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. The recommencement of operations has taken place without incident. In the second quarter of 2013, the Company primarily moved waste material (overburden) and exposed coal in the pit, aligning its operating activities to the significantly lower demand. Subsequent to the end of the second quarter of 2013, SouthGobi entered into a coal supply agreement with Winsway, an integrated logistic service provider, for the sale of 1.2 million tonnes of Standard semi-soft coking coal product in 2013. Pricing for the coal to be sold under this contract will be based upon a floating monthly index. This agreement reaffirms the Company's longstanding relationship with Winsway, a key customer, as SouthGobi continues to focus on its 2013 commercial objectives. In addition, two small spot market sales were concluded subsequent to the end of the second quarter of 2013 and discussions with other potential customers are ongoing.
The rate of production in the second half of 2013 is expected to increase as the Company makes further sales and provides contractual tonnages under the Winsway coal supply agreement. The Company is focused on delivering on its commercial strategy and targets. However, as market conditions in China's coking coal markets are expected to remain challenging in the short term, the Company is withdrawing its production guidance of 3.2 million tonnes of semi-soft coking coal for the current year.
Whilst SouthGobi has a predominantly two product strategy of a Premium and Standard semi-soft coking coal product from the Ovoot Tolgoi Mine, the capability to begin supplying a washed semi-soft coking coal product is an important step in improving both SouthGobi's market position and access to end customers. The Company has had to modify its plans and delay production of the washed product. The timing for washing will be aligned with improvements in market conditions for this type of product. SouthGobi is however planning to mine some Premium semi-soft coking coal product as a raw coal in 2013.
The Company has been minimizing uncommitted capital expenditures, exploration and operational expenditures in order to preserve its financial resources. For at least twelve months from the end of the June 30, 2013 reporting period, the Company expects its liquidity to remain sufficient based on existing capital resources and estimated income from mining operations. Estimated income from mining operations is subject to a number of external market factors including supply and demand and pricing in the coal industry.
(1) China Coal Resource (en.sxcoal.com)
Longer term, SouthGobi remains well positioned, with a number of key competitive strengths, including:
-- Strategic location - SouthGobi is the closest major coking coal producer in the world to China. The Ovoot Tolgoi Mine is approximately 40km from China, which is approximately 190km closer than Tavan Tolgoi coal producers in Mongolia and 7,000 to 10,000km closer than Australian and North American coking coal producers. The Company has an infrastructure advantage, being approximately 50km from existing railway infrastructure, which is approximately one tenth the distance to rail of Tavan Tolgoi coal producers in Mongolia.-- Premium quality coals - Most of the Company's coal resources have coking properties, including a mixture of semi-soft coking coals and hard coking coals. SouthGobi is also completing its investment in infrastructure to capture more of the value from the products it sells.-- Favorable cost structure - The long-term cost structure of SouthGobi provides a strong base for sustainable growth when access to end-user markets is obtained even though competition from other Chinese and Mongolian semi-soft coals indicate that capturing margins relative to other international coals is difficult.-- Substantial resource base - The Company's aggregate coal resources (including reserves) include measured and indicated resources of 533 million tonnes and inferred resources of 302 million tonnes.