For the year ended December 31, 2012
The Company recorded a net loss of $103.0 million for the year ended December 31, 2012 compared to a net income of $57.7 million for the year ended December 31, 2011.
The Company's gross profit/(loss) is composed of revenue (net of royalties and selling fees) and cost of sales and relates solely to the Mongolian Coal Division. In 2012, the Company's gross profit/(loss) was negatively impacted by $53.0 million of idled mine costs, resulting in a gross loss of $44.0 million. The Company recorded a gross profit excluding idled mine costs of $9.0 million in 2012 compared to a gross profit excluding idled mine costs of $51.7 million in 2011. Gross profit will vary by year depending on sales volumes, sales prices and unit costs.
In 2012, SouthGobi recorded revenue of $53.1 million compared to $179.0 million in 2011. In the last three quarters of 2012, customers were reluctant to enter into new sales contracts primarily due to the following:
-- Customers' ability to export coal through the Shivee Khuren Border Crossing for the first half of 2012 was significantly below their projections due to: a) the delayed opening of the expanded border crossing infrastructure at the Shivee Khuren Border Crossing; b) the extended closure of the Shivee Khuren Border Crossing for the Chinese New Year and Mongolian Tsagaan Sar public holidays in the first quarter of 2012; c) the closure of the existing gravel road used to transport coal from the Ovoot Tolgoi Mine and neighboring mines to the Shivee Khuren Border Crossing for over four weeks in the second quarter of 2012;-- The uncertainty with respect to whether SouthGobi would receive a formal request from MRAM to suspend mining activities on its Ovoot Tolgoi mining license, which caused customers concern that they would be unable to collect and export additional coal purchased from the Ovoot Tolgoi Mine in the second and third quarters of 2012; and-- The softening of inland China coking coal markets closest to SouthGobi's operations throughout the last three quarters of 2012.
Revenues are presented net of royalties and selling fees. The Company is subject to a 5% royalty on all coal sales exported out of Mongolia based on a set reference price per tonne published monthly by the Government of Mongolia. Effective January 1, 2011, the Company is also subject to a sliding scale additional royalty of up to 5% on coal sales exported out of Mongolia based on the set reference price. Based on the 2012 reference prices, the Company was subject to an average 8% royalty based on a weighted average reference price of $88.07 per tonne. The Company's effective royalty rate for 2012, based on the Company's average realized selling price of $47.76 per tonne, was 14%.
SouthGobi, together with other Mongolian mining companies impacted by the escalation of effective royalty rates, opened a dialog with the appropriate Government of Mongolia authorities with a view of moving to a more equitable process for setting reference prices. A successful outcome was achieved and commencing October 1, 2012 (for a six month trial period) the royalty rate will be determined using the contracted sales price per tonne, not the reference price per tonne published by the Government of Mongolia. The dialog has continued with the appropriate Government of Mongolia authorities with the goal of extending the trial period until the end of 2013. In the fourth quarter of 2012 (a full quarter under the trial period), the Company's effective royalty rate was 6%, a significant reduction from prior quarters in 2012.