Hong Kong Exchanges and Clearing Limited, The Stock Exchange of Hong Kong Limited and
Hong Kong Securities Clearing Company Limited take no responsibility for the contents of
this announcement, make no representation as to its accuracy or completeness and
expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance
upon the whole or any part of the contents of this announcement.
(a company continued under the laws of British Columbia, Canada with limited liability)
(Stock Code: 1878)
Court of Justice of Mongolia declares that SouthGobi Sands and
three of its former employees are guilty of tax evasion.
SouthGobi firmly rejects and will appeal what it considers to be a
gross miscarriage of justice.
HONG KONG – SouthGobi Resources Ltd. (TSX: SGQ, HK: 1878) has issued the attached
press release in Vancouver, Canada on February 1, 2015.
By order of the Board
SouthGobi Resources Ltd.
Mr. Gordon Lancaster
Interim Chair
Hong Kong, February 1, 2015
As of the date of this announcement, the non-executive Directors are Mr. Bold Baatar, Mr.
Kelly Sanders and Mr. Jeff Tygesen, and the independent non-executive Directors are Mr.
Pierre Bruno Lebel, Mr. Andre Henry Deepwell, and Mr. William Gordon Lancaster.
For identification purposes only
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February 1, 2015
Court of Justice in Mongolia declares that SouthGobi Sands and
three of its former employees are guilty of tax evasion.
SouthGobi firmly rejects and will appeal what it considers to be a
gross miscarriage of justice.
HONG KONG – SouthGobi Resources Ltd. (TSX: SGQ, HK: 1878) (“SouthGobi” or the
“Company”) announced on January 7, 2015, that the Company had been informed that the
re-investigation by the State Investigation Agency into alleged violations of Mongolian
taxation law against three (3) former employees of SouthGobi Sands LLC (“SGS”), the
Company’s Mongolian subsidiary, and against SGS as “civil defendant” had been completed
and that the case had been transferred back to the Second District Criminal Court of Justice
for trial. Further detail in respect of the tax investigations can be found in section 6
“Regulatory issues and investigations” of the Company’s Management Discussion and
Analysis (“MD&A”) for the three months ended September 30, 2014 which is available at
The trial commenced on January 28, 2015. On January 30, 2015, the panel of appointed
judges from the Second District Criminal Court of Justice found the three (3) former
employees guilty of tax evasion and gave sentences ranging from 5 years and 6 months to 5
years and 10 months of imprisonment in the correctional facilities of strict regimen in
Although SGS was not a party to the criminal proceedings and was not allowed to call
witnesses in its own defence, the Court declared it to be financially liable as a “civil
defendant” for a penalty of MNT 35.3 billion (approximately US$ 18.1 million). The Company
is awaiting written reasons for the Court’s judgment. The Company has been advised that the
penalty would only be payable after a final appeal.
Notwithstanding the intention to file appeals by SGS and its three (3) former employees, the
Company understands that under Mongolian law the former employees will not be granted
bail after the Court’s sentence and have been remanded into custody.
President and CEO, Mr. Enkh-Amgalan Sengee has said “We are extremely disappointed by
the Court’s decision. The conclusions reached by the experts as highlighted in their report
presented to the Court are erroneous and there is a complete lack of evidence to support this
harsh verdict. We fully support our former employees and will lodge an immediate appeal
against the Court’s decision”.
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SGS and its former employees Messrs. Justin Kapla, Hilarion Cajucom Jr. and Cristobal
David have been subject to various investigations with regards to allegations of breaching
Mongolia’s taxation laws for the past thirty months. Since October 2012, these persons have
been prevented from leaving Mongolia under Mongolia's Law on the Legal Status of Foreign
Citizens. The experts appointed by the relevant authorities in Mongolia have issued in total
four reports (one report after each series of investigations). These reports have all been
different and contradicted one another in terms of content and final sums of purported tax
evasion. The conclusions contained in the experts’ reports are neither supported by nor
consistent with Mongolian tax law or international accounting standards utilized by reputable
Mongolian and international firms. The Company believes that the inconsistencies are
manifest when considering the systematic changes in the sums of alleged tax evasion from
one report to another. For example, the total amount alleged in the latest report dated
December 2014 is MNT35.3 billion, i.e.:
85% lower compared to the amount alleged in the second experts’ report dated
December 2012 (MNT234 billion); and
59% lower compared to the amount alleged in the third experts’ report dated January
2014 (MNT84.9 billion).
These inconsistencies and errors in the experts’ reports were recognized by the same panel
of appointed judges from the Second District Criminal Court of Justice in August 2014, who at
that time, viewed the Prosecutor’s accusations as lacking evidence and ordered the case be
returned for re-investigation. The fourth and latest experts’ report resulting from this
re-investigation was presented to the Court on January 28, 29 and 30, 2015. It appears that
this report contains the same information and errors as the three previous reports although
the amount of alleged tax evasion had been reduced. The Company believes that the latest
report, like the previous reports, fails to provide any evidence supporting the case against
SGS and its former employees.
The Company, including SGS, has prepared its financial statements in compliance with
International Financial Reporting Standards (“IFRS”), and lodged all its tax returns as
required under Mongolian tax law. For the period under investigation, i.e. between 2007 and
2011, the Company earned revenues of MNT456.8 billion (US$349.7 million) from coal sales
and paid MNT103.1 billion (US$79.7 million) in taxes in Mongolia. The amounts of purported
tax evasion, when added to the taxes already paid by SGS, would mean the Company's tax
rate as a percentage of revenue (not profit) would be 74%, 41% and 30% respectively. This
would be grossly above the amounts prescribed to be paid on taxable income under
Mongolian law.
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During the investigative period, the Company requested that one of the largest and most
reputable international auditing firms conduct an independent assessment of the allegations
raised through the investigations. The auditing firm concluded that the experts’ reports had no
basis and were the result of incomplete reviews and erroneous interpretation of a mining
company’s financial statements prepared in accordance with Mongolian accounting and
reporting standards and Mongolian tax laws. The auditing firm also concluded the experts
had failed to consider all relevant information and documents provided by the Company
during the investigations. To illustrate the confusion and lack of support for the experts’
conclusions presented by the Prosecutor to the Court in the hearings of January 28, 29 and
30, 2015, the Company notes, by way of example:
The experts’ report alleges that SGS falsely increased its accounts payable balance in
order to reduce its taxable income. This claim amounts to 70% of the overall tax evasion
penalty recommended by the experts (MNT 24.3 billion out of MNT35.3 billion). This
increase in the payable balance relates almost exclusively to unrealized foreign
exchange losses which arose on MNT968.9 billion (US$693.9 million) in investments
made into SGS by its parent company, SouthGobi Resources Limited, in US Dollar and
translated into MNT. The loss itself resulted from the depreciation of the MNT against the
US Dollar over the period being investigated. This significant investment made by the
Company was for the development of the mining resource in the South Gobi region,
directly for the benefit of the Mongolian economy. The Company notes that this
investment is precisely the type of investment that Mongolia is currently trying to attract
from overseas investors.
Under Mongolian tax law, unrealized foreign exchange losses cannot be used to reduce
taxable income. SGS has precisely followed this regulation as shown in its tax statements
that are available to the public and never deducted the foreign exchange losses from its
taxable income in its tax filings. SGS is also required to file separately statutory financial
statements with the Ministry of Finance of Mongolia. These statutory financial statements
need to be done, by law in Mongolia, in accordance with IFRS. Under IFRS, unlike under
Mongolian tax law, SGS is required to reduce its income by unrealized foreign exchange
losses. The experts have therefore confused tax accounting rules with IFRS accounting rules
that are used for statutory financial statements.
In order to assist the experts in understanding the difference between IFRS and
accounting rules in Mongolia for the calculation of taxable income, SGS prepared
provided reconciliation statements to various experts and authorities throughout
investigation. The Company believes that the experts have failed to properly evaluate
assess the validity of the reconciliations statements.
As another example, the experts’ report claimed that the Company should have paid
value added tax (“VAT”) on goods allegedly “transferred to other parties free of charge”.
These goods described in the experts’ report are (i) mobile equipment owned by SGS
and destroyed by an accidental fire at the mine site; (ii) fixed assets that are fully
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depreciated and still held at the mine site; (iii) equipment relating to expired exploitation
requirements and still held at the mine site; and (iv) cash donations paid by SGS to local
communities, including donations that contributed to the construction of a kindergarten.
Paying VAT on these items, including donations, is strictly prohibited under the law on
VAT in Mongolia.
The General Tax Law of Mongolia outlines precisely the process and which authorities should
be responsible for the resolution of tax disputes. The Company has enquired and not
received any explanation as to why this case is being treated as a criminal case as opposed
to a civil case. Consequently, the Company disputes both the process as well as the
conclusions of the investigations that led to the accusations and verdict against SGS and its
three (3) former employees. No new evidence was presented during the latest Court hearing
and the Company firmly considers these allegations were not proven.
In addition, the Company notes that the Prosecutor’s recommended sentence on January 29,
2015 against the three (3) former employees excluded imprisonment. On January 30, 2015,
the Prosecutor amended the recommended sentence to then include imprisonment. The
Company is currently seeking legal advice and clarification on this matter.
The Company has not committed tax evasion and will absolutely appeal the Court’s verdict. It
will continue to vigorously defend itself and support its three (3) former employees in the
appeal process.
The Company has cash of US$3.3 million at January 30, 2015 which excludes restricted cash
of US$1.2 million held in Mongolia. The consequences for the Company from the verdict
relating to the tax investigations are uncertain. If the verdict is not reversed on appeal, the
Company is likely to be unable to meet its obligations, which could result in voluntary or
involuntary insolvency proceedings involving the Company as discussed under the heading
“Risk Factors” in the MD&A issued on November 10, 2014 and available on SEDAR at
About SouthGobi
SouthGobi is listed on the Toronto and Hong Kong stock exchanges, in which Turquoise Hill
Resources Ltd. (“Turquoise Hill”), also publicly listed in Toronto and New York, has a 47.9%
shareholding. Turquoise Hill took management control of SouthGobi in September 2012 and
made changes to the board and senior management. Rio Tinto has a majority shareholding in
Turquoise Hill.
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SouthGobi is focused on exploration and development of its metallurgical and thermal coal
deposits in Mongolia’s South Gobi Region. It has a 100% shareholding in SouthGobi Sands
LLC, Mongolian registered company that holds the mining and exploration licences in
Mongolia and operates the flagship Ovoot Tolgoi coal mine. Ovoot Tolgoi produces and sells
coal to customers in China.
Investor Relations
Galina Rogova
Office: +86-21-6103-3550
Email: [email protected]
Media Relations
Altanbagana Bayarsaikhan
Office: +976 70070710
Email: [email protected]
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