Migao Reports Fiscal 2016 First Quarter Financial Results

TSX: MGO

TORONTO, Aug. 15, 2016 /CNW/ - Migao Corporation (TSX:MGO), a China-based specialty potash fertilizer producer, today reported financial results for the three  month  period ended June 30,  2016.

Migao reported revenues of $90.2 million for the first quarter ended June 30, 2016, representing $26.5 million (23%) decrease from $116.7 million for the quarter ended June 30, 2015. The revenue decrease for the quarter ended June 30, 2016, is mainly due to declined volume for potassium sulphate, hydrochloric acid, potassium chloride (direct sales) and ammonium chloride, coupled with lower average sales price for all products except for hydrochloric acid and ammonium chloride during the quarter ended June 30, 2016, compared with one year ago.  PRC fertilizer market remained weak in the quarter ended June 30, 2016.  Compared to the same quarter one year ago, sales volume and average sales price for potassium chloride (direct sales) decreased by 64% and 24% respectively during the current quarter which contributed approximately $49.2 million revenue decrease. Average sales price for potassium sulphate during the current quarter also decreased by 29% from one year ago causing the revenue to decrease by approximately $11.8 million. The above declines in revenue were partially offset by increased revenue from compound fertilizers as well as direct sales of other products than potassium chloride mainly as a result of higher sales volume for compound fertilizers sold during the current quarter.  During the quarter ended June 30, 2016, the exchange rate of Chinese Yuan (RMB) / Canadian dollar remained at level comparable to the same quarter one year ago.  

Gross profit for the quarter ended June 30, 2016, was $3.0 million, compared to gross profit of $8.0 million for the same quarter one year ago. The change in gross profit for the current quarter was mainly due to lower gross profit margin realized from sales of potassium sulphate, and ammonium chloride as compared to the same quarter one year ago. The decreased gross profit margin for potassium sulphate was primarily caused by lower average sales prices during the current quarter.  Also, Migao had a gross loss of approximately $2.2 million from sales of potassium chloride (direct sale) during the first quarter of fiscal 2017, which partially offset the gross profits realized from other products. However, the gross profit and margin of Migao's another core product – potassium nitrate in the current quarter was higher than the same quarter one year ago, primarily attributed to declined material costs.     

Selling, general and administrative expenses were $12.4 million for the quarter ended June 30, 2016, decreased by $0.7 million from $13.1 million for the quarter ended June 30, 2015, primarily due to decreased selling expense caused by lower volume of products delivered during the first quarter of fiscal 2017. Finance costs were $1.6 million for the quarter, down by $2.1 million from $3.7 million for the same quarter last year and the decrease was primarily due to reduction in bank loans by approximately $38 million during the quarter.

As a result, for the quarter ended June 30, 2016 Migao reported a net loss of $9.9 million or $(0.19), per basic and diluted share, compared to a net loss of $5.4 million or $(0.10) per basic and diluted share for the same quarter one year ago. For the quarter ended June 30, 2016, average selling price for potassium nitrate was RMB2,780 ($548) per tonne, RMB2,425 ($478) per tonne for potassium sulphate, RMB962 ($190) for compound fertilizers and RMB1,546 ($305) per tonne for potassium chloride,  compared to RMB3,926 ($778) per tonne for potassium nitrate, RMB3,424 ($679) per tonne for potassium sulphate, RMB1,617 ($320) per tonne for compound fertilizers and RMB2,044($405) per tonne for potassium chloride in the first quarter of fiscal 2016.

As at June 30, 2016, Migao reported cash and restricted cash of $120.4 million and working capital of $147.4 million.

At June 30, 2016, Migao had $37.1 million of inventory, which included $8.6 million (43,552 tonnes) of potassium chloride inventory on hand with an average delivered price of $197 per tonne (March 31, 2016 - $349), and $10.0 million of various other raw materials in stock, and $1.8 million of goods in transit comprising of potassium chloride with average delivered price of $260 per tonne. Also included in inventory was $14.3 million (93,413 tonnes) of finished goods inventory on hand, including co-products.  During the quarter ended June 30, 2016, Migao (excluding SQM JV and Eurochem JV) sold 16,233 tonnes of potassium nitrate, 54,031 tonnes of potassium sulphate,60,909 tonnes of compound fertilizers and 60,018 tonnes of potassium chloride (direct sale).

Cash and cash equivalents was $6.6 million as at June 30, 2016, compared to $1.8 million as at March 31, 2016. The increase in cash and cash equivalents during the quarter ended June 30, 2016 was mainly a combined results of $13.9 million of cash provided from  operations, a net $26.4 million of cash provided from investing activities mainly as a result of redemption of structured deposits by $26.7 million, as well as a net $35.3 million of cash used in financing activities primarily due to loan repayment by $54.2 million and loan interest payment of $1.6 million, net off by cash inflows from new loan drawdowns and advance from a director by $20.5 million. The impact from the changes in foreign exchange rates on the cash flow was approximately $0.2 million for the quarter ended June 30, 2016.

SUMMARY FINANCIAL RESULTS

In $'000 except per share data
	3 months ended	3 months ended
	June 30, 2016	June 30, 2015
Revenue	90,188	116,664
Gross profit (loss)	3,031	7,973
Gross profit (loss) (% of revenue)	3.4%	6.8%
Profit (loss)	(9,914)	(5,445)
EBITDA	(8,019)	(121)
Earnings per share
Basic	(0.19)	(0.10)
Diluted	(0.19)	(0.10)
Weighted average number of shares
(in millions of shares)
Basic	52.5	52.5
Diluted	52.5	52.5

Balance Sheet Highlights

In $'000 except ratio
	June 30, 2016	March 31, 2016
Current ratio	1.41:1	1.38:1
Cash, cash equivalents and restricted cash	120,360	110,756
Working capital	147,356	162,370
Total assets	656,932	747,361
Total liabilities	364,453	436,581
Total equity	292,479	310,780

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 Migao Limited ("Eurochem JV") was incorporated in Hong Kong. Eurochem International Holding B.V. ("Eurochem") and HK Migao each owns 50% of the Eurochem JV, and each party is anticipated to contribute US$18 million to the joint venture with total anticipated capital contribution of US$36 million. During the year ended March 31, 2015 Migao and Eurochem had made capital contribution of US$7.21 million and US$18 million to Eurochem JV, respectively.

As at June 30, 2016, Migao still anticipates to contribute an additional US$10.79 million (approximately $14.0 million) to the capital of Eurochem JV in 2016 calendar year in accordance with the Eurochem JV Agreement.

2)      Shanghai Migao

Due to the weakness of PRC potassium sulphate market and the compliance of local environmental requirement to substitute heavy oil used in the production of potassium sulpahte for natural gas, most of the potassium sulphate productions at Shanghai Migao had been halted since the beginning of fourth quarter of fiscal 2016. As of June 30, 2016 the potassium sulphate productions at Shanghai Migao remained closed.

3)      Events after the reporting period

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 the common shares of Migao (the "Shares") not owned by Purchaser or its affiliates.  Pursuant to the Arrangement Agreement, the Shares would be acquired for cash consideration of $0.75 per Share through a court-approved plan of arrangement under the Business Corporations Act (Ontario) (the "Arrangement"). 

A special meeting of Migao's shareholders was held on July 27, 2016 (the "Meeting"), wherein the special resolution approving the Arrangement was approved by approximately 85% of the votes cast by Migao's shareholders present in person or represented by proxy at the Meeting. The resolution approving the Arrangement was also passed by approximately 71% of the votes cast by Migao'sshareholders, other than those votes that were required to be excluded for the purpose of minority approval under Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions.

On July 29, 2016, the Ontario Superior Court of Justice issued the final order approving the Arrangement. The closing of the Arrangement is subject to the satisfaction or waiver of all other conditions of the Arrangement. Completion of the Arrangement is expected to occur by the end of August, 2016, and the Shares will be de-listed from the Toronto Stock Exchange thereafter.

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 may include forward-looking statements within the meaning of certain securities laws, including the "safe harbour" provisions of the Securities Act (Ontario) and other provincial securities laws in Canada.  These forward-looking statements include, among others and not limited to, statements regarding the closing and the anticipated timing of closing of the Arrangement, and the delisting of the Shares following completion of the Arrangement, 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 our company include, but are not limited to: completion of the Arrangement is subject to a number of conditions, including receipt of approvals required by the People's Republic of China, and other conditions which are typical for transactions of this nature. Failure to satisfy any of these conditions may result in the non-completion of the Arrangement; 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; global financial conditions; and the implementation of the Labour Contract Law in the People's Republic of China in 2008.  In addition to the foregoing risk factors, there are also risks related to doing business in China which include, but are not limited to:  state ownership; government sector intervention; foreign investment; repatriation of profit and currency conversion; tax; shareholders' rights and enforcement of judgements; developing legal system; protection of intellectual property rights; permits and business licenses; appropriation; and availability of land.  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 risks and factors that may affect completion of the Arrangement were set forth in the Information Circular in respect of the Meeting; 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.

To be added to Migao's email distribution list for news releases or to be removed from the list, please send a request to [email protected].

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]