCompanyhasbeenbarredfromtransportingitsF-gradecoalproductsintoChinaforsalesinceDecember15,2018.
TheCompany,togetherwithotherMongoliancoalcompanies,havebeenindiscussionswithChineseauthoritiesregardingapotentialamendmentorwithdrawaloftheseimportrestrictionstoallowfortheimportationofF-gradecoalintoChina;however,therecanbenoassurancethatafavorableoutcomewillbereached.
RISKFACTORSTherearecertainrisksinvolvedintheCompany'soperations,someofwhicharebeyonditscontrol.
Theseriskscanbebroadlycategorizedinto:(i)risksrelatingtotheCompany'sabilitytocontinueasagoingconcern;(ii)risksrelatingtotheCommonShares;(iii)risksrelatingtotheeconomicoperationoftheCompany'sOvootTolgoiMine;(iv)risksrelatingtotheCompany'sotherprojectsinMongolia;and(v)risksrelatingtoitsbusinessandindustry.
TheriskfactorsidentifiedbelowcouldhaveamaterialadverseimpactontheCompany'sbusiness,operations,resultsofoperations,financialconditionandfutureprospectsandcouldcauseactualeventstodiffermateriallyfromthosedescribedinforward-lookingstatementsrelatingtotheCompany.
Additionalrisksanduncertaintiesnotpresentlyknown,ornotexpressedorimpliedbelow,orthatarepresentlydeemedimmaterial,couldalsoharmtheCompany'sbusiness,operations,resultsofoperations,financialconditionandfutureprospects.
Someofthefollowingstatementsareforward-lookingandactualresultsmaydiffermateriallyfromtheresultsanticipatedintheseforward-lookingstatements.
See"Forward-LookingStatements".
RisksRelatingtotheCompany'sAbilitytoContinueasaGoingConcernUnlesstheCompanyacquiresadditionalsourcesoffinancingand/orfundingintheshortterm,theabilityoftheCompanytocontinueasagoingconcernisthreatenedTheCompany'sconsolidatedfinancialstatementshavebeenpreparedonagoingconcernbasis,whichassumesthattheCompanywillcontinueoperatinguntilatleastDecember31,2020andwillbeabletorealizeitsassetsanddischargeitsliabilitiesinthenormalcourseofoperationsastheycomedue.
However,certainadverseconditionsandmaterialuncertaintiescastdoubtupontheabilityoftheCompanytocontinueasagoingconcern.
Theseinclude:theCompanyhasaworkingcapitaldeficiency(excesscurrentliabilitiesovercurrentassets)of$114.
7millionasatDecember31,2019;theCompanyhasanobligationtopayCICunderthe2019DeferralAgreement,the2020FebruaryDeferralAgreement,the2020MarchDeferralAgreement,the2020AprilDeferralAgreement,the2020MayDeferralAgreement,the2020JuneDeferralAgreementandthe2020NovemberDeferralAgreement;thetradeandotherpayablesoftheCompanyremainhighduetoliquidityconstraints.
SeetheCompany'sagingprofileofthetradeandotherpayablesasatDecember31,2019inSection6ofthisAnnualInformationFormundertheheadingentitled"LiquidityandCapitalResources–LiquidityandCapitalManagement–GoingConcernConsiderations";43theCompanyhasothercurrentliabilitieswhichrequiresettlementintheshort-term,includingthe$31.
8millionofunpaidtaxespayablebySGStotheMongoliangovernment;thecurrentoperationplanrequirestheCompanytoraisesignificantoperationalfundinginordertosupporttheCompany'sminingoperationsandcontemplatesequipmentmaintenanceexpenditures,inordertoachievetheCompany'srevenueandcashflowtargets.
SuchexpendituresandotherworkingcapitalrequirementsmayrequiretheCompanytoseekadditionalfinancing.
ThereisnoguaranteethattheCompanywillbeabletosecureothersourcesoffinancing;andthecurrentimportrestrictionsonF-gradecoalbyChineseauthoritieswillfurtheraffecttheshort-termcashinflowandmayinturnunderminetheexecutionoftheoperationplan.
ThiscouldresultinadjustmentstotheamountsandclassificationsofassetsandliabilitiesintheCompany'sconsolidatedfinancialstatementsandsuchadjustmentscouldbematerial.
IftheCompanyisunabletocontinueasagoingconcern,itmaybeforcedtoseekreliefunderapplicablebankruptcyandinsolvencylegislation,whichmaynegativelyaffectthepriceandvolatilityoftheCommonSharesandanyinvestmentinsuchsharescouldsufferasignificantdeclineortotallossinvalue.
IftheCompanyisunabletocontinueasagoingconcernitmaybeforcedtoseekreliefunderapplicablebankruptcyandinsolvencylegislation.
IftheCompanyseeksreliefunderapplicablebankruptcyandinsolvencylegislation,itsbusinessandoperationswillbesubjecttocertainrisks,includingbutnotlimitedto,thefollowing:AninsolvencyfilingbyoragainsttheCompanywillcauseaneventofdefaultundertheConvertibleDebenture;AninsolvencyfilingbyoragainsttheCompanymayadverselyaffectitsbusinessprospects,includingitsabilitytocontinuetoobtainandmaintainthecontractsnecessarytooperateitsbusinessoncompetitiveterms;TherecanbenoassuranceastotheCompany'sabilitytomaintainorobtainsufficientfinancingsourcesforoperationsortofundanyreorganizationplanandmeetfutureobligations;TherecanbenoassurancethattheCompanywillbeabletosuccessfullydevelop,prosecute,confirmandconsummateoneormoreplansofreorganizationthatareacceptabletotheapplicablecourtsanditscreditors,equityholdersandotherpartiesininterest;andThevalueoftheCommonSharescouldbereducedtozeroasresultofaninsolvencyfiling.
Duetotheinherentuncertaintiesoflitigation,itisnotpossibletopredictthefinaloutcomeoftheClassActionordeterminetheamountofanypotentiallosses,ifany.
TheCompanyissubjecttolitigationrisks.
InthenormalcourseoftheCompany'sbusiness,itmaycomeinvolvedin,namedasapartyto,orbethesubjectof,variouslegalproceedings,including,withoutlimitations,mininglaws,environmentallaws,labourlaws,andanti-corruptionandanti-briberylawsinthejurisdictionsinwhichtheCompanyoperates.
Defenseandsettlementcostsassociatedwithlegalclaimscanbesubstantial,evenwithrespecttoclaimsthatarefrivolousorhavenomerit.
Duetotheinherentuncertaintyofthelitigationprocess,theresolutionofanyparticularlegalproceedingtowhichtheCompanyisormaybecomesubjectcouldhaveamaterialadverseimpactonitsbusiness,operations,resultsofoperations,financialconditionandfutureprospects.
44TheCompanyiscurrentlyadefendantintheClassAction(asmoreparticularlydescribedinSection7"RegulatoryIssuesandContingencies"ofthisAnnualInformationForm).
TheCompanyfirmlybelievesthatithasastrongdefenseonthemeritsandwillcontinuetovigorouslydefenditselfagainsttheClassActionthroughindependentCanadianlitigationcounselretainedbytheCompanyforthispurpose.
Duetotheinherentuncertaintiesoflitigation,itisnotpossibletopredictthefinaloutcomeoftheClassActionordeterminetheamountofpotentiallosses,ifany.
IntheeventtheCompanyincursanyliabilityinconnectionwiththeClassAction,itmaintainsinsurancewithrespectthereto.
WhiletheCompanybelievesthatsuchinsurancecoverageisinanamountthatwouldbesufficienttocoveranyamountstheCompanymayberequiredordeterminestopaywithrespectthereto,therecanbenoassurancethatsuchcoveragewillbeadequatetodoso,and,ifso,anyamountsnotsocoveredwouldberequiredtobepaidbytheCompany.
TheCompany'sabilitytocontinueasagoingconcernwillbeimpactedtotheextentitisrequiredtopayanyamountsinconnectionwiththeClassAction,whichwouldhaveamaterialadverseeffectonthebusinessandoperationsoftheCompanyandmaynegativelyaffectthepriceandvolatilityoftheCommonSharesandanyinvestmentinsuchsharescouldsufferasignificantdeclineortotallossinvalue.
RisksRelatingtotheCommonSharesTherecanbenoassurancethattheCeaseTradeOrderwillbeliftedinatimelymanneroratall.
OnJune19,2020,theBCSCissuedageneral"failuretofile"ceasetradeordertoprohibitthetradingbyanypersonofanysecuritiesoftheCompanyinCanada,whichremainsineffectasofthedateofthisAnnualInformationForm.
TheCTOwasissuedasofresultoftheCompany'sfailuretofile:(i)itsannualconsolidatedfinancialstatementsfortheyearendedDecember31,2019andtheaccompanyingManagement'sDiscussion&Analysis;(ii)itsAnnualInformationFormfortheyearendedDecember31,2019;and(iii)itsinterimconsolidatedfinancialstatementsforthethree-monthperiodendedMarch31,2020andaccompanyingManagement'sDiscussion&Analysis,ineachcasepriortothefilingdeadlineofJune15,2020.
TheCTOwillremainineffectuntilsuchtimeastheCompanymakesasuccessfulapplicationtotheBCSCtohavetheCTOrevoked.
WhiletheCompanyistakingsuchactionsasitconsidersnecessaryinordertoremedyitsfilingdefaultsassoonaspossible,therecanbenoassurancethattheCompanywillhavetheCTOliftedinatimelymanneroratall.
ForsolongastheCTOremainsineffect,itwillhaveasignificantadverseimpactontheliquidityoftheCommonSharesandshareholdersmaysufferasignificantdeclineortotallossinvalueofitsinvestmentintheCommonSharesasaresult.
TherecanbenoassurancethattradingintheCommonShareswillresumeontheTSXorHKEX.
InconjunctionwiththeissuanceoftheCTO,tradingintheCommonShareswashaltedontheTSXeffectiveasofJune19,2020.
OnSeptember11,2020,theTSXnotifiedtheCompanythatitisreviewingtheeligibilityforcontinuedlistingoftheCommonSharesontheTSXpursuanttotheTSX'sRemedialReviewProcess.
TheCompanyhasbeengranteduntilJanuary11,2021toremedythefollowingdelistingcriteria,aswellasanyotherdelistingcriteriathatbecomeapplicableduringtheRemedialReviewProcess:(i)financialconditionand/oroperatingresults;(ii)adequateworkingcapitalandappropriatecapitalstructure;and(iii)disclosureissues.
TheTSXContinuedListingCommitteehasscheduledameetingtobeheldonFebruary11,2021toconsiderwhetherornottosuspendtradinginanddelisttheCommonSharesontheTSX.
IftheCompanyfailstodemonstratetotheTSXthatithasremediedtheDelistingCriteriaonorbeforeFebruary16,2021,theCommonShareswillbedelistedfromtheTSX30daysfromsuchdate.
45AttherequestoftheCompany,tradinginthesharesoftheCompanyontheHKEXwassuspendedwitheffectasofAugust17,2020pendingthepublicationoftheauditedannualresultsoftheCompanyfortheyearendedDecember31,2019.
TheHKEXhasprovidedtheCompanywiththefollowingresumptionguidancewhichmustbesatisfiedbytheCompanyinorderfortradingtoresumeontheHKEX:(i)publishalloutstandingfinancialresultsandaddressanyauditmodifications;(ii)informthemarketofallmaterialinformationfortheCompany'sshareholdersandinvestorstoappraiseitsposition;(iii)announcequarterlyupdatesontheCompany'sdevelopmentsunderRules13.
24AoftheHKEX'sListingRules,including,amongstotherrelevantmatters,itsbusinessoperations,itsresumptionplanandtheprogressofimplementation;and(iv)demonstratecompliancewithRule13.
24oftheHKEXlistingruleswhichrequiresthatanissuercarryoutabusinesswithasufficientlevelofoperationsandassetsofsufficientvaluetosupportitsoperationstowarrantthecontinuedlistingoftheissuer'ssecurities.
NotwithstandingasuccessfulapplicationbytheCompanytorevoketheCTO,(i)theCommonShareswillbedelistedfromtheTSXiftheCompanyfailstodemonstratetotheTSXthatithasremediedtheDelistingCriteriaonorbeforeJanuary11,2021,unlessanextensionisgrantedbytheTSXpriortotheJanuary11,2021deadline.
;and(ii)theHKEX'sListingDivisionwillrecommendtotheHKEX'sListingCommitteethatitproceedwiththecancellationoftheCompany'sHKEXlistingiftheCompanyfailstoremedytheissuescausingitstradingsuspension,fullycomplywiththeListingRulestotheHKEX'ssatisfactionandresumetradinginitssharesontheHKEXbyFebruary16,2022.
AdelistingoftheCommonSharesfromeithertheTSXorHKEXwillhaveasignificantadverseimpactontheliquidityoftheCommonSharesandshareholdersoftheCompanymaysufferasignificantdeclineortotallossinvalueofitsinvestmentintheCommonSharesasaresult.
Futureissuancesorsales,orperceivedpossibleissuancesorsales,ofsubstantialamountsofCommonSharesinthepublicmarketcouldmateriallyandadverselyaffecttheprevailingmarketpriceoftheCommonSharesandtheCompany'sabilitytoraisecapitalinthefuture.
IftheCompanyisabletosuccessfullyapplyfortherevocationoftheCTO,themarketpriceoftheCommonSharescoulddeclineasaresultoffuturesalesofsubstantialamountsoftheCommonSharesorothersecuritiesrelatingtotheCommonSharesinthepublicmarket,includingsalesbyitssubstantialShareholders,ortheissuanceofnewCommonShares,ortheperceptionthatsuchsalesorissuancesmayoccur.
Futuresales,orperceivedpossiblesales,ofsubstantialamountsoftheCommonSharescouldalsomateriallyandadverselyaffecttheCompany'sabilitytoraisecapitalinthefutureatatimeandatapricefavorabletoit,andShareholdersmayexperiencedilutionintheirholdingsuponissuanceorsaleofadditionalCommonSharesorothersecuritiesinthefuture.
Futurestockmarketconditionsmaychange.
Therearerisksinvolvedwithanyequityinvestment.
ThemarketpriceoftheCommonSharesmayriseorfalldependinguponarangeoffactorsandstockmarketconditions,whichareunrelatedtotheCompany'sfuturefinancialperformance.
Movementsoninternationalstockmarkets,localinterestratesandexchangerates,domesticandinternationaleconomicandpoliticalconditions,aswellasgovernment,taxationandotherpolicychangesmayaffectthestockmarket.
AstheCompanyisalistedcompanyontheTSXandtheHKEX,itsCommonSharepricewillalsobesubjecttonumerousinfluencesincludingbroadtrendsinthestockmarketandthesharepricesofindividualcompaniesorsectors.
46RisksRelatingtotheEconomicOperationoftheCompany'sOvootTolgoiProjectTherecanbenoassurancethatthemineplandevelopedfortheOvootTolgoiMinewillultimatelybeviableorprofitableduetotheinherentoperationalrisks.
AsaresultofworkperformedbyDMCL,theCompanyincreaseditsestimateoftotalresourcesattheOvootTolgoidepositfromthosedescribedinthe2016TechnicalReport,hasdeclaredreservesfortheOvootTolgoidepositandpreparedanewmineplan.
Therearenoassurances,however,thattheCompanywillexecuteitsmineplanandrealizeontheestimatesfortheOvootTolgoideposit.
Itisnotunusualintheminingindustryforminingoperationstoexperienceunexpectedproblemsduringcommercialproduction,resultingindelaysandrequiringmorecapitalthananticipated.
ActualcostsandeconomicreturnsmaydiffermateriallyfromtheCompany'sestimates.
Risksassociatedwiththeoperationofminesinclude,butarenotlimitedto,thefollowing:Unusualorunexpectedgeologicalformations;Unstablegroundconditionsthatcouldresultincave-insorlandslides;Floods;Poweroutages;Restrictionsorinterruptionsinsupplyofkeymaterials;RestrictionsorinterruptionstocoalexportsintoChina;Labourdisruptionsorshortages;Socialunrestinadjacentareas;Equipmentfailure;Firesandexplosions;Changestoapplicablelaw;andInabilitytoobtainsuitableoradequatemachinery,equipment,orlabour.
Inaddition,risksparticulartotheCompany'smineplaninclude:TransitiontocontractminingandiftheCompanyisabletonegotiateacontractwithapplicablecontractorsatratesthatjustifythetransition;Abilitytogeneratesufficientsalesvolumesateconomicalrealizedprices;Maintaininganadequatewatersupplytotheminesitetopermitthecontinuedoperationsofthewashplantasplanned;Achievingsatisfactoryyieldsfromwetwashingoperations;Successfulconversionofresourcesintoreservesduringthelifeofmine;ContinueddelaysinthecustomclearanceprocessattheCekeborder;ContinuedbanontheimportofF-gradecoalproductsintoChina;ImpactoftheCOVID-19pandemicontheCompany'sabilitytoexportcoalintoChina;Successinenhancingtheoperationalefficiencyandtheoutputthroughputoftheofthewetwashplant;and47Successfulnegotiationswiththewashplantoperatorconcerninganagreementregardingtheoperationofthewashplant.
AnyoftherisksnotedabovecouldhaveamaterialadverseimpactontheCompany'sfinancialperformance,cashflowandresultsofoperations,whichmaynegativelyaffectthepriceandvolatilityoftheCommonSharesandanyinvestmentinsuchsharescouldsufferasignificantdeclineortotallossinvalue.
RisksRelatingtotheCompany'sProjectsinMongoliaTheCompanyissubjecttocontinuinggovernmental,regulatoryandinternalinvestigations,theoutcomeofwhichisunclearatthistimebutcouldhaveamaterialadverseeffectontheCompany.
TheCompanyissubjecttocertaininvestigationsreferredtounderSection7ofthisAnnualInformationFormundertheheadingentitled"RegulatoryIssuesandContingencies",whichcouldresultinoneormoreoftheMongolian,Canadian,China,UnitedStatesorothergovernmentalorregulatoryagenciestakingcivilorcriminalactionagainsttheCompany,itsaffiliatesoritscurrentorformeremployees.
Defenseandsettlementscostsassociatedwithdefendingandrespondingtoanycivilorcriminalactioncanbesubstantial.
ThelikelihoodorconsequencesofsuchinvestigativeactionsareunclearatthistimebutcouldincludefinancialorotherpenaltiesandcouldhaveamaterialadverseeffectontheCompanyandthevalueoftheCommonShares.
LegislationinMongoliamaybesubjecttoconflictinginterpretations,whichmayhaveadverseconsequencesontheCompany'sbusiness.
TheMongolianlegalsystemsharesseveralofthequalitativecharacteristicstypicallyfoundinadevelopingcountryandmanyofitslaws,particularlywithrespecttomattersoftaxation,arestillevolving.
AtransactionorbusinessstructurethatwouldlikelyberegardedunderamoreestablishedlegalsystemasappropriateandrelativelystraightforwardmightberegardedinMongoliaasoutsidethescopeofexistingMongolianlaworregulation.
Asaresult,certainbusinessarrangementsorstructuresandcertaintaxplanningmechanismsmaycarrysignificantrisks.
Inparticular,whenbusinessobjectivesandpracticalitiesdictatetheuseofarrangementsandstructuresthat,whilenotnecessarilycontrarytosettledMongolianlaw,aresufficientlynovelwithinaMongolianlegalcontext,itispossiblethatsucharrangementsmaybechallengedresultingintheirinvalidation.
ThelegalsysteminMongoliahasinherentuncertaintiesthatcouldlimitthelegalprotectionsavailabletotheCompany,whichinclude:(i)inconsistenciesbetweenlaws;(ii)limitedjudicialandadministrativeguidanceoninterpretingMongolianlegislation;(iii)substantialgapsintheregulatorystructureduetodelayorabsenceofimplementingregulations;(iv)thelackofestablishedinterpretationsofnewprinciplesofMongolianlegislation,particularlythoserelatingtobusiness,corporateandsecuritieslaws;(v)alackofjudicialindependencefrompolitical,socialandcommercialforces;and(vi)bankruptcyproceduresthatarenotwelldevelopedandaresubjecttoabuse.
TheMongolianjudicialsystemhasrelativelylittleexperienceinenforcingthelawsandregulationsthatcurrentlyexist,leadingtoadegreeofuncertaintyastotheoutcomeofanylitigation;itmaybedifficulttoobtainswiftandequitableenforcement,ortoobtainenforcementofajudgmentbyacourtofanotherjurisdiction.
Inaddition,whilelegislationhasbeenenactedtoprotectprivatepropertyagainstexpropriationandnationalization,duetothelackofexperienceinenforcingtheseprovisionsandpoliticalfactors,theseprotectionsmaynotbeenforcedintheeventofanattemptedexpropriationornationalization.
ExpropriationornationalizationofanyoftheCompany'sassets,orportionsthereof,potentiallywithoutadequatecompensation,couldmateriallyandadverselyaffectitsbusinessandresultsofoperations.
48ApplicationofandamendmentstolegislationcouldadverselyaffecttheCompany'sminingrightsinitsprojectsormakeitmoredifficultorexpensivetodevelopitsprojectsandcarryoutmining.
The2006MineralsLaw(asdefinedundertheheading"DEFINITIONSANDOTHERINFORMATION–DefinedTermsandAbbreviations"intheCompany'smostrecentlyfiledAnnualInformationForm),whichpreservestoalimitedextentsomeofthesubstanceoftheformer1997mineralslegislation,wasdraftedwiththeassistanceoflegalexpertsintheareaofmininglegislationandwaswidelyregardedasprogressive,internallyconsistentandeffectivelegislation.
However,the2006MineralsLawhasbeensubsequentlyamendedandthepotentialforpoliticalinterferencehasincreasedandtherightsandsecurityoftitleholdersofmineraltenuresinMongoliahasbeenweakened.
Certainprovisionsofthe2006MineralsLawareambiguousanditisunclearhowtheywillbeinterpretedandappliedinpractice.
ExamplesofsuchprovisionsincludethoserelatingtothedesignationofamineraldepositasaMineralDepositofStrategicImportance(asdefinedundertheheading"DEFINITIONSANDOTHERINFORMATION–DefinedTermsandAbbreviations"intheCompany'smostrecentlyfiledAnnualInformationForm).
Refertotheriskfactorentitled"TheGovernmentofMongoliacoulddeterminethatanyoneormoreoftheCompany'sprojectsinMongoliaisaMineralDepositofStrategicImportance"below.
Inaddition,theintroductionofnewMongolianlawsandregulationsandtheinterpretationofexistingonesmaybesubjecttopolicychangesreflectingdomesticpoliticalorsocialchanges.
Forexample,onJuly16,2009,theParliamentofMongoliaenactedtheMiningProhibitioninSpecifiedAreasLaw(the"SpecifiedAreasLaw")thatprohibitsmineralsexplorationandmininginareassuchasheadwatersofriversandlakes,forestareasasdefinedintheLawofForestsofMongoliaofMay17,2012,asamended,andareasadjacenttoriversandlakesasdefinedintheLawofMongoliaonWaterenactedonMay17,2012,asamended.
PursuanttotheSpecifiedAreasLaw,theGovernmentofMongoliahasdefinedtheboundariesofcertainareasinwhichexplorationandminingispurportedlyprohibited.
Alistoflicenceshasbeenpreparedthatoverlapwiththeprohibitedareasdescribedinthelawbasedoninformationsubmittedbywaterauthorityagencies,forestauthorityagenciesandlocalauthoritiesforsubmissiontotheGovernmentofMongolia.
PortionsofthemininglicenceinrespectoftheOvootTolgoiMineandtheexplorationlicencepertainingtotheZagSuujProjectareincludedonthelistofspecifiedareasdescribedintheSpecifiedAreasLaw.
InregardtotheOvootTolgoiMiningLicence,thepotentialareawhichmaybeaffectedisarelativelysmallareawhichrepresentsapproximately3%oftheentireareaofthemininglicenceanddoesnotcontainanyreservesorresourcesorimmovableassets.
Accordingly,thelossofthepotentiallyaffectedareawouldnotmateriallyandadverselyaffecttheexistingoperations.
Activitieshistoricallycarriedoutontheotherlicencesreferredtoaboveincludedrilling,trenchingandgeologicalreconnaissance.
TheCompanyhasnoimmovableassetslocatedinanyofthepotentiallyaffectedareasoftheselicencesandthelossofanyorallofthesepotentiallyaffectedpropertieswouldnotmateriallyandadverselyaffecttheexistingoperations.
TheMiningProhibitioninSpecifiedAreasLawhasnotbeenadequatelyenforcedtodatemainlyduetocompensationissuesduetothelicenceholders.
Inordertoaddresstheissuesfacingitsimplementation,inFebruary2015theParliamentofMongoliaadoptedanamendmenttotheLawonImplementationoftheMiningProhibitioninSpecifiedAreasLaw(the"AmendedLawonImplementation").
TheAmendedLawonImplementationprovidesanopportunityforlicenseholderscoveredwithinthescopeofapplicationoftheMiningProhibitioninSpecifiedAreasLawtocontinuetheirminingoperationssubjecttoadvanceplacementoffundstocover100%ofthefutureenvironmentalrehabilitationcosts.
AmodelcontractandaspecificGovernmentregulationonthis49requirementwillbeadoptedbytheGovernment.
Thelicenseholdersmustalsoapplywithin3monthsaftertheamendmenttotheLawonImplementationcomesintoeffectforpermissiontoMRAMtoresumeactivities.
TheCompanysubmitteditsapplicationwithrespecttoitsmininglicensesbeforethedeadlinesetonJune16,2015andhasnotyetreceivedanycommunicationfromMRAMonthestatusofitsapplication.
PursuanttotheMongolianLaw"Toprohibitmineralexplorationandminingoperationsatheadwatersofrivers,waterprotectionzonesandforestedareas",theGovernmentadministrativeagencyhasnotifiedtheCompanythatspeciallicensearea12726Aispartlyoverlappingwithawaterreservoir.
TheCompanyhasinspectedtheareatogetherwiththeCadastralDivisionoftheMineralResourceAuthorityaswellasthroughthecadastralregistrationsystemoftheMinistryofEnvironment,itisdeterminedthat29hectaresofSukhaitBulagispartlyoverlappingwithawaterreservoir,ofwhichhasbeenpartlyhandedover.
(ResolutionNo.
6/7522issuedonSeptember29,2015bytheHeadofCadastralDivisionoftheMineralResourceAuthority).
InaccordancewithArticle22.
3ofLawofMongoliaonWater,5,602.
96hectaresofland,includingSukhaitynBulag,UvurZadgai,andZuunShandpertainingtoexplorationlicense9443X,whichwasconvertedtomininglicenseMV-0125436inJanuary2016,isoverlappingwithaprotectedareaboundary.
Theoverlappingareahasbeenofficiallyhandedovertothelocaladministration.
(ResolutionNo.
688issuedonSeptember24,2015bytheHeadofCadastralDivisionoftheMineralResourceAuthority)InconnectionwiththenullificationofAnnex2oftheGovernmentorderNo.
194"Ondeterminingboundary"issuedonJune5,2012,areaaroundthewaterreservoirlocatedatMV-016869licenseareawasannulledfromtheSpecifiedAreaLaw.
Therefore,mininglicense12726Awasremovedfromthelistoflicensesthatoverlapswiththeprohibitedareasdescribedinthelaw.
Therehasbeenlimiteddevelopmentofthelawduring2016whiletwoexplorationlicensesoftheCompany(13779Xand5267X)wereconvertedtomininglicenses(MV-020676andMV-020675)inNovember2016.
TheCompanywillcontinuetomonitorthedevelopmentsandensurethatitfollowsthenecessarystepsintheAmendedLawonImplementationtosecureitsoperationsandlicensesandisfullycompliantwithMongolianlaw.
TherecanbenoassurancethatfuturepoliticalandeconomicconditionsinMongoliawillnotresultintheGovernmentofMongoliaadoptingdifferentpoliciesinrelationtoforeigndevelopmentandownershipofmineralresources.
Anysuchchangesingovernmentorpolicymayresultinchangesinlawsaffectingownershipofassets,environmentalprotection,labourrelations,repatriationofincome,returnofcapital,investmentagreements,incometaxlaws,royaltyregulation,governmentincentiveandotherareas,eachofwhichmaymateriallyandadverselyaffecttheCompany'sabilitytoundertakeexplorationanddevelopmentactivitiesinthemannercurrentlycontemplated.
Anyrestrictionsimposedorchargesleviedorraised(includingroyaltyfees)underMongolianlawfortheexportofcoalcouldharmtheCompany'scompetitiveness.
OnAugust26,2019,SGSreceivedtheNoticeLetterfromMRAMnotifyingthattheCompany'sthreemininglicenses(MV-016869,MV-020436andMV-020451)fortheSoumberDeposithavebeenterminatedbytheHeadofCadastreDivisionofMRAMeffectiveasofAugust21,2019.
SeeSection7ofthisAnnualInformationFormundertheheadingentitled"RegulatoryIssuesandContingencies–TerminationofSoumberDepositMiningLicenses"formoreinformation.
TheCompanybelievesthecancellationoftheSoumberLicensesiswithoutmerit.
TheCompanyisnotawareofanyfailureonitsparttofulfillitsenvironmentalreclamationdutiesastheyrelatetotheSoumberDeposit.
OnOctober4,2019,SGSfiledaclaimagainstMRAMandtheMinistryofEnvironmentand50TourismofMongoliaintheAdministrationCourtseekinganordertorestoretheSoumberLicenses.
TheAdministrationCourtissuedtherulinginOctober2020andmadeanordertoacceptSGS'sclaimandrestoretheSoumberLicenses.
ThecasewastransferredtotheHighCourtforfinalruling.
TheCompanyanticipatesthattheHighCourtwillissueitsrulingbeforetheendofthefirstquarterof2021.
TheterminationoftheSoumberLicensesdoesnothaveanyimpactontheCompany'scurrentminingoperationsattheOvootTolgoiminesite.
TheCompanywilltakeallsuchactions,includingadditionallegalactions,asitconsidersnecessarytoreinstatetheSoumberLicenses.
However,therecanbenoassurancethatafavorableoutcomewillbereached.
TheimpactoftheCOVID-19pandemicinChinacouldhaveamaterialadverseimpactontheCompany'sbusiness,resultsofoperations,orfinancialcondition.
InDecember2019,COVID-19wasreportedtohavesurfacedinWuhan,ChinaandcontinuestoexpandwithinthePeople'sRepublicofChina("PRC")andglobally.
OnMarch12,2020,theWorldHealthOrganizationdeclaredtheCOVID-19outbreakasaglobalpandemic.
InChina,reactionstooreffortstocontainthespreadofCOVID-19haveledto,amongotherthings,significantrestrictionsontravelwithinChina,extendedshutdownofbusinessoperations,mandatoryquarantinerequirementsoninfectedindividualsandageneralreductioninindustrialandconsumeractivity.
InMongolia,theMongolianStateEmergencyCommissionclosedMongolia'ssouthernborderwithChinaeffectiveasofFebruary11,2020inordertopreventthespreadoftheCOVID-19.
Accordingly,theCompanysuspendedcoalexportstoChinabeginningasofFebruary11,2020.
OnMarch28,2020,theMongolian-Chineseborderwasre-openedforcoalexportonatrialbasis,withalimitimposedonthetotalvolumeofcoalthatwaspermittedtobeexportedduringthistrialperiod.
TheCompanyhasexperiencedacontinuousimprovementinthevolumeofcoalexportedtoChinasinceMarch28,2020.
DuringtheperiodbetweenApriltoOctober2020,anaggregateof1.
9milliontonnesofcoalwasexportedbytheCompanyfromMongoliatoChina,ascomparedtoanaggregateof2.
0milliontonnesofcoalduringthesameperiodinthe2019calendaryear.
TheborderclosurehashadanadverseimpactontheCompany'ssalesandcashflowsinthefirstandsecondquarterof2020.
Inordertomitigatethefinancialimpactoftheborderclosuresandpreserveitsworkingcapital,theCompanytemporarilyceasedmajorminingoperations(includingcoalmining),reducedproductiontoonlycoal-blendingactivitiesandplacedapproximatelyhalfofitsworkforceonfurloughfromFebruary2020.
SinceAugust2,2020,theCompanyhasresumeditsminingoperations,whichincludesmining,blendingandwashingofcoal.
AsatOctober31,2020,SGSemployed208employeesattheOvootTolgoiMinesite(December31,2019:383employees).
TheCompanyproduced1.
1milliontonnesfromAugusttoOctober2020,ascomparedto1.
3milliontonnesfromAugusttoOctober2019.
TheCompanywillcontinuetocloselymonitorthedevelopmentoftheCOVID-19pandemicandtheimpactithasoncoalexportstoChinaandwillreactpromptlytopreservetheworkingcapitaloftheCompany.
TheCompanybelievestheCOVID-19pandemicinChinahasnegativelyaffecteditsbusiness.
Furthermore,theeconomicslowdownandnegativebusinesssentimentinthePRCcouldpotentiallyhaveanegativeimpactonthedemandforcoalgenerallyandourbusinessoperationsandfinancialconditionmaybeadverselyaffectedasaresult.
GiventhedifficultyinvolvedindeterminingwithanydegreeofcertaintyastohowlongtheCOVID-19pandemicwilllast,theCompanycannotpredictiftheadverseimpactontheCompany'sbusiness,financialconditionandoperationswillbeshort-livedorlonglastingatthistime.
IfthenegativeimpactoftheCOVID-19pandemiccontinuesandbecomeslonglasting,theCompany'sbusiness,financialconditionandoperationsmaybemateriallyandadverselyaffectedasaresultofanyslowdownineconomicgrowthinChina,reducedemandforcoalorotherfactorsthattheCompanycannotforesee.
51TheCompany'sabilitytocarryonbusinessinMongoliaissubjecttopoliticalrisk.
TheCompany'sabilitytoefficientlyconductitsexplorationanddevelopmentactivitiesissubjecttochangesingovernmentpolicyorshiftsinpoliticalattitudeswithinMongoliathatarebeyondtheCompany'scontrol.
Governmentpolicymaychangetodiscourageforeigninvestment,nationalizationofminingindustriesmayoccurorothergovernmentlimitations,restrictionsorrequirementsnotcurrentlyforeseenmaybeimplemented.
ThereisnoassurancethattheCompany'sassetswillnotbesubjecttonationalization,requisitionorconfiscation,whetherlegitimateornot,byanyauthorityorbody.
TheprovisionsunderMongolianlawforcompensationandreimbursementoflossestoinvestorsundersuchcircumstancesmaynotbeeffectivetorestorethevalueoftheCompany'soriginalinvestment.
Inaddition,Mongoliamayexperiencepoliticalinstability.
SuchinstabilitycouldhaveamaterialadverseeffectoneconomicorsocialconditionsinMongoliaandmayresultinoutbreaksofcivilunrest,whichcouldmateriallyandadverselyaffecttheCompany'sbusinessandresultsofoperations.
TheGovernmentofMongoliacoulddeterminethatanyoneormoreoftheCompany'sprojectsinMongoliaisaMineralDepositofStrategicImportanceifitmeetslegalrequirements.
Underthe2006MineralsLaw,theStateGreatKhuralofMongolia(the"ParliamentofMongolia")haswidediscretiontodesignatemineraldepositstobeMineralDepositsofStrategicImportance.
TheGovernmentofMongoliaisempoweredtoparticipateonanequitybasiswiththelicenceholderintheexploitationand/orminingofeachMineralDepositofStrategicImportanceontermstobenegotiatedbetweentheGovernmentofMongoliaandsuchlicenceholder.
DetailsofanymineralsreservesmustbefiledbytherelevantlicenceholderwiththeGovernmentofMongolia,andthosedepositsontheStrategicDepositsListrepresentmostofthelargestandhighestprofiledepositsinMongolia.
InadditiontodepositscurrentlyontheStrategicDepositsListandtheadditionalTier2DepositsList,theParliamentofMongoliamayatanytimedesignateotherdepositsnotyetcurrentlyonsuchListstobeMineralDepositsofStrategicImportance,addsuchdepositstoeithertheStrategicDepositsListortheTier2DepositsListand,intheformercase,commencenegotiationswiththerelevantlicenceholderwithrespecttothetermsunderwhichtheGovernmentofMongoliawilltakeaninterestinsuchdeposit.
WhiletheGovernmentofMongoliaisintheprocessofaddingtheexactlocationandcoordinatesforeachMineralDepositofStrategicImportance,anumberofdepositsontheStrategicDepositsListareidentifiedbynameonlywithnoindicationofthelatitudeandlongitudecoordinatesforthedeposit,anditisthereforenotalwayspossibletopreciselydeterminetheintendedgeographicareacoveredbyeachdesignatedMineralDepositofStrategicImportanceortoaccuratelydeterminewhetherornotanygivenlicenceareaiswithin,oroverlaps,aMineralDepositofStrategicImportance.
InJuly2014,theMongolianParliamentmadeanamendmenttotheMineralsLawandredefinedthetermof"MineralDepositofStrategicImportance".
AccordingtotheMineralsLaw,theMineralDepositofStrategicImportancemeans"adepositwhichcanaffectnationalsecurity,nationaleconomicandsocialdevelopmentoradepositthatcanproducemorethanfivepercentofMongolianGDPinayear".
Underthe2006MineralsLaw,thesizeoftheGovernmentofMongolia'sparticipationisdeterminedlargelybythelevelofstatefundingwhichhasbeenprovidedfortheexplorationanddevelopmentofanydeposit,withtheGovernmentofMongoliaentitledtoparticipateupto50%intheeventthattherehasbeenstatefundingofsuchdepositandupto34%iftherehasnot.
However,the2006MineralsLawisveryvagueastothedetailsandmethodbywhichtheGovernmentofMongoliawilltakeitsinterestandthefinalarrangementsinrespectoftheGovernmentofMongolia'sinterestineachMineralDepositofStrategicImportance,includingtheamountofcompensationtobepaidtothelicenceholderandtheactualformoftheGovernmentofMongolia'sinterestaresubjecttonegotiationbetweentheGovernmentofMongolia52andthelicenceholder.
In2015,theParliamentofMongoliaadoptedanamendmenttothe2006MineralsLawprovidingforthepossibilityfortheGovernmenttocollectaspecialroyaltyonMineralDepositsofStrategicImportanceinlieuofholdinganequitystakeinsuchdeposit.
Itstipulatesthatthepartiescanagreetotransfertothelicenceholderthestate'sshareintheMineralDepositofStrategicImportanceupontheapprovalofanauthorizedGovernmentbody,withthelicenceholderagreeingtopayaspecialroyaltyatapercentage(nottoexceed5%)tobeapprovedbytheGovernment.
The2006MineralsLawalsocontainsprovisionsrequiringanycompanywhichholdsaMineralDepositofStrategicImportancetolistnolessthan10%ofitssharesontheMongolianStockExchange.
Thisparticularprovisionofthe2006MineralsLawhasnotyetbeenenforcedanditisnotclearhowitwillworkinpractice.
Inrecentyears,therehavebeenanumberofproposedamendmentstothe2006MineralsLawsuggestedbyvariousparties,manyofwhichhavecenteredonamendingthe2006MineralsLawtoincreasetheGovernmentofMongolia'sparticipatinginterestinexcessof50%.
Whilethe2006MineralsLawprovidesthattheinterestoftheGovernmentofMongoliashouldtaketheformofanequityinterest,basedonpastpractice,anddependingontheresultsofindividualnegotiations,theinterestmaybeintheformofproductionorprofitsharingorsomeotherarrangementnegotiatedbetweenthelicenceholderandtheGovernmentofMongolia.
TherecanbenoassurancethatlegislationwillnotbeenactedthatfurtherstrengthenstheGovernmentofMongolia'srighttoparticipateinprivatelyheldmineralresourcesinMongolia.
NoneofthedepositscoveredbytheCompany'sexistingmininglicencesorexplorationlicencesarecurrentlydesignatedasMineralDepositsofStrategicImportance.
However,therecanbenoassurancethatanyoneormoreofthesedepositswillnotbesodesignatedinthefuture,inwhichcasetheCompany'sbusinessandresultsofoperationsmaybemateriallyandadverselyaffected.
TheApplicationoftheForeignInvestmentLawofMongoliaapprovedbytheParliamentofMongoliaisuncertain.
PriortoOctober3,2013,theCompanywassubjecttotheForeignInvestmentLawofMongolia("FIL"),asdescribedintheCompany'sManagement'sDiscussionandAnalysisofFinancialConditionandResultsofOperationfortheperiodendedDecember31,2012.
TheCompanyconsidersthatthisriskhasbeensubstantiallymitigatedfollowingtherepealoftheFILandintroductionoftheInvestmentLawonOctober3,2013,whichappearstoprovidegreatercertaintyforforeigninvestmentinMongolia.
However,thatcertaintyremainssubjecttotheinherentuncertaintiesofthelegalsysteminMongoliaasdescribedintheriskfactorentitledthe"LegislationinMongoliamaybesubjecttoconflictinginterpretations,whichmayhaveadverseconsequencesontheCompany'sbusiness"above.
RisksrelatingtotheCompany'sbusinessandindustrySomeoftheCompany'sprojectsmaynotbecompletedasplanned;costsmayexceedoriginalbudgetsandmaynotachievetheintendedeconomicresultsorcommercialviability.
TheCompany'sbusinessstrategydependslargelyonexpandingitsproductioncapacityattheOvootTolgoiMineandfurtherdevelopingitsothercoalprojectsintocommerciallyviablemines.
Whetheramineraldepositwillbecommerciallyviabledependsonanumberoffactors,including:(i)theparticularattributesofthedeposit,suchassize,gradeandproximitytoinfrastructure;(ii)commodityprices,whicharehighlycyclical;and(iii)governmentregulations,includingregulationsrelatingtoprices,taxes,royalties,landtenure,landuse,importingandexportingofmineralresourcesandenvironmentalprotection.
TheCompany'slong-termintentiontodevelopminesattheZagSuujProjectandtheOvootTolgoiUndergroundDepositinthefutureisbasedoneconomic,geological,engineering,environmentalandmine53planningevaluations.
Thefeasibilityofminingattheseprojectshasnotbeenandmayneverbeestablished.
IftheCompanyisunabletodevelopalloranyofitsprojectsintoacommercialworkingmine,itsbusiness,financialconditionandresultsofoperationswillbemateriallyandadverselyaffected.
TheCompany'sprojectsaresubjecttoboth(i)technicalriskinthattheymaynotperformasdesigned,or(ii)operationalredesignormodificationasaresultofon-goingevaluationoftheprojects.
Increaseddevelopmentcosts,loweroutputorhigheroperatingcostsmayallcombinetomakeaprojectlessprofitablethanexpectedatthetimeofthedevelopmentdecision.
ThiswouldhaveanegativeimpactontheCompany'sbusinessandresultsofoperations.
NoassurancecanbegiventhattheCompanywouldbeadequatelycompensatedbythirdpartyprojectdesignandconstructioncompanies(ifnotperformedbytheCompany)intheeventthataprojectdidnotmeetitsexpecteddesignspecification.
WithrespecttoZagSuujProject,aswithallexplorationpropertiesorprojectstakenonbyminingcompanies,thereisariskthatexplorationprojectswillnotbeconvertedtocommerciallyviablemines,inpartbecauseactualcostsfromcapitalprojectsmayexceedtheoriginalbudgets.
Asaresultofprojectdelays,costoverruns,changesinprojectscientificortechnicalinformation,changesinmarketcircumstancesorotherreasons,theCompanymaynotbeabletoachievetheintendedeconomicbenefitsordemonstratethecommercialfeasibilityoftheseprojects,whichinturnmayaffecttheCompany'sbusiness,resultsofoperationsandgrowthprojects.
TheCompany'scoalreservesandresourcesareestimatesbasedonanumberofassumptions,andtheCompanymayproducelesscoalthanitscurrentestimates.
ThecoalreserveandresourceestimatesarebasedonanumberofassumptionsthathavebeenmadebytheQPsinaccordancewithNI43-101.
Reserveandresourceestimatesinvolveexpressionsofjudgmentbasedonvariousfactorssuchasknowledge,experienceandindustrypractice,andtheaccuracyoftheseestimatesmaybeaffectedbymanyfactors,includingqualityoftheresultsofexplorationdrillingandanalysisofcoalsamples,aswellastheproceduresadoptedbyandtheexperienceofthepersonmakingtheestimates.
TheCompanynotesthat,ingeneral,mineralresourceandreserveestimatesarealwayssubjecttochangebasedonnewinformation.
Specifically,shouldtheCompanyencountermineralizationdifferentfromthatpredictedbypastdrilling,samplingandsimilarexamination,mineralresourceand/orreserveestimatesmayhavetobeadjusteddownward.
Inaddition,therankofcoalultimatelyminedmaydifferfromthatindicatedbydrillingresults.
Therecanbenoassurancethatcoalrecoveredinlaboratorytestswillbeduplicatedunderon-siteconditionsorinproduction-scaleoperations.
Intheeventthattheactuallevelofimpuritiesishigherthanexpectedorthecoalminedisofalowerqualitythanexpected,thedemandfor,andrealizablepriceof,theCompany'scoalmaydecrease.
Short-termfactorsrelatingtoreserves,suchastheneedfororderlydevelopmentofcoalseamsortheprocessingofnewordifferentqualitycoals,mayalsomateriallyandadverselyaffecttheCompany'sbusinessandresultsofoperations.
Theinclusionofreserveandresourceestimatesshouldnotberegardedasarepresentationthatalltheseamountscanbeeconomicallyexploitedandnothingcontainedherein(including,withoutlimitation,theestimatesofminelives)shouldbeinterpretedasassuranceoftheeconomiclivesoftheCompany'scoalreservesandresourcesortheprofitabilityofitsfutureoperations.
Mineralresourcesthatarenotmineralreservesdonothavedemonstratedeconomicviability.
Duetotheuncertaintythatmayattachtoinferredmineralresources,thereisnoassurancethatmineralresourceswillbeupgradedtoprovenandprobableorereserves.
Inferredmineralresourcesareconsideredtoospeculativegeologicallytohaveeconomicconsiderationsappliedtothemthatwouldenablethemtobecategorizedasmineralreserves.
54TheCompany'sresultsofoperationsaresubject,toasignificantextent,toeconomic,politicalandlegaldevelopmentsinChina.
TheCompanyexpectsthatamajorityifnotallofthecoalsalesfromtheOvootTolgoiMinewillbemadetocustomersbasedinChina.
Accordingly,theeconomic,politicalandsocialconditions,aswellasgovernmentpolicies,ofChinamayaffectitsbusiness.
TheChineseeconomydiffersfromtheeconomiesofmostdevelopedcountriesinmanyrespects,including:(i)structure;(ii)levelofgovernmentinvolvement;(iii)levelofdevelopment;(iv)growthrate;(v)controlofforeignexchange;and(vi)allocationofresources.
TheChineseeconomyhasbeentransitioningfromaplannedeconomytoamoremarket-orientedeconomy.
Forthepasttwodecades,theChinesegovernmenthasimplementedeconomicreformmeasuresemphasizingtheutilizationofmarketforcesinthedevelopmentoftheChineseeconomy.
ChangesintheChinese'spolitical,economicandsocialconditions,laws,regulationsandpoliciescouldmateriallyandadverselyaffecttheCompany'sbusinessandresultsofoperations.
Morerecently,theCOVID-19pandemichasresultedinreducedindustrialactivityinChina,withtemporaryclosuresoffactoriesandotherfacilities,asdescribedintheriskfactorentitled"TheimpactoftheCOVID-19pandemicinChinacouldhaveamaterialadverseimpactontheCompany'sbusiness,resultsofoperations,orfinancialcondition".
Inaddition,theChinesegovernmentindirectlyinfluencescoalpricesthroughitsregulationofpowertariffsanditscontroloverallocationofthetransportationcapacityofthenationalrailsystem.
AnysignificantdownturninthepricesinChinacouldmateriallyandadverselyaffecttheCompany'sbusinessandresultsofoperations.
Additionally,theChinesegovernmentcouldadoptnewpoliciesthatcouldshiftdemandawayfromcoaltootherenergysources.
Anysignificantdeclineindemandfor,orover-supplyof,coalcouldmateriallyandadverselyaffecttheCompany'srevenuesfromcoalexportsales.
AsaresultofimportrestrictionsestablishedbythePRCauthoritiesattheCekeborder,theCompanyhasbeenbarredfromtransportingitsF-gradecoalproductsintoChinaforsalesinceDecember15,2018.
TheCompany,togetherwithotherMongoliancoalcompanies,havebeenindiscussionswiththePRCauthoritiesregardingapotentialamendmentorwithdrawaloftheseimportrestrictionstoallowfortheimportationofF-gradecoalintoChina;however,therecanbenoassurancethatafavorableoutcomewillbereached.
AprotractedorindefinitebanontheimportoftheCompany'sF-gradecoalproductsintoChinamayhaveamaterialadverseimpactontheCompany'sfinancialperformance,cashflowandresultsofoperations,whichmaynegativelyaffectthepriceandvolatilityoftheCommonSharesandanyinvestmentinsuchsharescouldsufferasignificantdeclineortotallossinvalue.
TheinterestsoftheCompany'sprincipalstakeholders,CIC,NovelSunriseandVoyageWisdom,maydifferfromthoseoftheotherstakeholders.
AsatNovember26,2020,tothebestoftheCompany'sknowledge:CICholdsatotalof64.
8millionCommonSharesrepresentingapproximately23.
8%oftheissuedandoutstandingCommonShares;NovelSunriseholdsapproximately46.
4millionCommonSharesrepresentingapproximately17.
0%oftheissuedandoutstandingCommonShares;andVoyageWisdomholdsapproximately25.
8millionCommonSharesrepresentingapproximately9.
5%oftheissuedandoutstandingCommonShares.
Accordingly,theCompany'sprincipalstakeholdersmayhavetheabilitytosubstantiallyaffecttheoutcomeofmatterssubmittedtoShareholdersoftheCompanyforapproval,including,withoutlimitation,theelectionandremovalofdirectors,amendmentstoourarticlesofincorporationandbylawsandtheapproval55ofanybusinesscombination.
ThismaydelayorpreventanacquisitionoftheCompanyorcausethemarketpriceoftheCommonSharestodecline.
TheinterestsofeachoftheseprincipalstakeholdersmayconflictwiththeinterestsofotherShareholdersandthereisnoassurancethatanyoftheseprincipalstakeholderswillvoteitsCommonSharesinawaythatbenefitsminorityShareholders.
WhilenoShareholderhastheabilitytoelectamajorityoftheBoardunilaterally,bothNovelSunriseandCIChavebeengrantedcontractualdirectorappointmentrights.
Inaddition,theCompany'sprincipalstakeholdersmayhaveaninterestinpursuingacquisitions,divestituresandothertransactionsthat,inthejudgmentofmanagement,couldenhanceitsequityordebtinvestment,eventhoughsuchtransactionsmightinvolveriskstootherShareholdersandmaynegativelyaffectprevailingmarketpricesoftheCommonShares.
Subjecttocompliancewithapplicablesecuritieslaws,theprincipalstakeholdersmaysellsomeoralloftheirCommonSharesinthefuture.
Nopredictioncanbemadeastotheeffect,ifany;suchfuturesalesofCommonShareswillhaveonmarketpricesoftheCommonSharesprevailingfromtimetotime.
However,thefuturesaleofasubstantialnumberofCommonSharesbyourprincipalstakeholders,ortheperceptionthatsuchsalescouldoccur,couldadverselyaffectprevailingmarketpricesoftheCommonShares.
TaxandroyaltylegislationinMongoliaissubjecttovaryinginterpretationsandchangeswhichmayhaveasignificantimpactontheCompany'sfinancialposition.
Mongoliantax,currency,customsandroyaltylegislationissubjecttovaryinginterpretationsandchanges,whichcanoccurfrequently.
TheinterpretationbytheCompany'smanagementofsuchlegislationasappliedtothetransactionsandactivityoftheCompanymaybechallengedbytherelevantauthorities.
TheMongoliantaxauthoritiesmaybetakingamoreassertivepositionintheirinterpretationofthelegislationandassessments,anditispossiblethattransactionsandactivitiesthathavenotbeenchallengedinthepastmaybechallengedbytaxauthorities.
Asaresult,significantadditionaltaxes,penalties,interestorroyaltiesmaybeassessed.
Fiscalperiodsremainopentoreviewbytheauthoritiesinrespectoftaxesforfivecalendaryearsprecedingtheyearofreview.
Undercertaincircumstances,reviewsmaycoverlongerperiods.
TheMongoliantaxlegislationdoesnotprovidedefinitiveguidanceincertainareas,specificallyinareassuchasvalue-addedtax,withholdingtax,corporateincometax,personalincometax,transferpricingandotherareas.
Fromtimetotime,theCompanyadoptsinterpretationsofsuchuncertainareasthatreducetheoveralltaxrateoftheCompany.
Asnotedabove,suchtaxpositionsmaycomeunderheightenedscrutinyasaresultofrecentdevelopmentsinadministrativeandcourtpractices.
Theimpactofanychallengebythetaxauthoritiescannotbereliablyestimated;however,itmaybesignificanttothefinancialpositionand/ortheoveralloperationsoftheentityinquestion.
TheroyaltyregimeinMongoliaisevolvingandhasbeensubjecttochangesince2012.
OnFebruary1,2016,theGovernmentofMongoliaissuedaresolutioninconnectionwiththeroyaltyregime.
FromFebruary1,2016onwards,royaltiesaretobecalculatedbasedontheactualcontractpriceincludingtransportationcoststotheMongoliaborder.
Ifsuchtransportationcostshavenotbeenincludedinthecontract,therelevanttransportationcosts,customsdocumentationfees,insuranceandloadingcostsshouldbeestimatedforthecalculationofroyalties.
IntheeventthatthecalculatedsalespriceasdescribedabovediffersfromthecontractsalespriceofotherentitiesinMongolia(samequalityofcoalandsamebordercrossing)bymorethan10%,thecalculatedsalespricewillbedeemedtobe"non-market"underMongoliantaxlawandtheroyaltywillthenbecalculatedbasedonareferencepriceasdeterminedbytheGovernmentofMongolia.
OnSeptember4,2019,theGovernmentofMongoliaissuedaresolutioninconnectionwiththeroyaltyregime.
FromSeptember1,2019onwards,intheeventthatthecontractsalespriceislessthanthereference56priceasdeterminedbytheGovernmentofMongoliabymorethan30%,thentheroyaltypayablewillbecalculatedbasedontheMongoliangovernment'sreferencepriceinsteadofthecontractsalesprice.
Therecanbenoassurance,however,thattheGovernmentofMongoliawillnotdisagreewiththemethodologyemployedbytheCompanyindeterminingthecalculatedsalespriceandrequirethattheroyaltypayablebecalculatedbasedontheMongoliangovernment'sreference,whichcouldhaveamaterialadverseeffectonthebusinessandoperationsoftheCompanyandmaynegativelyaffectthepriceandvolatilityoftheCommonShares.
ManagementbelievesthatitsinterpretationoftherelevantlegislationisappropriateandtheCompany'spositionsrelatedtotax,royaltyandotherlegislationwillbesustained.
Managementbelievesthattax,royaltyandlegalrisksareremoteatpresent.
Managementperformsregularre-assessmentoftaxriskanditspositionmaychangeinthefutureasaresultofthechangeinconditionsthatcannotbeanticipatedwithsufficientcertaintyatpresent.
TheCompanydoesnotinsureagainstallriskstowhichitmaybesubjectinplannedoperationsandinsurancecoveragecouldproveinadequatetosatisfypotentialclaims.
ForcertainaspectsoftheCompany'sbusinessoperations,insurancecoverage,inparticularbusinessinterruptioninsurance,isrestrictedorprohibitivelyexpensive.
TheCompanycurrentlyholdsitsprimaryinsurancepoliciesthroughCanadianinsuranceproviderstoinsureitsproperties.
TheCompanyhastakenoutinsuranceforrisksincludingcommercialgeneralliability,andaviationpremisesliability.
TheCompanymaintainsminingpropertyinsuranceforallofitsminingassetswhereverlocated,propertyinsuranceonitsofficepremisesandliabilityinsuranceforitsdirectorsandofficers.
However,noassurancecanbegiventhattheCompanywillelectorbeabletoobtainsuchinsurancecoverageateconomicallyreasonablepremiums(oratall),orthatanycoverageitobtainswillbeadequatetocovertheextentofanyclaimsbroughtagainstit.
Exploration,developmentandproductionoperationsonmineralpropertiesinvolvenumerousrisks,includingenvironmentalrisks,suchasunexpectedorunusualgeologicaloperatingconditions,rockburstsorslides,fires,floods,earthquakesorotherenvironmentaloccurrences,andpoliticalandsocialinstability.
TheCompanydoesnotmaintaininsuranceagainstanyenvironmentalorpoliticalrisks.
Shouldanyliabilitiesariseforwhichitisnotinsuredorinsurancecoverageisinadequatetocovertheentireliability,theycouldreduceoreliminatetheCompany'sactualorprospectiveprofitability,resultinincreasingcostsandadeclineinthevalueoftheCommonSharesandcouldmateriallyandadverselyaffecttheCompany'sbusinessandresultsofoperations.
LicencesandpermitsaresubjecttorenewalandvariousuncertaintiesandtheCompanymayonlyrenewitsexplorationlicencesalimitednumberoftimesforalimitedperiodoftime.
TheCompany'sactivitiesaresubjecttoextensivelicensingandpermittingrequirements.
TheCompanystrivestoobtainallrequiredlicensesandpermitsonatimelybasisandtocomplywithallsuchlicensesandpermitsatalltimes.
However,therecanbenoassurancethattheCompanywillobtainandmaintainallrequiredlicensesandpermitsorthatitwillnotfacedelaysinobtainingallrequiredlicensesandpermits,renewalsofexistinglicensesandpermits,additionallicensesandpermitsrequiredforexistingorfutureoperationsoractivities,oradditionallicensesandpermitsrequiredbynewlegislation.
TheCompanynotesthefollowingwithrespecttoitsabilitytoobtainandmaintainapplicablelicensesandpermits:InApril2012,MRAMannouncedthesuspensionofexplorationandminingactivityoncertainoftheCompany'slicencesincludingthelicencepertainingtotheOvootTolgoiMine.
AlthoughtheCompanydidnotreceiveofficialnotificationofasuspensionoflicencesandhadnoreasonto57believeitslicenceswerenotingoodstanding,thisannouncementcausedasignificantdisruptionintheCompany'sbusinesswhichultimatelyleadtothecurtailmentofoperationsattheOvootTolgoiMine.
AlthoughtheCompanyreceivedaletterfromMRAMonSeptember6,2012confirmingthatallMELsandmininglicenceswereingoodstandingthereisstillariskthatitslicencescouldberevoked.
CertainprovisionsoftheLawonLandofMongoliaenactedonJune7,2002,asamended(the"LandLawofMongolia")andthe2006MineralsLawprovidefortherevocationofpreviouslygrantedlanduserights,MELsormininglicencesonthegroundsthattheaffectedareaoflandhasbeendesignatedasSNT.
TheLandLawofMongoliagrantsthediscretiontodeclareanareaoflandforspecialneedspurposestolocalgoverningauthoritiesandidentifiesvariousbroadcategorieswhichqualifyasspecialneeds.
The2006MineralsLawrequiresthelocalgoverningauthoritythatdesignatesanareaoflandasaspecialneedsterritorytocompensatewithinoneyearthelicenceholderwhoserightsorlicencestatusareaffected.
Thefailuretopaythecompensationwithintheone-yearperiodwouldallowthelicenceholdertoresumeitsoperations.
IfanyoftheCompany'slanduserightsormininglicencesinMongoliaarerevokedbecausetheunderlyinglandisdeclaredasspecialneedsterritory,thereisnoassurancethattheCompanywillreceiveadequatecompensationanditsbusinessandresultsofoperationmightbeadverselyandmateriallyaffected.
OnFebruary13,2015,theLicenseAreaswereincludedintoaspecialprotectedarea(referredtoasaSpecialNeedsTerritoryor"SNT")newlysetupbytheUmnugobiAimag'sCRKhtoestablishastrictregimeontheprotectionofnaturalenvironmentandprohibitminingactivitiesintheterritoryoftheSNT.
OnJuly8,2015,SGSandtheChairmanoftheCRKh,inhiscapacityastherespondent'srepresentative,reachedanagreement(the"AmicableResolutionAgreement")toexcludetheLicenseAreasfromtheterritoryoftheSNTinfull,subjecttoconfirmationoftheAmicableResolutionAgreementbythesessionoftheCRKh.
ThepartiesformallysubmittedtheAmicableResolutionAgreementtotheappointedjudgeoftheAdministrativeCourtforherapprovalandrequestedadismissalofthecaseinaccordancewiththeLawofMongoliaonAdministrativeCourtProcedure.
OnJuly10,2015,thejudgeissuedherorderapprovingtheAmicableResolutionAgreementanddismissingthecase,whilereaffirmingtheobligationofCRKhtotakenecessaryactionsatitsnextsessiontoexcludetheLicenseAreasfromtheSNTandregisterthenewmapoftheSNTwiththerelevantauthorities.
MiningactivitiesattheSoumberpropertycannotproceeduntiltheLicenseAreasareremovedfromtheSNT.
OnJune29,2016,theMongolianParliamentandCRKhelectionwasheld.
Asaresult,theCompanyisawarethatadditionalactionmaybetakeninrespectoftheSNT;however,theCompanyhasnotyetreceivedanyindicationonthetimingofthenextsessionoftheCRKh.
TheCompanyisconfidentofapositiveoutcomeinitschallengeofthisnewCRKhresolution;however,thereisnoassurancethattheCompanywillreceiveadequatecompensationanditsbusinessandresultsofoperationmightbeadverselyandmateriallyaffected.
OnAugust26,2019,SGSreceivedtheNoticeLetterfromMRAMnotifyingthattheCompany'sthreemininglicenses(MV-016869,MV-020436andMV-020451)fortheSoumberDeposithavebeenterminatedbytheHeadofCadastreDivisionofMRAMeffectiveasofAugust21,2019.
SeeSection6ofthisAnnualInformationFormundertheheadingentitled"RegulatoryIssuesandContingencies–TerminationofSoumberDepositMiningLicenses"formoreinformation.
58Theinabilitytoobtainormaintainlicensesandpermitswithrespecttoitsminingoperations,ofanydelaywithrespecttotheobtainingoflicensesandpermits,couldhaveamaterialadverseimpactontheCompany'sfinancialperformance,cashflowandresultsofoperations.
ProlongedperiodsofsevereweatherconditionscouldmateriallyandadverselyaffecttheCompany'sbusinessandresultsofoperations.
SevereweatherconditionsmayrequiretheCompanytoevacuatepersonnelorcurtailoperationsandmaycausedamagestotheprojectsite,equipmentorfacilities,whichcouldresultinthetemporarysuspensionofoperationsorgenerallyreducetheCompany'sproductivity.
SevereweatherconditionshavenotcausedanydelayordamagestotheCompany'soperationstodate.
However,therecanbenoassurancethatsevereweatherwillnotoccur.
AnydamagestotheCompany'sprojectsordelaysinitsoperationscausedbyprolongedperiodsofsevereweathercouldmateriallyandadverselyaffectitsbusinessandresultsofoperations.
TheCompany'sbusinessandresultsofoperationsaresusceptibletothecyclicalnatureofcoalmarketsandarevulnerabletofluctuationsinpricesforcoal.
TheCompanyexpectstoderivesubstantiallyallofitsrevenueandcashflowfromthesaleofcoal.
Therefore,themarketpriceoftheCommonShares,theCompany'sabilitytoraiseadditionalfinancingandmaintainongoingoperationsanditsfinancialconditionandresultsofoperationswillbedirectlyrelatedtothedemandfor,andpriceof,coalandcoal-relatedproducts.
CoaldemandandpricearedeterminedbynumerousfactorsbeyondtheCompany'scontrol,includingtheinternationaldemandforsteelandsteelproducts,theavailabilityofcompetitivecoalsupplies,internationalexchangerates,politicalandeconomicconditionsinMongolia,Chinaandelsewhereintheworld,milderormoreseverethannormalweatherconditions,productioncostsinmajorcoalproducingregionsand,mostrecently,theimpactoftheCOVID-19pandemic.
TheChineseandinternationalcoalmarketsarecyclicalandhaveinthepastexhibitedsignificantfluctuationsinsupply,demandandpricesfromyeartoyear.
Therehasbeensignificantpricevolatilityonthecoalspotmarket.
AnoversupplyofcoalinChinaorageneraldownturnintheeconomiesofanysignificantmarketsfortheCompany'scoalandcoal-relatedproductscouldmateriallyandadverselyaffectitsbusinessandresultsofoperations.
Inaddition,theCompany'sdependenceonAsianmarketsmayresultininstabilityinitsoperationsduetopoliticalandeconomicfactorsinthoseAsianjurisdictionswhicharebeyondtheCompany'scontrol.
ThecombinedeffectsofanyorallofthesefactorsoncoalpricesorvolumesareimpossiblefortheCompanytopredict.
IfrealizedcoalpricesarebelowthefullcostofproductionofanyoftheCompany'sfutureminingoperationsandremainatsuchalevelforanysustainedperiod,theCompanycouldexperienceincreasedlossesandmaydecidetodiscontinueoperations,whichcouldrequiretheCompanytoincurclosurecostsandresultinfurtherreducedrevenues.
TheCompany'scoalminingactivitiesaresubjecttooperationalrisks,includingequipmentbreakdown.
TheCompany'scoalminingoperationsaresubjecttoanumberofoperationalrisks,someofwhicharebeyonditscontrol,whichcoulddelaytheproductionanddeliveryofcoal.
Theserisksincludeunexpectedmaintenanceortechnicalproblems,periodicinterruptionstoitsminingoperationsduetoinclementorhazardousweatherconditionsandnaturaldisasters,industrialaccidents,powerorfuelsupplyinterruptionsandcriticalequipmentfailure,includingmalfunctionandbreakdownofitsshovels,uponwhichitscoalminingoperationsareheavilyreliantandwhichwouldrequireconsiderabletimetoreplace.
Theserisksandhazardsmayresultinpersonalinjury,damageto,ordestructionof,propertiesorproductionfacilities,environmentaldamage,businessinterruptionanddamagetoitsbusinessreputation.
Inaddition,breakdownsofequipment,difficultiesordelaysinobtainingreplacementshovelsandotherequipment,59naturaldisasters,industrialaccidentsorothercausescouldtemporarilydisrupttheCompany'soperations,whichinturnmayalsomateriallyandadverselyaffectitsbusiness,prospects,financialconditionandresultsofoperations.
TheCompany'sfuturefinancialperformancedepends,inpart,onthesuccessfuloperationofthewashplantattheOvootTolgoiMine,whichissubjecttovariousrisksInthefourthquarterof2016,theCompanyinitiatedaplantochangetheexistingproductmixtohighervalueandhighermarginoutputsbywashingcertaingradesofcoalinordertoproducemorepremiumsemi-softcokingcoalandtoinitiatemoreprocessingofthelowergradesofcoalinordertoreducetheashcontentandimprovethesellingpriceandmarginsonitsthermalcoalproduct.
TheconstructionofthewashplantattheOvootTolgoiminewascompleted,andoperationsatthewashplantcommenced,inOctober2018.
BecausetheCompany'scurrentmineplanispredicated,inpart,onincorporatingacoalwashingandprocesssystems,theCompany'sfuturefinancialperformancewilldependonthesuccessfuloperationofthewashplantattheOvootTolgoimine.
Theoperatingperformanceofthewashplant,andtherelatedcostofoperationandmaintenance,maybeadverselyaffectedbyavarietyofriskfactors,including,butnotlimitedto,thefollowing:Maintaininganadequatewatersupplyandpowersupplytotheminesitetopermitthecontinuedoperationsofthewashplantasplanned;Achievingsatisfactoryyieldsfromwetwashingoperations;TheCompanysuccessfullyenhancingtheoperationalefficiencyandtheoutputthroughputofthewetwashplant;TheCompanysuccessfullynegotiatinganagreementwiththewashplantoperatorregardingtheoperationofthewashplant;Unexpectedmaintenanceandreplacementexpenditures;Shutdownsduetothebreakdownorfailureofthewashplant'sequipment;Labourdisputes;andCatastrophiceventssuchasfires,explosions,severestormsorsimilaroccurrenceaffectingthewashplantfacilityorthirdpartiesprovidingservicestothewashplant.
Anyoftherisksnotedabovecouldhaveamaterialadverseimpactontheoperationalperformanceorcostofoperationsofthewashplant,whichinturncouldhaveamaterialadverseeffectontheCompany'sfinancialperformance,cashflowandresultsofoperations.
TheunavailabilityorshortageofreliableandsufficientcoaltransportationcapacitythatmeetsMongolianauthorityregulationswillreducetheCompany'scoalrevenuebycausingittoreduceitsproductionvolumeorimpairingitsabilitytosupplycoaltoitscustomers.
TheCompanyanticipatesthatthemajorityofitscoalproductionfromtheprojectsinMongoliawillbeexportedtoChina.
Inadequatetransportationinfrastructure,orrestrictionsonordelaysincoalexportstoChina,islikelytoaffectthepricingtermsonwhichitcansellthecoaltocustomersandthewillingnessandabilityofsuchcustomerstopurchasecoalfromit.
CustomersarelikelytofactorinanydelaysandthecostsandavailabilityoftransportationindeterminingthepricetheyarepreparedtopaytopurchasetheCompany'scoal.
Therefore,itsminingoperationsareanticipatedtobehighlydependentonroadandrailservicesinMongoliaandChina.
60InMongolia,abottleneckinthetransportationofcoalfromtheOvootTolgoiMinetocustomersinChinamayariseiftheroadconnectingtheOvootTolgoiMinetotheShiveeKhurenBorderCrossingdoesnothavesufficientcapacitytosupporttheincreasedamountofcargotraffic,isaffectedbyexternalfactorssuchasdisruptionscausedbybadweatherorisclosedforrepair,suchaswasthecaseduring2012,whentheroadconnectingtheOvootTolgoiMinetotheShiveeKhurenBorderCrossingwasclosedforoverfourweeksforrepair.
OnMay8,2015,thecommercialoperationofthePavedHighwaycommencedandsubsequentlytheunpavedhighwaywhichwaspreviouslyusedtotransportcoalthroughtheShiveeKhurenBorderCrossingwasclosed.
ThePavedHighwayisexpectedtosignificantlyincreasethesafetyofcoaltransportation,reduceenvironmentalimpactsandimproveefficiencyandcapacityofcoaltransportation.
ThePavedHighwayisexpectedtohaveacarryingcapacityinexcessof20milliontonnesofcoalperyear.
TheopeninghoursoftheShiveeKhurenBorderCrossingalsoaffecttheCompany'sabilitytoexpeditethemovementofitscoalshipments.
TherecanbenoassurancethattherewouldbeanyothercosteffectivemeansoftransportingthecoaltotheCompany'sprimarymarketinChina.
Asaresult,theCompanymayexperiencedifficultyexpeditingthemovementofitscoalshipmentsand/orsignificantcostescalationforthetransportationservices,whichcouldaffectitsproductionandreduceitsprofitability.
Inaddition,theCompanyhasbeenexperiencingdelayswithrespecttothecustomclearanceprocessattheShiveeKhurenBorderCrossingsinceJuly2017.
Thesedelayshavecausedtypicalturnaroundtimesforcoalexportingtruckstodouble.
TheCompanycontinuestocloselymonitorthesituation.
TherecanbenoassurancesthatdelayswithrespecttothecustomclearanceprocessattheShiveeKhurenBorderCrossingwillimprove.
ContinueddelaysmayhaveamaterialadverseimpactontheCompany'sfinancialperformance,cashflowandresultsofoperations.
TheCompanywasinformedthateffectiveasofFebruary11,2020,theMongolianStateEmergencyCommissionclosedMongolia'ssouthernborderwithChinainordertopreventthespreadofCOVID-19.
Accordingly,theCompanysuspendedcoalexportstoChinabeginningasofFebruary11,2020asaresultoftheborderclosure.
OnMarch28,2020,theMongolian-Chineseborderwasre-openedforcoalexportonatrialbasis,withalimitimposedonthetotalvolumeofcoalthatwaspermittedtobeexportedduringthistrialperiod.
TheCompanyhasexperiencedacontinuousimprovementinthevolumeofcoalexportedtoChinasinceMarch28,2020.
DuringtheperiodbetweenApriltoOctober2020,anaggregateof1.
9milliontonnesofcoalwasexportedbytheCompanyfromMongoliatoChina,ascomparedtoanaggregateof2.
0milliontonnesofcoalduringthesameperiodinthe2019calendaryear.
TheborderclosurehashadanadverseimpactontheCompany'ssalesandcashflowsinthefirstandsecondquarterof2020.
Inordertomitigatethefinancialimpactoftheborderclosuresandpreserveitsworkingcapital,theCompanytemporarilyceasedmajorminingoperations(includingcoalmining),reducedproductiontoonlycoal-blendingactivitiesandplacedapproximatelyhalfofitsworkforceonfurloughfromFebruary2020.
SinceAugust2,2020,theCompanyhasresumeditsminingoperations,whichincludesmining,blendingandwashingofcoal.
AsatOctober31,2020,SGSemployed208employeesattheOvootTolgoiMinesite(December31,2019:383employees).
TheCompanyproduced1.
1milliontonnesfromAugusttoOctober2020,ascomparedto1.
3milliontonnesfromAugusttoOctober2019.
TherewereafewCOVID-19casesreportedinUlaanbaatar(beingthecapitalcityofMongolia)onNovember11,2020.
Asaresult,theMongolianlocalauthoritieshavetakencertainprecautionarystepstominimizefurthertransmissionsandannouncedalockdownofUlaanbaataruntilDecember2,2020.
AlthoughtheCompany'sminingoperationsandtheexportofcoalfromMongoliatoChinacontinuesasofthedatehereof,therecanbenoguaranteethattheCompanywillbeabletocontinueexportingcoaltoChina,orthebordercrossings61wouldnotbethesubjectofadditionalclosuresasaresultofCOVID-19inthefuture.
TheCompanywillcontinuetocloselymonitorthedevelopmentoftheCOVID-19pandemicandtheimpactithasoncoalexportstoChinaandwillreactpromptlytopreservetheworkingcapitaloftheCompany.
InChina,railandroadinfrastructureandcapacityhasinthepastbeenaffectedbyextremeweatherconditions,earthquakes,delayscausedbymajorrailaccidents,theCOVID-19pandemic,thediversionofrollingstockneededtodeliveremergencyfoodreliefandseasonalcongestionduringpublicholidays.
Therecanbenoassurancethattheseproblemswillnotrecurorthatnewproblemswillnotoccur.
Inanyofthesecircumstances,thecustomersmaynotbeabletotakedeliveryoftheCompany'scoal,whichmayleadtodelaysinpayment,orrefusaltopay,fortheCompany'scoaland,asaresult,theCompany'sbusinessandresultsofoperationscouldbemateriallyandadverselyaffected.
TheCompany'sprospectsdependonitsabilitytoattract,retainandtrainkeypersonnel.
Recruiting,retainingandtrainingqualifiedpersonneliscriticaltotheCompany'ssuccess.
Thenumberofpersonsskilledintheacquisition,explorationanddevelopmentofminingpropertiesislimitedandcompetitionwithintheminingindustryforsuchpersonsisintense,inparticular,Mongolianlawrequiresthatatleast90%ofaminingcompany'semployeesbeofMongoliannationality.
Thisprovisionofthelaw,coupledwiththelargenumberofactiveminingprojectsinMongolia,furtherlimitsthenumberofavailablepersonnelandincreasescompetitionforskilledpersonnel.
Thereputationandcapabilitytooperatecontinuouslyoverthelongertermarekeyfactorsinalsoattractingkeypersonneltoitsbusiness.
TheCompanyisreinforcingitscorevaluesofethicalbehaviorindealingwithallitsstakeholdersfromseniormanagementdowninordertoensuretheCompanyattractstherightpeopletoitsbusiness.
AstheCompany'sbusinessactivitygrows,itwillrequireadditionalkeyfinancial,administrative,mining,marketingandpublicrelationspersonnelaswellasadditionaloperationsstaff.
IftheCompanyisnotsuccessfulinattractingsuchkeypersonnel,orretainingexistingkeypersonnel,itsbusinessandresultsofoperationscouldbemateriallyandadverselyaffected.
Inaddition,theCompany'sabilitytotrainoperatingandmaintenancepersonnelisakeyfactorforthesuccessofitsbusinessactivities.
IftheCompanyisnotsuccessfulinrecruiting,trainingandretainingsuchpersonnel,itsbusinessandresultsofoperationscouldbemateriallyandadverselyaffected.
CompetitioninthecoalindustrymayhinderdevelopmentplansandadverselyaffecttheCompany'scoalsalesifitisnotabletocompeteeffectively.
ContinuedgrowthinminingandmineralexplorationactivitiesinMongoliacouldcreateanincreasingdemandforminingequipmentandrelatedservices.
Shortagesof,orhighercostsfor,equipmentandservicescouldrestricttheCompany'sabilitytocarryouttheexploration,developmentandproductionactivities,increaseitscostsofoperationsandadverselyaffectitsfutureplans.
TheCompanyintendstosellamajorityofthecoalitproducesinChina.
CompetitionintheChinesecoalindustryisbasedonmanyfactors,including,amongothers,price,productioncapacity,coalqualityandcharacteristics,transportationcapabilityandcosts,blendingcapabilityandbrandname.
TheCompany'scoalbusinesswillmostlikelycompeteinChinawithotherlargeChineseandinternationalcoalminingcompanies.
Duetolocation,someoftheCompany'sChinesecompetitorsmayhavelowertransportationcoststhantheCompanydoes.
TheChinesecoalmarketishighlyfragmentedandtheCompanyfacespricecompetitionfromsomesmalllocalcoalproducersthatproducecoalforsignificantlylowercoststhantheCompanyduetovariousfactors,includingtheirlowerexpenditureonsafetyandregulatorycompliance.
SomeoftheCompany'sinternationalcompetitors,includingtheMongoliancoalproducers,mayhavegreatercoalproductioncapacityaswellasgreaterfinancial,marketing,distributionandotherresourcesthantheCompanydoes,andmaybenefitfrommoreestablishedbrandnamesininternationalmarkets.
The62Company'sfuturesuccesswilldependonitsabilitytorespondinaneffectiveandtimelymannertocompetitivepressure.
ThereareanumberofrisksassociatedwiththeCompany'soperationplan,dependenceonalimitednumberofcustomersandinabilitytoattractadditionalcustomers.
ThecurrentoperationplancontemplatessignificantoperationalfundingintheCompany'sminingoperationsaswellasequipmentmaintenanceinordertoachievetheCompany'srevenueandcashflowtargets.
SuchexpendituresandotherworkingcapitalrequirementsmayrequiretheCompanytoseekadditionalfinancing.
ThereisnoguaranteethattheCompanywillbeabletosecureothersourcesoffinancing.
IftheCompanyisunabletocontinueasagoingconcern,itmaybeforcedtoseekreliefunderapplicablebankruptcyandinsolvencylegislation.
TheCompanyhasbeensellingitscoalproductssince2008.
TheCompanyhad13activecustomerswiththelargestcustomerrepresentingapproximately42%,thesecondlargestcustomerrepresentingapproximately36%,thethirdlargestcustomerrepresentingapproximately9%,thefourthlargestcustomerrepresentingapproximately6%andtheremainingcustomersaccountingfor7%oftheCompany'stotalsalesfortheyearendedDecember31,2019.
Inordertomitigatethisrisk,theCompanyisattemptingtomodifyitssalesstrategyinordertoexpanditsexistingcustomerbase.
Withcertainofitscustomers,theCompanyhasacceptedpaymentforcoaldeliveriesintheformofbankinstruments,inlieuofcash.
Therecanbenoassurance,however,thattheCompanywillbeabletosatisfyorcomplywiththefundingconditionsofsuchinstrumentsfollowingcompletionofthecoaldeliveryorthebankthatissuestheinstrumentwillbecapableofpayingalloranyportionoftheproceedstotheCompany,whichcouldhaveamaterialadverseeffectonthebusinessandoperationsoftheCompanyandmaynegativelyaffectthepriceandvolatilityoftheCommonShares.
TheCompanystillexpectstosellthemajorityofthecoalfromitsMongolianminingoperationstocustomersinChina.
ChineselawrequiresspecificauthorizationtobeobtainedbyentitiesresponsiblefortheimportofcoalintoChina.
IntheeventthattheCompany'scustomers,ortheagentsofsuchcustomerswhoareresponsibleforimportingcoalintoChinaontheirbehalf,failtoobtainandretainthenecessaryauthorizations,theirabilitytoimportcoalintoChinamaybeaffected,whichcouldmateriallyandadverselyaffecttheCompany'sbusinessandresultsofoperations.
TherearesignificantuncertaintiesastotheoutcomesoftheaboveeventsorconditionsthatmaycastsignificantdoubtontheCompany'sabilitytocontinueasagoingconcernand,therefore,theCompanymaybeunabletorealizeitsassetsanddischargeitsliabilitiesinthenormalcourseofbusiness.
Shouldtheuseofthegoingconcernbasisinpreparationoftheconsolidatedfinancialstatementsbedeterminedtobenotappropriate,adjustmentswouldhavetobemadetowritedownthecarryingamountsoftheCompany'sassetstotheirrealizablevalues,toprovideforanyfurtherliabilitieswhichmightariseandtoreclassifynon-currentassetsandnon-currentliabilitiesascurrentassetsandcurrentliabilities,respectively.
Theeffectsoftheseadjustmentshavenotbeenreflectedintheconsolidatedfinancialstatements.
FailuretomaintainaneffectivesystemofinternalcontrolsmayresultinmaterialmisstatementsoftheCompany'sfinancialstatementsorcausetheCompanytofailtomeetitsreportingobligationsorfailtopreventfraud.
EffectiveinternalcontrolsarenecessaryfortheCompanytoprovidereliablefinancialreportsandpreventfraud.
IftheCompanyfailstomaintainaneffectivesystemofinternalcontrols,theCompanymaynotbeabletoreportitsfinancialresultsaccuratelyorpreventfraud;andinthatcase,ShareholdersandinvestorscouldloseconfidenceintheCompany'sfinancialreporting,whichwouldharmtheCompany'sbusinessandcouldnegativelyimpactthepriceoftheCommonShares.
63FollowingtheimplementationoftheRemedialActionsandPreventativeMeasures,theChiefExecutiveOfficerandChiefFinancialOfficeroftheCompanyhaveeachconcludedthat,asofDecember31,2019,theCompany'sdisclosurecontrolsandprocedures,asdefinedinNI52-109,areeffectivetoachievethepurposeforwhichtheyhavebeendesigned.
IftheCompanysuffersanyfuturematerialweaknessesinitsinternalcontrolsandproceduresorfailstomaintaintheadequacyofitsinternalcontrolsandprocedures,theCompanycouldbethesubjectofregulatoryscrutiny,penaltiesorlitigation,allofwhichwouldharmtheCompany'sbusinessandcouldnegativelyimpactthepriceoftheCommonShares.
TheCompanycannotprovideassurancesthattheCompanywillnotexperiencepotentialmaterialweaknessesinitsinternalcontrols.
EveniftheCompanyconcludesthatitsinternalcontrolsoverfinancialreportingprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationofconsolidatedfinancialstatementsforexternalpurposesinaccordancewithIFRS,becauseoftheirinherentlimitations,internalcontroloverfinancialreportingmaynotpreventordetectfraudormisstatements.
Theseinherentlimitationsincludetherealitiesthatjudgmentsindecision-makingcanbefaulty,andthatbreakdownscanoccurbecauseofsimpleerrorormistake.
Additionally,controlscanbecircumventedbyindividualacts,bycollusionoftwoormoreindividualsorbyunauthorizedoverrideofcontrols.
Failuretoimplementrequiredneworimprovedcontrols,ordifficultiesencounteredintheirimplementation,couldharmtheCompany'sresultsofoperationsorcausetheCompanytofailtomeetitsfuturereportingobligations.
TheCompany'soperationsareexposedtorisksinrelationtoenvironmentalprotectionandrehabilitation.
TheoperationsofcoalminesinvolvesubstantialenvironmentalrisksandhazardsandtheCompany'soperationsaresubjecttolawsandregulationsrelatingtotheenvironment,healthandsafetyandotherregulatorymattersinMongoliaandChina.
TheriskofenvironmentalliabilityisinherentintheoperationoftheCompany'sbusiness.
EnvironmentalhazardsmayoccurinconnectionwiththeCompany'soperationsasaresultofhumannegligence,forcemajeure,orotherwise.
ClaimsmaybeassertedagainsttheCompanyarisingoutofitsoperationsinthenormalcourseofbusiness,includingclaimsrelatingtolanduse,safety,healthandenvironmentalmatters.
TheCompanyisnotinsuredagainstenvironmentalliabilitiesandtherecanbenoassurancethatenvironmentalliabilitieswouldnotmateriallyandadverselyaffectitsbusinessandresultsofoperations.
Inaddition,theCompanyissubjecttoreclamationrequirements.
TheCompany'sminewilleventuallyclose.
Thekeytasksinrelationtotheclosureoftheminesinvolves(i)long-termmanagementofpermanentengineeredstructures(forexample,spillways,roads,wastedumps);(ii)achievementofenvironmentalclosurestandards;(iii)orderlyretrenchmentofemployeesandcontractors;and(iv)relinquishmentofthesitewithassociatedpermanentstructuresandcommunitydevelopmentinfrastructureandprogramstonewowners.
ThesuccessfulcompletionofthesetasksisdependentontheCompany'sabilitytosuccessfullyimplementnegotiatedagreementswiththerelevantgovernment,communityandemployees.
Theconsequencesofadifficultclosurerangefromincreasedclosurecostsandhandoverdelaystoongoingenvironmentalimpactsandcorporatereputationdamageifdesiredoutcomescannotbeachieved,whichcouldmateriallyandadverselyaffecttheCompany'sbusinessandresultsofoperations.
TheCompanycurrentlydoesnotownacoalstoragefacilityattheCekeborder.
Asaresultofpotentialstricterrequirementsforcoalstoragefacilitieswhichmaybeadoptedbythelocalgovernmentinthefuture,theCompanymaynotbeabletosecureenoughstoragespaceattheCekeborder,whichcouldhaveamaterialadverseeffectonthebusinessandoperationsoftheCompanyandmaynegativelyaffecttheprice64andvolatilityoftheCommonShares.
Aspartofitsfocusoncapitalpreservation,theCompanyhasdecidedtosuspendindefinitelyallfurtherdevelopmentactivitiesrelatingtothepreviouslyannouncedCekeLogisticsParkProjectuntilfurthernotice.
TheCompanymaybeatriskofbecomingsubjecttolitigationproceedingsinitiatedbyitsinvestmentpartnerintheCekeLogisticsParkProjectforfailingtocomplywiththeunderlyingagreementsgoverningprojectdevelopment.
Duetotheinherentuncertaintyofthelitigationprocess,theresolutionofanyparticularlegalproceedingtowhichtheCompanymaybecomesubjectcouldhaveamaterialadverseimpactonitsbusiness,operations,resultsofoperations,financialconditionandfutureprospects.
Environmentallegislationisevolvinginamannerwhichwillrequirestricterstandardsandenforcement,increasedfinesandpenaltiesfornon-compliance,morestringentenvironmentalassessmentsofproposedprojectsandaheighteneddegreeofresponsibilityforcompaniesandtheirofficers,directorsandemployees.
TheCompanymayexperienceincreasedcostsofproductionarisingfromcompliancewithenvironmentallawsandregulations.
ShouldtheCompanyfailtocomplywithcurrentorfutureenvironmentallawsandregulations,theCompanymayberequiredtopaypenaltiesortakecorrectiveactions,anyofwhichmayhaveamaterialadverseeffectonitsresultsofoperationsandfinancialcondition.
Foreigncurrencyfluctuationscouldaffectexpensesandanyfutureearnings.
TheCompanyisexposedtoforeignexchangefluctuationswithrespecttotheMNT,ChineseRenminbi,HongKong,andCanadiandollars.
TheCompany'sfinancialresultsarereportedinUnitedStatesdollars.
ThesalariesforlocallaborersinMongoliaarepaidinlocalcurrency.
SalesofcoalintoChinahavebeenandmaycontinuetobesettledinUnitedStatesdollarsandRenminbi.
TheCompanyhasasubsidiaryinHongKongwheresomeexpensesareincurredinHongKongdollars.
SincetheCompany'sheadquartersisinCanada,aminorportionofitsexpensesareinCanadiandollarsandtheCompanyholdsaportionofitscashinCanadiandollars.
Asaresult,itsfinancialpositionandresultsareimpactedbytheexchangeratefluctuationsbetweentheaforementionedcurrenciesandtheUnitedStatesdollar.
InformationinthisAnnualInformationFormregardingfutureplansreflectscurrentintentionsandissubjecttochange.
WhethertheCompanyultimatelyimplementsthebusinessstrategiesdescribedinthisAnnualInformationFormwilldependonanumberoffactorsincluding,butnotlimitedto:thepoliticalsituationinMongoliaandChina;theavailabilityandcostofcapital;currentandprojectedcoalprices;coalmarkets;costsandavailabilityofdrillingservices,costsandavailabilityofheavyequipment,suppliesandpersonnel;successorfailureofactivitiesinsimilarareastothoseinwhichtheCompany'sprojectsaresituated;andchangesinestimatesofprojectcompletioncosts.
TheCompanywillcontinuetogatherinformationaboutitsprojects,anditispossiblethatadditionalinformationwillcauseittoalteritsscheduleordeterminethataprojectshouldnotbepursuedatall.
Accordingly,theCompany'splansandobjectivesmaychangefromthosedescribedinthisAnnualInformationForm.
DESCRIPTIONOFMATERIALPROPERTYQualifiedPersonsDisclosureofascientificortechnicalnatureinthisAnnualInformationForminrespectoftheCompany'smaterialmineralprojectwaspreparedbyorunderthesupervisionoftheindividualssetoutinthetablebelow,eachofwhomisa"QualifiedPerson"asthattermisdefinedinNI43-101:65PropertyQualifiedPersonsFieldofExpertiseRelationshiptoCompanyOvootTolgoiDr.
WeiliangWangResourcesIndependentConsultantOvootTolgoiVincentLiReservesIndependentConsultantDisclosureofascientificortechnicalnaturerelatingtotheOvootTolgoiMinecontainedinthisAnnualInformationFormisderivedfromtheOvootTolgoiTechnicalReportpreparedinaccordancewithNI43-101fortheOvootTolgoiMinedatedMay15,2017,preparedbyDr.
WeiliangWang,Mr.
VincentLiandMr.
LarryLiofDMCL.
AcopyoftheOvootTolgoiTechnicalReportisavailableundertheCompany'sprofileonSEDARatwww.
sedar.
com.
OvootTolgoiDepositPropertyDescriptionandLocationTheOvootTolgoiDepositislocatedinthesouthwestcorneroftheUmnugobiAimag(SouthGobiProvince)ofMongoliawithintheadministrativeunitofGurvantesSoum,320kmsouthwestoftheprovincialcapitalofDalanzadgadand950kmsouthofthenation'scapitalUlaanbaatar.
TheOvootTolgoiDepositisapproximately45kilometresnorthoftheMongolia-ChinaborderandtheCekebordercrossing.
Ceke,locatedinthePeople'sRepublicofChina,isthemaindistributioncenterfortheOvootTolgoicoal.
TheCompanyholdsitsinterestintheOvootTolgoiDepositthroughitswhollyownedsubsidiary,SGS,theoperatingentityundertheCompany,whichisincorporatedinMongoliaandholdsthemininglicencesoftheOvootTolgoiDeposit.
ThepropertyislocatedadjacenttotheexistingMAK-QinghuaMines(includingtheNariinSukhaitMine)operations.
TheOvootTolgoiDepositresourcescomprisesoftwodifferentresourceareas,referredtoastheSunriseandSunsetFieldsrespectively.
BothSunriseandSunsetFieldsarewithintheOvootTolgoimininglicence,whichcoversatotalof9,282ha,andshallexpireby2037,withtwopossible20-yearextensions.
ThewastedumpsfortheSunriseandSunsetFieldsarelocatedtothesouthofeitherfieldwithintheOvootTolgoiMiningLicencearea.
ThemapbelowsetsouttheboundaryofthemininglicenceandlocationofkeyinfrastructuresattheOvootTolgoiDeposit.
TheCompanyiscurrentlyreviewingallaspectsoftheOvootTolgoiDeposit'sminewithaviewtoachievingoptimizationofminingstrategy.
Thisreviewandoptimizationmayaffectthepitsizesshownonthemap.
66TheCompany'sexplorationactivities,miningoperationandlanduserightsfortheOvootTolgoiDeposit,aswellastheCompany'sdevelopmentprojectsaregovernedbythe2006MineralsLawandtheLandLawofMongolia.
TheuseofwaterisgovernedbytheWaterLawofMongoliaandthe2006MineralsLaw.
Theselawsallowlicenceholderstousethelandandwaterinconnectionwithexplorationandminingoperations,subjecttothediscretionaryauthorityofMongoliannational,provincialandregionalgovernmentalauthoritiesasgrantedundertheMongolianlaw.
TheGovernmentofMongoliagrantsMELsforaperiodofthreeyearswiththerighttoextendtheperiodthreetimesforthreeadditionalyearseach.
MELholdersaresubjecttovariousenvironmentalprotectionobligationsincludingpreparationandacceptancebytheMongoliangovernmentofdetailedEIAandpreparationofanEMP,whichmustbeapprovedbytheSoumGovernor,aswellastheannualpostingofabondequalto50%ofexpectedreclamationcosts.
MELholdersarealsorequiredtopayalandrentfeeandcommittoaminimumexpenditureperhectareoflicenceareaassetoutinthetablebelow.
67MongolianMineralExplorationLicenceFeesYearLicenceFee(MNT/ha)MinimumExpenditure(US$/ha)11450.
0022900.
5034350.
504-61,4501.
007-92,1751.
509-127,25010.
00Followingsuccessfulexploration,theholderofaMELcanapplyforamininglicenceoveranyportionoftheMEL.
Amininglicenceisgrantedforaperiodof30years,withtherighttoextendtheperiodfortwoadditional20-yearperiods.
Themininglicencecoversbothmineralandsurfaceleaserights.
TheprimaryrequirementstomaintainmininglicencesinMongoliaare:(i)payannualrenewalfeeofUS$5.
00/ha;(ii)submitandhaveapprovedanannualmineplan;(iii)reportminingquantitiesandpayappropriateroyalties;(iv)submitandhaveapprovedannualEPPforminingactivities;and(v)submitanannualreportfortheyearmostrecentlycompletedonminingactivitiesbyFebruary15ofthefollowingyear.
InSeptember2007portionsofexistingMELscoveringtheOvootTolgoiDepositareaheldbytheCompanywereconvertedtolicenceno.
12726Acoveringanareaofapproximately9,282haencompassingtheareasoftheSunsetPitandtheSunrisePitforthedevelopmentofanopen-pitcoalmine(the"OvootTolgoiMiningLicence").
TheOvootTolgoiMiningLicenceisheldbySGSandexpiresin2037.
RungePincockMinarcohasinspectedacopyoftheOvootTolgoiMiningLicence.
TheareacoveredbytheOvootTolgoiMiningLicenceisadjacenttoconcessionsheldbyMAKwherecoalisbeingproducedfromtheNariinSukhaitMine.
TheSunriseandSunsetcoaldepositsextendacrosstheOvootTolgoiMiningLicenceboundaryintotheMAK'sconcessions.
ResourceandreserveestimatespreviouslydisclosedbytheCompanyforSunriseandSunsetarelimitedtotheareacoveredbytheOvootTolgoiMiningLicence,eventhoughtheopenpitsextendacrosstheleaseboundariesinordertoeffectivelyaccessalleconomiccoalwithinthelicencearea.
SGSandMAKhaveenteredacooperationagreementonFebruary20,2014(amendedinMay2015)whichallowsSGStostripofftheoverburdeninMAK'spropertyatSGS'sowncost.
MAKwillremovethecoalwithinitsleaseareatoallowdevelopmentoftheSGS'spits.
ThecoalwithinthepitsandwithintheMAK'sconcessionshasbeentreatedasgeneratingnorevenueandhavingnoassociatedcost.
SGSandMAKhavealsosignedanothercooperationagreementrelatedtothedumpingofoverburdenremovedbyMAKfromtheMAK'sconcessiononanareaoftheSGS'sconcessionsthathasbeenshowntocontainnopotentiallyeconomiccoalresources.
WastedisposalareashavebeenidentifiedandapprovedintheOvootTolgoiMiningLicence.
Accessibility,Climate,LocalResources,InfrastructureandPhysiographyTheareaaroundtheOvootTolgoiDepositcurrentlysupportsatraditionalsubsistenceeconomyfocusedonraisingsheep,goats,andcamels.
TheUmnugobiAimagisthemostsparselypopulatedprovincein68Mongoliawithadensityof0.
8people/km2.
Therearetwoprimarysourcesofmininglabour–Ulaanbaatarandthelocalsoum.
Thesurfaceexpressionofthedepositrangesfromflat,gravel-covereddesertplainstomoderatelyhillyterrain.
Surfaceelevationrangesfrom1,515to1,555mabovesealevel.
Theregionexperiencesacontinentaldesertclimate.
Temperaturetypicallyrangesfrom0°to-30°Cinthewinter,increasingto30°to35°Cinthesummermonths.
Highwindsoccurfrequently,particularlythroughoutthespring.
Averageannualrainfallisapproximately130mmwithmostprecipitationoccurringduringthesummermonths.
Vegetationissparse,consistingprimarilyofsmallshrubsandgrasses.
ThelocalweatherisacceptableforexplorationactivitiesfromAprilthroughOctober.
Whileexplorationactivitiesarenotrecommendedduringtheharshwinters,theclimateallowsyear-roundminingoperations.
TheOvootTolgoiDeposithasanonsiteairportthatisaccessedviacharteredaircraftfromUlaanbaatar,providingtransportforthecommuterosterworkforce.
AregularairserviceisalsoavailablefromUlaanbaatartoDalanzadgad,theadministrativecentreofUmnugobiAimag.
TravelfromDalanzadgadtothesitetakesapproximatelysevenhoursoverunpavedroads.
AllpartsoftheOvootTolgoiDepositcanbereachedwithfour-wheel-drivevehicles.
AraillineconnectstheOvootTolgoiareawiththeindustrialcentresinthePRC.
Therailroadterminusisapproximately40kmsouthoftheOvootTolgoiDeposit,attheShiveeKhurenBorderCrossing.
CoaltruckstraveloverlandfrombothOvootTolgoiandtheneighbouringMAK-QinghuaMinetotherailroadterminuslocatedatCeke.
ElectricalpowerisavailablefromapowerlinedistributingpowerfromCeketovariouspointswithintheOvootTolgoiDeposit.
Additionalelectricpoweriscurrentlysuppliedbyon-sitedieselgenerators,asrequired.
NosurfacewateriscurrentlyavailableintheimmediateareaoftheOvootTolgoiDeposit.
Waterforthecampandshopcomplexesissuppliedfromwatersupplywellsdrilledduringthehydrologicalinvestigations.
Therecentlycompletedpermanentaccommodationcamphasawatertreatmentfacility.
Waterfordustsuppressionisavailablefromthepitdewatering.
HistoryThefirstgeologicalinvestigationsatNariinSukhaittookplacein1951and1952andwereledbyV.
S.
Volkhonina.
Resultsincludedgeologicalmappingatascaleof1:500,000.
CoalwasfirstidentifiedintheNariinSukhaitareain1971byaMongoliangeologicalsurveyexpeditionledbyD.
Dashtseren.
AstudyoftheNariinSukhaitcoaldepositwasundertakenbyExplorationUnitNo.
15oftheUlaanbaatarGeologicalResearchGroupin1991thatdelineatedaninferredresourceontheproperty.
Readersareremindedthatinferredmineralresourcesareconsideredtoospeculativegeologicallytohavetheeconomicconsiderationsappliedtothemthatwouldenablethemtobecategorizedasmineralreserves.
Sincethisestimatewasreported,substantialexplorationhasbeenundertakenassetoutundertheheading"DescriptionofMaterialProperty–OvootTolgoiDeposit-Exploration"inthisAnnualInformationForm.
TheCompanyacquireditsinterestintheOvootTolgoiDepositfromTurquoiseHillinMay2007.
GeologicalSettingThecoal-bearingsedimentarysequencesatOvootTolgoiareLatePermianinageandareinterpretedtohavebeendepositedalongthemarginsofatectonicallyactivecontinentalbasin.
Theregionisinterpretedtohavesubsequentlyundergonebasinandrangestyleextensionaltectonicsfollowedbyaperiodofcompressionalfoldingandfaulting.
ThemostprominentfeaturerelatingtothecoaldepositatOvootTolgoi69isthearcuate,east-west-trendingNariinSukhaitfault.
Thecoal-bearingsedimentarysequencesareexposedprimarilyinawindowadjacenttotheNariinSukhaitfault.
RegionalGeologyTheSouthGobiregionofMongoliaisconsideredtoreflectacomplexgeologicalhistoryofcontinentalaccretionandBasin-and-Rangestylecrustalextension,followedbyregional-scalecompressionalfoldingandfaulting.
Theregionisthereforedominatedbyelongate,east-westtrendingmountainrangesandinterveningbasins.
TheinterveningbasinscontainLateCretaceoustoPermianagesediments,overlainbyrelativelythinQuaternaryunconsolidatedsediments.
Themountainrangesseparatingthesebasinscomprisemostlycrystallinebasementrocks,dissectedbyintermediatetohighanglefaultsthatshowevidenceofbothcompressionalandextensionalmovement.
ThemostprominentstructurerelatingtotheOvootTolgoicoaldepositisthearcuate,east-west-trending,moderatelydippingNariinSukhaitfaultwheretheLatePermiancoal-bearingsectionisexposedinawindowadjacenttoitintheMAKMineWestPit.
CoalOccurrencesThemostprominentstructuralfeaturerelatingtothecoaldepositatOvootTolgoiisthearcuate,east-westtrendingNariinSukhaitfault.
Thecoal-bearingsedimentarysequences,interpretedtobeofLatePermian,areexposedprimarilyinawindowadjacenttotheNariinSukhaitfault.
TheonlyplacewherethefaultisexposedisintheNariinSukhaitMine,whereitappearsasanintermediateanglestructure(40-50degrees)intheirwestpit.
TheCompany'sconcessionsatOvootTolgoicontaintwodistinctresourceareaswithintheLatePermiansequences,whicharetheSunriseandtheSunsetFields.
ExplorationactivitiesundertakenbySGSwithintheOvootTolgoiDepositareahavefocusedonthethickcoalformingtheNo.
5Seam,butadditionallyhavedelineatedfurthercoalresourcesinpackagesof"upperseams"locatedaboveandbelowthishorizon.
Assuch,thecurrentgeologicalmodelinghasorganizedthecoalseamswithintheOvootTolgoiDepositintoanumberofSeamGroupsincludingtheSeamNos.
4,5L,5U,6,7,8,9,10and11.
SeamNos.
1through3,describedintheearlyworkatNariinSukhaithavenotbeenidentifiedintheOvootTolgoiDeposit.
InterburdenbothwithinandbetweencoalseamsishighlyvariableatOvootTolgoi.
Interburdenbetweenthecoalseamsisgenerallydominatedbysandstonesandconglomerates,whilethepartingswithinthecoalsaremostcommonlymudstonesandcarbonaceousmudstones.
StructuralGeologyTheSunriseFieldislocatedonSGScontrolledlandsurroundingthesoutheastcorneroftheMAKmininglicence.
TheSeamNo.
5iscurrentlybeingminedbyMAKandMAK-Qinghuaandisinthisareaalongtheaxisofaregional-scaleantiform.
ThisstructuretrendstothesouthwestfromtheMAKEastPitandformsthebasisfortheCompany'sresourcesattheSunriseField.
Thecoal-bearingsedimentarysequencesaresoutheastdippingwithanaveragedipofaround35degrees.
MinorSeamNos.
6and7occurabovetheSeamNo.
5andSeamNo.
4occursbeneaththeSeamNo.
5.
CoalresourcesestimatedfortheSunriseFieldarelargelycontributedbytheSeamNo.
5.
TheSunsetFieldislocatedonthesouthwestcorneroftheMAK'sconcessions.
Coalresourcesarefoundalongasoutheasterly-dippingmonocline,whichcouldrepresentapreservedlimbofasouthwesterly-plungingantiformextendinginanorth-east/south-westdirectionfromtheexposureinthenorth-westoftheSunsetPit,throughtotheMAKpit.
ThemajorityofresourcesarefoundintheSeamNo.
5Land5Uwithin70asoutheastdippingcoal-bearingsequence.
Additionally,aconsiderableproportionofresourcesoccurintheuppercoalsformingSeamNos.
8,9,and10.
MineralizationThecoal-bearingformationsoccurprimarilywithinazoneofupperPermian-agedsedimentsexposedinthehangingwalloftheNariinSukhaitFault.
EarlyworkadoptedtheseamnomenclaturepresentedbyDashkhoral(ageologist)in1992,therebycallingtheverythickcoalinthemiddleofthesequencetheSeamNo.
5,andnamingtheupperseamsinascendingorder.
Asexplorationworkprogressed,numerousadditionalseamsandsplitswerediscoveredwithintheoverallpackagesofcoalpreviouslydescribed.
Thefollowingtablespresentthecoalseamcharacteristicsonaseam-by-seambasis:OvootTolgoiDepositCoalSeamCharacteristicsSunsetFieldCoalSeamThicknessSeamGroupAverageCumulativeCoalApparentThickness(m)MaximumCumulativeCoalApparentThickness(m)110.
062.
971011.
534.
2925.
356.
886.
529.
95U45.
1204.
35L36.
7140.
4SunriseFieldCoalSeamThicknessSeamGroupAverageCumulativeCoalApparentThickness(m)MaximumCumulativeCoalApparentThickness(m)78.
120.
3619.
857.
35U29.
3100.
05L54.
3144.
346.
4524.
92CoalQualityRawcoalandcleancoalqualityoftheOvootTolgoiCoalMinehasbeenanalysedthroughcore,soldcoalandwashabilitysamples.
CoalqualityhasbeenshowntobesimilarinboththeSunriseandSunsetPits.
Asummaryofcoalqualitydataforeachpitorganizedbythecoalseamgroupandconfinedtothein-pitresources(depthDMCL.
Drillholecollarswereverifiedagainstthedigitaltopographyoftheresourcemodel.
Additionalsamplingofanumberofcoalseamsandassaywerealsocarriedoutin2018.
Nomaterialconcernswereencountered.
SecurityofSamplesSecuritymeasurestospecificallydetectanytamperingwithsampleswhileintransitwerenotemployed.
Coalisabulkcommodityand,consequently,notsusceptibletomodificationor"salting"asthiswouldrequirereplacementormodificationofaconsiderableproportionofthesamplecollectedforanalysis,whichisdifficulttoachieveonfullandsolidcore.
ResourceEstimateTheterm"resource"isutilizedtoquantifycoalcontainedinseamsoccurringwithinspecifiedlimitsofthicknessanddepthfromsurfaceconsideredbytheQPtohavereasonableprospectsforeventualeconomicextraction.
Foracompletedescriptionofaresource,referto"mineralresource"undertheheading"Definitionsandotherinformation–GlossaryofGeologicalandMiningTerms"inthisAnnualInformationForm.
Theresourceestimatespresentedareonanin-situbasis,i.
e.
,withoutadjustmentformininglossesorrecovery.
Minimumseamthicknessisconfinedtobe0.
6mandmaximumpartingthicknessisconfinedtobe0.
3m.
Coalintervalsnotmeetingthesecriteriaarenotincludedinthereportedresources.
InaccordancewithNI43-101,DMCLhasmadereferencetotheGSCPaper88-21duringtheclassification,estimationandreportingofcoalresourcesfortheOvootTolgoiDeposit.
TheexerciseofresourceclassificationisinitiallymadebasedontheGeology-TypeofthecoaldepositsasdefinedintheGSCPaper7688-21.
Accordingtothelevelofconfidenceofcoalresourceexistenceanddatadensity,theresourcesarefurtherclassifiedintothreecategoriesrespectively:Measured,IndicatedandInferred,inconformitywiththerequirementsofNI43-101.
TheQPconsideredtheseduringtheclassificationoftheresourcesattheOvootTolgoiDeposit.
Asaconsequenceofmaterialchangesinsomekeyassumptionsunderlyingtheanalysisofitsresourcessubsequenttothelastdetailedreviewoftheprojectin2016,particularlythoserelatingtoongoingchangesincoalmarketconditionsinChina,geologicalanalysis,optimizedminingstrategyandprocessingstrategy,theCompanyhasupdateditsresourceandreserveestimatefortheOvootTolgoiDeposit.
ResourceshavebeenestimatedfortheOvootTolgoiDepositasofDecember31,2016,includingMeasuredResourcesof201.
8Mt,IndicatedResourcesof100.
31MtandInferredResourcesof89.
01Mt.
ResourcecategorizationwascompletedonaSeamGroupbasis.
Theresourcecategorizationalsotookintoaccountthecontinuityandconfidenceindrillholeintersectionsalongeachsection.
TheupdatedestimateofresourcesattheOvootTolgoiDepositissummarizedinthefollowingtable.
OvootTolgoiDeposit-SurfaceResourceEstimateCoalfieldSeamGroupResource(Mt)MeasuredIndicatedInferredSunrisePit(depthDMCLfortheOvootTolgoiDepositasofDecember31,2016usingtheMinexTMmodelsprovidedbytheCompany.
Thekeyassumptionsusedfortheresourceestimationare:Minimumcoalthickness=0.
6m;Maximumcoalparting=0.
3m;Surfaceresourceswereconstrainedtoadepthof300m,thesameasthepitdesignusedinthe2012TechnicalReport;Volumeswereconvertedtotonnagesusinglaboratoryrelativedensityanalyticalresultsconvertedtoanestimatedin-situbasis;Resourcesareinclusiveofreserves;ResourceswereconstrainedtotheminingleaseheldbySGSonly;Resourcewereestimatedonanin-situbasis(i.
e.
asanin-situtonnageandnotadjustedforminingrecovery);Resourcesweredepletedbyminedouttonnage;andResourceswereestimatedbasedonthesurveydatamadeavailableasofDecember20,2016fortheSunriseandSunsetfields.
ReserveEstimateInlate2016,theCompanyengagedDMCLtoconductacomprehensivereviewofallrelevantinformationincludingtechnicaldata,miningstrategy,pitoptimization,minedesign,productionscheduling,coalprocessingstrategy,salesstrategy,coalpricesandrecoveringcoaltransactionconditions,inordertoprepareandupdateitsresourcesandreservesestimateandtoprepareanewmineplan.
Thisprocessresultedinare-calculationofestimatedreservesbyDMCLthatappearsinthetablebelow.
78OvootTolgoiDeposit-ReserveEstimatePitSeamGroupReserve(Mt)ProvenProbableTotalSunrisePit70.
390.
470.
8561.
741.
373.
115U29.
286.
2535.
535L12.
441.
7314.
1740.
400.
520.
92Sub-total44.
2510.
3454.
59SunsetPit110.
010.
000.
01104.
970.
645.
61910.
210.
5210.
73810.
420.
4810.
905U21.
061.
8022.
865L8.
560.
919.
47Sub-total55.
234.
3459.
57GrandTotal99.
4914.
68114.
17Totalsmaynotaddupduetorounding.
TheabovereserveestimatesattheOvootTolgoiDepositwereestimatedasofDecember31,2016basedontheresourcemodelprovidedbySGS.
MeasuredandIndicatedResourcesareinclusiveofthoseMineralResourcesmodifiedtoproducetheReserves,i.
e.
,ReservesarenotadditionaltoResources.
Thekeyassumptionsusedforthereserveestimationare:Thereserveestimationusedcoalsellingpricesprovidedbyanindependentmarketconsultingfirm,whichwascommissionedbytheCompanyinDecember2016andsubsequentlyconfirmedasreasonableandappropriatebythequalifiedpersonresponsibleforthisreserveestimate;ReservesdonotincludeanyInferredResourceswhichhavebeentreatedaswaste(i.
e.
theirminingcostshavebeencoveredbutnorevenuehasbeenassumedfortheInferredResources);Arecoveryfactorof95%andadilutionfactorof2.
5%havebeenappliedintheReserveestimate;Thepitdesign(andthusReserves)waspreparedtoadepthof300mbelowtheoriginalgroundsurface,whichissameasthepitdesignusedinthe2012TechnicalReport;ReservesareconstrainedtotheminingleaseheldbySGSonly,althoughtheopenpitlimitswillextendacrosstheleaseboundaryintotheadjacentleaseheldbyMAK,SGSandMAKhaveanagreementinplacethatallowsSGStostripofftheoverburdeninMAK'slease.
CoalwithinthepitsandwithintheMAK'sleasehasbeentreatedasgeneratingnorevenueandhavingnoassociatedcostwhereasthewastewithinthepitsandMAK'sleasewillbestrippedoffatSGS'cost;Reservesareestimatedtoaccountforcoalandwastethatwasminedasof31December2016;andTotalsmaynotaddupduetorounding.
79MiningOperationsMiningMethodTheminingmethodemployedattheOvootTolgoiDepositcouldbedescribedasopenpitterraceminingutilizinglarge-scalehydraulicexcavators,shovelsandtrucks.
Terraceminingisutilizedwherecoalseamsdipsteeplyandoperatingmachineryonthecoalseamroofandfloorisnotpossible,duetothesteepseamdips.
Terraces,orbenches,areexcavatedalongfixedhorizontalhorizonsandthesebenchesintersectbothcoalandwaste.
Coalandwasteareminedseparatelyoneachbenchwithdozersbeingused,asneeded,topushcoalorwastedowntotheexcavatorforloadingontotrucks.
Thisminingmethodallowslarge-scaleopenpitminingtooccurproductivelyinsteeplydippingcoalseamenvironments.
Allwasteisdumpedex-pit,asthesteepdipsprecludein-pitdumping.
TheopenpitlimitsextendacrosstheOvootTolgoiMiningLicenceboundaryintotheadjacentleaseheldbyMAK.
Asdescribedpreviously,theCompanyandMAKhaveacooperationagreementinplacetoallowminingacrosstheboundary,whichstipulatesthatSGSisresponsibleforremovalofMAKwastebutMAKisresponsibleforminingofMAKcoal.
Accordingly,thecurrentreserveestimatedoesnotincludeanycoalwithintheMAKleasethatmustbeextractedaspartoftheCompanyminingoperation.
Therefore,inthecurrentmineplan,norevenuehasbeenassumedfortheMAKcoalwhereascostshavebeenassumedforstrippingofftheMAKwaste.
CoalProductionandStrippingTheactualproductionandstrippingvolumein2017,2018and2019andtheproductionscheduledisclosedinthe2017TechnicalReportaretabulatedbelow.
ActualProduction2017TechnicalReportDifferencesCoalProduction(Mt*)Strippingvolume(Mbcm**)CoalProduction(Mt)Strippingvolume(Mbcm)CoalProduction(Mt)Strippingvolume(Mbcm)20176.
3820.
794.
6930.
9836.
0%-32.
9%20184.
3518.
208.
2938.
74-47.
5%-53.
0%20195.
0318.
288.
4830.
63-40.
7%-40.
3%*Mt:milliontonnes**Mbcm:MillionbankcubicmetersThedifferencebetweentheactualproductionandthestrippingvolumein2017,2018and2019,andtheproductionandstrippingvolumedisclosedinthe2017TechnicalReportwasmainlyattributedtotherestrictionofcoalimportthroughCekeborder.
Accordingly,theprojectedproductionandthestrippingvolumein2020and2021willbeexpectedtobeadverselyaffectedandbelowthelevelindicatedby2017TechnicalReportforthesamereason.
Inthefuture,moreextensiveuseofminingcontractorswillbeconsideredtocatchupwiththedifferenceofproduction.
80WashingOperationThewashingoperationhasbeencurrentlyinplacesince2018andwillbeexpandedinthefuturesinceChinadoesnotallowimportofF-gradecoal.
Therecoveryratein2019was52%,withtheinputofF-gradecoal(1.
41Mt)andproductionofwashedB-gradecoal(0.
74Mt).
TechnicalReportThelatesttechnicalreportfortheOvootTolgoiDepositthathasbeenpreparedbyDMCLcontainsdetailsofthemineplanforOvootTolgoiandinformationwithrespectto(i)processingandrecoveryoperations,(ii)infrastructure,permittingandcompliance,and(iii)capitalandoperatingcostsasof2017.
ThemineplanintheDMCLtechnicalreportincludesaprocessingstrategymarkedbywetwashingfacilitiescomprisedofawetwashplantequippedwiththecustomizedjigwashingcircuitanddeepde-wateringequipment.
Theprocessingstrategywillbemulti-phasedandexpandedovertime.
ThemineplanintheDMCLtechnicalreportissubjecttochangesfromtimetotimedependingonthemarketconditionsasexplainedaboveandtheCompanywillengageQPtoreviewthenecessitytoupdatethetechnicalreportwhennecessaryandifrequiredtoprovideupdatedandrelevantdisclosureofthelatestdevelopmentandprospectofOvootTolgoimine.
CoalMarkets,MarketingandSalesContractsForinformationonsalesandmarketingreferto"SalesandMarketing"inthisAnnualInformationForm.
EnvironmentalMattersTheprincipalMongolianenvironmentalagencyistheMinistryofEnvironment,GreenDevelopmentandEnvironment.
ThisagencyreviewsandapprovesEIAs,EMPs,andEnvironmentalMonitoringPlansrequiredbythe2006MineralsLawsandsubsequentamendmentin2014.
Inaddition,theSoumGovernmentreceivesacopyofeachEIAdocumentandhasenvironmentalinspectorswhomonitorthedevelopment,operation,andreclamationofmineswithintheirjurisdiction.
InadditiontoobtainingapprovalofanEIA,anoperatorisalsorequiredtodeterminecostsforannualimplementationoftheEMP.
Fundsinanamountsufficienttocoveranamountequalto50%ofthebudgetforeachyearmustbedepositedinaspecialaccountestablishedbytheGovernmentMinistryinchargeoftheenvironment.
FundsfromthisaccountarereleasedduringmineclosurephaseupondemonstrationoffullimplementationoftheEMPforlifeofmine.
Iftheminingdamagestheenvironment,causespollution,orviolatesthetermsofanypermits,theoperatormustmakepaymentsforthedamageasdeterminedbytheGovernmentofMongolia.
Inaddition,ifanyculturalorhistoricresourceisdamagedasaresultofthemining,theoperatormustalsopaydamages.
Financialcompensationisalsorequiredfordamagestoanystructureownedbythirdparties.
Themineoperatorisalsorequiredtopayallrelocationcostsforanyonerequiredtoberelocatedasaresultoftheminingoperation.
Thesecostsareinadditionto,notincludedin,thecostssetoutintheEIA.
TheCompanycompletedanEMPfortheOvootTolgoiDepositinAugust2005andEnvironmentalConsultingCompany(ENCO),Ltd.
,preparedanEIAin2006anditwasupdatedin2012.
Subsequently,theMELsweretransferredfromOTLLCtoSGS,andthenconvertedtotheOvootTolgoiMiningLicence.
AnumberoffairlysignificantprojectchangeshaveoccurredsincethesubmissionandapprovalofEIAincludinganincreasedminepitsizeanddepthwithassociatedincreasesinoreandwasterockquantities81andhauling,increasedblasting,increasedoperatinghoursanddays,increasedworkforce,andrelocationofthemancamp.
ThesechangesresultedinthepreparationoftheAddendum.
Astofloodingofthefinalpit,asbackfillingisnotproposedasasignificantpartofthemineplanitispossiblethatapitlakewouldappearasaresultofre-establishmentofthegroundwatertable.
Thepossibilitythatapitlakewillformpartofthepostminingreclamationcreatesapotentialliabilitywithrespecttowaterquality.
Itisrecommendedthatappropriatestudybeperformedtodetermineifthepitlakewilldischargetothesurfacewatersystemorthealluviuminordertoestimatethelong-termeffectofwaterinthefinalpit.
Detailedplansforreclamationofthefinalminingpithaveyettobedetermined,asthefinalpitwouldprovidepossibleaccessforfutureopenpitorundergroundminingtoextractsomeoftheremainingcoal,ifeconomic.
ForinformationontheCompany'senvironmentalpolicyreferto"SocialandEnvironmentalPolicies–EnvironmentalPolicy"inthisAnnualInformationForm.
TheCompanyhasmade$8.
6millionprovisionforthemineclosure(i.
e.
thedecommissioningliabilitiesinthefinancialstatement)asofDecember31,2019.
TaxesThefollowingtaxes,royalties,andothergovernmentleviesareapplicabletotheOvootTolgoiminingoperation:RoyaltypaymentstotheGovernmentofMongolia.
BasedonSGS'sunderstandingoftheMongolianroyaltylegislation,itissubjecttoabaseroyaltyinMongoliaof5%onallexportcoalsales.
Inaddition,effectiveJanuary1,2011,SGSissubjecttoanadditionalslidingscaleroyaltyofupto5%.
TheroyaltyiscalculatedusingasetreferencepricepertonnepublishedmonthlybytheGovernmentofMongolia.
OnSeptember4,2019,theGovernmentofMongoliaissuedaresolutioninconnectionwiththeroyaltyregime.
FromSeptember1,2019onwards,intheeventthatthecontractsalespriceislessthanthereferencepriceasdeterminedbytheGovernmentofMongoliabymorethan30%,thentheroyaltypayablewillbecalculatedbasedontheMongoliangovernment'sreferencepriceinsteadofthecontractsalesprice.
Referto"RISKFACTORS–RisksrelatingtotheCompany'sprojectsinMongolia"inthisAnnualInformationForm.
PropertyTax:0.
6%onacquisitionvalueand1%insubsequentyears;MiningLicence:AfeeofMNT7,250perhectareispayableyearlyontheOvootTolgoiMiningLicenceintheamountofMNT67.
5million(MNT7,250x9,312ha=MNT67.
5million)(approximatelyUS$33.
8thousandasofDec31,2015);VAT:10%oncapital,materialsandsupplies.
VATisassumedtoberefundedoncetheCompany'scoalisincorporatedinthefinalminingproductlist;Airpollutionfee:Afeeof1,000MNTpertonneofROMcoal;Landfee:Afeeof5MNTpersquaremeter,thefeeisimposedtwicehigherfortheminingareaswhichis10MNTpersquaremeter;IncomeTax:10%ofthefirstthreebillionMNTofnetprofitbeforetax,25%thereafter;andDepreciation:10yearsonequipment,40yearsonfixedassets,threeyearsonminorassets.
SALESANDMARKETINGTheCompanyexpectsthatallproductionfromtheOvootTolgoiMinewillcontinuetobemarketedandsoldintothePRC.
SaleableproductsfromtheOvootTolgoiMineprimarilyincludeSouthGobistandard82andSouthGobipremiumsemi-softcokingcoalproducts.
Somehigherashcontentproductiswashedorblendedandsoldassemi-softcokingcoalproductwhilesomeoftheunwashedproductissoldasathermalcoalproduct,asandwhenthemarketallows.
CoalsalesfromOvootTolgoiaremadethroughtheShiveeKhurenBorderCrossing.
OncethecoalarrivesinthePRCitisdistributedfromCeke.
EndusersandlogisticsspecialistsgenerallyundertakelogisticsfromCeke,withthecoaldestinedforuseincoke-making,powergenerationandcementmaking.
TheCompanyestablishedawhollyownedforeignenterpriseinChinain2016,whichenablestheCompanytosellcoaldirectlytoChineseendusers.
TheCompanyintendstocontinuetodevelopmarketsforbothitspremiumandstandardsemi-softcokingcoalproductsandtopursuelong-termsupplyofftakewithendusersinthePRCtocomplementitsexistingcustomerbaseandtogainbestvalueoftheCompany'scoalinthePRCmarket.
TheCompanyiscommittedtofurtherenhancethequalityofitscoalproductsthroughwetwashingandcoalblendingandincreaseitsmarketpenetrationinthePRC.
ThecommissioningofthewashplantattheOvootTolgoiminewascompletedduringthesecondquarterof2018.
DIRECTANDINDIRECTEMPLOYEESAsatDecember31,2019,theCompanyhad471employees,including419Mongolianemployees.
SOCIALANDENVIRONMENTALPOLICIESEnvironmentalPolicyWithintheframeworkofapplicableenvironmentallawsandlegislation,theCompanyaspirestodemonstrateenvironmentalleadershipbyadheringtothefollowingprinciples:avoidanyenvironmentalimpactwherepossible;whereenvironmentalimpactcannotbeavoided,minimizetheimpact;andengagementoflocalsintheareainwhichitoperates.
Inordertoimplementitsenvironmentalpolicy,theCompanyiscommittedtoadheringtothefollowing:fullydischargingitsdutyofprotectingtheenvironmentinaccordancewithMongolianlawsinthecourseofitsminingactivities;prioritizingenvironmentalactionsforimplementationinitsbusinessactivities;implementingthirdpartyandinternalenvironmentalmonitoringandincludetheparticipationoflocalpeopleandgovernmentalorganizations;preventingandreducingenvironmentalimpact,andrehabilitatingandcarryingoutbiologicaloffsettingintheprojectarea;carryingoutlandreclamationinaccordancewithMongolianstandardsduringminingoperationandatthetimeofmineclosure;establishingandimplementingenvironmentalmanagementsystem;identifying,assessingandmanagingtheenvironmentalrisksofitsactivitiesinallplanningandoperationaldecisions;83regularlyexaminingitsenvironmentalmanagementsystemandregulations,andrevisingthesamewherenecessary,inordertocontinuouslyimproveitsenvironmentalactivities;cooperatingwithlocalpeopleandadministrationaswellasspecialistsorspecializedagencies;andregularlyorganizingtrainingforitsemployeesandcontractorswithrespecttotheenvironment.
TheCompanyuses,andwillcontinuetoutilize,appropriateandrecognizedenvironmentalmanagementsystems,includingdocumentationofallrelevantenvironmentalmatters,andconductinginternalcomplianceauditsandengagingthirdpartiestoconductauditswherenecessarytoassistwithenvironmentalmanagement.
Specifically,themeasuresitistakingorthatitexpectstotakeinrelationtotheprotectionoftheenvironmentattheOvootTolgoiMineinclude:Reducinglandusefootprintatminingsite:EachyeartheCompanydeterminespotentialareasthatcanbereclaimedandin2019SGSconductedtechnicalandbiologicalrehabilitationcovering1.
3haofland.
Itisanticipatedthattheareaofthereclaimedlandwillincreaseannually.
Monitoringbiodiversityinlicenceareaandsurroundingterritories:CurrentlytherearenoendangeredplantandanimalspeciesintheOvootTolgoiMinearea.
TheCompanymonitorsbiodiversityconservationandimpactmitigationmeasuresinminingareasandispreparedtoundertakeactionasrequiredinthefuturetopreserveormaintainbiodiversity.
In2019,anenvironmentalmonitoringprogramwascompletedincooperationwithminingcompaniesofNariinSukhait.
Developinganenvironmentalprotectionstrategy:TheCompanyworkedwithaprofessionalorganizationtodevelopastrategyfor2014-2018toprotectbiologicaldiversity,maintainecosystembalanceandpreservespeciesdwellingnearbytheOvootTolgoiMinearea,allinaccordancewithMongolianlawsandregulations.
In2015,thebiodiversityoffsetstrategicplanwasproduced.
Withinthisframeworkofbiodiversityoffset,theCompanyestablishedawaterpointforrarewildanimalsintheTost,TosonBumbaNatureReservein2016.
In2017,bordermarkingoftheTost,TosonBumbaNatureReservewascompleted.
Aspartofthe2018biodiversityoffsetprogram,equipmentwasdonatedtosupporttheregularenvironmentalprotectionactivitiesofthenewlyestablishedAdministrationOfficeinGurvantesSoumofUmnugobiAimag,whichisinchargeofthestateprotectedsite"TostandTosonBumba".
In2019,fivemotorcyclesweredonatedtoenvironmentalprotectionguardstoenabletheconvenientaccesstotheprotectedsite.
Environmentalprotectionactivities:TheCompanyplantedandmaintained400desertpoplarsandelmtreesalongtheShiveeKhurenportroadside.
AttheOvootTolgoicamp,60desertpoplarsand400elmtreeswereplantedandmaintained.
Additionally,46employeesoftheCompanyparticipatedinthecleaningoftheSukhantRiverandKhailaastgorgebasinsthatarelocatedneartheminesite.
Monitoringtheairqualityatminingsite:TheCompanyaimstodevelopacomprehensiveairqualityplanandimprovetheinternalandindependentairqualitymonitoringandanalysismechanism.
Inordertoachievethegoal,theCompanycooperateswith"EACC",anenvironmentalconsultancyfirm,andanon-sitesurveywascompletedintheendofNovember2019.
Re-usinggreywater:TheCompanyreusesitsgreywaterusingawatertreatmentfacility,whichisakeypartofreducingconsumptionofwaterresourcesandbenefitstheenvironment.
TheOvootTolgoicamphasutilizedgreywatersince2015.
BetweenJanuaryandNovember2019,theCompanypurified28,906m3ofdomesticwastewater.
8,030m3wasusedfordustsuppressionand84plantwateringand12,515m3graywater,whichmeetthestandard,issuppliedtothewastewaterarea.
Recyclingwasteoilandplasticbottle:TheCompanyhasengagedaprofessionalwasteoil-recyclingcontractor.
Othernon-toxicwasterecyclablesaregiventoalocalvillageinordertoincreaseincomeandprovideworkopportunitieswithinthecommunity.
Additionally,theCompanyisworkingtogetherwiththefirstlocalwasteservicecompanyinMongoliatoimprovenon-mineralswastehandlingandmanagement.
In2018,156.
9tonnesofwasteoiland18.
3tonnesofplasticbottlesweresoldtoarecyclingcontractorcompany.
ForfurtherinformationontheEIAandEMPfortheOvootTolgoiMine,refertothesectionentitled"DescriptionofMaterialProperty–OvootTolgoiDeposit–EnvironmentalMatters"inthisAnnualInformationForm.
HealthandSafetyPolicy1.
Basedonindustrybestpracticeandadvancedtechnology,theCompanyaspirestobearesponsibleminingcompanyintermsofsafetybycomplyingwiththeoccupationalhealthandsafetystandardsandrequirementsunderMongolianlaws,providingemployeeswithhealthyandsafeworkplaceconditions,andcommittingtoatargetofzeroincidents.
TheCompanyconsiderseveryemployeetobeaninvaluableasset.
2.
TheCompanywilldeterminedetailedperformancetargets,obligationsanddutiesthatarerequiredtoimplementtheCompany'soccupationalhealthandsafety("OHS")goalsandobjectives.
3.
ToachieveourOHSgoalsandobjectivestheCompanywill:identify,mitigateandcontroltheCompany'soperationalriskswhichmayadverselyimpacthealthoftheCompany'semployeesanditscontractors;complywiththeapplicablelaws,regulationsandstandardsand,wherepossible,useitsendeavorstomaintainitsperformancebeyondthestandardssetoutbythoselaws,regulationsandstandards;establishaccountabilityrelatedtotheCompany'sOHSgoalsandobjectivesanditsperformanceatalllevelsoftheorganizationandeffectivelyexchangeinformationinthisregard;plan,manage,perform,andclosealloperationsinamannerthatmeetourOHSgoalsandobjectives;develop,implementandadhereeffectiveOHSManagementSystemswhichalignwithinternationallyrecognizedbestpractices;regularlyorganizeandprovidetrainingtotheCompany'semployeesanditscontractorsinordertoimprovetheirsafety-relatedknowledgeandskills,andinstillpositiveOHSattitudes;identifydirectandunderlyingcausesofallOHSincidentsandtakemeasurestopreventanyreoccurrenceofsuchincidences;andregularlymonitor,auditandreviewtheeffectivenessoftheOHSmanagementsystemforthepurposeofitscontinuousimprovement.
854.
AllemployeesoftheCompanyanditscontractorsarerequiredtoobserve,andactinaccordancewith,theCompany'sOHSpolicy.
HealthandSafetyTrainingIn2019,theOHSdepartmentorganizedthefollowingtrainingseminarstosupporttheCompany'scommitmenttosocialresponsibility:1.
"Communityemergencytacticaltraining"attheOvootTolgoiminefuelfarmwasaimedatensuringthepreparednessofthedepartmentsandagencieswhowillcooperatewiththeCompanyintheeventofemergencysituations.
The67themergencyfirefightingteam,policedepartmentsofGurvantesandNoyonsoumsoftheUmnugoviaimag,employeesofthehealthcenterandsecuritiesparticipatedinthistraining.
2.
"Environmentalsafety,properuseofPPE,emergencyresponse,guidetofirstaid,properuseofplasticcontainer"trainingwasprovidedto128localchildreninordertoincreasetheirsafetyknowledgeandskills.
3.
Inordertomonitorworkplacedust,protectthehealthandsafetyofemployeesandimplementthenewlyapprovedduststandardsofMongolia,theadvisoryteamfor"Developqualityinfrastructure:Mineindustryproject"isprovidingcapacitybuildingtrainingtotheworkinggroup.
CommunityRelationsTheCompanyaspirestobealeaderincommunityrelationsby(i)treatinglocalcitizenswithdignityandrespect,(ii)developinggoodrelationshipsandmutualtrustwithlocalgovernments,and(iii)implementingenvironmentallyfriendlytechnologyforcoalexplorationandmining.
TheCompanystrivestoachievethesegoalswhilepursuingtheunderlyingbusinessobjectiveofbuildingvalue.
TheCompanyemploysfull-timeCommunityRelationsOfficersandrepresentativesintheneighbouringtownofGurvantesandintheprovincialcapitalofDalanzadgadtosupportitslabourrecruitmenteffortsfromthelocalareasurroundingtheOvootTolgoiMineandtodirectlyliaisewithlocalvillagememberstohelpincreaseunderstandingoftheCompany'sprojects.
TheCompanyhasplayedasignificantroleincontributingtotheinfrastructureintheSouthGobiregion.
Mostnotableisthefinancingofa52-unitapartmentprojectinGurvantesSoum,Umnugobiprovince,whichtheCompanylaunchedaspartofitscorporatesocialresponsibilityprogram.
ThisapartmentprojectaimstoprovideaffordableandcomfortableapartmentsforSGSstaffinthesoum,aswellasothersoumresidents.
TheCompanywasinvolvedinthepavingoftherunwayattheOvootTolgoiairport,whichhasenhancedtradeandeconomicactivityinthelocalcommunitiesoftheSouthGobiregion.
RoadstobothGurvantesandtheShiveeKhurenbordercrossinghavebeenimprovedandupgradedtofacilitatethemovementoflocalresidentsbyincreasingtrafficsafetyandreducingtraveltime.
TheCompany,throughitsjointventurewithNTBLLC,completedtheconstructionofapavedhighwayfromtheOvootTolgoiDeposittotheShiveeKhurenbordercrossing.
Thehighwaysignificantlyincreasesthesafetyofcoaltransportation,reducesenvironmentalimpacts,andimprovesefficiencyandcapacityofcoaltransportation.
Additionally,theCompanyrenovatedandequippedtheGurvanteshospitaltoprovidestaffandpatientswithbetterworkingandtreatmentconditions.
86CorporateSocialResponsibilityIn2019,anaggregateofMNT820,222,402(approximatelyUSD294,655)wasspentbytheCompanyondonationswithinthelocalcommunityandcountry.
In2019,theCompanycontinueditscorecorporatesocialresponsibilityactivitieswiththefollowinginitiatives:1.
ContinuedauniversityscholarshipprogramforstudentsfromUmnugobi,Mongolia,whichwasoriginallylaunchedin2009.
Between2009and2019,SGShasgranted171scholarshipstostudentsfromDalanzadgad,Gurvantes,Noyon,SevreiandBayandalaisoums,eachofwhomsatisfiedthefollowingeligibilitycriteria:(i)currentlyintheirthirdyearofstudiesoraboveatanaccreditedMongolianuniversity,includingtheNationalUniversityofMongolia,theMongolianUniversityofScienceandTechnologyandtheMongolianStateUniversityofAgriculture;(ii)obtainedaGPAof3.
0orhigher;and(iii)iswillingtoworkinlocalsoumsfor4yearsormoreaftergraduation.
In2019,SGSawardedscholarshipsto21studentspursuanttothisuniversityscholarshipprogram.
MNT56,349,300wasawardedforthetuitionfees.
2.
SuccessfullyorganizedanautumnsportscompetitionamongsecondaryschoolstudentsofGurvantes,NoyonandSevreisoumsofMongolia.
Approximately1,610childrenparticipatedintheevent.
3.
AspartofthecelebrationofTsagaansar,aMongoliantraditionalspringholiday,theCompanydistributedpresentsto112elderlyanddisabledresidentsofGurvantessouminMongolia.
4.
Continuedtoprovidecoalandlivestockfeedtolocalresidentsduringthecoldwintermonths.
7,200tonsofcoalweredonatedtoGurvantes,Bayandalai,NoyonandSevreisoumsandfundsweredonatedtotheAnimalProtectionFundofthesoumtopurchasefodders.
5.
WithintheframeworkoftheflightdiscountagreementwithGurvanTes,localcitizensreceiveda50%discountonflightsbetweenOvootTolgoiandUlaanbaatar.
6.
FilesSGS'annualreportoncitizenshipwiththeGovernors'officesofGurvantes,Noyon,Sevrei,BayandalaiandDalanzadgadsoums.
TheannualEnglishLanguageOlympiadamongsecondaryschoolstudentsofGurvantes,Noyon,Sevrei,BayandalaisoumsofMongoliahasbeenpostponedduetoCovid-19.
CorporateCitizenshipCommitteeTheCorporateCitizenshipCommittee("CCC")wascreatedtoreviewandapprovemakedonationsforthesustainableprojectsthatbenefitthewidercommunities.
TheCCCwasformedin2019aspartofthetri-partycooperationagreement(the"Tri-PartyCooperationAgreement")betweentheCompany,Aimag`sgovernorandtheprioritizedSoums`(Gurvantes,Noyon,Sevrei,Bayandalai)governors.
Attherequestoftheprioritizedsoums,itwasagreedthattheCompanywoulddonateuptoMNT100milliontoprojectsapprovedbytheCCC.
ThefollowingprojectshavebeenexecutedundertheTri-PartyCooperationAgreement:1.
Noyonsoum'sschoolgym:Noyonsoum'sGeneralEducationSchoolcommemoratedits80thanniversary.
Theschooladministrationandthesoum'sgovernorrequestedtheCCCmakeadonationtorefurbishthegymoftheschool.
MNT75millionwasdonatedtorenovatethe87gymnasiumfloor,walls,andtheheatingsystems.
Moreover,theschoolheldtheopeningceremonywithafriendlybasketballgamewhereSGS'srepresentativesfromtheEnvironmentalandCommunityRelationsDepartmentparticipatedandhandedoversportingequipmentsuchastabletennisnetsandbasketballs,volleyballsandsoccerballs.
2.
Bayandalaisoum'swashroomfacility:ApublicwashroomfacilityisbeingbuiltalongtheBayandalaisoum'spavedroadthatisconnectedwiththecenterofUmnugovi,Dalanzadgad.
CCCagreedtodonateMNT90milliontowardstheproject.
DuetothehighrateoftravelonthepavedroadthroughtheBayandalaisoum,itisexpectedthatthepublicwashroomfacilitywillimprovethecleanlinessofBayandalaisoum.
3.
Dalanzadgadsoum'sbiologycabinet:Dalanzadgad's3rdGeneralEducationSchool'sbiologyclassroomreceivedadonationofMNT20millionthatwillbeputtowardsthepurchaseoflearningaides,suchassynthetichumanbodypartsandskeletons,forbiologystudents.
4.
ContainersforSevreisoum:TwousedcontainersweredonatedbySGStoKhongorEls'maintourismsiteinUmnugoviofSevreisoum.
Thecontainerswillberepurposedastreatmentfacilitiesforelderresidents.
InternationalYouthGreenGamessponsorshipAttheofficialrequestofthePresidentialofficeinMongolia,theSpecialAdvisoryCommitteeagreedtosponsortherepairoftheShootingCenterinUlaanbaatar,whichwillhostshootingcompetitionsconductedbythefirstInternationalYouthGreenGamesin2020undertheauspicesofUNESCO.
MNT1billionwillbedonatedtowardstherepairandrefurbishment.
ThegameswerescheduledtobeheldinthecapitalcityofUlaanbaatarbetweenSeptember13-19,2020underthePresidentofMongolia,BattulgaKhaltmaa;however,thegameshavebeenpostponedduetoCOVID-19.
DESCRIPTIONOFCAPITALSTRUCTURETheauthorizedsharecapitaloftheCompanyconsistsofanunlimitednumberofCommonShareswithoutparvalueandanunlimitednumberofPreferredShares.
AsatFebruary2,2021,therewere272,702,835CommonSharesandnoPreferredSharesissuedandoutstanding.
RightsandrestrictionsinrespectoftheCommonSharesandPreferredSharesaresetoutintheCompany'sArticles,andintheBCBCAanditsregulations.
CommonSharesTheholdersofCommonSharesareentitledtoonevoteperCommonShareatallmeetingsofShareholdersexceptmeetingsatwhichonlyholdersofanotherspecifiedclassorseriesofsharesoftheCompanyareentitledtovoteseparatelyasaclassorseries.
SubjecttothepriorrightsoftheholdersofPreferredSharesandanyothersharesrankingseniortotheCommonShares,theholdersofCommonSharesareentitledtoreceivedividendsasandwhendeclaredbythedirectors,andtoreceiveaproratashareoftheremainingpropertyandassetsoftheCompanyintheeventofliquidation,dissolutionorwindingupoftheCompany.
TheCommonShareshavenopre-emptive,redemption,purchaseorconversionrights.
TherearenosinkingfundprovisionsinrelationtotheCommonSharesandtheyarenotliabletofurthercallsortoassessmentbytheCompany.
TheBCBCAprovidesthattherightsandprovisionsattachedtoanyclassofsharesmay88notbemodified,amendedorvariedunlessconsentedtobyspecialresolutionpassedbyamajorityofnotlessthantwo-thirdsofthevotescastinpersonorbyproxybyholdersofsharesofthatclass.
PreferredSharesThePreferredSharesrankseniortotheCommonSharesastothepaymentofdividendsandthedistributionofpropertyandassetsontheliquidation,dissolutionorwindingupoftheCompany.
HoldersofPreferredShareswillnotbeentitledtoanyvotingrightsasaclassexceptasmaybeprovidedundertheBCBCAotherthanthosevotingrightsthatattachtoanyseriesofPreferredSharesasdeterminedbytheBoardfromtimetotime.
ThePreferredSharesareissuableinoneormoreseries,eachconsistingofsuchnumberofPreferredSharesasmaybefixedbytheBoard.
TheBoardmayfromtimetotimebyresolutionpassedbeforetheissueofanyPreferredSharesofanyparticularseries,determinethedesignationofthePreferredSharesofthatseries,fixthenumberofPreferredSharesofthatseriesandcreate,defineandattachspecialrightsandrestrictionstothePreferredSharesofthatseries.
DIVIDENDSANDDISTRIBUTIONSNocashdividendsordistributionsweredeclaredontheCommonSharesforthefinancialyears2017,2018and2019.
FurthertotherequirementsoftheHKEX'sCorporateGovernanceCode,theBoardhasadoptedadividendpolicy(the"DividendPolicy")effectiveasofMarch26,2019.
UndertheDividendPolicy,theBoardwillmakealldecisionswithrespecttodividendsontheCommonShares,andtheBoardshallconsiderthefollowingfactorsindeterminingifandwhendividendsshouldbedeclaredandpaidinthefuturebasedon,amongstotherthings:theactualandexpectedfinancialresultsoftheCompanyattherelevanttime(includingwhethertheCompanyhasadequateretainedearnings);economicconditionsandotherinternalorexternalfactorsthatmayhaveanimpactonthebusinessorfinancialperformanceandpositionoftheCompany;theCompany'sbusinessstrategyandoperationalplans,includingfuturecashcommitmentsandinvestmentneedstosustainthelong-termgrowthoftheCompany;thecurrentandexpectedliquiditypositionandcapitalrequirementsoftheCompany;andanyotherfactorsthattheBoarddeemsappropriate.
TheCompanyhasnotpaidanydividendsontheCommonSharessinceitsincorporationandtheBoarddoesnotanticipatethatanydividendswillbedeclaredontheCommonSharesintheimmediateorforeseeablefutureMARKETFORSECURITIESTheCommonSharesarelistedfortradinginCanadaontheTSXunderthesymbol"SGQ"andinHongKongontheHKEXunderthestockcode1878.
AsTheCommonShareweresuspendedfromtradingontheTSXandhaltedfromtradingontheHKEXonDecember17,2018.
TradingintheCommonSharesontheTSXresumedonMay30,2019,andtradingintheCommonSharesontheHKEXresumedonMay31,2019.
89ACTOwasissuedbytheBCSConJune19,2020andtheCommonShareshavebeenhaltedfromtradingontheTSXsincethattime.
OnAugust17,2020,theCompanyrequestedthatthetradingoftheCommonSharesbesuspendedontheHKEX.
TheclosingpriceoftheCommonSharesontheTSXasofJune18,2020(beingthelasttradingdatepriortothedateonwhichtradingintheCommonSharesontheTSXwashalted)wasCdn$0.
09andtheclosingpriceoftheCommonSharesontheHKEXonAugust16,2020(beingthelasttradingdatepriortotheCommonSharesbeingsuspendedfromtradingontheHKEX)wasHK$0.
50.
ThefollowingsetsforththehighandlowmarketpricesandthevolumeoftheCommonSharestradedontheTSXandHKEXduringtheperiodsindicated:TSX(statedinCanadiandollars)PeriodHighLowVolumeJanuary20190.
140.
14n/aFebruary20190.
140.
14n/aMarch20190.
140.
14n/aApril20190.
140.
14n/aMay20190.
170.
126,300June20190.
180.
1258,700July20190.
170.
1445,500August20190.
140.
11104,300September20190.
130.
1078,100October20190.
140.
1124,500November20190.
140.
135,100December20190.
130.
07118,500HKEX(statedinHongKongdollars)PeriodHighLowVolumeJanuary20191.
181.
18n/aFebruary20191.
181.
18n/aMarch20191.
181.
18n/aApril20191.
181.
18n/aMay20191.
501.
152,990,200June20191.
270.
941,869,400July20191.
140.
881,607,050August20191.
160.
891,215,23390PeriodHighLowVolumeSeptember20191.
000.
84976,200October20191.
040.
76589,200November20191.
000.
821,265,650December20191.
040.
78963,900DIRECTORSANDOFFICERSBiographicalInformationThename,provinceorstate,andcountryofresidenceandpositionwiththeCompanyofeachdirectorandexecutiveofficeroftheCompany,andtheprincipalbusinessoroccupationinwhicheachdirectororexecutiveofficerhasbeenengagedduringtheimmediatelyprecedingfiveyearsareasfollows(suchinformationnotbeingwithintheknowledgeoftheCompany,ithasbeenfurnishedbyeachdirectorandofficerindividually):NameandMunicipalityofResidencePositionwithCompanyPrincipalOccupationDuringPastFiveYearsDALANGUERBANBeijing,ChinaExecutiveDirectorandChiefExecutiveOfficer(SinceMarch31,2020)ChiefExecutiveOfficeroftheCompany(March31,2020topresent);Retired(July2017toMarch2020);ChiefRepresentativeofChinaNonferrousMetalIndustry'sForeignEngineeringandConstructionCo.
,Ltd.
inMongolia(1991–July2017).
JIAMINBAOBeijing,ChinaDirector(sinceMarch18,2020)MemberoftheExecutiveCommitteeofCIC(September2019–present);ManagingDirector,InvestmentDepartmentIatCICCapital(July2015toSeptember2019);ManagingDirector,PrivateEquityDepartmentatCIC(June2011toJuly2015);DirectorofPTBumiResourcesTbk(July9,2020topresent).
ZHIWEICHENHongKongDirector(sinceApril13,2018)DeputyGeneralManagerofChinaCinda(HK)HoldingsCo.
Limited("CindaHK")(2016topresent)andtheManagingDirectorofitsinvestmentdepartment(2012to2016).
91NameandMunicipalityofResidencePositionwithCompanyPrincipalOccupationDuringPastFiveYearsYINGBINIANHENorthVancouver,CanadaIndependentDirector(sinceMay16,2017)DirectorofChinaGoldInternationalResourcesCorp.
(May2003topresent);DirectorofTri-RiverVenturesInc.
(October2006topresent);DirectorofVatukoulaGoldMinesplc(February2013topresent);DirectorofPTBumiResourcesTbk(June18,2019topresent);DirectorofZhongrunResourcesInvestmentCorporation(December2010toJune2018);DirectorofHuaxingMachineryCorp.
(January2011toDecember2016).
KALEEKUHongKongDirector(sinceDecember9,2020)ManagingDirectorofCindaHK(March2018-present);DirectorofZhongchangInternationalHoldingsGroupLimited(January2021topresent);ExecutiveDirectorofCindaHK(March2017–March2018);SeniorManagerAssistantofCindaHK(1996–March2017).
BENNIUBeijing,ChinaDirector(sinceMay30,2019)VicePresidentatCICCapital(May31,2019topresent);SeniorManageratChinaMinmetalsCorporation(April2012toJanuary2019).
JINLANQUANSydney,AustraliaIndependentDirector(sinceAugust6,2015)FinancialPlannerandBusinessConsultant,J&QInvestmentsPtyLtd.
(June2004–present).
MAOSUNRichmond,BritishColumbia,CanadaIndependentDirector(LeadDirectorsinceMay30,2019,InterimLeadDirectorbetweenAugust2016andMay30,2019,DirectorsinceNovember2015)Foundingpartner,Mao&YingLLP(October2009-present).
WEIGUOZHANGBeijing,ChinaChiefFinancialOfficer(sinceJune1,2018)ChiefFinancialOfficeroftheCompany(June1,2018topresent):PresidentofNFC'sKyrgyzstanoffice(November2012toDecember2017).
AIMINGGUOBeijing,ChinaChiefOperatingOfficer(sinceJune1,2018)ChiefOperatingOfficeroftheCompany(June1,2018topresent);DeputyChiefEngineeratShanxiHongshaFirstConstructionCo.
,Ltd.
,asubsidiaryofYangquanCoalIndustryGroupCo.
,Ltd.
(January2014toMay2018).
92NameandMunicipalityofResidencePositionwithCompanyPrincipalOccupationDuringPastFiveYearsTAOZHANGBeijing,ChinaVicePresident(sinceJuly3,2018)VicePresidentoftheCompany(July3,2018topresent);SeniorSupervisoroftheCorporateDevelopment(Investment)DepartmentofNFC(May2018–June2016);SupervisorintheQuality,Health,SafetyandEnvironmentDepartmentatNFC(June2016toDecember2012).
Eachdirector'stermofofficeexpiresatthenextannualgeneralmeetingoftheCompany,currentlyscheduledtobeheldonJanuary21,2021.
CeaseTradeOrders,Bankruptcies,PenaltiesorSanctionsOtherthandisclosedbelow,totheknowledgeoftheCompany,nodirector,executiveofficerorShareholderoftheCompanyholdingasufficientnumberofCommonSharestomateriallyaffectcontrolis,asatthedateinthisAnnualInformationForm,orhasbeen,within10yearsbeforethedateinthisAnnualInformationForm,adirectororexecutiveofficerofanycompany(includingtheCompany)that,whilethatpersonwasactinginthatcapacity:wasthesubjectofaceasetradeorsimilarorderoranorderthatdeniedtherelevantcompanyaccesstoanyexemptionundersecuritieslegislation,foraperiodofmorethan30consecutivedays;wassubjecttoaneventthatresulted,afterthedirectororexecutiveofficerceasedtobeadirectororexecutiveofficer,inthecompanybeingthesubjectofaceasetradeorsimilarorderoranorderthatdeniedtherelevantcompanyaccesstoanyexemptionundersecuritieslegislation,foraperiodofmorethan30consecutivedays;withinayearofthatpersonceasingtoactinthatcapacity,becamebankrupt,madeaproposalunderanylegislationrelatingtobankruptcyorinsolvencyorwassubjecttoorinstitutedanyproceedings,arrangementorcompromisewithcreditorsorhadareceiver,receivermanagerortrusteeappointedtoholditsassets;orhaswithinthe10yearsbeforethedateinthisAnnualInformationForm,becomebankrupt,madeaproposalunderanylegislationrelatingtobankruptcyorinsolvency,orbecomesubjecttoorinstitutedanyproceedings,arrangementorcompromisewithcreditors,orhadareceiver,receivermanagerortrusteeappointedtoholdtheassetsoftheproposeddirector.
OnMay13,2020,theCompanyappliedforaMCTOwiththeapplicableCanadiansecuritiesregulatorsinconnectionwiththeanticipateddelayedfilingoftheRequiredFilings.
AMCTOwasissuedbytheBCSConMay15,2020.
OnJune19,2020,theBCSCissuedaCTOprohibitingtradinginthesecuritiesoftheCompanybyanypersoninCanada,duetotheCompany'sfailuretofiletheRequiredFilingspriortothedeadlineofJune15,2020providedintheMCTO.
TheCeaseTradeOrderremainsineffectasofthedateofthisAnnualInformationForm.
Mr.
YingbinIanHe(adirectoroftheCompany)wasadirectorofHuaxingMachineryCorp.
("Huaxing")fromJanuary2011toDecember2016.
OnFebruary26,2015,theBritishColumbiaSecuritiesCommissionissuedaceasetradeorderrequiringallpersonstoceasetradinginthesecuritiesofHuaxinguntilHuaxing93filesamendedandrestatedauditedfinancialinformationforthefinancialyearsendedDecember31,2013and2012.
OnJune9,2015,theAlbertaSecuritiesCommissionissuedaceasetraderorderwhichrequiredthatalltradingorpurchasingceaseinrespectofthesecuritiesofHuaxingasaresultofthefailurebyHuaxingtofile:(i)annualauditedfinancialstatements,annualmanagement'sdiscussionandanalysis,andcertificationofannualfilingsfortheyearendedDecember31,2014;and(ii)interimunauditedfinancialstatements,interimmanagement'sdiscussionandanalysis,andcertificationofinterimfilingsfortheinterimperiodendedMarch31,2015.
ShareholdingsofDirectorsandSeniorManagementAsatFebruary2,2021,tothebestoftheCompany'sknowledge,thedirectorsandexecutiveofficers,asagroup,beneficiallyowned,directlyorindirectly,orexercisedcontrolordirectionover,7,000CommonSharesrepresentinglessthan1%oftheoutstandingCommonShares.
CommitteesoftheBoardThecommitteesoftheBoardconsistoftheAuditCommittee,theNominatingandCorporateGovernanceCommittee,theCompensationandBenefitsCommittee,theHealth,Environment,SafetyandSocialResponsibilityCommitteeandtheOperationsCommittee.
ThemembersoftheAuditCommitteeareMessrs.
MaoSun(Chair),YingbinIanHe,andMs.
JinLanQuan.
ThemembersoftheNominatingandCorporateGovernanceCommitteeareMessrs.
YingbinIanHe(Chair),MaoSun,andMs.
JinLanQuan.
ThemembersoftheCompensationandBenefitsCommitteeareMs.
JinLanQuan(Chair),Messrs.
YingbinIanHeandMaoSun.
ThemembersoftheHealth,Environment,SafetyandSocialResponsibilityCommitteeareMessrs.
Dalanguerban(Chair),YingbinIanHeandAimingGuo.
TheOperationsCommitteewasformedonJuly14,2020.
ThemembersoftheOperationsCommitteeareMessrs.
YingbinIanHe(Chair),DalanguerbanandBenNiu.
TheprimaryobjectiveoftheOperationsCommitteeistoassisttheBoardofDirectorsinfulfillingitsoversightresponsibilitieswithrespecttomineoperationsandproductmarketing.
In2017,theBoardformedaSpecialCommitteetoinitiateandoverseetheformalinternalinvestigationintothechargesagainstMr.
Aminbuheandtheconnection,ifany,betweenthosechargesandtheCompanyandhisconductasChairmanandChiefExecutiveOfficeroftheCompany.
InDecember2018,themandateoftheSpecialCommitteewasexpandedtoincludeoversightoftheinvestigationintotheallegationsofseriousfraud,misappropriationofCompanyassetsandothercriminalactsbytheFormerManagementandEmployees.
TheSpecialCommitteewasofficiallydissolvedbytheBoardonAugust22,2019.
ThemembersoftheSpecialCommitteeconsistedofMessrs.
Sun,HeandMs.
Quan.
94AuditCommitteeInformationAuditCommitteeCharterThecharteroftheAuditCommitteeisreproducedinitsentiretyinSchedule"A"tothisAnnualInformationForm.
CompositionofAuditCommitteeTheAuditCommitteeconsistsofMessrs.
MaoSun(Chair),YingbinIanHeandMs.
JinLanQuan.
TheBoardhasdeterminedthateachofMessrs.
Sun,HeandMs.
Quanare"independent"directors,andeachis"financiallyliterate"withinthemeaningofMultilateralInstrument52-110AuditCommittees.
RelevantEducationandExperienceMaoSunMr.
SunisthefoundingpartnerofMao&YingLLP,aprivateaccountingfirmofferingtax,assuranceandmanagementconsultingservices.
Mr.
Sunhasover15years'experienceintheaccountingsectorandhasextensiveknowledgeofCanadianaccountingstandards,InternationalFinancialReportingStandardsandCanadiantaxationlaws.
Mr.
SunhasextensiveexperiencewithCanadianlistedcompanies.
Since2014,Mr.
SunhasbeentheChiefFinancialOfficerofHFXHoldingCorp.
Mr.
SunwasaDirectorandChairmanoftheauditcommitteeforYalianSteelCorporation(TSX-V)from2012to2013,andaDirectorandmemberoftheauditcommitteeforWildskyResourcesInc.
(TSX-V)(formerlyChinaMineralsMiningCorporation)from2017toFebruary2020.
PriortofoundingMao&YingLLP,Mr.
SunwastheauditmanagerintheVancouverofficeofKPMG,aninternationallyrecognizedaccountingfirm.
Mr.
SungraduatedfromColumbiaUniversityinNewYorkwithaMasterDegreeinInternationalAffairs,InternationalFinanceandBusiness,andaBachelorDegreeinComputerSciencefromNanjingUniversity,China.
Mr.
SunisamemberoftheInstituteofCharteredAccountantsofBritishColumbia,theCanadianTaxFoundationandtheCanadianInstituteofCorporateDirectors.
YingbinIanHeDirectorofChinaGoldInternationalResourcesCorp.
(May2003topresent);DirectorofTri-RiverVenturesInc.
(October2006topresent);DirectorofVatukoulaGoldMinesplc(February2013topresent);DirectorofPTBumiResourcesTbk(June18,2019topresent);DirectorofZhongrunResourcesInvestmentCorporation(December2010toJune,2018);DirectorofHuaxingMachineryCorp.
(January2011toDecember2016).
Mr.
He'scareerintheminingindustryhasspannedover30years,withextensiveseniorexecutiveandboardexperience.
Mr.
HeistheLeadDirectorandanIndependentNon-ExecutiveDirectorofChinaGoldInternationalResourcesCorp.
Ltd.
("ChinaGold"),acompanyduallylistedontheTSXandHKEX;aDirectorofTri-RiverVenturesInc.
("Tri-River"),acompanylistedontheTSX-V;aDirectorofPTBumiResourcesTbk,acompanylistedontheJakartaStockExchange,andaDirectorandnon-ExecutiveChairmanofVatukoulaGoldMinesPlc("Vatukoula"),formerlylistedontheLondonStockExchangeAlternativeInvestmentMarket.
Previously,Mr.
HealsoservedasaDirectorontheBoardsofthefollowingcompanies:ZhongrunResourcesInvestmentCorporation("Zhongrun"),listedonShenzhenStockExchange;JiulianResourcesInc.
("Jiulian"),listedontheTSX-V;HuaxingMachineryCorp.
,listedonthe95TSX-V;andDollyVardenSilverCorp.
,listedontheTSX-V.
InadditiontobeingaformerPresidentandDirectorofSpurVenturesInc.
,listedontheTSX-V,Mr.
HewasalsotheGeneralManagerofitsoperatingsubsidiaryYichangMapleleafChemicalsInc.
Inhisearlycareer,Mr.
HeworkedasamineralprocessengineerandcoalpreparationengineerinaCanadianminingcompanyandanengineeringconsultingcompany.
Mr.
HeobtainedhisDoctoralandMaster'sDegreesinMineralProcessEngineeringfromtheUniversityofBritishColumbiainCanadaandhisBachelorDegreeinCoalPreparationfromHeilongjiangInstituteofMiningandTechnology(currentlyknownastheHeilongjiangUniversityofScienceandTechnology)inChina.
Mr.
HeisamemberoftheCanadianInstituteofMining,MetallurgyandPetroleumandtheCanadianInstituteofCorporateDirectors.
Mr.
HeiscurrentlytheChairmanoftheAuditCommitteeofChinaGoldandamemberoftheAuditCommitteeforTri-River.
HewasamemberoftheAuditCommitteesforZhongrun,JiulianandVatukoula.
JinLanQuanMs.
QuanisanindependentfinancialplannerandbusinessconsultantbasedinSydney,Australia.
Priortohercurrentrole,Ms.
QuandevelopedextensiveanddiversefinanceandauditexperienceduringhertimeasanauditpartnerwithoneofthebigfourinternationalaccountingfirmsinSydney,Australia.
Ms.
Quanhasextensiveexperienceinfinancialconsultingserviceswithspecialistskillsinexternalauditing,internalauditstructuring,corporatefinancingandriskmanagementandbusinessacquisition.
Ms.
QuanwaspreviouslyadirectorofKrestaHoldingsLtd.
,acompanylistedontheAustralianStockExchange.
Ms.
QuanisaCertifiedPublicAccountantofChinaandamemberoftheChineseInstituteofCertifiedPublicAccountants.
SheisalsoaFellowoftheAssociationofCharteredCertifiedAccountantsofUnitedKingdom,amemberoftheCharteredaccountantsAustraliaandNewZealand(CAANZ)andamemberoftheCanadianInstituteofCorporateDirectors.
Pre-ApprovalPoliciesandProceduresAllservicestobeperformedbytheCompany'sindependentauditormustbeapprovedinadvancebytheAuditCommitteeoradesignatedmemberoftheAuditCommittee("DesignatedMember").
TheDesignatedMemberisamemberoftheAuditCommitteewhohasbeengiventheauthoritytograntpre-approvalsofpermittedauditandnon-auditservices.
TheAuditCommitteehasconsideredwhethertheprovisionofservicesotherthanauditservicesiscompatiblewithmaintainingtheauditors'independenceandhasadoptedapolicygoverningtheprovisionoftheseservices.
Thispolicyrequiresthepre-approvalbytheAuditCommitteeortheDesignatedMemberofallauditandnon-auditservicesprovidedbytheexternalauditor,otherthananydeminimisnon-auditservicesallowedbyapplicablelaworregulation.
ThedecisionsoftheDesignatedMembertopre-approvepermittedservicesneedtobereportedtotheAuditCommitteeatitsregularlyscheduledmeetings.
Pre-approvalfromtheAuditCommitteeorDesignatedMembercanbesoughtforplannedengagementsbasedonbudgetedorcommittedfees.
Nofurtherapprovalisrequiredtopaypre-approvedfees.
Additionalpre-approvalisrequiredforanyincreaseinscopeorinfinalfees.
Pursuanttotheseprocedures,100%ofeachoftheservicesprovidedbytheCompany'sexternalauditorrelatingtothefeesreportedasaudit,audit-related,taxandotherfeeswerepre-approvedbytheAuditCommitteeortheDesignatedMember.
96AuditFeesBDOwasappointedastheCompany'sauditoronNovember13,2019.
PwCservedastheCompany'sauditorfromApril2,2012toNovember13,2019.
Feespaid/payabletoBDOanditsaffiliatesinrespectofauditandnon-auditservicesprovidedduringthefiscal2019wereapproximatelyCdn$563,000.
FeesbilledbyPwCanditsaffiliatesduringfiscal2019andfiscal2018wereapproximatelyCdn$425,000andCdn$959,000,respectively.
Thesefeesaredetailedbelow.
PwCBDOPwCBDO(Canadian$in000's)2019201920182018AuditFees1328563848n/aAuditRelatedFees197-111n/aTotal425563959n/a1Feesforauditservicesbilledrelatingtofiscal2019consistedof:(i)auditoftheCompany'sannualfinancialstatements;(ii)reviewoftheCompany'squarterlyfinancialstatements;(iii)statutoryauditoftheannualfinancialstatementsofsubsidiariesoftheCompany;and(iv)otherservicesrelatedtoCanadiansecuritiesregulatoryauthorities'matters.
ConflictsofInterestCertaindirectorsoftheCompanyanditssubsidiariesareassociatedwithotherreportingissuersorothercorporations,whichmaygiverisetoconflictsofinterest.
InaccordancewiththeBCBCA,directorsandofficersoftheCompanyarerequiredtodisclosetotheCompanythenatureandextentofanyinterestthattheyhaveinamaterialcontractormaterialtransaction,whethermadeorproposed,withtheCompany,ifthedirectororofficer:(i)isapartytothecontractortransaction;(ii)isadirectororanofficer,oranindividualactinginasimilarcapacity,ofapartytothecontractortransaction;or(iii)hasamaterialinterestinapartytothecontractortransaction.
TheNominatingandGovernanceCommitteemonitorsthedisclosureofconflictsofinterestbydirectorswithaviewtoensuringthatnodirectorvotesorparticipatesinanyBoarddeliberationsonamatterinrespectofwhichsuchdirectorhasamaterialinterest.
EthicalBusinessConductTheCompanyhasadoptedandimplementedaCodeofBusinessConductandEthics(the"EthicsPolicy")called"TheWayWeWork".
TheEthicsPolicyisapplicabletoallemployees,consultants,officersandDirectorsregardlessoftheirpositionintheorganization,atalltimesandeverywheretheCompanydoesbusiness.
Inadditionto"TheWayWeWork",theCompanyhasalsoadoptedadditionalguidancenotesandstandardswhichformpartoftheCompany'soverallCodeofConductStandards.
IncludedintheCodeofConductStandardsarethefollowingpoliciesandstandards:theAnti-CorruptionStandardandtheConflictsofInterestStandard,"TheWayWeWork"andGuidelinesfortheinvestigationintoallegationsofseriouswrongdoingandtheEthicsPointprogram.
EthicsPointistheCompany'swhistleblowingservicethatisadministeredbyanindependentthirdpartyprovider.
EthicsPointprovidesanavenuefortheCompany'spersonneltoraiseconcernsconfidentially97andanonymouslyanditisavailableforuseshouldsomeonesuspectorisawareofanyillegal,unsafeorinappropriateactivityatwork.
InformationregardingEthicsPointisavailableontheCompany'swebsiteatwww.
SouthGobi.
com.
TheEthicsPolicyandtheCodeofConductStandardsprovidethattheCompany'semployees,consultants,officersandDirectorsarerequiredtoupholdtheCompany'scommitmenttoacultureofhonesty,integrityandaccountabilityandthattheCompanyrequiresthehigheststandardsofprofessionalandethicalconductfromitsemployees,consultants,officersandDirectors.
AcopyoftheEthicsPolicyentitled"TheWayWeWork"andthevariouspoliciesformingtheCodeofConductStandardsareavailableontheCompany'swebsiteatwww.
SouthGobi.
comandmaybeobtained,withoutcharge,byrequesttoSouthGobiResourcesLtd.
atitsregisteredandrecordsofficeinCanada,20thfloor–250HoweStreet,Vancouver,BritishColumbia,CanadaV6C3R8,fortheattentionoftheCorporateSecretary,orbyphoneto604-762-6783.
TheNominatingandCorporateGovernanceCommitteemonitorscompliancewiththeCodeofConductStandardsandisresponsibleforestablishingsystemstoverifycompliancewithlegal,regulatory,corporategovernanceanddisclosurerequirements.
OnApril30,2019,theSpecialCommittee,withtheassistanceoftheForensicAccountant,completeditsassessmentofpotentialremedialactionsandpreventativemeasurestoimproveandstrengthentheCompany'scommitmenttoacultureofhonesty,integrityandaccountabilityandcompliancewiththehigheststandardsofprofessionalandethicalconductanddelivereditsreportsettingoutasetofrecommendedRemedialActionsandPreventativeMeasurestotheBoard,whichwasapprovedatameetingheldonApril28,2019.
TheRemedialActionsandPreventativeMeasureswereintendedtoremediatetheincidentsidentifiedintheFormalInvestigationandaddressdeficienciesintheimplementationoftheCompany'spracticesandprocedures.
Issuesidentifiedofnoteforthepurposesofsuchremediationincludealackofpreventativemeasurestoavoidconflictsofinterests,theneedforadditionalemployeeoversightandtheneedtoenhancecompliancewithaccountingprotocolsanddocumentationretention.
AsummaryoftheRemedialActionsandPreventativeMeasures,whichwereadoptedandapprovedbytheBoardandtheactionsthattheCompanyhastakentoimplementtheRemedialActionsandPreventativeMeasures,issetoutinthesectionofthisAnnualInformationFormentitled"GeneralDevelopmentoftheBusiness–Overview–2019".
INTERESTOFMANAGEMENTANDOTHERSINMATERIALTRANSACTIONSOtherthanasdescribedelsewhereinthisAnnualInformationForm,nodirector,executiveofficerorpersonorcompanythatbeneficiallyowns,orcontrolsordirects,directlyorindirectly,morethan10%ofanyclassorseriesoftheCompany'soutstandingvotingsecuritiesandnoassociateoraffiliateofanyofsuchpersonsorcompanieshasanymaterialinterest,directorindirect,inanytransactionwithinthethreemostrecentlycompletedfiscalyearsorsincethecommencementoftheCompany'slastcompletedfiscalyearorinanyproposedtransaction,which,ineithercase,hasmateriallyaffectedorisreasonablyexpectedtomateriallyaffecttheCompanyoranyofitssubsidiaries.
TRANSFERAGENTSANDREGISTRARSTheregistrarandtransferagentfortheCommonSharesinCanadaisASTTrustCompany(Canada)atitsprincipalofficesinVancouverandToronto.
TheregistrarandtransferagentfortheCommonSharesinHongKongisComputershareHongKongInvestorServicesLimited.
98MATERIALCONTRACTSMaterialcontractsunderNI51-102arecontracts,otherthancontractsenteredintointheordinarycourseoftheCompany'sbusiness,whicharematerialtotheCompany.
TheCompanyhasnotenteredintoanymaterialcontractssinceJanuary1,2020.
PriortoJanuary1,2020,thefollowingmaterialcontractswereenteredintoandremainineffect:NovelPrivatePlacementOnFebruary24,2015,theCompanyenteredintoasubscriptionagreement(the"NovelSubscriptionAgreement")withNovelSunrisesettingoutthetermsandconditionsoftheNovelPrivatePlacement,whichconsistedoftheissuanceofacombinationofmandatoryconvertibleunitsoftheCompanyandCommonSharestoNovelSunrise.
TheNovelPrivatePlacementwascompletedintwostagesforaggregategrossproceedsof$7.
5million.
ThenetproceedsoftheNovelPrivatePlacementwereappliedtowardsgeneralworkingcapital.
PursuanttothetermsoftheNovelSubscriptionAgreement,NovelSunriseisentitledtonominateuptothreeindividualsforappointmentorelectiontotheBoardandtoappointexecutiveofficersoftheCompany,subjecttoNovelSunriseanditsaffiliatesowningcertainthresholdpercentagesoftheissuedandoutstandingCommonShares,asmoreparticularlysetoutinNovelSubscriptionAgreement.
AcopyoftheNovelSubscriptionAgreementisavailableundertheCompany'sprofileonSEDARatwww.
sedar.
com.
ConvertibleDebentureThemajortermsoftheConvertibleDebenturearedescribedinthechartbelow.
UnlessotherwisedefinedinthisAnnualInformationForm,capitalizedtermsusedinthechartbelowshallhavethemeaningsascribedtothemintheConvertibleDebenture.
Transaction:AnoriginalprincipalamountofUS$500millionseniordebenturesconvertibleintoCommonShares(US$485millionnetofadvisoryfees).
Subsequently,asdescribedherein,US$250millionwasconvertedintoCommonShares,leavinganoutstandingprincipalbalanceofUS$250millionMaturity:30years.
Interest:TheConvertibleDebenturecarriesinterestof8.
0%perannummadeupof:(i)acashcouponof6.
4%payablesemi-annually;and(ii)additionalinterestof1.
6%perannumpayableinCommonSharestobeissuedoneachanniversaryoftheissue.
Sharevalueshallbecalculatedbasedonthe50businessdayvolumeweightedaverageprice("VWAP")priortoeachanniversaryoftheissue.
ConversionPrice:Cdn$11.
88shallbeconsideredthe"BaseConversionValue"andordinarily,theconversionpricewillbesetattheBaseConversionValue,subjecttotheadjustmentssetoutbelow.
99Atthetimeofconversion,theVWAPoftheCommonSharesforthe50businessdayspriortotheconversiondatewillbecalculated(the"ConversionDateValue").
IntheeventtheConversionDateValueislowerthantheBaseConversionValue,thentheconversionpricewillbetheConversionDateValue.
Theconversionpricewillbesubjecttoa"FloorPrice"ofCdn$8.
88.
Theconversionprice,sodetermined,isreferredtoasthe"ConversionPrice"inthissummaryofkeyinvestmentterms.
TheCompany'sEarlyConversionRight:AftertheearlieroftwoyearsfromclosingorthetimeoftheQualifiedFloat(asdefinedbelow),theCompanywillhavetherighttorequireconversionofupto50%oftheinitialprincipalamountofUS$500millionattheConversionPrice.
TheCompanyexercisedthisconversionrightandonMarch29,2010,theCompanyconvertedUS$250millionofthedebtinto21,560,961CommonSharesatapriceofUS$11.
64pershare.
QualifiedFloat:AtransactionwherebytheCommonSharesarelistedontheSEHKortheSEHKandtheTSXandthatmeetsthefollowingthreecriteria,shallbeconsidereda"QualifiedFloat":(i)notlessthan25%oftheissuedandoutstandingCommonShares(onanon-dilutedbasis,exceptincludingtheinitialprincipalamountoftheConvertibleDebentureonanas-convertedbasis)areheldbypersonswhoarenotinsidersoftheCompany(i.
e.
insiderholdingscannotexceed75%);(ii)theofferingpriceoftheCommonSharesissuedtoachievethepublicfloatisnotlessthanthebaseconversionvalueunlessCICconsents;and(iii)theCommonSharesarelistedontheSEHK.
RighttoNominateDirector:WhiletheConvertibleDebentureisoutstanding,orwhileCICSubcohasa15%directorindirectshareholdinginterestintheCompany,CICSubcohastheright,butnottheobligation,tonominateonepersontotheBoard.
WhenCICSubconominatesaperson,theBoardisnotobligedtoappointsuchnomineeasadirector;theelectionofanomineetotheBoardissubjecttoShareholders'approval.
Furthermore,theCICSubcocannotrequirethatitsnomineebeemployedbyorparticipateastheCompany'sexecutiveormanager,andthesoleentitlementofthenomineeistoactinthecapacityofdirector.
IfappointedtotheBoardthenomineewouldbeanon-independentnon-executivedirector.
VotingRestriction:CICoranytransfereewillbeentitledtoonevoteperCommonShareheldonmatterstobevotedonbyShareholders.
However,ifconversionresultsinCICSubco,oritsaffiliates,directlyorindirectlyowningmorethan29.
9%ofthefullydilutedCommonSharesoutstanding,CICSubcowillnotvoteanyShareinexcessof29.
9%.
ThiscapinCIC'svotingrightsisacontractualagreementbetweenCICandtheCompanyandwillnotextendtothirdpartytransfereesofallorapartofanyCommonSharesissuedtoCICandthereaftersoldtoathirdparty.
ThecapdoesincludesharesheldbyCICaffiliates,andsharesbeneficiallyownedbyCIC,soaffiliatetransfereesarepartoftheaggregatesummationtodeterminethe29.
9%.
Further,ifCICtransfersitsinterest,inthe100ConvertibleDebentureortheancillaryagreements,thelatterbeingthesecurityholder'sagreementandtheregistrationrightsagreementmadeinconnectionwiththeConvertibleDebenturefinancing,toanaffiliate,thetransfereeoftheinterestwouldbeboundbythecontractualvotinglimitation.
Security:TheConvertibleDebentureissecuredbyafirstchargeovertheCompany'sassets.
Standardloanrestrictivecovenantsregardingincurringadditionaldebtandgrantingadditionalsecuritytothirdparties(withstandardcarve-outsandgraceperiodsforissuesofthistype)applytotheCompanyanditsdirectandindirectsubsidiaries.
Pre-emptiveRight:WhiletheConvertibleDebentureisoutstanding,orwhileCICSubcohasa15%directorindirectshareholdinginterestintheCompany,theCICSubcohasapre-emptiverightonaproratabasistosubscribeforanynewCommonSharesissuedduringtheperiodwhichtheConvertibleDebenturesremainoutstanding.
Thepre-emptiverightwillnotapplytonewCommonSharesissuedpursuanttopro-ratapublicequityofferingsmadetoallShareholders,ortheexerciseofstockoptionsandsharestoachievea25%publicfloat.
RightofFirstOffer:WhiletheConvertibleDebentureisoutstanding,orwhileCICSubcohasa15%directorindirectshareholdinginterestintheCompany,CICSubcohasarightoffirstofferforanydirectorindirectsaleofTurquoiseHill'sstakeintheCompany.
LiquidityRights:CICSubcohasregistrationrightsforCommonSharesreceiveduponconversionoftheConvertibleDebenture.
Undercertainconditions,includingthenon-paymentofinterestamountsasthesamebecomedue,amountsoutstandingundertheConvertibleDebenturemaybeaccelerated.
BankruptcyandinsolvencyeventswithrespecttotheCompanyoritsmaterialsubsidiarieswillresultinanautomaticaccelerationoftheindebtednessundertheConvertibleDebenture.
Subjecttonoticeandcureperiods,certaineventsofdefaultundertheConvertibleDebenturewillresultinaccelerationoftheindebtednessundersuchdebentureattheoptionofCIC.
Suchothereventsofdefaultinclude,butarenotlimitedto,non-payment,breachofwarranty,non-performanceofobligationsundertheConvertibleDebenture,defaultonotherindebtednessandcertainadversejudgments.
OnJune12,2017,theCompanyexecutedtheJune2017DeferralAgreementwithCICforarevisedrepaymentscheduleonthe$22.
3millionofcashinterestandassociatedcostsdueundertheConvertibleDebentureonMay19,2017.
ThekeyrepaymenttermsoftheJune2017DeferralAgreementare:(i)theCompanywasrequiredtorepayonaverage$2.
2millionofthecashinterestandassociatedcostsmonthlyduringtheperiodfromMay2017toOctober2017;and(ii)theCompanywasrequiredtorepay$9.
7millionofcashinterestandassociatedcostsonNovember19,2017.
TheCompanywillpayadeferralfeeatarateof6.
4%perannuminconsiderationforthedeferral.
OnApril23,2019,theCompanyexecutedthe2019DeferralAgreementwithCICinrelationtoadeferralandrevisedrepaymentscheduleinrespectof(i)$41.
8millionofoutstandingcashandpaymentinkindinterestandassociatedcostsdueandpayabletoCIConNovember19,2018undertheConvertibleDebentureandtheJune2017DeferralAgreement;and(ii)$27.
9millionofcashandPIKInterestpaymentspayabletoCICundertheConvertibleDebenturefromApril23,2019toandincludingMay19,2020.
PursuanttoSection501(c)oftheTSXCompanyManual,the2019DeferralAgreementbecameeffective101onJune13,2019,beingthedateonwhichthe2019DeferralAgreementwasapprovedbyshareholdersattheCompany'sadjournedannualandspecialmeetingofshareholders.
Thekeyrepaymenttermsofthe2019DeferralAgreementare:(i)theCompanyagreedtopayatotalof$14.
3millionovereightinstalmentsfromNovember2019toJune2020;(ii)theCompanyagreedtopaythePIKInterestcoveredbytheDeferralbywayofcashpayments,ratherthantheissuanceofCommonShares;and(iii)theCompanyagreedtopaytheremainingbalanceof$62.
6milliononJune20,2020.
TheCompanyagreedtopayadeferralfeeatarateof6.
4%perannuminconsiderationofthedeferredamounts.
Atanytimebeforethepaymentunderthetermsofthe2019DeferralAgreementisfullyrepaid,theCompanyisrequiredtoconsultwithandobtainwrittenconsentfromCICpriortoeffectingareplacementorterminationofeitherorbothofitsChiefExecutiveOfficeranditsChiefFinancialOfficer,otherwisethiswillconstituteaneventofdefaultundertheConvertibleDebenture,butCICshallnotwithholditsconsentiftheBoardproposestoreplaceeitherorbothsuchofficerswithnomineesselectedbytheBoard,providedthattheBoardactedhonestlyandingoodfaithwithaviewtothebestinterestsoftheCompanyintheselectionoftheapplicablereplacements.
AsaconditiontoagreeingtotheDeferral,CICrequiredthattheCooperationAgreementdatedNovember19,2009betweenSGSandCIC,beamendedandrestatedtoclarifythemannerinwhichtheservicefeepayabletoCICundertheCooperationAgreementiscalculated,witheffectasofJanuary1,2017.
Specifically,theManagementFeeundertheAmendedandRestatedCooperationAgreementisdeterminedbasedonthenetrevenuesrealizedbytheCompanyandallofitssubsidiariesderivedfromsalesintoChina(ratherthanthenetrevenuesrealizedbytheCompanyanditsMongoliansubsidiariesascurrentlycontemplatedundertheCooperationAgreement).
AsconsiderationfordeferringpaymentoftheadditionalManagementFeepayabletoCICasaresultoftheAmendedandRestatedCooperationAgreement,theCompanyagreedtopaytoCICadeferralfeeattherateof2.
5%ontheoutstandingManagementFee.
PursuanttotheAmendedandRestatedCooperationAgreement,theCompanyagreedtopayCICthetotaloutstandingManagementFeeandrelatedaccrueddeferralfeeof$4.
2millionoversixinstalmentsfromJune2019toNovember2019.
TheCompanyexecutedtheAmendedandRestatedCooperationAgreementwithCIConApril23,2019.
Pursuanttotheirterms,boththe2019DeferralAgreementandtheAmendedandRestatedCooperationAgreementbecameeffectiveonJune13,2019,beingthedateonwhichthe2019DeferralAgreementwasapprovedbyshareholdersattheCompany'sadjournedannualandspecialmeetingofshareholders.
Inconnectionwiththe2019DeferralAgreement,theCompanyalsoannouncedthatitintendstodiscussapotentialdebtrestructuringplanwithrespecttoamountsowingtoCICwhichismutuallybeneficialtotheCompanyandCIC;andtoformaspecialcommitteecomprisedofindependentdirectorstoensurethattheinterestsofitsminorityshareholdersarefairlyconsideredinthenegotiationandreviewofanysuchrestructuring;however,therecanbenoassurancethatafavorableoutcomewillbereached.
Asofthedatehereof,therehasnotbeenanysignificantprogressinrelationstotherestructuringplan.
OnFebruary19,2020,theCompanyandCICenteredintothe2020FebruaryDeferralAgreementpursuanttowhichCICagreedtogranttheCompanyadeferralof:(i)the2020FebruaryDeferralAmounts;and(ii)approximately$0.
7millionoftheManagementFeewhichwasdueandpayableonFebruary14,2020toCICundertheAmendedandRestatedCooperationAgreement.
The2020FebruaryDeferralAgreementbecameeffectiveonMarch10,2020,beingthedateonwhichtheCompanyobtainedtherequisiteacceptanceofthe2020FebruaryDeferralAgreementfromtheTSXasrequiredunderapplicableTSXrules.
102Theprincipaltermsofthe2020FebruaryDeferralAgreementareasfollows:Paymentofthe2020FebruaryDeferralAmountswillbedeferreduntilJune20,2020,whiletheManagementFeewillbedeferreduntiltheyarerepaidbytheCompany.
Asconsiderationforthedeferraloftheseamounts,theCompanyagreedtopayCIC:(i)adeferralfeeequalto6.
4%perannumonthe2020FebruaryDeferralAmounts,commencingonthedateonwhicheachsuch2020DeferralAmountwouldotherwisehavebeendueandpayableunderthe2019DeferralAgreement;and(ii)adeferralfeeequalto2.
5%perannumontheManagementFee,commencingonthedateonwhichtheManagementFeewouldotherwisehavebeendueandpayableundertheAmendedandRestatedCooperationAgreement.
TheCompanyagreedtoprovideCICwithmonthlyupdatesregardingitsoperationalandfinancialaffairs.
AstheCompanyanticipatedpriortoagreeingtothe2020FebruaryDeferralAgreementthatadeferralwaslikelyrequiredinrespectofthemonthlypaymentsdueandpayableintheperiodbetweenApril2020andJune2020underthe2019DeferralAgreementandAmendedandRestatedCooperationAgreement,theCompanyandCIChaveagreedtodiscussingoodfaithadeferralofthesepaymentsonamonthlybasisastheybecomedue.
Therecanbenoassurance,however,thatafavorableoutcomewillbereachedeitheratalloronfavorableterms.
TheCompanyagreedtocomplywithallofitsobligationsunderthe2019DeferralAgreementandtheAmendedandRestatedCooperationAgreement,asamendedbythe2020FebruaryDeferralAgreement.
TheCompanyandCICagreedthatnothinginthe2020FebruaryDeferralAgreementprejudicesCIC'srightstopursueanyofitsremediesatanytimepursuanttothe2019DeferralAgreementandAmendedandRestatedCooperationAgreement,respectively.
OnMarch10,2020,theCompanyagreedwithCICthatthe$2.
0millionwhichwasdueandpayabletoCIConMarch19,2020underthe2019DeferralAgreementwillbedeferreduntilJune20,2020.
Thetermsofthe2020MarchDeferralAgreementaresubstantiallythesameasthetermsofthe2020FebruaryDeferralAgreement,includingthattheCompanyagreedtopayCICadeferralfeeequalto6.
4%perannumonthe2020MarchDeferralAmount,commencingonMarch19,2020.
The2020MarchDeferralAgreementbecameeffectiveonMarch25,2020,beingthedateonwhichtheCompanyobtainedtherequisiteacceptanceofthe2020MarchDeferralAgreementfromtheTSXasrequiredunderapplicableTSXrules.
OnApril10,2020,theCompanyagreedwithCICthatthe$2.
0millionwhichwasdueandpayabletoCIConApril19,2020underthe2019DeferralAgreementwillbedeferreduntilJune20,2020.
Thetermsofthe2020AprilDeferralAgreementaresubstantiallythesameasthetermsofthe2020FebruaryDeferralAgreement,includingthattheCompanyagreedtopayCICadeferralfeeequalto6.
4%perannumonthe2020AprilDeferralAmount,commencingonApril19,2020.
The2020AprilDeferralAgreementbecameeffectiveonApril29,2020,beingthedateonwhichtheCompanyobtainedtherequisiteacceptanceofthe2020AprilDeferralAgreementfromtheTSXasrequiredunderapplicableTSXrules.
OnMay8,2020,theCompanyagreedwithCICthatthe2020MayDeferralAmountwhichwasdueandpayabletoCIConMay19,2020andMay15,2020underthe2019DeferralAgreementandtheAmendedandRestatedCooperationAgreement,respectively,willbedeferreduntilJune20,2020.
Thetermsofthe2020MayDeferralAgreementaresubstantiallythesameasthetermsofthe2020FebruaryDeferralAgreement,includingthattheCompanyagreedtopayCICadeferralfeeequalto6.
4%perannumonthe103deferredcashinterestanddeferralfeescommencingonMay19,2020andadeferralfeeequalto2.
5%perannumonthedeferredManagementFeescommencingonMay15,2020.
The2020MayDeferralAgreementbecameeffectiveonJune8,2020,beingthedateonwhichtheCompanyobtainedtherequisiteacceptanceofthe2020MayDeferralAgreementfromtheTSXasrequiredunderapplicableTSXrules.
OnJune19,2020,theCompanyagreedwithCICthatthe2020JuneDeferralAmountwhichwasdueandpayabletoCIConJune19,2020underthe2019DeferralAgreementandthepriordeferralagreementsenteredintoduringtheperiodbetweenFebruarytoMay2020willbedeferreduntilSeptember14,2020.
Thetermsofthe2020JuneDeferralAgreementaresubstantiallythesameasthetermsofthe2020FebruaryDeferralAgreement,includingthattheCompanyagreedtopayCICadeferralfeeequalto6.
4%perannumonthe2020JuneDeferralAmountcommencingonJune19,2020.
The2020JuneDeferralAgreementbecameeffectiveonJuly17,2020,beingthedateonwhichtheCompanyobtainedtherequisiteacceptanceofthe2020JuneDeferralAgreementfromtheTSXasrequiredunderapplicableTSXrules.
OnNovember19,2020,theCompanyandCICenteredintothe2020NovemberDeferralAgreementpursuanttowhichCICagreedtogranttheCompanyadeferralofthe2020NovemberDeferralAmounts.
Theeffectivenessofthe2020NovemberDeferralAgreementandtherespectivecovenants,agreementsandobligationsofeachpartyunderthe2020NovemberDeferralAgreementaresubjecttotheCompanyobtainingtherequisiteapprovalofthe2020NovemberDeferralAgreementfromtheCompany'sshareholdersinaccordancewithapplicableTSXrules.
OnOctober29,2020,theCompanyobtainedanorderfromtheBCSCwhichpartiallyrevokedtheCTOto,amongstotherthings,permittheCompanytoexecutethe2020NovemberDeferralAgreement.
Theprincipaltermsofthe2020NovemberDeferralAgreementareasfollows:Paymentofthe2020NovemberDeferralAmountswillbedeferreduntilAugust31,2023.
CICagreedtowaiveitsrightsarisingfromanydefaultoreventofdefaultundertheConvertibleDebentureasaresultoftradingintheCommonSharesbeinghaltedontheTSXbeginningasofJune19,2020andsuspendedontheHKEXbeginningasofAugust17,2020,ineachcaseforaperiodofmorethanfivetradingdays.
Asconsiderationforthedeferralofthe2020NovemberDeferralAmounts,theCompanyagreedtopayCIC:(i)adeferralfeeequalto6.
4%perannumonthe2020NovemberDeferralAmountspayableundertheConvertibleDebentureandthe2020JuneDeferralAgreement,commencingonthedateonwhicheachsuch2020NovemberDeferralAmountwouldotherwisehavebeendueandpayableundertheConvertibleDebentureortheJune2020DeferralAgreement,asapplicable;and(ii)adeferralfeeequalto2.
5%perannumonthe2020NovemberDeferralAmountspayableundertheAmendedandRestatedCooperationAgreement,commencingonthedateonwhichtheManagementFeewouldotherwisehavebeendueandpayableundertheAmendedandRestatedCooperationAgreement.
The2020NovemberDeferralAgreementdoesnotcontemplateafixedrepaymentscheduleforthe2020NovemberDeferralAmountsandrelateddeferralfees.
Instead,theCompanyandCICwouldagreetoassessingoodfaiththeCompany'sfinancialconditionandworkingcapitalpositiononamonthlybasisanddeterminetheamount,ifany,ofthe2020NovemberDeferralAmountsandrelateddeferralfeesthattheCompanyisabletorepayundertheConvertibleDebenture,theJune2020DeferralAgreementortheAmendedandRestatedCooperationAgreement,havingregardtotheworkingcapitalrequirementsoftheCompany'soperationsandbusinessatsuchtimeandwiththeviewofensuringthattheCompany'soperationsandbusinesswouldnotbemateriallyprejudicedasaresultofanyrepayment.
CommencingasofNovember19,2020anduntilsuchtimeastheNovember2020PIKInterestisfullyrepaid,CICreservestherighttorequiretheCompanytopayandsatisfytheamountoftheNovember2020PIKInterest,eitherinfullorinpart,bywayofissuinganddeliveringPIKinterestsharesin104accordancewiththeConvertibleDebentureprovidedthat,onthedateofissuanceofsuchshares,theCommonSharesarelistedandtradingonatleastonestockexchange.
Ifatanytimebeforethe2020NovemberDeferralAmountsandrelateddeferralfeesarefullyrepaid,theCompanyproposestoappoint,replaceorterminateoneormoreofitsChiefExecutiveOfficer,itsChiefFinancialOfficeroranyotherseniorexecutive(s)inchargeofitsprincipalbusinessfunctionoritsprincipalsubsidiary,thentheCompanymustfirstconsultwith,andobtainwrittenconsentfromCICpriortoeffectingsuchappointment,replacementortermination.
OnJanuary21,2021,the2020NovemberDeferralAgreementwasapprovedattheCompany'sannualandspecialmeetingofshareholders.
Asaresult,the2020NovemberDeferralAgreement,togetherwiththedeferralandwaiverthereunderinfavouroftheCompany,becameeffectiveasofthesamedate.
AcopyoftheConvertibleDebenturemaybefoundundertheCompany'sprofileonSEDARatwww.
sedar.
com.
CICMutualCooperationAgreementOnNovember19,2009,theCompanyenteredintotheCooperationAgreementwithCIC.
Theagreementisoncommercialtermsconsistentwithindustrypractices.
UnderthetermsoftheCooperationAgreement,CICagreedtoprovideadvisoryservicestotheCompanyinrelationtothesaleofcoalintothePRC,andotherprocurementandlogisticsrelatedmatters.
Inconsideration,theCompanyagreedtoacommercialpaymentforsuchservicesbasedontheamountoftheCompany'scoalsalesintothePRCwhichoriginatedfromMongolia.
AsaconditiontoagreeingtotheDeferral,CICrequiredthattheCooperationagreementbeamendedandrestatedtoclarifythemannerinwhichtheManagementFeepayabletoCICundertheCooperationAgreementiscalculated,witheffectasofJanuary1,2017.
Specifically,theManagementFeeundertheAmendedandRestatedCooperationAgreementisdeterminedbasedonthenetrevenuesrealizedbytheCompanyandallofitssubsidiariesderivedfromsalesintoChina(ratherthanthenetrevenuesrealizedbytheCompanyanditsMongoliansubsidiariesascurrentlycontemplatedundertheCooperationAgreement).
AsconsiderationfordeferringpaymentoftheadditionalManagementFeepayabletoCICasaresultoftheAmendedandRestatedCooperationAgreement,theCompanyagreedtopaytoCICadeferralfeeattherateof2.
5%ontheoutstandingManagementFee.
PursuanttotheAmendedandRestatedCooperationAgreement,theCompanyagreedtopayCICthetotaloutstandingManagementFeeandrelatedaccrueddeferralfeeof$4.
2millionoversixinstalmentsfromJune2019toNovember2019.
PursuanttoSection501(c)oftheTSXCompanyManual,theAmendedandRestatedCooperationAgreementbecameeffectiveonJune13,2019,beingthedateonwhichthe2019DeferralAgreementwasapprovedbyshareholdersattheCompany'sadjournedannualandspecialmeetingofshareholders.
INTERESTSOFEXPERTSBDOLimitedistheindependentauditoroftheCompanyandtheyhaveadvisedthattheyareindependentwithrespecttotheCompanywithinthemeaningoftheCodeofProfessionalConductoftheInstituteofCharteredProfessionalAccountantsofBritishColumbia.
DisclosureinthisAnnualInformationFormrelatingtoscientificandtechnicalinformationwithrespecttotheOvootTolgoiDepositisderivedfromtheOvootTolgoiTechnicalReportpreparedinaccordancewithNI43-101byDragonMiningConsultingLimited("DMCL").
TotheknowledgeoftheCompany,DMCLnoranyofitsrespective"designatedprofessionals"(assuchtermisdefinedinNI51-102)heldsecuritiesoftheCompanyrepresentinginexcessof1%oftheoutstandingsecuritiesofanyclassatthetimeofthepreparationofthereport.
105INSURANCETheCompanycurrentlyholdstheirprimaryinsurancepoliciesthroughCanadianinsuranceproviderstoinsureitsproperties.
TheCompanyhastakenoutinsuranceforrisksincludingcommercialgeneralliabilityandminingpropertyinsuranceforallofitsminingassetswhereverlocated.
However,noassurancecanbegiventhattheCompanywillelectorbeabletoobtainsuchinsurancecoverageateconomicallyreasonablepremiums(oratall),orthatanycoverageitobtainswillbeadequatetocovertheextentofanyclaimsbroughtagainstit.
ADDITIONALINFORMATIONAdditionalinformation,includingdirectors'andofficers'remunerationandindebtedness,principalholdersoftheCompany'ssecuritiesandsecuritiesauthorizedforissuanceunderequitycompensationplansiscontainedintheCompany'smanagementproxycirculardatedDecember9,2020fortheCompany'sannualandspecialmeetingofshareholdersheldonJanuary21,2021.
AdditionalfinancialinformationiscontainedintheCompany'scomparativefinancialstatementsandMD&AasatandfortheyearsendedDecember31,2019and2018,copiesofwhichareavailableundertheCompany'sprofileonSEDARatwww.
sedar.
comandmayalsobeobtainedbyrequesttoSouthGobiResourcesLtd.
,20thfloor–250HoweStreet,Vancouver,BritishColumbia,CanadaV6C3R8,Attention:CorporateSecretary,orbyphoneto604-762-6783orUnit1208-10,Tower1,GrandCenturyPlace,193PrinceEdwardRoadWest,Mongkok,Kowloon,HongKong.
AdditionalinformationrelatingtotheCompanymaybefoundundertheCompany'sprofileonSEDARatwww.
sedar.
com.
S-1SCHEDULE"A"AUDITCOMMITTEECHARTER(amendedNovember23,2020)I.
PurposeTheprimaryobjectiveoftheAuditCommittee(the"Committee")ofSouthGobiResourcesLtd.
(the"Company")istoactasaliaisonbetweentheBoardandtheCompany'sindependentauditors(the"Auditors")andtoassisttheBoardinfulfillingitsoversightresponsibilitieswithrespectto:(a)theintegrityandaccuracyofthefinancialstatementsandotherfinancialinformationprovidedbytheCompanytoitsshareholders,thepublicandothers;(b)theCompany'scompliancewithlegalandregulatoryrequirements;(c)theCompany'sriskmanagementandinternalfinancialandaccountingcontrols,andmanagementinformationsystems;and(d)thequalification,independenceandperformanceoftheAuditors.
AlthoughtheCommitteehasthepowersandresponsibilitiessetforthinthisCharter,theroleoftheCommitteeisoversight.
ThemembersoftheCommitteearenotfull-timeemployeesoftheCompanyandmayormaynotbeaccountantsorauditorsbyprofessionorexpertsinthefieldsofaccountingorauditingand,inanyevent,donotserveinsuchcapacity.
Consequently,itisnotthedutyoftheCommitteetoconductauditsortodeterminethattheCompany'sfinancialstatementsanddisclosuresarecompleteandaccurateandareinaccordancewithgenerallyacceptedaccountingprinciplesandapplicablerulesandregulations.
ThesearetheresponsibilitiesofmanagementandtheAuditors.
TheresponsibilitiesofamemberoftheCommitteeareinadditiontosuchmember'sdutiesasamemberoftheBoard.
II.
OrganizationTheCommitteeshallconsistofthreeormoreindependentnon-executivedirectorsoftheCompany.
TheCommitteemembershipshallsatisfy,ataminimum,thelawsgoverningtheCompanyandtheindependence,financialliteracy,expertiseandfinancialexperiencerequirementsunderapplicablesecuritieslaws,rulesandregulations,stockexchangerulesandpolicies,andanyotherregulatoryrequirementsapplicabletotheCompany.
ThemembersoftheCommitteeandtheChairoftheCommitteeshallbeappointed(andmaybereplaced)bytheBoardontherecommendationoftheNominating&CorporateGovernanceCommittee.
TheappointmentofmembersoftheCommitteeshalltakeplaceannuallyatthefirstmeetingoftheBoardafterameetingofshareholdersatwhichdirectorsareelected,providedthatiftheappointmentofmembersoftheCommitteeisnotsomade,thedirectorswhoarethenservingasmembersoftheCommitteeshallcontinueasmembersoftheCommitteeuntiltheirsuccessorsareappointed.
MembersoftheCommitteeshallnotsimultaneouslyserveontheauditcommitteesofmorethantwootherpubliccompanies,unlesstheBoardfirstdeterminesthatsuchsimultaneousservicewillnotimpairtheabilityoftherelevantmembertoeffectivelyserveontheCommittee.
MembersoftheCommitteemustbefinanciallyliterate,astheBoardinterpretssuchqualificationinitsbusinessjudgment,andallmembersshallbeabletoreadandunderstandtheCompany'sfinancialstatementsandtounderstandthebreadthandcomplexityoftheissuesthatcanreasonablybeexpectedtoberaisedbytheCompany'sfinancialstatements.
S-2NomemberoftheCommitteeshallhave(i)beenapartneroforotherwisehavehadafinancialinterestintheAuditorsduringthepasttwoyears;or(ii)participatedinthepreparationofthefinancialstatementsoftheCompanyoranycurrentsubsidiaryatanytimeduringthepastthreeyears.
AtleastonememberoftheCommitteeshallhavepastemploymentexperienceinfinanceoraccountingofpubliccompanies,requisiteprofessionalcertificationinaccounting,oranyothercomparableexperienceorbackgroundwhichresultsinsuchindividual'sfinancialsophistication(includingbeingorhavingbeenachiefexecutiveofficer,chieffinancialofficerorotherseniorofficerwithfinancialoversightresponsibilities).
AnymemberoftheCommitteemayberemovedorreplacedatanytimebytheBoardandshallceasetobeamemberoftheCommitteeassoonassuchmemberceasestobeadirectoroftheCompany.
WhereavacancyoccursatanytimeinthemembershipoftheCommittee,itmaybefilledbytheBoardontherecommendationoftheNominating&CorporateGovernanceCommittee.
TheCommitteemayformanddelegateauthoritytoindividualmembersorsubcommitteeswhenappropriate.
ThemembersoftheCommitteeshallbeentitledtoreceivesuchremunerationforactingasmembersoftheCommitteeastheBoardmayfromtimetotimedetermine.
III.
MeetingsTheCommitteeshallmeetasfrequentlyastheCommitteedeemsnecessarytocarryoutitsdutieseffectively,butnotlessfrequentlythanfourtimesperyear.
TheCommitteeshallmeetatleastquarterlywithmanagement,theCompany'sfinancialandaccountingofficer(s)andtheAuditorsinseparatesessionstodiscussanymattersthattheCommitteeoreachofthesegroupsbelieveshouldbediscussedprivately.
Meetingsmaybeheldinperson,bytelephone,byvideo-conferenceorbyanycombinationofanyoftheforegoing,totheextentpermittedbytheCompany'sconstatingdocumentsandapplicablecorporatelaw.
AmajorityofthemembersoftheCommittee,presentinperson,byvideo-conference,bytelephoneorbyacombinationthereof,shallconstituteaquorum.
MattersdecidedbytheCommitteeshallbedecidedbyamajorityvote.
TheChairoftheCommitteeshallhaveanordinaryvoteandnotacastingvote.
TheChairoftheCommitteeshallbeanindependentchairwhoisnottheChairoftheBoard.
IntheabsenceoftheappointedChairoftheCommitteeatanymeeting,themembersshallelectatemporaryChairfromthoseinattendanceatthemeeting.
TheChairoftheCommittee,inconsultationwiththeothermembersoftheCommittee,shallsetthefrequencyandlengthofeachmeetingandtheagendaofitemstobeaddressedateachupcomingmeeting.
TheChairshallensurethattheagendaforeachupcomingmeetingoftheCommitteeiscirculatedtoeachmemberoftheCommitteeinadvanceofthemeeting.
TheCommitteewillappointaSecretarywhowillkeepfullminutesofallmeetings.
TheSecretarymaybetheCompany'sCorporateSecretaryoranotherpersonwhodoesnotneedtobeamemberoftheCommittee.
DraftandfinalversionsofthemeetingminutesshallbesenttoallmembersoftheCommitteewithinareasonabletimefollowingsuchmeetings,which,inthecaseofdraftmeetingminutes,shallbecirculatednolaterthan21daysfollowingthedateoftheapplicablemeeting.
TheCommitteemayinvite,fromtimetotime,suchpersonsasitmayseefittoattenditsmeetingsandtotakepartindiscussionandconsiderationoftheaffairsoftheCommittee.
TheCompany'saccountingandfinancialofficer(s)andtheAuditorsshallattendanymeetingwhenrequestedtodosobytheChairoftheCommittee.
S-3IV.
AuthorityandResponsibilitiesTheBoard,afterconsiderationoftherecommendationoftheCommittee,shallnominatetheAuditorsforappointmentbytheshareholdersoftheCompanyinaccordancewithapplicablelaw.
TheAuditorsreportdirectlytotheCommittee.
TheAuditorsareultimatelyaccountabletotheCommitteeandtheBoardasrepresentativesoftheshareholders.
InfulfillingitsdutiesandresponsibilitiesunderthisCharter,theCommitteewillbeentitledtoreasonablyrelyon:(a)theintegrityofthosepersonswithintheCompanyandoftheprofessionalsandexperts(suchastheAuditors)fromwhomitreceivesinformation;(b)theaccuracyofthefinancialandotherinformationprovidedtotheCommitteebysuchpersons,professionalsorexperts;and(c)therepresentationsmadebytheAuditorsastoanyservicesprovidedbythemtotheCompany.
TheCommitteeshallhavethefollowingresponsibilities:(a)Auditors1.
RecommendtotheBoardtheindependentauditorstobenominatedforappointmentorreappointmentastheAuditorsoftheCompanyattheCompany'sannualmeetingofshareholdersandtheremunerationtobepaidtotheAuditors;approvethescopeofallauditingservicestobeprovidedbytheAuditors;bedirectlyresponsiblefortheoversightoftheworkoftheAuditors,includingtheresolutionofdisagreementsbetweenmanagementandtheAuditorsregardingfinancialreporting;andrecommendtotheBoardandtheshareholderstheterminationoftheappointmentoftheAuditors,ifandwhenadvisable.
2.
WhenthereistobeachangeoftheAuditors,(i)reviewallissuesrelatedtothechange,includinganynoticesrequiredunderapplicablelaw,stockexchangerulesorpolicies,orotherregulatoryrequirements,andtheplannedstepsforanorderlytransition;and(ii)beprimarilyresponsibleforquestionsrelatingtosuchchange.
3.
ReviewanddiscusswiththeAuditorstheirauditplan,scope,staffing,materialitythreshold,andgeneralauditapproach.
4.
ReviewandmonitortheAuditors'independenceandobjectivityandtheeffectivenessoftheauditprocessinaccordancewithapplicablestandards.
TheCommitteeshoulddiscusswiththeAuditorsthenatureandscopeoftheauditandreportingobligationspriortothecommencementoftheaudit.
5.
ReviewonanannualbasistheperformanceoftheAuditors,includingtheleadauditpartner.
6.
TakereasonablestepstoconfirmtheindependenceoftheAuditors,whichinclude:(a)ensuringreceiptfromtheAuditorsofaformalwrittenstatementinaccordancewithapplicableregulatoryrequirementsdelineatingallrelationshipsbetweentheAuditorsandtheCompany;(b)consideringanddiscussingwiththeAuditorsanydisclosedrelationshipsorservices,includingnon-auditservices,thatmayimpacttheobjectivityandindependenceoftheAuditors;(c)developingandimplementingapolicyontheprovisionofnon-auditrelatedservicesprovidedbytheAuditorstotheCompanyoritssubsidiariesandapprovinginadvancetheS-4provisionofandthefeesforsuchservices,withaviewtoensureindependenceoftheAuditors,andinaccordancewithapplicableregulatorystandards,includingapplicablestockexchangerequirementswithrespecttoapprovalofnon-auditrelatedservicesperformedbytheAuditors(forthepurposesofthisPartIV(a)(6)(c),Auditorsincludeanyentitythatisundercommoncontrol,ownershipormanagementwiththeAuditorsoranyentitythatareasonableandinformedthirdpartyknowingalltherelevantinformationwouldreasonablyconcludetobepartoftheAuditors,nationallyorinternationally);and(d)asnecessary,takingorrecommendingthattheBoardtakeappropriateactiontooverseetheindependenceoftheAuditors.
7.
Reviewandapproveanydisclosuresrequiredtobeincludedinperiodicreportsunderapplicablesecuritieslaws,rulesandregulationsandstockexchangeandotherregulatoryrequirementswithrespecttonon-auditservicesprovidedbytheAuditors.
8.
ConfirmwiththeAuditorsandreceivewrittenconfirmationatleastonceperyear:(i)indicatingthattheAuditorsareamemberingoodstandingwiththeCanadianPublicAccountabilityBoard(CPAB)andcomparablebodieselsewheretotheextentrequiredanddisclosinganysanctionsorrestrictionsimposedbytheCPABandsuchothercomparablebodies;and(ii)respondingtoanyotherreasonablerequestoftheCommitteeforconfirmationastotheirqualificationstoactastheCompany'sAuditors.
9.
Considerthetenureoftheleadauditpartnerontheengagementinlightofapplicablelaw,stockexchangerulesandpoliciesorotherregulatoryrequirements.
10.
ReviewallreportsrequiredtobesubmittedbytheAuditorstotheCommitteeunderapplicablelaws,rulesandregulations,stockexchangerulesandpoliciesorotherregulatoryrequirements.
11.
ReceiveandconsiderallrecommendationsandexplanationswhichtheAuditorsplacebeforetheCommittee.
12.
Ensurethattheprovisionofanynon-auditrelatedservicesbytheAuditorsdoesnotimpairtheirindependenceorobjectivityanddevelopandimplementanynecessarypoliciesinthatregard.
(b)FinancialStatementsandFinancialInformation13.
Reviewanddiscusswithmanagement,thefinancialandaccountingofficer(s)oftheCompanyandtheAuditors,theCompany'sannualauditedfinancialstatements,includingthedisclosuremadeinManagement'sDiscussionandAnalysisrelatingtheretoandtheAuditor'sreportthereon,priortofilingordistributionofsuchstatements,andrecommendtotheBoard,ifappropriate,thattheCompany'sauditedfinancialstatementsbeincludedintheCompany'sannualreportsdistributedandfiledunderapplicablelawsandregulatoryrequirements.
14.
Reviewanddiscusswithmanagement,thefinancialandaccountingofficer(s)oftheCompanyandtheAuditors,theCompany'sinterimfinancialstatements,includingthedisclosuremadeinManagement'sDiscussionandAnalysisrelatingtheretoandtheAuditors'reviewofsuchinterimfinancialstatements,priortofilingordistributionofsuchstatements.
15.
ReviewanyearningspressreleaseoftheCompanybeforetheCompanypubliclydisclosesthisinformation.
S-516.
BesatisfiedthatadequateproceduresareinplaceforthereviewoftheCompany'sdisclosureoffinancialinformationextractedorderivedfromtheCompany'sfinancialstatementsandperiodicallyassesstheadequacyoftheseprocedures.
17.
DiscusswiththeAuditorsandreviewthemattersrequiredtobediscussedbyapplicableauditingstandardsrequirementsrelatingtotheconductoftheaudit,including:(a)theadoptionof,orchangesto,theCompany'ssignificantauditingandaccountingprinciplesandpractices,includingsignificantassumptionsandqualifications;(b)themanagementletterprovidedbytheAuditorsandtheCompany'stimelyresponsetothatletter;(c)anydifficultiesencounteredinthecourseoftheauditwork,includinganyrestrictionsonthescopeofactivitiesoraccesstorequestedinformation,orpersonnelandanysignificantdisagreementswithmanagement;and(d)anymaterialqueriesraisedbytheAuditorstomanagementaboutaccountingrecords,financialaccountsorsystemsofcontrolandmanagement'sresponse.
18.
DiscusswithmanagementandtheAuditorsanymajorissuesregardingaccountingprinciplesusedinthepreparationoftheCompany'sfinancialstatements,includinganysignificantchangesintheCompany'sselectionorapplicationofaccountingprinciples,atleasttwiceayear.
Reviewanddiscussanalysespreparedbymanagementand/ortheAuditorssettingforthsignificantfinancialreportingissuesandjudgmentsmadeinconnectionwiththepreparationofthefinancialstatements,includinganalysesoftheeffectsofalternativeapproachesundergenerallyacceptedaccountingprinciples.
19.
Reviewanyreportunderapplicablesecuritieslaw,stockexchangerulesorpoliciesorotherregulatoryrequirements,includinganyreportsrequiredtobeincludedinstatutoryfilings,includingintheCompany'sannualproxystatement.
(c)OngoingReviewsandDiscussionswithManagementandOthers20.
ObtainandreviewanannualreportfrommanagementrelatingtotheaccountingprinciplesusedinthepreparationoftheCompany'sfinancialstatements,includingthosepoliciesforwhichmanagementisrequiredtoexercisediscretionorjudgmentsregardingtheimplementationthereof.
21.
Periodicallyreviewseparatelywitheachofmanagement,thefinancialandaccountingofficer(s)oftheCompanyandtheAuditors:(a)anysignificantdisagreementbetweenmanagementandtheAuditorsinconnectionwiththepreparationofthefinancialstatements,;(b)anydifficultiesencounteredduringthecourseoftheaudit,includinganyrestrictionsonthescopeofworkoraccesstorequiredinformation;and(c)management'sresponsetoeach.
22.
PeriodicallydiscusswiththeAuditors,withoutmanagementbeingpresent:(a)theirjudgmentsaboutthequality,integrityandappropriatenessoftheCompany'saccountingprinciplesandfinancialdisclosurepracticesasappliedinitsfinancialreporting;and(b)thecompletenessandaccuracyoftheCompany'sfinancialstatements.
23.
MonitortheintegrityoftheCompany'sfinancialstatementsandannualreportandaccounts,half-yearreportand,ifpreparedforpublication,quarterlyreports,andreviewsignificantfinancialS-6reportingjudgmentscontainedtherein.
InreviewingsuchreportsbeforesubmissiontotheBoard,theCommittee'sreviewshallincludeareviewof:(a)anychangesinaccountingpoliciesandpractices;(b)majorjudgmentalareas;(c)significantadjustmentsresultingfromtheaudit;(d)goingconcernassumptionsandanyqualifications;(e)compliancewithaccountingstandards;and(f)compliancewithapplicablestockexchangeregulationsandotherlegalrequirementsrelatingtofinancialreporting.
24.
Considerandapprove,ifappropriate,significantchangestotheCompany'saccountingprinciplesandfinancialdisclosurepracticesassuggestedbytheAuditorsormanagementandtheresultingfinancialstatementimpact.
ReviewwiththeAuditorsormanagementtheextenttowhichanychangesorimprovementsinaccountingorfinancialpractices,asapprovedbytheCommittee,havebeenimplemented.
25.
Reviewanddiscusswithmanagement,theAuditorsandtheCompany'sindependentcounsel,asappropriate,anylegal,regulatoryorcompliancemattersthatcouldhaveasignificantimpactontheCompany'sfinancialstatements,includingapplicablechangesinaccountingstandardsorrules,orcompliancewithapplicablelawsandregulations,inquiriesreceivedfromregulatorsorgovernmentagenciesandanypendingmateriallitigation.
26.
DiscusswiththeCompany'sfinancialandaccountingofficer(s)andtheAuditorsanymatterswhichshouldbebroughttotheattentionoftheCommitteeconcerningaccounting,financialandoperatingpracticesandcontrolsandaccountingpracticesoftheCompanyandgivedueconsiderationtosuchmatters.
27.
ReviewtheprincipalcontrolriskstothebusinessoftheCompany,itssubsidiariesandjointventures;andverifythateffectivecontrolsystemsareinplacetomanageandmitigatetheserisks.
28.
Reviewanddiscusswithmanagementanyearningspressreleases,includingtheuseof"proforma"or"adjusted"non-GAAPinformation,aswellasanyfinancialinformationandearningsguidanceprovidedtoanalystsandratingagencies,beforetheCompanypubliclydisclosesthisinformation.
Suchdiscussionsmaybedonegenerally(i.
e.
,discussionofthetypesofinformationtobedisclosedandthetypesofpresentationsmade).
29.
Reviewanddiscusswithmanagementanymaterialoff-balancesheettransactions,significantorunusualitems,arrangements,obligations(includingcontingentobligations)andotherrelationshipsoftheCompanywithunconsolidatedentitiesorotherpersons,thatmayneedtobereflectedinthereportsoraccounts,ormayhaveamaterialcurrentorfutureeffectonfinancialcondition,changesinfinancialcondition,resultsofoperations,liquidity,capitalresources,capitalreservesorsignificantcomponentsofrevenuesorexpenses.
Obtainexplanationsfrommanagementofallsignificantvariancesbetweencomparativereportingperiods.
S-730.
ReviewanddiscusswithmanagementtheCompany'smajorriskexposuresandthestepsmanagementhastakentomonitor,controlandmanagesuchexposures,includingtheCompany'sriskassessmentandriskmanagementguidelinesandfinancialandaccountingpolicies.
(d)RiskManagementandInternalControls31.
Review,basedupontherecommendationoftheAuditorsandmanagement,thescopeandplanoftheworktobedonebytheCompany'sfinancialandaccountinggroupandtheresponsibilities,budgetandstaffingneedsofsuchgroup.
32.
Discusstheinternalcontrolsystemwithmanagementtoensurethatmanagementhasperformeditsdutytohaveaneffectiveinternalcontrolsystem.
Suchdiscussionsshouldincludeadequacyofresources,staffqualificationsandexperience,trainingprogramsandbudgetoftheCompany'saccountingandfinancialreportingfunction.
33.
Ensurethatmanagementhasdesignedandimplementedeffectivesystemsofriskmanagementandinternalcontrolsand,atleastannually,reviewandassesstheeffectivenessofsuchsystems.
34.
ApproveandrecommendtotheBoardforadoptionpoliciesandproceduresonriskoversightandmanagementtoestablishaneffectivesystemforidentifying,assessing,monitoringandmanagingrisk.
35.
InconsultationwiththeAuditorsandmanagement,reviewtheadequacyoftheCompany'sinternalcontrolstructureandproceduresdesignedtoensurecompliancewithapplicablelawsandregulations,anddiscusstheresponsibilities,budgetandstaffingneedsoftheCompany'sfinancialandaccountinggroup.
36.
Establishandreviewproceduresfor:(a)thereceipt,retentionandtreatmentofcomplaintsreceivedbytheCompanyregardingaccounting,internalaccountingcontrolsorauditingmatters;and(b)theconfidential,anonymoussubmissionbyemployeesoftheCompanyofconcerns,includingwithoutlimitation,concernswithrespecttointernalcontrols,financialreportingandquestionableaccountingorauditingmatters.
TheCommitteeshouldensurethatproperarrangementsareinplaceforfairandindependentinvestigationofsuchmattersandforappropriatefollow-up.
37.
EnsurecoordinationbetweentheAuditorsandtheCompany'sinternalauditteamandensurethattheinternalauditorfunctionisadequatelyresourcedandhasappropriatestandingwithintheCompany;MaintainadirectreportingrelationshipwiththeCompany'sinternalauditteamandreview:(i)theinternalcontrolreportspreparedbymanagement,includingmanagement'sassessmentoftheeffectivenessoftheCompany'sinternalcontrolstructureandproceduresforfinancialreporting;(ii)theAuditors'attestationandreportontheassessmentmadebymanagement;and(iii)theperformanceoftheCompany'sinternalauditteamonanannualbasis.
38.
ReviewtheappointmentoftheChiefFinancialOfficerandanykeyfinancialexecutivesinvolvedinthefinancialreportingprocessandrecommendtotheNominatingandCorporateGovernanceCommitteeandtotheBoardanychangesinsuchappointments.
39.
ReviewarrangementsthatemployeesoftheCompanycanuse,inconfidence,toraiseconcernsaboutpossibleimproprietiesinfinancialreporting,internalcontrolorothermatters.
TheCommitteeshouldensurethatproperarrangementsareinplaceforfairandindependentinvestigationofthesemattersandforappropriatefollow-upaction;andactasthekeyrepresentativebodyforoverseeingtheCompany'srelationswiththeAuditors.
S-8(e)OtherResponsibilities40.
CreateanagendaandtimetablefortheCommitteefortheensuingyear.
41.
Reviewandapproverelated-partytransactionsifrequiredunderapplicablelaw,stockexchangeorotherregulatoryrequirements.
42.
Considermajorinvestigationfindingswithrespecttoriskmanagementandinternalcontrolmatters,asdelegatedbytheBoardoronitsowninitiative,andmanagement'sresponsetosuchfindings.
43.
Reviewandapprove:(a)anychangeorwaiverintheCompany'scodeofethicsapplicabletoseniorfinancialofficers;and(b)anydisclosuresmadeunderapplicablelaw,stockexchangeorotherregulatoryrequirementsregardingsuchchangeorwaiver.
44.
Establish,reviewandapprovepoliciesforthehiringofpartners,formerpartners,employees,orformeremployeesoftheAuditorsortheCompany'sformerindependentauditors.
45.
Reviewandreassesstheadequacyof,andthedutiesandresponsibilitiessetoutin,thisCharterannuallyandrecommendtotheNominatingandCorporateGovernanceCommitteeandtotheBoardanychangesdeemedappropriatebytheCommittee.
46.
Reviewitsownperformanceannually,seekinginputfrommanagementandtheBoard.
47.
ConfirmtotheBoardannuallythatallresponsibilitiesoutlinedinthisCharterhavebeencarriedout.
48.
PerformanyotheractivitiesconsistentwiththisCharter,theCompany'sconstatingdocumentsandgoverninglaw,astheCommitteeortheBoarddeemsnecessaryorappropriate.
V.
ReportingTheCommitteeshallreportregularlytotheBoard,includingonmatterssetoutinapplicablestockexchangeregulations,andshallsubmittheminutesofallmeetingsoftheCommitteetotheBoard(whichminutesshallordinarilybeincludedinthepapersforthenextfullboardmeetingaftertherelevantmeetingoftheCommittee).
TheCommitteeshallalsoreporttotheBoardontheproceedingsanddeliberationsoftheCommitteeatsuchtimesandinsuchmannerastheBoardmayrequire.
TheCommitteeshallreviewwiththefullBoardanyissuesthathavearisenwithrespecttothequalityorintegrityoftheCompany'sfinancialstatements,theCompany'scompliancewithlegalorregulatoryrequirements,theperformanceorindependenceoftheAuditorsortheperformanceoftheCompany'sfinancialandaccountinggroup.
VI.
ResourcesandAccesstoInformationTheCommitteeshallbeprovidedwithsufficientresourcesbytheCompanytoperformitsduties.
TheCommitteeshallhavetheauthorityto:(i)retain,attheexpenseoftheCompany,independentlegal,accountingandotheradvisorsorconsultantstoadvisetheCommittee,asitdeterminesnecessarytocarryoutitsduties;and(ii)approvethetermsandconditionsofthearrangement(including,thefeesandotherretentionterms)withsuchoutsideadvisors.
TheCommitteehastheauthoritytoconductanyinvestigationappropriatetofulfillingitsresponsibilities.
TheCommitteehasdirectandunrestrictedaccesstoanyofficer,employeeorconsultantoftheCompanyanditssubsidiaries.
TheCommitteemayrequestanyofficer,employeeorconsultantoftheCompanyoritsS-9subsidiaries,theCompany'soutsidecounselortheAuditorstoattendameetingoftheCommitteeortomeetwithanymembersof,orconsultantsto,theCommitteewithorwithoutthepresenceofmanagement.
Intheperformanceofanyofitsdutiesandresponsibilities,theCommitteeshallhaveunrestrictedaccesstoanyandallbooksandrecordsoftheCompanyanditssubsidiariesnecessaryfortheexecutionoftheCommittee'sobligations.
TheCommitteeshalldeterminetheextentoffundingnecessaryforpaymentof:(a)compensationtotheCompany'sindependentpublicaccountingfirmengagedforthepurposeofpreparingorissuinganauditreportorperformingotheraudit,revieworattestservicesfortheCompany;(b)compensationtoanyindependentlegal,accountingandotheradvisorsorconsultantsretainedtoadvisetheCommittee;and(c)ordinaryadministrativeexpensesoftheCommitteethatarenecessaryorappropriateincarryingoutitsduties.
AmendmentsAtleastannually,thischarterwillbefullyevaluatedbytheNominatingandCorporateGovernanceCommitteeandanyappropriateupdateswillberecommendedtotheBoardforconsideration.
TheNominatingandCorporateGovernanceCommitteeshallhavetheauthoritytomakeminortechnicalamendmentstothischarterfromtimetotimeasrequired.