Migao Reports Fiscal 2016 Second Quarter Financial Results

TSX:  MGO

TORONTO, Nov. 16, 2015 /CNW/ - Migao Corporation (TSX:MGO), a China-based specialty potash fertilizer producer, today reported financial results for the three and six month  period ended September 30,  2015.

Migao reported revenues of $171.4 million for the second quarter ended September 30, 2015, representing a $120.4million (236%) increase from $51.0 million for the quarter ended September 30, 2014. The revenue increase for the quarter ended September 30, 2015, is mainly due to increased sales for potassium chloride (direct sale)("KCL"), potassium nitrate and ammonium chloride primarily as a result of significantly higher sales volumes of these products sold during the current quarter, coupled with higher average sales price for potassium chloride as well as higher Candian dollor / Chinese Yuan RMB exchange rate achieved during the quarter ended September 30, 2015, as compared to one year ago.  Sales volume for potassium chloride (direct sales), potassium nitrate and ammonium chloride increased by 1776%, 373% and 1165% respectively during the quarter ended September 30, 2015 as compared to the same period one year ago. The significantly higher sales volume for potassium chloride during the current quarter was mainly due to Migao's effort to liquidate its KCL stock before the new VAT policy in PRC comes into effect to hedge against down side risk from such change. Fertilizer sales including imported fertilizers and processed fertilizers in PRC are subject to value added tax ("VAT") ranging from 3% to 13% effective on and from September 1, 2015. Given PRC fertilizer market is rather competitive and fertilizer buyers are sensitive to price change, Migao doesn't expect the additional cost can be 100% transferred to its customers. Sales volume for potassium sulphate and hydrochloric acid decreased by approximately 55% and 36% respectively during the second quarter of fiscal 2016 as compared to the same quarter last year and the volume decrease over-weighted the effect of higher average sales price causing overall sales amounts for these products to decrease during the current quarter. Similar to prior year, sales of compound fertilizers were minimal due to seasonality reason. In addition, approximate 15% appreciation of Chinese Yuan (RMB) against Canadian dollar also contributed to the higher dollar sales reported for the quarter ended September 30, 2015 as compared to the same quarter one year ago. The fluctuation in the exchange rate between RMB and Canadian dollar also impacts Migao's other financial numbers reported in Canadian dollars during the quarters ended September 30, 2015. Gross profit was $7.9 million for the quarter ended September 30, 2015 compared to gross profit of $7.8 million for the same quarter one year ago. The change in gross profit for the current quarter was mainly due to increases in gross profit from sales of KCL and ammonium chloride as a result of higher sales volume in KCL and ammonium chloride, coupled with improvements in the gross profit margin realized from sales of ammonium chloride. The increase in gross profit from sales of KCL and ammonium chloride was nearly offset by the decline in gross profit from sales of potassium sulphate and potassium nitrate primarily as a result of lower sales volume for potassium sulphate and lower gross margin for potassium nitrate. For the quarter ended September 30, 2015 gross loss was resulted from sales of potassium nitrate mainly due to average sales price dropped by approximately 13% during the current quarter as compared to the same quarter last year. The gross margin for potassium nitrate was further eroded by rising natural gas prices. Both average sales price and gross margin for potassium sulphate for the current quarter remained at the comparative level with the previous quarters. We also saw some improvements in the sales of ammonium chloride during the quarter as average sales prices as well as sales volume were better than the previous quarters. Demands for hydrochloric acid were still weak due to the slowing down of the Chinese economy and the weak performance of its export sectors.      

Selling, general and administrative expenses were $9.2 million for the quarter ended September 30, 2015, up by $1.4 million from $7.8 million for the quarter ended September 30, 2014, primarily due to higher selling expenses as a result of increased volume of products delivered during the second quarter of fiscal 2016. Finance costs were $3.9 million, up by $1.7 million from $2.2 million for the same quarter last year and the increase was primarily due to higher level of interest bearing debts during the three and six months  ended September 30, 2015.

As a result, for the quarter ended September 30, 2015 Migao reported a net loss of $8.6 million or $(0.16), per basic and diluted share, compared to a net loss of $0.3 million or $(0.01) per basic and diluted share for the same quarter one year ago. For the six months ended September 30, 2015 Migao reported total revenue of $288.0 million as compared to revenue of $110.3 million for the same period one year ago. Net loss was $14.1 million or $(0.27) per basic share for the six month period ended September 30, 2015 as compared to a net profit of $0.1 million or $0.01 per basic share for the same six month period last year.

For the quarter ended September 30, 2015, average selling price for potassium nitrate was RMB3,551 ($737) per tonne, RMB3,400 ($706) per tonne for potassium sulphate, RMB990 ($205) for compound fertilizers and RMB2,159 ($448) per tonne for potassium chloride,  compared to RMB4,073 ($720) per tonne for potassium nitrate, RMB3,282 ($580) per tonne for potassium sulphate, RMB3,071 ($543) per tonne for compound fertilizers and RMB1,963($347) per tonne for potassium chloride in the second quarter of fiscal 2015.

As at September 30, 2015, Migao reported cash and restricted cash of $168.6 million and working capital of $171.4 million.

At September 30, 2015, Migao had $66.4 million of inventory, which included $8.5 million (19,935 tonnes) of potassium chloride inventory on hand with an average delivered price of $425 per tonne (March 31, 2015 - $417), and $15.8 million of various other raw materials in stock, and 6.8 million of goods in transit comprising of potassium chloride with average delivered price of $454 per tonne. Also included in inventory was $32.3 million (92,189 tonnes) of finished goods inventory on hand, including co-products.  During the quarter ended September 30, 2015, Migao (excluding SQM JV and Eurochem JV) sold 7,097 tonnes of potassium nitrate, 33,045 tonnes of potassium sulphate, and 310,049 tonnes of potassium chloride (direct sale).

Cash and cash equivalents was $27.5 million as at September 30, 2015, compared to $14.7 million as at March 31, 2015. The increase in cash and cash equivalents during the six month period  ended September 30, 2015 was mainly a combined results of $35.1  million of cash inflows from operations, a net $40.9 million of cash used in investing activities mainly as a result of $39.4 million of cash invested structured deposits and $1.5 million of cash used in purchase equipment,  as well as a net cash inflow of $18.5 million from financing activities primarily as a result from $81.2 million of cash inflow from loan drawdowns, reduced by $55.2 million of cash used in loan repayments, and $7.6 million of cash used in loan interest payments. The impact from the changes in foreign exchange rates on the cash flow was approximately $0.1 million for the period  ended September 30, 2015.

SUMMARY FINANCIAL RESULTS










In $'000 except per share date






3 months ended

3 months ended

YTD

YTD


September 30, 2015

September 30, 2014

fiscal 2016

fiscal 2015

Revenue

171,379

51,033

288,043

110,250

Gross profit (loss)

7,885

7,844

15,858

15,496

Gross profit (loss) (% of revenue)

4.6%

15.4%

5.5%

14.1%

Profit (loss)

(8,627)

(298)

(14,072)

147

EBITDA

(2,942)

3,519

(3,063)

7,971

Loss (earnings) per share






Basic

(0.16)

(0.01)

(0.27)

0.01


Diluted

(0.16)

(0.01)

(0.27)

0.01

Weighted average numbers of shares
(in millions of shares)






Basic

52.5

52.5

52.5

52.5


Diluted

52.5

52.5

52.5

52.5

Balance Sheet Highlights




In $'000 except ratio




September 30, 2015

March 31, 2015

Current ratio

1.39:1

1.50:1

Cash, cash equivalents and restricted cash

168,558

118,349

Working capital

171,380

175,755

Total assets

780,767

696,239

Total liabilities

442,169

355,062

Total equity

338,598

341,177

Long term debt to equity ratio

0.01:1

0.01:1




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 JV was incorporated in Hong Kong on February 14, 2014. Eurochem and Migao each owns 50% of Eurochem JV.  Accordingly, 50% of Eurochem JV's operation is included in Migao's consolidated financial statements. Eurochem and Migao anticipated that would contribute US$18 million (approximately $20 million) to Eurochem JV for a total capital contribution of US$36 million (approximately $38 million).  During the quarter ended December 31, 2014, Migao contributed US$7.2 million (approximately $8.3 million) and Eurochem contributed US$18 million (approximately $20 million) to the capital of Eurochem JV.

During the quarter ended June 30, 2014, Eurochem JV obtained the approval from the Ministry of Commerce of the PRC to conduct business in China.  On October 28, 2014, Eurochem JV purchased 100% of equity interest of Yunnan Migao Fertilizer Co., Ltd. ("Yunnan Migao"), an wholly-owned subsidiary of Migao that was incorporated on July 12, 2013, for cash consideration of US$18 million (approximately $20 million). From October 28, 2014 and on, Yunan Migao is a wholly owned subsidiary of Eurochem JV.

As at September 30, 2015, Migao anticipates it will contribute an additional US$10.79 million to the capital of Eurochem JV in the 2015 calendar year.

2)  Financial guarantee contracts

In December 2014, two of Migao's wholly owned subsidiaries, Liaoning Migao and Changchun Migao, have entered into financial guarantee contracts with the Bank of China, Suifenhe branch, for the provision of financial guarantee in respect of a bank facility of RMB 98 million (approximately $18.3 million) being granted to a major raw material supplier of Migao in China for a period from December 28, 2014 till December 21, 2015. The bank facility will be used in the purchase of raw materials on Migao's behalf and such a guarantee is intended to be provided for the purchase of imported potassium chloride.  

Migao subsequently obtained a clarification from the guarantee and the lending bank that the bank facility guaranteed by the Group can only be used for the purpose of issuing letter of credit for the purchase of imported potash fertilizer on behalf of Migao. As at September 30, 2015, $nil  of the bank facility under the financial guarantee provided by Migao was utilized for issuing letter of credit to settle the purchase of imported potassium chloride on behalf of Migao. The directors of the Company consider that the default risk of unutilized portion of such financial guarantee is minimal.

3)  Yunnan facility update

Yunnan Migao commenced construction of a 60,000 tonne per annum potassium nitrate production facility during the quarter ended March 31, 2015. The construction of the 60,000 tonne per annum potassium nitrate production is anticipated to be completed and put into operation in the 2015 calendar year. Up to date, approximately 80% of the construction work has been completed.

4)  Value added tax on fertilizer

On August 10, 2015 the PRC government announced that they were to resume the imposition of 13% value added tax ("VAT") on both imported fertilizers and processed fertilizers sold in domestic markets effective September 1, 2015. Under the new VAT scheme, Migao is required to remit to the PRC government the net VAT amount which is calculated as the VAT on sales net off the VAT on qualified purchases and expenditures during a reporting period and such remittance is not refundable anymore. Prior to the change, such VAT remittance had either been waived or refunded after the remittance (which was treated as other income in the consolidated financial statements). There is a transition period for fertilizer producers to gradually adapt to the new change in VAT scheme. A 3% VAT is levied on qualified inventory sold by fertilizer producers during the transition period, but no VAT on materials purchase can be deducted from VAT on sales (at 3% rate) to calculate the net VAT amount. Qualified inventory refers to inventory including raw materials and finished goods that are possessed by a fertilizer producer prior to September 1, 2015 and the fertilizer producer is required to register with the local tax authority for the quantity of the inventory that is qualified for this lower VAT rate application. The transition period spans from September 1, 2015 to June 30, 2016.

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, 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: 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 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 info@migaocorp.com.

SOURCE Migao Corporation

For further information: Helen Lu, Chief Financial Officer, Migao Corporation, 778.375.3247, Helen.lu@migaocorp.com; Jackie Liang, Investor Relations, Migao Corporation, 647.607.1616, investors@migaocorp.com

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