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Wednesday, March 25, 2015
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SouthGobi Loses Appeal Over Tax Case, Court Upholds ₮35.3 Billion Fine
March 25 (InfoMongolia) It was earlier (February 01, 2015) reported that three former employees of SouthGobi Sands LLC ("SGS"), the Turquoise Hill's Mongolian subsidiary, were found guilty of tax evasion by the panel of appointed judges from the Second District Criminal Court of Justice.
Sentences for the former employees were ranged from 5 years and 6 months to 5 years and 10 months of imprisonment in the correctional facilities of strict regimen in Mongolia, but later on February 26, 2015, the President of Mongolia Ts.Elbegdorj issued an official pardon to these three defendants, where fines of 1,000,000 MNT (approx. 510 USD) or the equivalent amount in assets for each defendant were issued. In addition, SGS has been found to be financially liable as a "civil defendant" for a penalty of 35.3 billion MNT (approx. 17.7 million USD as of March 20, 2015 rates).
Nevertheless, the Turquoise Hill firmly rejected the Court's verdict and therefore, it filed an appeal against the Court's verdict issued on February 18, 2015. The Company has been notified by the 10th Appeal Court for Criminal Case of Mongolia that the hearing for the appeal has been set for March 25, 2015 and today the SouthGobi Sands lost the appeal in the tax case heard by Mongolia's Court of Appeal.
Regarding to this ongoings, Mongolia's "Udriin Sonin" (Daily News) newspaper recently interviewed Mongolian Metals & Mining analyst Erdenedalai CHOINKHOR aka Dale Choi, who operates in investment industry between Ulaanbaatar and London and is known to the market as Dale Choi, Founder of Independent Mongolian Metals & Mining Research.
In his interview, Dale Choi stressed, "Deterioration of foreign direct investment (FDI) in Mongolia is directly reflected and closely related to performance of companies operating in Mongolia and listed in international exchanges, specifically one can say that their stock's prices are market barometer for investment condition of Mongolia. Specifically, deterioration is reflected in collapse of prices of stocks of these companies. I want to illustrate relationship between collapse in FDI and stock price on shocking example of one company (SGS).
The company is called SouthGobi Sands, the SouthGobi Resources' wholly-owned subsidiary. In the beginning, it was operating very successfully and now it is in very difficult condition. When the company did its IPO on Hong Kong Stock Exchange in 2010 it valued itself at 17 Canadian dollars per share or 2.73 billion Canadian dollars in total and raised 459 million Canadian dollars in cash. Foreign institutional investors were optimistic on future of Mongolian mining and expected it to grow. South Gobi exported 4 million tons of coal to China in 2011 and Mongolia was leading country which supplied coal to China, even ahead of Australia. However, starting with last election cycle and because of regrettable co-incidence today's tragic situation has been realized.
However, it should not be overstatement that it is all Mongolia's fault. Factors such as collapse of coal market and decline in coal price affected the company. However, the biggest factors are laws and regulations. The shareholder of company, Turquoise Hill Resources, announced financial agreement before 2012 elections that it will sell 56 per cent of the company to China's Chalco Company. At that time populists have treated the issue emotionally that Chinese company is buying and this have led to initiation and approval of law to limit foreign investment. At that time Turquoise Hill Resources owned 56 per cent of South Gobi and valued each share at 8.48 Canadian dollars to raise 898 million dollars from the sale. In another words, the buyer and seller both have valued the company at 1.54 billion Canadian dollars. Now, in 2015, Turquoise Hill Resources is selling its last remaining shares in the company to a Chinese company at 35 Canadian cents per share valuing company at 77 million Canadian dollars and raising 17 million Canadian dollars. In summary, South Gobi, which was worth 1.54 billion in 2012, is now worth 77 million or there is 95% destruction in shareholder value. Wealth of investors, who invested in Mongolia, disappeared by 95%. This closely resembles collapse in FDI from 4.45 billion USD in 2012 to 506 million in 2014 or by 89%.
Shares of SouthGobi up to recently have declined all the way to 34 cents per share. However, curiously last month shares revived till 1.06 dollar per share. As I understand, market has optimistic expectation of revival of company's business. Currently, the company has total of 219 million shares outstanding and market capitalization of 235 million dollars.
Finally, The Company itself has reported that it might go bankrupt. At the same time, foreign investors are likely to see that Mongolian authorities have, in the end, bankrupted the company. This is very risky issue.
As I am bystander and observer, it is not proper for me to directly instruct and say do this and that on how to solve the problem.
However, from financial analyst point of view, if this case can be resolved exactly according to law and due process it will be very important positive message to foreign investors".
Moreover, Turquoise Hill Resources Ltd., which owns 47.9% of the SouthGobi Resources (Company), is to announce the Company's fourth quarter and full year 2014 financial results on March 30, 2015.
Turquoise Hill has advised the Company that it will include select financial information for the 11 months ended November 30, 2014 including Revenue and Cost of Sales and additional information for the 12 months ended December 31, 2014 as it relates to their investment in the Company.
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