SouthGobi's troubles erode coal orders

PUBLISHED : Wednesday, 27 June, 2012, 12:00am
UPDATED : Wednesday, 27 June, 2012, 12:00am


SouthGobi Resources saw its share price slump 8.4 per cent after it said production had been halted and it failed to get approval from Mongolian environmental authorities for a processing plant.

SouthGobi, which mines coal in Mongolia and exports it to the mainland for steel-smelting, said in a statement to the Hong Kong stock exchange that its customers had cut back on orders because they were not sure if an alleged suspension of its operating licence by the Mongolian government would become official. Just over two months ago, SouthGobi Resources said Mongolia's Mineral Resources Authority announced that it wanted to suspend the company's exploration and mining licences.

SouthGobi has not been officially notified about the licences but the uncertainty means its customers have been reluctant to put in new orders in the second quarter.

Many regulatory bodies in Mongolia also are hesitant to give it the necessary approvals and permits to operate.

For example, SouthGobi was unable to gain approval to revise its environmental impact assessment from the Mongolian Ministry of Environment for a coal-handling facility. SouthGobi needs the approval to operate the facility and a delay in the plant's operation means a cut in profit for the miner as its construction was designed to increase gross profit margin.

The 'lack of clarity over whether SouthGobi Resources may receive a formal licence suspension at some stage has customers fearful that they would be unable to collect and export additional purchased coal,' the miner said.

Several factors also resulted in mounting inventory on the Mongolian side of the border.

Among them, Mongolian authorities delayed until May the commissioning of an expansion of a border crossing that monitors coal exports. There was also an extended border holiday closure in the first quarter. And the closure of a main road for export for four weeks for repairs added to the problems.

Combined with worsened demand in China amid an economic slowdown, SouthGobi decided to halt production in recent days.

It said it observed 'a substantial deterioration in sentiment among its customers,' with reference prices in key end-user markets declining since late May.

The miner estimated second-quarter coal sales to be between 200,000 tonnes and 300,000 tonnes.

It sold 840,000 tonnes in the first-quarter and 4 million tonnes last year.

The company's share price ended yesterday at HK$36.9 each, down 20 per cent from the start of the year, versus a 1 per cent gain of the benchmark Hang Seng Index.