SouthGobi Announces Second Quarter 2022 Financial and Operating Results

HONG KONG, CHINA / ACCESSWIRE / August 12, 2022 / 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 three and six months ended June 30, 2022. All figures are in U.S. dollars ("USD") unless otherwise stated.

Significant Events and Highlights

The Company's significant events and highlights for the three months ended June 30, 2022 and the subsequent period to August 12, 2022 are as follows:

• Operating Results - In response to the increase in the number of the Coronavirus Disease 2019 ("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. On May 25, 2022, the Ceke Port of Entry re-opened for coal export on a trial basis. As a result, the Company recorded 0.1 million tonnes of sales in the second quarter of 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 processing shall remain suspended for the time being. The Company will revisit the possibility of resuming coal processing at a later date.

The Company experienced an increase in the average selling price of coal from $47.9 per tonne in the second quarter of 2021 to $66.6 per tonne in the second quarter of 2022, due to improved market conditions in China.

• Financial Results - The Company recorded a $2.7 million profit from operations in the second quarter of 2022 compared to a $1.0 million loss from operations in the second quarter of 2021. The financial results for the second quarter of 2022 were impacted by the foreign exchange gain of $1.4 million, a write off of other payables of $1.6 million and by the decreased sales resulting from the temporary closure of the Ceke Port of Entry experienced by the Company during the second quarter.
• China Investment Corporation ("CIC") convertible debenture ("Convertible Debenture") - On May 13, 2022, the Company and CIC entered into an agreement (the "2022 May Deferral Agreement"), pursuant to which CIC agreed to grant the Company a deferral of (i) semi-annual cash interest payments of $7.9 million payable to CIC on May 19, 2022 (the "Deferred Amounts"); and (ii) the management fee which payable to CIC

on February 14, 2022 and August 14, 2021 (the "Deferred Management Fee") under the Amended and Restated Cooperation Agreement (collectively, the "2022 Deferral Amounts") under the Convertible Debenture.

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

• Payment of the 2022 Deferral Amounts will be deferred until August 31, 2023.
• As consideration for the deferral of the Deferred Amounts, the Company agreed to pay CIC a deferral fee equal to 6.4% per annum on the Deferred Amounts payable under the Convertible Debenture, commencing on May 19, 2022.
• As consideration for the deferral of the Deferred Management Fee, the Company agreed to pay CIC a deferral fee equal to 2.5% per annum on the outstanding balance of the Deferred Management Fee payable under the Amended and Restated Cooperation Agreement, commencing on the date on which each such 2022 May Deferred Management Fee would otherwise have been due and payable under the Amended and Restated Cooperation Agreement.
• The Company agreed to provide CIC with monthly updates regarding its operational and financial affairs.
• If at any time before the 2022 Deferral Amounts and related deferral fee 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 CIC prior to effecting such appointment, replacement or termination.
• The Company and CIC agreed that nothing in the 2022 May Deferral Agreement prejudices CIC's rights to pursue any of its remedies at any time pursuant to the prior deferral agreements.
• 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 disapplication of the stock marker "S" from the Company's trading symbol on the HKEX will take effect. While it was disclosed in the Company's management proxy circular dated June 29, 2022 that the anticipated effective date of the Delisting would be July 29, 2022, the Company wishes to update its shareholders and investors that, subject to obtaining the said approvals from the TSX and TSX-V, the Company is targeting to complete the Delisting prior to mid-September 2022.

• Sale by CIC of its Interests in the Company- On May 27, 2022, the Company announced that as disclosed in the press release issued by CIC on May 26, 2022 (the "CIC Press Release"), CIC has entered into an agreement to sell (the "CIC Sale Transaction") all of its interests in the Company, including its 64,766,591 common shares of the Company and the Convertible Debenture, to JD Zhixing Fund L.P. (the "Buyer"). The Company has been advised that the Buyer is an exempted limited partnership formed under the laws of Cayman Islands. The Buyer's general partner is JD Dingxing Limited, a corporation formed under the laws of the Cayman Islands. The Buyer's limited partner is Inner Mongolia Tianyu Trading Limited, a corporation formed under the laws of Hong Kong. As disclosed in the CIC Press Release, completion of the CIC Sale Transaction is subject to the satisfaction of certain conditions precedent.

In connection with the CIC Sale Transaction, CIC has agreed to assign (the "Assignment") to the Buyer all of CIC's rights in and obligations under: (i) the Convertible Debenture and related security documents; (ii) 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 (the "Deferral Agreements"); and (iv) the Securityholders Agreement.

Subject to completion of the CIC Sale Transaction and related Assignment, the Buyer has 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 realized by the Company and all of its subsidiaries derived from sales into China.

Upon the completion of the CIC Sale Transaction and related Assignment:

• while the Convertible Debenture is outstanding, or while the Buyer has a minimum 15% direct or indirect stake in the Company, the Buyer will have the right to nominate one director to the board of directors (the "Board") pursuant to the board nomination rights contained in the Securityholders Agreement;
• the buyer also will have the right to nominate two additional directors to the Board if it and its affiliates have a minimum 20% direct or indirect stake in Company, or one additional director to the Board if it and its affiliate have a minimum 10% direct or indirect stake in Company, pursuant to the board nomination rights contained in the Deferral Agreements; and
• while the Convertible Debenture is outstanding, or while the buyer has a minimum 15% direct or indirect stake in Company, the buyer will have certain pre-emption rights on a pro-rata basis to subscribe for any new shares to be allotted and issued by Company. The pre-emption rights do not apply to new shares issued pursuant to pro-rata public equity

offerings made to all shareholders, exercise of stock options and shares issued to achieve a 25% public float.

• 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.

Refer to section "Liquidity and Capital Resources" of this press release for details.

OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS

Summary of Operational Data

1. 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.

2. Per 200,000 man hours and calculated based on a rolling 12 month average.

Overview of Operational Data

For the three months ended June 30, 2022

The Company experienced an increase in the average selling price of coal from $47.9 per tonne in the second quarter of 2021 to $66.6 per tonne in the second quarter of 2022, as a result of improved market conditions in China. The product mix for the second quarter of 2022 consisted of approximately 52% premium semi-soft coking coal, 40% standard semi-soft coking coal/premium thermal coal and 8% of washed coal compared to approximately 72% premium semi-soft coking coal, 27% standard semi-soft coking coal/premium thermal coal and 1% washed coal in the second quarter of 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. On May 25, 2022, the Ceke Port of Entry reopened for coal export on a trial basis. As a result, the Company recorded 0.1 million tonnes of sales in the second quarter of 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 processing shall remain suspended for the time being. The Company will revisit the possibility of resuming coal processing at a later date.

The Company's unit cost of sales of product sold increased from $41.4 per tonne in the second quarter of 2021 to $56.3 per tonne in the second quarter of 2022. The increase was mainly driven by the diseconomies of scale due to decreased sales as well as the increase in the effective royalty rate.

For the six months ended June 30, 2022

The Company sold 0.1 million tonnes for the first six months of 2022 as compared to 0.8 million tonnes for the first six months of 2021. The average selling price increased from $44.1 per tonne for the first six months of 2021 to $66.6 per tonne for the first six months of 2022, due to improved market conditions in China.

The Company's production in the first six months of 2021 was higher than the first six months of 2022 as a result of the temporary suspension of the Company's major mining operations (including coal mining) which took effect from November 2021 to July 2022 for the purpose of mitigating the financial impact of the border closures on the Company and preserving the Company's working capital.

The Company's unit cost of sales of product sold increased from $30.5 per tonne for the first six months of 2021 to $67.5 per tonne in the first six months of 2022. The increase was mainly driven by the diseconomies of scale due to decreased sales as well as the increase in the effective royalty rate.

1. Revenue and cost of sales related to the Company's Ovoot Tolgoi Mine within the Coal Division operating segment. Refer to note 3 of the condensed consolidated interim financial statements for further analysis regarding the Company's reportable operating segments.

2. A non-IFRS financial measure, idled mine asset costs represents the depreciation expense relates to the Company's idled plant and equipment.

Overview of Financial Results

For the three months ended June 30, 2022

The Company recorded a $2.7 million profit from operations in the second quarter of 2022 compared to a $1.0 million loss from operations in the second quarter of 2021. The financial results for the second quarter of 2022 were impacted by the foreign exchange gain of $1.4 million, a write off of other payables of $1.6 million and by the decreased sales resulting from the temporary closure of the Ceke Port of Entry experienced by the Company during the second quarter.

Revenue was $5.8 million in the second quarter of 2022 compared to $5.2 million in the second quarter of 2021. The Company's effective royalty rate for the second quarter of 2022, based on the Company's average realized selling price of $66.6 per tonne, was 26.4% or $17.6 per tonne, compared to 21.9% or $10.5 per tonne in the second quarter of 2021 (based on the average realized selling price of $47.9 per tonne).

Cost of sales was $5.1 million in the second quarter of 2022 compared to $4.6 million in the second quarter of 2021. The increase in cost of sales was mainly due to the increase in royalties during the quarter. 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 "Non-IFRS Financial Measures" section) during the quarter.

Operating expenses in cost of sales were $3.1 million in the second quarter of 2022 compared to $2.3 million in the second quarter of 2021. Cost of sales related to idled mine assets in the second quarter of 2022 included $0.2 million related to depreciation expenses for idled equipment (second quarter of 2021: $0.9 million).

Other operating income was $3.8 million in the second quarter of 2022 (second quarter of 2021: $0.1 million of other operating expenses). Foreign exchange gain of $1.4 million and write off of other payables of $1.6 million were recorded in the second quarter of 2022. (second quarter of 2021: the Company incurred a foreign exchange loss of $0.2 million).

Administration expenses were $1.8 million in the second quarter of 2022 compared to $1.5 million in the second quarter of 2021, the increase in the balance was mainly due to the increase in legal and professional fees for the second quarter of 2022.

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

Finance costs were $10.2 million and $8.9 million in the second quarter of 2022 and 2021 respectively, which primarily consisted of interest expense on the $250.0 million Convertible Debenture.

For the six months ended June 30, 2022

The Company recorded a $2.5 million profit from operations in the first six months of 2022 compared to a $6.5 million in the first six months of 2021. The financial results were impacted by (i) the higher selling price achieved by the Company; and (ii) decreased sales volume resulting from the temporary closure of the Ceke Port of Entry experienced by the Company during the first six months of 2022.

Revenue was $5.8 million in the first six months of 2022 compared to $33.3 million in the first six months of 2021. The Company's effective royalty rate for the first six months of 2022, based on the Company's average realized selling price of $66.6 per tonne, was 26.4% or $17.6 per tonne, compared to 16.0% or $7.1 per tonne in the first six months of 2021 (based on the average realized selling price of $44.1 per tonne).

Cost of sales were $6.1 million in the first six months of 2022 compared to $22.9 million in the first six months of 2021, as follows:

Operating expenses in cost of sales were $3.6 million in the first six months of 2022 compared to $14.6 million in the first six months of 2021. The overall decrease in cost of sales was primarily due to the reduced sales.

Cost of sales related to idled mine assets in the first six months of 2022 included $0.7 million related to depreciation expenses for idled equipment (first six months of 2021: $1.4 million).

Other operating income was $5.8 million in the first six months of 2022 (first six months of 2021: $0.4 million of other operating expenses). Foreign exchange gain of $1.9 million and write off of other payables of $2.8 million were recorded in the first six months of 2022. (first six months of 2021: foreign exchange loss of $0.2 million).

Administration expenses were $3.0 million in the first six months of 2022 compared to $3.3 million in the first six months of 2021, as follows:

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

Finance costs were $20.3 million and $21.0 million in the first six months of 2022 and 2021 respectively, which primarily consisted of interest expense on the $250.0 million Convertible Debenture.

Summary of Quarterly Operational Data

1. A non-IFRS financial measure. Refer to section "Non-IFRS Financial Measures". Cash costs of product sold exclude idled mine asset cash costs.

2. Per 200,000 man hours and calculated based on a rolling 12 month average.

3. Not presented as nil sales was noted for the quarter.

Summary of Quarterly Financial Results

The Company's consolidated financial statements are reported under International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board. The following table provides highlights, extracted from the Company's annual and interim consolidated financial statements, of quarterly results for the past eight quarters.

1. Revenue and cost of sales relate to the Company's Ovoot Tolgoi Mine within the Coal Division operating segment. Refer to note 3 of the condensed consolidated interim financial statements for further analysis regarding the Company's reportable operating segments.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Capital Management

The Company has in place a planning, budgeting and forecasting process to help determine the funds required to support the Company's normal operations on an ongoing basis and its expansionary plans.

Costs reimbursable to Turquoise Hill

Prior to the completion of a private placement with Novel Sunrise Investments Limited ("Novel Sunrise") on April 23, 2015, Rio Tinto plc ("Rio Tinto") was the Company's ultimate parent company. In the past, Rio Tinto sought reimbursement from the Company for the salaries and benefits of certain Rio Tinto employees who were assigned by Rio Tinto to work for the Company, as well as certain legal and professional fees incurred by Rio Tinto in relation to the Company's prior internal investigation and Rio Tinto's participation in the tripartite committee. Subsequently Rio Tinto transferred and assigned to Turquoise Hill its right to seek reimbursement for these costs and fees from the Company.

On January 20, 2021, the Company and Turquoise Hill entered into a settlement agreement, whereby Turquoise Hill agreed to a repayment schedule in settlement of certain secondment costs in the amount of $2.8 million (representing a portion of the TRQ Reimbursable Amount) pursuant to which the Company agreed to make monthly payments to Turquoise Hill in the amount of $0.1 million per month from January 2021 to June 2022. The Company is contesting the validity of the remaining balance of the TRQ Reimbursable Amount claimed by Turquoise Hill.

As at June 30, 2022, the amount of reimbursable costs and fees claimed by Turquoise Hill (the "TRQ Reimbursable Amount") amounted to $6.8 million (such amount is included in the trade and other payables).

Going concern considerations

The Company's condensed consolidated interim financial statements have been prepared on a going concern basis which assumes that the Company will continue to operate until at least June 30, 2023 and will be able to realize its assets and discharge its liabilities in the normal course of operations as they come due. However, in order to continue as a going concern, the Company must generate sufficient operating cash flows, secure additional capital or otherwise pursue a strategic restructuring, refinancing or other transactions to provide it with sufficient liquidity.

Several adverse conditions and material uncertainties cast significant doubt upon the Company's ability to continue as a going concern and the going concern assumption used in the preparation of the Company's condensed consolidated interim financial statements. The Company incurred a loss attributable to equity holders of the Company of $17.8 million for the first six months of 2022 (compared to a profit attributable to equity holders of the Company of $5.8 million for the first six months of 2021), and as of that date, had a deficiency in assets of $121.2 million as at June 30, 2022 as compared to a deficiency in assets of $90.5 million as at December 31, 2021 while the working capital deficiency (excess current liabilities over current assets) reached $43.6 million as at June 30, 2022 compared to a working capital deficiency of $42.5 million as at December 31, 2021.

Included in the working capital deficiency as at June 30, 2022 are significant obligations, represented by trade and other payables of $64.6 million, which includes $23.0 million in unpaid taxes that are repayable on demand to the Mongolian Tax Authority ("MTA").

Furthermore, the Company may not be able to settle all trade and other payables on a timely basis, and as a result any continuing postponement in settling of certain trade and other payables owed to suppliers and creditors may impact the ability of the Company to resume its mining operations and may result in potential lawsuits and/or bankruptcy proceedings being filed against the Company. Except as disclosed elsewhere in this press release, no such lawsuits or proceedings were pending as at August 12, 2022.

As disclosed in the section "Impact of the COVID-19 pandemic", the Chinese-Mongolian border was re-opened for coal export on a trial basis on May 25, 2022 but there can be no guarantee that the Company will be able to continue exporting coal to China, or the Chinese-Mongolian border crossings would not be the subject of additional closure as a result of COVID-19 or any variants thereof in the future. The Company has been proactively adjusting its sales strategy and exploring opportunities to expand its sales.

There are significant uncertainties as to the outcomes of the above events or conditions that may cast significant doubt on the Company's ability to continue as a going concern and, therefore, the Company may be unable to realize its assets and discharge its liabilities in the normal course of business. Should the use of the going concern basis in preparation of the condensed consolidated interim financial statements be determined to be not appropriate, adjustments would have to be made to write down the carrying amounts of the Company's assets to their realizable values, to provide for any further liabilities which might arise and to reclassify non-current assets and noncurrent liabilities as current assets and current liabilities, respectively. The effects of these adjustments have not been reflected in the condensed consolidated interim financial statements. If the Company is unable to continue as a going concern, it may be forced to seek relief under applicable bankruptcy and insolvency legislation.

For the purpose of assessing the appropriateness of the use of the going concern basis to prepare the financial statements, management of the Company has prepared a cash flow projection covering a period of 12 months from June 30, 2022. The cash flow projection has considered the anticipated cash flows to be generated from the Company's business during the period under projection including cost saving measures. In particular, the Company has taken into account the following measures for improvement of the Company's liquidity and financial position, which include: (a) entering into three deferral agreements with CIC on November 19, 2020, (the "2020 November Deferral Agreement") for a deferral of (i) deferred cash interest and deferral fees of $75.2 million which were due and payable to CIC on or before September 14, 2020, under the deferral agreement signed on June 19, 2020 (the "2020 June Deferral Agreement"); (ii) semiannual cash interest payments in the aggregate amount of $16.0 million payable to CIC on November 19, 2020 and May 19, 2021; (iii) $4.0 million worth of PIK Interest shares ("2020 November PIK Interest") issuable to CIC on November 19, 2020 under the Convertible Debenture; and (iv) the management fee which payable to CIC on November 14, 2020, February 14, 2021, May 15, 2021, August 14, 2021 and November 14, 2021 under the Amended and Restated Cooperation Agreement (collectively, the "2020 November Deferral Amounts"), on