Migao Reports Fiscal 2016 Annual Financial Results

TSX:  MGO

TORONTO, June 29, 2016 /CNW/ - Migao Corporation (TSX:MGO) ("Migao"), a China-based specialty potash fertilizer producer, today reported financial results for the three and twelve month  period ended March 31, 2016. Migao reported net loss of $10.3 million or $(0.20) per basic and diluted share and net loss of $25.9 million or $(0.49) per basic and diluted share for the quarter and the year ended March 31, 2016, respectively.

Migao reported revenues of $522.2 million for the year ended March 31, 2016, representing a $77.7 million (17%) increase from $444.5 million for the year ended March 31, 2015. The revenue increase for the year ended March 31, 2016, is mainly due to increased revenue from sales of potassium chloride (direct sale) and ammonium chloride primarily as a result of higher sales volume in these products, as well as the effect of appreciation of Chinese currency, the Renminbi  ("RMB") against Canadian dollar during the current year as compared to one year ago.  The above impact of sales increase was partially offset by revenue declines from the sales of other products mainly as result of decreased sales volumes, coupled with lower average sales price in potassium sulphate. The significant drops in the sales volumes of all type of Migao's products  reflected the weakness in the PRC fertilizer markets which was mainly caused by the slow-down of PRC economy, abundant supplies, elevated inventory level, intensified competition as well as the change in value added tax ("VAT") regime on fertilizers. Fertilizer sales including imported fertilizers and processed fertilizers in PRC are subject to VAT rates  ranging from 3% to 13% effective from September 1, 2015 onward. Given the PRC fertilizer market is competitive and fertilizer buyers are sensitive to price change, Migao does not expect the additional cost associated with sales of the inventory existing before September 1, 2015 can be 100% transferred to its customers. In particular, PRC potassium sulphate market had weakened a significantly since the 2^nd half of calendar 2015 and the prices of potassium sulphate slumped from the peak level.  During the year ended March 31, 2016 the RMB appreciated by approximately 9% against Canadian dollar as compared to the year ended March 31, 2015. The fluctuation in the exchange rate between RMB and Canadian dollar also impacts Migao's other financial numbers reported in Canadian dollars during the periods ended March 31, 2016 as compared to the same periods one year ago.

Revenue for the three month period ended March 31, 2016 was $179.9 million as compared with $208.7 million for the same period one year ago, representing a decrease of $28.8 million (14%). The decrease in revenue was mainly attributed to decreased sales volume in potassium chloride, compound fertilizers and hydrochloric acid, coupled with lower average sales prices in potassium sulphate, potassium chloride and compound fertilizers during the fourth quarter ended March 31, 2016 as compared to one year ago.  

Gross profit for the quarter and the year ended March 31, 2016 was $11.5 million and $37.7 million respectively, compared to gross profit of $21.2 million and $47.0 million for the same periods one year ago. The decrease in gross profit for the quarter and the year ended March 31, 2016 was mainly due to declined gross profit margin from the sales of potassium sulphate resulting from reduced sales prices driven by the weakness of PRC fertilizer markets during the current year.  However the decrease in gross profit from sales of potassium sulphate was partly offset by the increases in gross profits from sales of other products, primarily as a result of higher gross margin for potassium nitrate, hydrochloric acid, compound fertilizer as well as ammonium chloride realized in the current year.  Demands for hydrochloric acid remained tepid due to the slowing down of the Chinese economy and the weak performance of its export sectors.

Selling, general and administrative expenses were $13.0 million and $46.1million for the three month and twelve  month period ended March 31, 2016, up by $1.0  million and by $6.1 million from $12.0 million and $40.0 million for the three and twelve  month period ended March 31, 2015, primarily due to increased costs caused by idle production capacity as a result of market weakness and higher expenditures on salaries and benefits and business development activities  during the current respective periods.

Finance costs were $1.8 million and $11.5million for the three and twelve month period ended March 31, 2016 as compared with $1.8 million and $7.6 million for the three and twelve month period ended March 31, 2015. The increase in finance costs was primarily due to increased bank loans borrowed during the twelve months ended March 31, 2016, compared to the same periods last year.

Migao recognized the impairment charge of $11.2 million on plant, equipment and land use rights for the three and twelve month ended March 31, 2016 primarily due to recurring loss at some of Migao's PRC subsidiaries as well as weaker outlook for PRC fertilizer sector.

Other income mainly comprised of rebate on VAT and interest income, were $0.8 million and $4.6 million during the three and twelve month period ended March 31, 2016 as compared to $4.0 million and $14.7 million for the same periods last year. Commencing from September 2015, all fertilizer sales in PRC are subject to VAT output tax of 13% (3% during the transition period which ended in June 2016) where VAT output tax were exempted before for certain agricultural products including most fertilizers. As a result, the amount of VAT tax rebate that Migao used to receive from the PRC government was significantly reduced during the quarter and the year ended March 31, 2016 as compared to the same periods last year.    

As a result, for the quarter ended March 31, 2016 Migao reported a net loss of $10.3 million or $(0.20), per basic and diluted share, compared to a net profit of $7.6 million or $0.14 per basic and diluted share for the same quarter one year ago.  Net loss was $25.9 million or $(0.49) per basic share for the year ended March 31, 2016 as compared to a net profit of $12.7 million or $0.24 per basic and diluted share for the same  period last year.

For the quarter ended March 31, 2016, average selling price for potassium nitrate was RMB3,619($760) per tonne, RMB2,428($510) per tonne for potassium sulphate, RMB2,746($576) for compound fertilizers and RMB1,838($386) per tonne for potassium chloride,  compared to RMB3,602($717) per tonne for potassium nitrate, RMB3,405($678) per tonne for potassium sulphate, RMB2,992($595) per tonne for compound fertilizers and RMB2,066($411) per tonne for potassium chloride in the quarter ended March 31, 2015.

As at March 31, 2016, Migao reported cash and restricted cash of $110.8 million and working capital of $162.4 million.

At March 31, 2016, Migao had $39.0 million of inventory, which included $17.5 million (50,167 tonnes) of potassium chloride inventory on hand with an average delivered price of $349 per tonne (March 31, 2015 - $417), and $4.3 million of various other raw materials in stock, and $1.2 million of goods in transit comprising of potassium chloride with average delivered price of $415 per tonne. Also included in inventory was $13.4 million (48,229 tonnes) of finished goods inventory on hand, including co-products.  During the quarter ended March 31,  2016, Migao (excluding SQM JV and Eurochem JV) sold 34,107 tonnes of potassium nitrate, 149,716 tonnes of potassium sulphate, 29,325 tonnes of compound fertilizers and 149,343 tonnes of potassium chloride (direct sale).

Cash and cash equivalents was $1.8 million as at March 31, 2016, compared to $14.7 million as at March 31, 2015. The decrease in cash and cash equivalents during the twelve month period ended March 31, 2016 was mainly a combined result of $9.4 million of cash inflows from operations, a net $39.1 million of cash used in investing activities mainly as a result of $39.4 million of cash invested structured deposits and $2.6 million of cash used in equipment purchase, offset by $2.9 million of interest income received, as well as a net cash inflow of $16.2 million from financing activities primarily as a result from $133.6 million of cash inflow from loan drawdowns, reduced by $105.8 million of cash used in loan repayments, and $11.5 million used in loan interest payments. The impact from the changes in foreign exchange rates on the cash flow was approximately $0.5 million for the period ended March 31, 2016.

SUMMARY FINANCIAL RESULTS
In $'000 except per share data
		3 months ended	3 months ended	YTD	YTD
		March 31, 2016	March 31, 2015	fiscal 2016	fiscal 2015
Revenue		179,867	208,744	522,272	444,487
Gross profit (loss)		11,453	21,225	37,746	46,974
Gross profit (loss) (% of revenue)		6.4%	10.2%	7.2%	10.6%
Profit (loss)		(10,311)	7,555	(25,907)	12,654
EBITDA		(5,600)	13,087	(6,052)	28,930
Earnings per share
	Basic	(0.20)	0.14	(0.49)	0.24
	Diluted	(0.20)	0.14	(0.49)	0.24
Weighted average number of shares
(in millions of shares)
	Basic	52.5	52.5	52.5	52.5
	Diluted	52.5	52.8	52.5	53

Balance Sheet Highlights
In $'000 except ratio
	March 31, 2016		March 31, 2015
Current ratio	1.38:1		1.50:1
Cash, cash equivalents and restricted cash	110,756		118,349
Working capital	162,370		175,755
Total assets	747,361		696,239
Total liabilities	436,581		355,062
Total equity	310,780		341,177

Migao's financial statements and MD&A have been filed on SEDAR and will be available at www.sedar.com

Recent developments

1)      Eurochem JV

Eurochem and Migao each owns 50% of Eurochem JV.  During the year ended March 31, 2016 Migao made $nil capital contribution to Eurochem JV and as at March 31, 2016, Migao anticipates to contribute an additional US$10.79 million to the capital of Eurochem JV in the 2016 calendar year.

2)      Yunnan facility update

The construction of Yunnna Migao's 60,000 tonne per annum potassium nitrate production line was substantially completed in the quarter ended December 31, 2015. The commissioning of the production line commenced in December 2015 and ended in January 2016 with successful quality assurance check. After the commissioning, the potassium nitrate production line has been put in normal operation during the quarter ended March 31, 2016.

3)      Shanghai Migao

Due to the weak of PRC potassium sulphate market and the compliance of local environmental requirements, most of the potassium sulphate productions at Shanghai Migao had been halted since the beginning of the fourth quarter of fiscal 2016. The PRC government is advocating higher usage of green energy such as solar energy and natural gas in the hope to reduce pollution and improve the country's overall air quality. In response to such green energy policy, there are requirements from the local government for Shanghai Migao to replace heavy oil with natural gas in its potassium sulphate production process. The substitution of heavy oil by natural gas led to higher unit production cost, combined with declined sales price for potassium sulphate, making it difficult for Shanghai Migao to operate profitably in foreseeable future.  Management considers the cessation of production for Shanghai Migao as the best option at present to minimize operating losses, and is negotiating with natural gas suppliers to obtain an acceptable rate before resuming the production. There is no guarantee that Migao will be able to secure natural gas supply at an acceptable rate.

It is anticipated that other municipalities may follow the suit and, and management expects Migao's other potassium sulphate producing facilities in the PRC to be faced with similar mandate to substitute heavy oil by natural gas in the future.

4)      Proposed Arrangement

On June 7, 2016, Migao entered into an arrangement agreement (the "Arrangement Agreement") in connection with the proposed acquisition by 2521416 Ontario Inc. ("Purchaser"), a company wholly-owned indirectly by Mr. Liu Guocai, the Chief Executive Officer, President and principal shareholder of Migao, of all of Migao's common shares not owned by Purchaser or its affiliates.  Pursuant to the Arrangement Agreement, the common shares would be acquired for cash consideration of $0.75 per common share through a court-approved plan of arrangement under the Business Corporations Act (Ontario) (the "Arrangement").  Completion of the Arrangement is subject to, among other things, the performance of each of the Corporation and the Purchaser of their respective obligations under the Arrangement Agreement, and the receipt of, among other things, approval of the court and Migao's shareholders.

About Migao
Migao Corporation, through its wholly owned subsidiaries, owns and operates fertilizer production plants in various strategic locations across China for the production and sale of specialty potash fertilizer (potassium nitrate and potassium sulphate) to China's agricultural market. Migao Corporation is subject to,and complies with strict government regulations that govern safety, quality and environmental protection. Migao's Sichuan facility, Guangdong facility, Liaoning facility, Changchun facility, Zunyi facility and Sichuan SQM Migao joint venture are ISO 14001 certified, an international environmental management standard. Please visit www.migaocorp.com for further information.

USE OF NON-GAAP MEASURES
Certain non-GAAP measures referenced in this news release have no standardized meaning under International Financial Reporting Standards ("IFRS") and therefore, are unlikely to be comparable to similar measures presented by other issuers. Where we reference non-GAAP measures, we provide definitions. For example, EBITDA is commonly defined as earnings before interest, taxes, depreciation and amortization. EBITDA is most directly comparable to the GAAP measure operating income or loss, except that depreciation and amortization of plant assets are included in measuring operating income or loss, but depreciation and amortization expenses are excluded in measuring EBITDA. In Migao's earnings releases, consolidated financial statements and MD&As, unless otherwise noted, all financial data is prepared in accordance with IFRS.

CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This news release includes forward-looking statements within the meaning of certain securities laws, including under the Securities Act (Ontario) and other provincial securities laws in Canada.  These forward-looking statements include, among others, statements with respect to our objectives and goals, and strategies to achieve those objectives and goals, as well as statements with respect to our beliefs, plans, objectives, expectations, anticipations, estimates and intentions.  The words "may", "will", "could", "should", "would", "suspect", "outlook", "believe", "plan", "anticipate", "estimate", "expect", "intend", "forecast", "objective", and "continue" (or the negative or grammatical variations thereof), and words and expressions of similar meaning, are intended to identify forward-looking statements.

By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, which give rise to the possibility that predictions, forecasts, projections and other forward-looking statements will not be achieved.  Certain material factors or assumptions are applied in making forward-looking statements and actual results, performance or achievements may differ materially from those expressed or implied in such statements.  We caution readers not to place undue reliance on forward-looking statements as a number of important factors, many of which are beyond our control, could cause actual results, performance or achievements to differ materially from the beliefs, plans, objectives, expectations, anticipations, estimates and intentions expressed in such forward-looking statements.  These factors that relate to Migao include, but are not limited to: risks related to raw materials; execution of the business plan; expansion plans; dependence on key personnel; key relationships; dependence on key customers; dependence on key suppliers; competition; market factors and volatility of commodity prices; environmental risks and hazards; operating risks; proprietary rights; infrastructure; future capital requirements; technical substitution; exchange rate fluctuations; insurance; foreign operations; tobacco industry considerations; weather conditions and natural disasters; control by management; seasonality; dividends; conflicts of interest; risks related to doing business in China, and change in the economic, political, regulatory and legal environment in China; and global financial conditions  Should one or more of these factors materialize, or should our estimates or underlying assumptions prove incorrect, actual results, performance or achievements may vary materially from those described in forward-looking statements.

We caution that the foregoing list of important factors that may affect our future results, performance or achievements is not exhaustive.  When reviewing our forward-looking statements, readers should carefully consider the foregoing factors and other uncertainties and potential events. Additional information about factors that may cause actual results to differ materially from expectations, and about material factors or assumptions applied in making forward-looking statements, may be found under the "Risk Factors" sections in our Annual Information Form and annual MD&A and elsewhere in our filings with Canadian securities regulatory authorities.  Except as required by Canadian securities laws, we do not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by us or on our behalf; such statements speak only as of the date made.  We cannot assure readers that actual results, performance and achievements will be consistent with these forward-looking statements, and the differences may be material. The forward-looking statements included herein are expressly qualified in their entirety by this cautionary language.

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SOURCE Migao Corporation

Helen Lu, Chief Financial Officer, Migao Corporation, 778.375.3247, [email protected]; Jackie Liang, Investor Relations, Migao Corporation, 647.607.1616, [email protected]