Tuesday, March 25, 2014

SouthGobi Seeks Financing to Avoid Default on CIC Debentures

SouthGobi Resources Ltd. (SGQ), a coal miner in Mongolia, is seeking additional financing to avoid a default on $250 million in debt, hurt by low prices and weaker-than-expected demand from Chinese buyers. Shares fell.

Based on forecasts for 2014, SouthGobi won’t have enough cash flow to meet obligations including interest payments on debentures held by China Investment Corp., the Vancouver-based company said yesterday in a statement.

The stock fell yesterday to the lowest in Toronto since its 2003 initial public offering. Its Hong Kong-traded shares plunged 11 percent to HK$4.94, a record low.

SouthGobi, controlled by a Rio Tinto Group unit, operates the Ovoot Tolgoi coking-coal mine, which lies about 40 kilometers (25 miles) from Mongolia’s border with China. Prices for coking coal have fallen to a three-year low amid slowing economic growth in China, the biggest market for the steelmaking ingredient, and an increase in supply from Australia.

“We expected a pick up and we haven’t been seeing that,” President and Chief Executive Officer Ross Tromans said today in an interview in Hong Kong. “Liquidity issues in China affect how much people are buying. It’s noticeable that some of them don’t have as much liquidity as they’ve had in the past, and that’s had an impact because they’re also waiting for their customers to pay them.”

Loss Widens

The company said in a statement yesterday its fourth-quarter loss widened to $138.7 million from $56.6 million a year earlier. It expects coal prices in China to remain under pressure in 2014, which will continue to affect the company’s margins and liquidity, according to the statement.

SouthGobi will look at a range of financing options including loans and equity, according to Chief Financial Officer Bertrand Troiano. The debt market is “difficult” right now, Troiano said today in the same interview.

The company is also looking to secure prepayments from customers and cut non-critical expenses to improve liquidity, he said.

Mongolia’s share of the imported coking coal market in China fell to 20 percent last year, from 36 percent in 2012 and 45 percent in 2011, according to presentation slides from Mongolian Mining Corp. Miners in the country have been hit by falling commodity prices and a pullback in foreign investments.

To contact the reporters on this story: Sonja Elmquist in New York at selmquist1@bloomberg.net; Michelle Yun in Hong Kong at myun11@bloomberg.net

To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net; Jason Rogers at jrogers73@bloomberg.net

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