Activities historically carried out on the exploration licenses with valid PMA applications include drilling, trenching and geological reconnaissance. The Company has no immovable assets located on these licenses and the loss of any or all of these licenses would not materially and adversely affect the existing operations.
Economic activity post transition in China's leadership has been slower than expected. The Chinese steel industry has been particularly affected and, as a result, demand and prices for coking coal have been negatively impacted. Nevertheless, market sentiment remains that demand in the second half of 2013 should improve; albeit, more slowly than anticipated at the beginning of this year. Looking forward, the more positive market position, as previously outlined, endures.
The Company resumed operations at the Ovoot Tolgoi Mine on March 22, 2013 after having been fully curtailed since the end of the second quarter of 2012. Full safety inductions and retraining were undertaken as part of the ramp-up which has taken place without incident. The Company has been producing at conservative levels reflecting lower demand and managing quality and stockpiles. The rate of production is expected to pick up as demand improves and the Company continues to target production of 3.2 million tonnes of semi-soft coking coal in 2013. Once toll washing commences, it will enable SouthGobi to develop a predominantly two product strategy of a Premium and Standard semi-soft coking coal product from the Ovoot Tolgoi Mine. The Premium product will be washed and the Standard product will be a predominantly unwashed product. The capability to begin supplying a washed semi-soft coking coal product in the second half of the year is another important step in improving both the Company's market position and access to end customers.
The Company continues to minimize uncommitted capital expenditures, exploration and operational expenditures in order to preserve its financial resources. For at least twelve months from the end of the March 31, 2013 reporting period, the Company expects its liquidity to remain sufficient based on existing capital resources and estimated income from mining operations. Liquidity beyond the twelve month period is dependent on the success of the recommencement of operations and ongoing demand and prices in the coal market.
To date, the Company has not signed any semi-soft coking coal sales contracts for the second quarter of 2013. However, discussions are actively continuing in order to meet the Company's commercial objectives. Market participants at the Ceke border have been selling coal from existing stockpiles rather than contracting new volumes as they deal with current market uncertainty. A request from the Ceke Coal Import Association received April 1, 2013 and indirectly supported by the Ejina Qi banner government in China for coal to be bought through the association has exacerbated this uncertainty. As a result, customers have been reluctant to purchase coal under individual contracts.
On April 8, 2013, the Government of Mongolia advised that the royalty regime trial period had not been extended beyond April 1, 2013. Under the trial period, royalties on all coal sales exported out of Mongolia were determined using the contracted sales price per tonne. However, effective April 1, 2013, royalties on all coal sales exported out of Mongolia will be based on the reference price per tonne published by the Government of Mongolia. The reference price applied does not adequately reflect the price applicable to the range of products of varying quality and prices sold ex-mine in Mongolia. This can result in effective royalty rates being far in excess of the prescribed royalty rates and will impact Mongolian producers' margins going forward if it is not changed. The current monthly royalty reference price system is not supported by any of the Mongolian coal producers and collectively these companies, including SouthGobi continue to engage with the Government of Mongolia to resolve this matter in the interests of all parties.
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