SGQ.V · 2023-03-31

SouthGobi announces fourth quarter and full year 2022 financial and operating results

Production Results Financials

R E S O U R C E S

March 31, 2023

SouthGobi announces fourth quarter and full year 2022 financial and operating results

HONG KONG – SouthGobi Resources Ltd. (Toronto Stock Exchange (“TSX”): SGQ, Hong Kong Stock Exchange (“HKEX”): 1878) (the “Company” or “SouthGobi”) today announces its financial and operating results for the quarter and the year ended December 31, 2022. All figures are in U.S. dollars (“USD”) unless otherwise stated.

The Board of Directors (the “Board”) wish to inform that the Company’s independent auditors, BDO Limited (“BDO”), have completed their audit of the consolidated financial statements of the Company for the year ended December 31, 2022 in accordance with Canadian generally accepted auditing standards and would like to announce the audited annual results of the Company for the year ended December 31, 2022 together with the comparative figures for the previous year and the respective notes in this announcement.

SIGNIFICANT EVENTS AND HIGHLIGHTS

The Company’s significant events and highlights for the year ended December 31, 2022 and the subsequent period to March 31, 2023 are as follows:

Operating Results – In response to the increase in the number of the Coronavirus Disease 2019 (“COVID-19”) case in Ejinaqi, a region in China’s Inner Mongolia Autonomous Region where the custom and border crossing are located, reported in late October 2021, the local government authorities imposed stringent preventive measures throughout the region, including the temporary closure of the Ceke Port of Entry located at the border of Mongolia and China. Accordingly, the Company’s coal exports into China were suspended from November 2021 to May 2022. Following the reopening of the Ceke Port of Entry for coal export on May 25, 2022, coal sales increased from 0.9 million tonnes in 2021 to 1.1 million tonnes in 2022.

Since May 25, 2022, the number of trucks permitted to cross the Chinese-Mongolian border, as well as the volume of coal exports, have increased. As a result, the Company has gradually resumed mining operations beginning on July 15, 2022. The Company’s major mining operations, including coal mining, have resumed and the Company expects to increase the volume of coal production in a gradual manner, while coal washing shall remain suspended for the time being. In response to the market situation, the Company has been mixing some higher ash content product with the semi-soft coking coal product and sold to the market as processed coal in 2022.

The Company experienced an increase in the average selling price of coal from $46.0 per tonne in 2021 to $65.7 per tonne in 2022, due to improved market conditions in China.

Financial Results – The Company recorded a $13.6 million profit from operations in 2022 compared to a $4.4 million profit from operations in 2021. The financial results for 2022 were impacted by a foreign exchange gain of $4.6 million and the increased sales experienced by the Company following the reopening of the Ceke Port of Entry during the second quarter of 2022.
Completion of Sale by China Investment Corporation (together with its wholly-owned subsidiaries and affiliates, “CIC”) of its Interests in the Company – The Company announced that, as disclosed in the press releases issued by CIC and JD Zhixing Fund L.P. (the “JDZF”) respectively on August 30, 2022, the sale (the “CIC Sale Transaction”) by CIC of all of its interests in the Company, including its 64,766,591 common shares of the Company and the convertible debenture (the “Convertible Debenture”), to JDZF was successfully completed on August 30, 2022. Following the completion of the CIC Sale Transaction, the respective rights and obligations of CIC under (i) the Convertible Debenture and related security documents; (ii) the amended and restated mutual cooperation agreement signed on April 23, 2019 (the “Amended and Restated Cooperation Agreement”) and related documents;

(iii) the deferral agreements between CIC, the Company and certain of its subsidiaries in connection with the deferral of interest payments and other outstanding fees under the Convertible Debenture and the Amended and Restated Cooperation Agreement; and (iv) the security holders agreement between the Company, CIC and a former shareholder of the Company, were assigned to JDZF. In connection with the completion of the CIC Sale Transaction, JDZF agreed to reduce the service fee payable by the Company under the Amended and Restated Cooperation Agreement from 2.5% to 1.5% of all net revenues realised by the Company and all of its subsidiaries derived from sales into China.

Deferral Agreements – On November 11, 2022, the Company and JDZF entered into an agreement (the “2022 November Deferral Agreement”) pursuant to which JDZF agreed to grant the Company a deferral of: (i) semi-annual cash interest payments of $7.1 million payable to JDZF on November 19, 2022 under the Convertible Debenture; (ii) $1.1 million in payment-in-kind interest (“PIK Interest”) shares issuable to JDZF on November 19, 2022 under the Convertible Debenture (collectively, the “2022 November Deferred Interest”); and

(iii) the management fees payable to JDZF on November 15, 2022, February 15, 2023, May 16, 2023 and August 15, 2023 under the Amended and Restated Cooperation Agreement (the “2022 November Deferred Management Fees”).

The principal terms of the 2022 November Deferral Agreement are as follows:

Payment of the 2022 November Deferred Interest and the 2022 November Deferred Management Fees will be deferred until November 19, 2023.
As consideration for the deferral of the 2022 November Deferred Interest, the Company agreed to pay JDZF a deferral fee equal to 6.4% per annum on the 2022 November Deferred Interest payable under the Convertible Debenture, commencing on November 19, 2022.
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As consideration for the deferral of the 2022 November Deferred Management Fees, the Company agreed to pay JDZF a deferral fee equal to 1.5% per annum on the outstanding balance of the 2022 Deferred Management Fees payable under the Amended and Restated Cooperation Agreement, commencing on the date on which each such 2022 November Deferred Management Fees would otherwise have been due and payable under the Amended and Restated Cooperation Agreement.
If at any time before the 2022 November Deferred Interest and the 2022 November Deferred Management Fees and related deferral fees are fully repaid, the Company proposes to appoint, replace or terminate one or more of its chief executive officer, its chief financial officer or any other senior executive(s) in charge of its principal business function or its principal subsidiary, the Company will first consult with, and obtain written consent (such consent shall not be unreasonably withheld) from JDZF prior to effecting such appointment, replacement or termination.
The Company agreed to comply with all of its obligations under the prior deferral agreements assigned to JDZF.
The Company and JDZF agreed that nothing in the 2022 November Deferral Agreement prejudices JDZF’s rights to pursue any of its remedies at any time pursuant to the prior deferral agreements.

On March 24, 2023, the Company and JDZF entered into an agreement (the “2023 March Deferral Agreement”) pursuant to which JDZF agreed to grant the Company a deferral of (i) the cash interest payment of approximately $7.9 million (the “2023 May Cash Interest”) which will be due and payable on May 19, 2023 under the Convertible Debenture; (ii) the cash interest, management fees, and related deferral fees of approximately $8.7 million (the “2022 May Deferred Amounts”) which are due and payable to JDZF on or before August 31, 2023 under the deferral agreement dated May 13, 2022; (iii) the cash and PIK Interest, and related deferral fees of approximately $13.5 million (the “2021 July Deferred Amounts”) which are due and payable to JDZF on or before August 31, 2023 under the deferral agreement dated July 30, 2021; and (iv) the cash and PIK Interest, management fees, and related deferral fees of approximately $110.4 million (the “2020 November Deferred Amounts”, and together with the 2023 May Cash Interest, the 2022 May Deferred Amounts and the 2021 July Deferred Amounts, the “2023 March Deferred Amounts”) which are due and payable to JDZF on or before August 31, 2023 under the deferral agreement dated November 19, 2020.

The effectiveness of the 2023 March Deferral Agreement and the respective covenants, agreements and obligations of each party under the 2023 March Deferral Agreement are subject to the approvals from the TSX and the shareholders of the Company in accordance with the requirements of Section 501(c) of the TSX Company Manual and the HKEX listing rules.

The principal terms of the 2023 March Deferral Agreement are as follows:

Payment of the 2023 March Deferred Amounts will be deferred until August 31, 2024 (the “Deferral Date”).
As consideration for the deferral of the 2023 March Deferred Amounts which relate to the payment obligations arising from the Convertible Debenture, the Company agreed to pay JDZF a deferral fee equal to 6.4% per annum on the outstanding balance of such 2023 March Deferred Amounts, commencing on the date on which each such 2023 March Deferred Amounts would otherwise have been due and payable under the Convertible Debenture.
As consideration for the deferral of the 2023 March Deferred Amounts which relate to payment obligations arising from Amended and Restated Cooperation Agreement, the Company agreed to pay JDZF a deferral fee equal to 1.5% per annum on the outstanding balance of such 2023 March Deferred Amounts commencing on the date on which each such 2023 March Deferred Amounts would otherwise have been due and payable under the Amended and Restated Cooperation Agreement.
The 2023 March Deferral Agreement does not contemplate a fixed repayment schedule for the 2023 March Deferred Amounts or related deferral fees. Instead, the 2023 March Deferral Agreement requires the Company to use its best efforts to pay the 2023 March Deferred Amounts and related deferral fees due and payable under the 2023 March Deferral Agreement to JDZF. During the period beginning as of the effective date of the 2023 March Deferral Agreement and ending as of the Deferral Date, the Company will provide JDZF with monthly updates of its financial status and business operations, and the Company and JDZF will on a monthly basis discuss and assess in good faith the amount (if any) of the 2023 March Deferred Amounts and related deferral fees that the Company may be able to repay to JDZF, having regard to the working capital requirements of the Company’s operations and business at such time and with the view of ensuring that the Company’s operations and business would not be materially prejudiced as a result of any repayment.
If at any time before the 2023 March Deferred Amounts and related deferral fees are fully repaid, the Company proposes to appoint, replace or terminate one or more of its chief executive officer, its chief financial officer or any other senior executive(s) in charge of its principal business function or its principal subsidiary, the Company will first consult with, and obtain written consent (such consent shall not be unreasonably withheld) from JDZF prior to effecting such appointment, replacement or termination.
The Company is convening a special meeting of Shareholders in the second quarter of 2023 to seek disinterested Shareholder approval of the 2023 March Deferral Agreement.
Issuance of PIK Interest shares – In November 2022, the Company issued 20,947,603 Common Shares to JDZF in accordance with the terms of the Convertible Debenture at an issuance price of CA$0.185 per Common Share as settlement of $2.9 million in outstanding PIK Interest owing by the Company to JDZF under the Convertible Debenture and related deferral agreements.
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Application for New Listing on the TSX Venture Exchange (the “TSX-V”) and Primary Listing on the Hong Kong Stock Exchange – On April 20, 2022, the Company announced that it would be making an application (the “Listing Application”) to the TSX-V to list its common shares on the TSX-V. In conjunction with the foregoing, the Company would also apply for voluntary delisting of its common shares from the TSX (the “Delisting”), subject to the Company receiving approval from the TSX-V of the Listing Application. Pursuant to the Rules Governing the Listing of Securities on the Hong Kong Stock Exchange (the “Listing Rules”), the Company announced it intends to submit a written notification to the HKEX stating, among other things, that it will be able to fully comply with the applicable Listing Rules in connection with the approval of the Listing Application and the Listing Application becoming effective, and such that its current secondary listing on the HKEX will be converted to a primary listing.

On July 28, 2022, the Company received an acknowledgment from the HKEX in respect of the Delisting issued pursuant to paragraph 3.34 of the HKEX’s Guidance Letter (HKEX- GL-112-22), which informed the Company that, upon the effective date of the Delisting, the Hong Kong Stock Exchange will regard the Company as having a primary (rather than secondary) listing status on the HKEX pursuant to Rule 19C.13A of the HKEX Listing Rules and the dis-application of the stock marker “S” from the Company’s trading symbol on the HKEX will take effect.

On March 6, 2023, the Company announced that it received a conditional acceptance letter from the TSX-V (the “TSX-V Conditional Approval Letter”) confirming that the TSX-V Listing Application had been approved subject to the satisfaction of certain listing conditions of the TSX-V. The Company is targeting a tentative date for the listing of the Company’s common shares on the TSX-V and the date of Delisting from TSX (i.e., the Effective Date) of April 17, 2023. The Company expects that the listing conditions of the TSX-V can be fulfilled by the Company before the Effective Date.

Completion of Sale by China Cinda (HK) Asset Management Co., Limited (together with its wholly-owned subsidiaries and affiliates, “CCAM”) of its Interests in the Company – The Company announced that, as disclosed in the press releases issued by CCAM and Land Grand International Holding Limited (“Land Grand”) respectively on November 28, 2022, the sale (the “Cinda Sale Transaction”) by CCAM of all of its interests in the Company, including its 46,358,978 common shares of the Company to Land Grand was successfully completed. In connection with the Cinda Sale Transaction, CCAM assigned to Land Grand certain rights in and obligations under the subscription agreement between the Company and Novel Sunrise Investments Limited (“Novel Sunrise”) dated February 24, 2015, including Novel Sunrise’s right to nominate a certain number of individual(s) for appointment or election to the board of directors of the Company while its beneficial interests in the Company’s issued and outstanding common shares exceed 10%.
Revolving Credit Facility – On March 2, 2023, an indirect wholly-owned subsidiary of the Company (the “Borrower”) entered into an unsecured revolving credit facility (the “Credit Facility”) with a related party of JDZF, the Company’s largest shareholder, which makes available to the Company up to a maximum principal sum of RMB90 million with a maturity date of three months after the agreement was signed. The Company has obtained the requisite acceptance from the TSX for the Credit Facility in accordance with the requirements of the TSX Company Manual, subject to certain standard conditions.
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The principal terms of the Credit Facility are as follows:

All obligations under the Credit Facility are due and payable on the maturity date.
The Credit Facility is a revolving facility, pursuant to which the Borrower will be entitled, but not obligated, to request advances (“Advances”) under the Credit Facility from time to time, provided that the aggregate amount of the outstanding Advances under the Credit Facility does not exceed the maximum loan amount at any time. The Borrower is entitled to repay all or any portion of the outstanding Advances under the Credit Facility from time to time without bonus or penalty.
Advances under the Credit Facility will not accrue interest if the Borrower repays any Advance in full within fifteen (15) days following the date of drawdown (the “Interest- Free Period”). If the Borrower fails to repay in full the amount of the Advance prior to the end of the Interest-Free Period, then the Borrower will pay to the Lender interest on the outstanding amount of such Advance, beginning on the day immediately following the last day of the Interest-Free Period (the “Interest Trigger Date”) and ending on but excluding the day on which such Advance is repaid or satisfied in full. Interest on the outstanding amount of each Advance from the Interest Trigger Date is calculated at a rate per annum equal to 5%, determined daily and calculated and payable on the date on which the relevant Advance is repaid in full.
The Company intends to use the proceeds of the Credit Facility for general corporate purposes.
Changes in Management

Mr. Jianmin Bao: Mr. Bao resigned as a non-executive director on August 31, 2022.

Mr. Ben Niu: Mr. Niu resigned as a non-executive director on August 31, 2022.

Mr. Tao Zhang: Mr. Zhang resigned as Vice President of Sales on September 2, 2022.

Mr. Dalanguerban: Mr. Dalanguerban was re-designated from Chief Executive Officer to President on September 8, 2022 and resigned as an executive director on December 6, 2022.

Mr. Dong Wang: Mr. Wang was appointed as Chief Executive Officer and an executive director on September 8, 2022.

Mr. Alan Ho: Mr. Ho was appointed as Chief Financial Officer (formerly, the acting Chief Financial Officer) on September 8, 2022.

Ms. Chonglin Zhu: Ms. Zhu was appointed as Senior Vice President of Finance and an executive director on September 8, 2022.

Mr. Zhiwei Chen: Mr. Chen resigned as a non-executive director on December 6, 2022.

Ms. Ka Lee Ku: Ms. Ku resigned as a non-executive director on December 6, 2022.

Mr. Zhu Gao: Mr. Gao was appointed as a non-executive director on December 6, 2022.

Mr. Gang Li: Mr. Li was appointed as a non-executive director on December 6, 2022.

Mr. Chen Shen: Mr. Shen was appointed as a non-executive director on December 6, 2022 and re-designated to an executive director on February 17, 2023.

Going Concern – Several adverse conditions and material uncertainties relating to the Company cast significant doubt upon the going concern assumption which includes the deficiencies in assets and working capital.

See section “Liquidity and Capital Resources” of this press release for details.

OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS

Summary of Annual Operational Data

Year ended December 31, 2022

2021

Sales Volumes, Prices and Costs

Premium semi-soft coking coal

0.27

Coal sales (millions of tonnes) 0.60 $ 73.49 $ Average realised selling price (per tonne) 51.80 Standard semi-soft coking coal/ premium thermal coal

0.08

Coal sales (millions of tonnes) 0.33 $ 39.85 $ Average realised selling price (per tonne) 35.01 Processed coal

0.76

Coal sales (millions of tonnes) 0.01 $ 65.43 $ Average realised selling price (per tonne) 48.53 Total

1.11

Coal sales (millions of tonnes) 0.94 $ 65.69 $ Average realised selling price (per tonne) 46.02

0.69

Raw coal production (millions of tonnes) 1.36

$ 52.04 $ Cost of sales of product sold (per tonne) 33.30 $ 34.52 $ Direct cash costs of product sold (per tonne) ⁽ⁱ⁾ 17.81 $ 1.62 $ Mine administration cash costs of product sold (per tonne) ⁽ⁱ⁾ 1.53 $ 36.14 $ Total cash costs of product sold (per tonne) ⁽ⁱ⁾ 19.34

Other Operational Data 3.59

Production waste material moved (millions of bank cubic meters) 5.94 Strip ratio (bank cubic meters of waste material per tonne of

5.14

coal produced) 4.36

0.00

Lost time injury frequency rate ⁽ⁱⁱ⁾ 0.00

(i) A Non-International Financial Reporting Standards (“non-IFRS”) financial measure. Refer to “Non-IFRS Financial Measures” section. Cash costs of product sold exclude idled mine asset cash costs.

(ii) Per 200,000 man hours and calculated based on a rolling 12-month average.

Overview of Annual Operational Data

The Company ended 2022 and 2021 without a lost time injury.

The Company experienced an increase in the average selling price of coal from $46.0 per tonne for 2021 to $65.7 per tonne for 2022, as a result of improved market conditions in China. The product mix for 2022 consisted of approximately 25% of premium semi-soft coking coal, 6% of standard semi-soft coking coal/premium thermal coal and 69% of processed coal compared to approximately 64% of premium semi-soft coking coal, 34% of standard semi-soft coking coal/premium thermal coal and 2% of processed coal in 2021.

In response to the increase in the number of COVID-19 cases in Ejinaqi, a region in China’s Inner Mongolia Autonomous Region where the custom and border crossing are located, reported in late October 2021, the local government authorities imposed stringent preventive measures throughout the region, including the temporary closure of the Ceke Port of Entry located at the border of Mongolia and China. Accordingly, the Company’s coal exports into China were suspended from November 2021 to May 2022. Following the reopening of the Ceke Port of Entry for coal export on May 25, 2022, coal sales increased from 0.9 million tonnes in 2021 to 1.1 million tonnes in 2022.

Since May 25, 2022, the number of trucks permitted to cross the Chinese-Mongolian border, as well as the volume of coal exports, have increased. As a result, the Company has gradually resumed mining operations beginning on July 15, 2022, yielding 0.7 million tonnes for 2022 as compared to 1.4 million tonnes for 2021. In response to the market situation, the Company has been mixing some higher ash content product with the semi-soft coking coal product and sold to the market as processed coal in 2022.

The Company’s unit cost of sales of product sold increased from $33.3 per tonne in 2021 to $52.0 per tonne in 2022. The increase was mainly driven by (i) the change in the product mix and processed coal having a relatively higher unit cost of sales as compared to the Company’s other coal products; and (ii) the increase in the effective royalty rate.

Summary of Annual Financial Results

$ in thousands, except per share information	2022	2021
Revenue(i)	$ 73,084 $	43,398
Cost of sales(i)	(57,762)	(31,304)
Gross profit excluding idled mine asset costs(ii)	16,252	15,011
Gross profit	15,322	12,094
Other operating income/(expenses), net	5,316	(1,426)
Administration expenses	(6,919)	(6,068)
Evaluation and exploration expenses	(147)	(223)
Profit from operations	13,572	4,377
Finance costs	(42,219)	(39,118)
Finance income	2,777	23,165
Share of earnings/(loss) of joint ventures	119	(159)
Current income tax expenses	(4,668)	(2,638)
Net loss attributable to equity holders of the Company	(30,419)	(14,373)
Basic and diluted loss per share	$ (0.11) $	(0.05)

(i) Revenue and cost of sales related to the Company’s Ovoot Tolgoi Mine within the Coal Division operating segment. Refer to note 2 of the selected information from the notes to the consolidated financial statements for further analysis regarding the Company’s reportable operating segments.

(ii) A Non-IFRS financial measure. Refer to “Non-IFRS Financial Measures” section. Idled mine asset costs represents the depreciation expense relates to the Company’s idled plant and equipment.

Overview of Annual Financial Results

The Company recorded a $13.6 million profit from operations in 2022 compared to a $4.4 million profit from operations in 2021. The financial results were impacted by (i) the higher selling price achieved by the Company; and (ii) increased sales experienced by the Company following the reopening of the Ceke Port of Entry during the second quarter of 2022.

Revenue was $73.1 million in 2022 compared to $43.4 million in 2021. The Company’s effective royalty rate for 2022, based on the Company’s average realised selling price of $65.7 per tonne, was 19.4% or $12.8 per tonne, compared to 18.7% or $8.6 per tonne in 2021 (based on the average realised selling price of $46.0 per tonne).

Cost of sales was $57.8 million in 2022 compared to $31.3 million in 2021. The increase in cost of sales in 2022 was mainly due to the effect of increased sales volume as well as the change in product mix. Cost of sales consists of operating expenses, share-based compensation expense, equipment depreciation, depletion of mineral properties, royalties and idled mine asset costs. Operating expenses in cost of sales reflect the total cash costs of product sold (a Non-IFRS financial measure, refer to section “Non-IFRS Financial Measures” for further analysis) during the year.

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Year ended December 31,

$ in thousands	2022	2021
Operating expenses	$ 40,114 $	18,176
Share-based compensation expense	36	52
Depreciation and depletion	2,486	2,034
Royalties	14,196	8,125
Cost of sales from mine operations	56,832	28,387
Cost of sales related to idled mine assets	930	2,917

$ 57,762 $ Cost of sales 31,304

Operating expenses in cost of sales were $40.1 million in 2022 compared to $18.2 million in 2021. Cost of sales related to idled mine assets in 2022 included $0.9 million related to depreciation expenses for idled equipment (2021: $2.9 million).

Other operating income was $5.3 million in 2022 (2021: other operating expenses of $1.4 million). A foreign exchange gain of $4.6 million and write-off of other payables of $3.3 million were recorded in 2022, respectively. (2021: foreign exchange loss of $0.3 million and write-off of other payables of $0.7 million).

Year ended December 31, $ in thousands 2022 2021

Management fee $ 1,201 $ 967 Provision/(reversal of provision) for doubtful trade and

other receivables	(784)	191
Foreign exchange loss/(gain), net	(4,639)	325
Gain on disposal of items of property, plant and equipment, net	(195)	(299)
Impairment on materials and supplies inventories	1,510	2,411
Impairment of prepaid expenses	145		–
Rental income from short term leases	(150)	(587)
Discount on settlement of trade payables	(191)	(891)
Written off of other payables	(3,287)	(691)
Gain on contract offsetting arrangement	(786)		–
Penalty on late settlement of trade payables	1,860		–
Other operating expenses/(income), net	$ (5,316) $	1,426

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Administration expenses were $6.9 million in 2022 as compared to $6.1 million in 2021, as follows:

$ in thousands 2022 2021

$ 1,146 $ Corporate administration 1,312

Legal and professional fees	1,830	1,098
Salaries and benefits	3,391	2,847
Share-based compensation expense	125	151
Depreciation	427	660

$ 6,919 $ Administration expenses 6,068

Administration expenses were higher for 2022 compared to 2021 primarily due to increase in salaries and benefits incurred during the year following the resumption of mining operations in the third quarter of the year.

The Company continued to minimise evaluation and exploration expenditures in 2022 in order to preserve the Company’s financial resources. Evaluation and exploration activities and expenditures in 2022 were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining licenses.

Finance costs were $42.2 million and $39.1 million in 2022 and 2021, respectively, which primarily consisted of interest expense on the $250.0 million Convertible Debenture.

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