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Plans for dry coal handling unit in Mongolia scrapped

World Coal,

Mongolia-focused SouthGobi Resources said it is now looking for new financing and after review will not proceed with a dry coal handling facility at the Ovoot Tolgoi semi-soft metallurgical coal mine, as it takes a US$ 66.9 million charge related to the decision.

The partly constructed coal handling facility will no longer be part of the company's product strategy for the foreseeable future, as it seeks to minimise costs, and the related non-cash impairment charge was applied in Q4 2013, according to a financial earnings report dated Monday.

SouthGobi reported a fall in product pricing for its coals, which are exported to China, as it sold more standard grade SSCC rather than its premium grade into a weaker market and booked a US$ 138.7 million loss for Q4, compared with a US$ 56.6 million loss in Q4 2012.

The miner saw excess supply last year for metallurgical coal from Australia, North America and Russia, while Chinese domestic washed coking coal production increased in 2013, as a result of continued capacity expansion in Shanxi.

"The Mongolian coal industry faced strong competition from seaborne and domestic Chinese coal producers. These factors led to both lower prices and a reduction in market share of 16% for Mongolian coal producers in Chinese coking coal imports in 2013 compared to 2012," SouthGobi said.

"The outlook for Mongolian coal exports remains dependent on China. Demand at the beginning of 2014 has been seasonally weak with the impact of the Chinese New Year lasting longer than expected and prices have again declined after rising in the fourth quarter of 2013."

As the miner anticipates coal prices in China to remain under pressure in 2014, this is expected to continue to affect the company's margins and liquidity, and SouthGobi said it actively seeking additional sources of financing to continue operating and meet its objectives.

The first phase of the dry coal handling facility project comprised a coal rotary breaker intended to reduce screening costs and improve yield recoveries. This equipment was successfully commissioned in February 2012 and operated briefly, but was not used further since mining activities that were halted later in 2012 recommenced in March 2013.

The second phase of the project included the installation of dry air separation modules and covered load out conveyors with fan stackers to take processed coals to stockpiles and enable more efficient blending.

"The company continues to focus on preserving its financial resources and has assessed, using updated operating cost assumptions and estimates, that it currently has the adequate equipment and capacity to efficiently meet its commercial objectives and execute its product strategy without the use of the facility," it said. "The use of mobile screens at stockpile areas closer to the pits has enabled the Company to realise a cost benefit compared to hauling the coal to the central handling facility and operating the rotary breaker."

As coal markets improve and production from Ovoot Tolgoi increases in line with anticipated capacity of 9 million tpa of ROM production, the facility will be reviewed again, SouthGobi said.

Further, SouthGobi said it recorded a US$ 30.2 million impairment loss in Q4 related to US$ 33.6 million in prepaid toll washing fees to Ejinaqi Jinda Coal Industry Co.

"The impairment followed the results of a trial sample from the wet washing facility and the delay in starting the commercial operations at the facility. The company is cooperating with Ejin Jinda in reviewing the use of the facility," it said.

Rio Tinto has an indirect controlling shareholding in SouthGobi through Turquoise Hill Resources, which is developing the copper-gold Oyu Tolgoi project. This company holds a majority interest in the TSX and Hong Kong Stock Exchange-listed SouthGobi Resources.

Edited from various sources by Sam Dodson

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