SGQ.V · 2012-11-13

Southgobi Resources Announces Third Quarter 2012 Financial and Operating Results

Production Results Financials

November 13, 2012

SOUTHGOBI RESOURCES ANNOUNCES THIRD QUARTER 2012 FINANCIAL AND OPERATING RESULTS

HONG KONG – SouthGobi Resources Ltd. (TSX: SGQ, HK: 1878), (the “Company” or “SouthGobi”) today announced its financial and operating results for the three and nine months ended September 30, 2012. All figures are in U.S. dollars unless otherwise stated.

HIGHLIGHTS

The Company’s highlights for the quarter ended September 30, 2012 and subsequent weeks are as follows:

SouthGobi’s mining activities remained fully curtailed throughout the third quarter of 2012

to manage coal inventories and to maintain efficient working capital levels;

SouthGobi continued to suspend uncommitted capital expenditures and exploration

expenditures to preserve its financial resources;

Sales volumes and revenue declined to 0.31 million tonnes and $3.3 million, respectively, in

the third quarter of 2012;

SouthGobi was notified that the Aluminum Corporation of China Limited’s (“CHALCO”)

proportional takeover bid for up to 60% of the issued and outstanding common shares of SouthGobi had been terminated, which also resulted in the termination of the cooperation agreement;

SouthGobi received a letter from the Mineral Resources Authority of Mongolia (“MRAM”)

confirming that as of September 4, 2012, all exploration and mining licenses held by the Company were in good standing;

SGQ Coal Investment Pte. Ltd., a wholly-owned subsidiary of SouthGobi that owns 100% of

the Company’s Mongolian operating subsidiary SouthGobi Sands LLC, filed a Notice of Investment Dispute on the Government of Mongolia pursuant to the Bilateral Investment Treaty between Singapore and Mongolia;

The proposed sale of the Tsagaan Tolgoi Deposit to Modun Resources Limited (“Modun”)

was cancelled by mutual agreement of both parties; and

SouthGobi announced changes to its Board of Directors and senior management team.

REVIEW OF QUARTERLY OPERATING RESULTS

The Company’s operating results for the previous eight quarters are summarized in the table below:

	2012			2011				2010
QUARTER ENDED	30-Sep	30-Jun	31-Mar	31-Dec	30-Sep	30-Jun	31-Mar	31-Dec
Volumes and prices Raw semi-soft coking coal Raw coal production (millions of tonnes) Coal sales (millions of tonnes) Average realized selling price (per tonne) Raw medium-ash coal Raw coal production (millions of tonnes) Coal sales (millions of tonnes) Average realized selling price (per tonne) Raw higher-ash coal Raw coal production (millions of tonnes) Coal sales (millions of tonnes) Average realized selling price (per tonne) Total Raw coal production (millions of tonnes) Coal sales (millions of tonnes) Average realized selling price (per tonne) Costs Direct cash costs of product sold excluding idled mine costs (per tonne) (i) Total cash costs of product sold excluding idled mine costs (per tonne) (i) Waste movement and stripping ratio Production waste material moved (millions of bank cubic meters) Strip ratio (bank cubic meters of waste material per tonne of coal produced) Pre-production waste material moved (millions of bank cubic meters) Other operating capacity statistics Capacity Number of mining shovels/excavators available at period end Total combined stated mining shovel/excavator capacity at period end (cubic meters) Number of haul trucks available at period end Total combined stated haul truck capacity at period end (tonnes) Employees and safety Employees at period end Lost time injury frequency rate (ii)	- - $ - - - $ - - 0.31 $ 1 5.79 - 0.31 $ 1 5.79 $ 8.23 $ 1 2.12 - - - 4 98 27 4,743 644 0.8	0.07 0.12 $ 67.17 0.11 0.04 $ 49.91 0.09 0.00 $ 38.80 0.27 0.16 $ 62.56 $ 22.57 $ 31.49 1.16 4.31 - 4 98 27 4,743 693 1.1	0.28 0.31 $ 67.59 0.64 0.53 $ 50.40 0.15 - $ - 1.07 0.84 $ 56.79 $ 10.80 $ 15.04 2.20 2.07 - 3 64 27 4,743 720 1.4	0.47 0.53 $ 67.62 0.37 0.37 $ 48.59 0.50 0.25 $ 40.30 1.34 1.15 $ 55.51 $ 22.14 $ 23.09 4.58 3.42 - 3 64 25 4,561 720 1.2	0.55 0.66 $ 66.83 0.20 0.20 $ 48.17 0.50 0.51 $ 39.74 1.25 1.37 $ 54.01 $ 22.64 $ 23.17 4.10 3.28 0.39 3 64 16 2,599 695 0.9	0.52 0.60 $ 65.96 - - $ - 0.35 0.45 $ 38.32 0.87 1.05 $ 54.06 $ 26.77 $ 27.61 4.08 4.74 0.80 4 98 16 2,599 658 0.6	0.48 0.34 $ 56.50 - - $ - 0.63 0.11 $ 31.68 1.11 0.45 $ 50.29 $ 18.91 $ 20.61 3.85 3.47 0.49 3 83 16 2,599 600 0.7	0.41 0.35 $ 47.08 - - $ - 0.97 1.12 $ 26.75 1.38 1.47 $ 31.56 $ 18.53 $ 19.25 3.56 2.58 0.73 3 82 15 2,254 544 0.8

(i) A non-IFRS financial measure, see Non-IFRS Financial Measures section

(ii) Per 1,000,000 man hours

For the three months ended September 30, 2012

For the three months ended September 30, 2012, the Company’s mining activities remained fully curtailed. The Company sold 0.31 million tonnes of coal at an average realized selling price of $15.79 per tonne compared to sales of 1.37 million tonnes of coal at an average realized selling price of $54.01 per tonne for the three months ended September 30, 2011.

Sales volume declined for the three months ended September 30, 2012 due to the continued softening of inland China coking coal markets closest to SouthGobi’s operations and the continued uncertainty with respect to whether SouthGobi would receive a formal request from MRAM to suspend mining activities on its Ovoot Tolgoi mining license, which caused customers concern that they would be unable to collect and export additional coal purchased from the Ovoot Tolgoi Mine. The decrease in the average realized selling price in the third quarter of 2012 is primarily related to the Company’s sales mix - only higher-ash coals were sold in the third quarter of 2012 - and the significant reduction in the Company’s selling price for higher-ash coals.

In the third quarter of 2012, the Company sold higher-ash stockpiles to satisfy existing sales contracts. The Company’s average realized selling price was negatively impacted by the continued softening of the inland China coking coal markets closest to SouthGobi’s operations.

Direct cash costs of product sold excluding idled mine costs (a non-IFRS financial measure, see Non-IFRS Financial Measures section) were $8.23 per tonne for the three months ended September 30, 2012 compared to $22.64 per tonne for the three months ended September 30, 2011. Direct cash costs of product sold excluding idled mine costs primarily decreased due to non-cash coal stockpile impairments recorded in the third quarter of 2012.

For the nine months ended September 30, 2012

For the nine months ended September 30, 2012, the Company produced 1.33 million tonnes of raw coal with a strip ratio of 2.52 compared to production of 3.22 million tonnes of raw coal with a strip ratio of 3.74 for the nine months ended September 30, 2011. The decrease in production primarily related to the curtailment of the Company’s mining operations in the second and third quarters of 2012; whereas, the decrease in the strip ratio primarily related to the below-trend strip ratio in the first quarter of 2012 which will be normalized over the life-of-mine.

For the nine months ended September 30, 2012, the Company sold 1.31 million tonnes of coal at an average realized selling price of $47.76 per tonne compared to sales of 2.87 million tonnes of coal at an average realized selling price of $53.44 per tonne for the nine months ended September 30, 2011. Revenue decreased to $51.9 million for the nine months ended September 30, 2012 from $128.0 million for the nine months ended September 30, 2011 primarily due to decreased sales volumes in the second and third quarters of 2012 and lower average realized selling prices in the third quarter of 2012, partially offset by higher sales volumes in the first quarter of 2012.

Direct cash costs of product sold excluding idled mine costs (a non-IFRS financial measure, see Non-IFRS Financial Measures section) were $11.61 per tonne for the nine months ended September 30, 2012 compared to $23.55 per tonne for the nine months ended September 30, 2011. Direct cash costs of product sold excluding idled mine costs have primarily decreased as a result of a lower strip ratio, reduced fuel prices and non-cash coal stockpile impairments recorded in the third quarter of 2012.

REVIEW OF QUARTERLY FINANCIAL RESULTS

The Company’s financial results for the previous eight quarters are summarized in the table below:

($ in thousands, except for per share information, unless otherwise indicated)

	2012			2011				2010
QUARTER ENDED	30-Sep	30-Jun	31-Mar	31-Dec	30-Sep	30-Jun	31-Mar	31-Dec
Revenue Gross profit/(loss) excluding idled mine costs Gross profit margin excluding idled mine costs Gross profit/(loss) including idled mine costs Other operating expenses Administration expenses Evaluation and exploration expenses Income/(loss) from operations Net income/(loss) Basic income/(loss) per share Diluted income/(loss) per share	$ 3 ,337 (8,601) -258% (27,532) (29,301) (5,178) (958) (62,969) (54,564) (0.30) (0.30)	$ 8,412 1,778 21% (13,809) (3,803) (7,497) (2,099) (27,208) 237 0.00 (0.12)	$ 4 0,153 22,674 56% 22,674 (2,578) (5,882) (5,033) 9,181 3,126 0.02 0.02	$ 5 1,064 16,637 33% 16,637 (24,644) (8,612) (14,513) (31,132) (18,897) (0.10) (0.14)	$ 6 0,491 17,635 29% 17,635 (138) (7,993) (10,908) (1,404) 55,921 0.31 (0.02)	$ 4 7,336 9,744 21% 9,744 (3,024) (6,808) (4,356) (4,444) 67,323 0.37 -	$ 2 0,158 7,690 38% 7,690 (1,383) (5,336) (1,991) (1,020) (46,602) (0.25) (0.25)	$ 4 1,595 3,950 9% 3,950 (2,121) (6,599) (4,144) (8,914) (28,720) (0.16) (0.16)

	2012			2011				2010
QUARTER ENDED	30-Sep	30-Jun	31-Mar	31-Dec	30-Sep	30-Jun	31-Mar	31-Dec
Net income/(loss) Income/(loss) adjustments, net of tax Idled mine costs Share-based compensation Net impairment loss/(recovery) on assets Unrealized foreign exchange losses/(gains) Unrealized loss/(gain) on embedded derivatives in CIC debenture Realized loss/(gain) on disposal of FVTPL investments (i) Unrealized loss/(gain) on FVTPL investments Adjusted net income/(loss) (ii)	$ (54,564) 13,572 1,490 34,299 179 (12,856) - 1,197 (16,683)	$ 237 10,966 4,383 2,583 (511) (26,770) 46 2,282 (6,784)	$ 3,126 - 3,799 - (950) 776 (85) 339 7,005	$ (18,897) - 4,050 23,818 34 (10,790) - 155 (1,630)	$ 5 5,921 - 4,296 (2,925) 103 (62,058) - 2,449 (2,214)	$ 6 7,323 - 3,349 - 263 (70,422) - (3,629) (3,116)	$ (46,602) - 2,715 - (993) 36,780 - 4,116 (3,984)	$ (28,720) - 3,840 574 (1,837) 19,995 - (4,375) (10,523)

(i) FVTPL is defined as “fair value through profit or loss”

(ii) A non-IFRS financial measure, see Non-IFRS Financial Measures section

For the three months ended September 30, 2012

The Company recorded a net loss of $54.6 million for the three months ended September 30, 2012 compared to a net income of $0.2 million for the three months ended June 30, 2012 and a net income of $55.9 million for the three months ended September 30, 2011.

Gross Profit:

The Company’s gross profit is composed of revenue (net of royalties and selling fees) and cost of sales and relates solely to the Mongolian Coal Division. For the three months ended September 30, 2012, gross loss was negatively impacted by $18.9 million of idled mine costs, resulting in a gross loss of $27.5 million. The Company recorded a gross loss excluding idled mine costs of $8.6 million for the three months ended September 30, 2012 compared to a gross profit excluding idled mine costs of $1.8 million for the three months ended June 30, 2012 and $17.6 million for the three months ended September 30, 2011.

The Company recognized revenue of $3.3 million in the third quarter of 2012 compared to $8.4 million in the second quarter of 2012 and $60.5 million in the third quarter of 2011. The decrease in revenue from the second quarter of 2012 can be attributed to the Company’s sales mix - only higher-ash coals were sold in the third quarter of 2012 - and the significant reduction in the Company’s selling price for higher-ash coals due to market conditions. The decrease in revenue from the third quarter of 2011 can primarily be attributed to decreased sales volumes and a lower average realized selling price due to the significant reduction in the Company’s selling price for higher-ash coals in the third quarter of 2012. SouthGobi’s effective royalty rate in the third quarter of 2012 was 30%, significantly higher than prior periods due to the Company’s sales mix and the significant reduction in the Company’s selling price for higher-ash coals.

SouthGobi, together with other Mongolian mining companies affected by the escalation of effective royalty rates, opened a dialog with the appropriate Government of Mongolia authorities with a view of moving to a more equitable process for setting reference prices. There has been a successful outcome and commencing October 1, 2012 (for a six month trial period) the royalty will be calculated using the contracted sales price per tonne, not the reference price per tonne published by the Government of Mongolia. Over the trial period, the Company’s effective royalty rate is expected to be significantly lower.

Cost of sales was $30.9 million in the third quarter of 2012 compared to $22.2 million in the second quarter of 2012 and $42.9 million in the third quarter of 2011. Cost of sales comprise the direct cash costs of product sold, mine administration cash costs of product sold, idled mine costs, inventory impairments, equipment depreciation, depletion of mineral properties and share-based compensation. Of the $30.9 million and $22.2 million recorded as cost of sales in the third and second quarters of 2012, $12.0 million and $6.6 million related to mine operations and $18.9 million and $15.6 million related to idled mine costs, respectively. Cost of sales related to mine operations increased in the third quarter of 2012 compared to the second quarter of 2012 primarily due to coal stockpile impairments totaling $7.2 million and higher sales volumes, partially offset by lower unit costs. Cost of sales related to mine operations decreased in the third quarter of 2012 compared to the third quarter of 2011 primarily due to lower sales volumes, partially offset by coal stockpile impairments totaling $7.2 million.

Other Operating Expenses:

Other operating expenses in the third quarter of 2012 increased to $29.3 million compared to $3.8 million in the second quarter of 2012 and $0.1 million in the third quarter of 2011. The increase in other operating expenses primarily relates to provisions for doubtful trade and other receivables, an impairment loss on available-for-sale financial assets, and an impairment of property, plant and equipment, partially offset by reduced public infrastructure costs.

For the three months ended September 30, 2012, the Company recorded $29.5 million of provisions and impairments in other operating expenses related to the following:

Trade and other receivables – the Company recorded a total loss provision of $11.1 million for certain uncollectible trade receivables. The Company anticipates full recovery of its remaining outstanding trade and other receivables.
Available-for-sale financial asset – as at September 30, 2012, the Company determined that objective evidence of impairment in the Company’s investment in Aspire Mining Limited (“Aspire”) existed. Therefore, an impairment loss of $16.1 million was recognized in other operating expenses.
Property, plant and equipment - the Company recorded $2.3 million of impairment charges to reduce various items of property, plant and equipment to their recoverable amounts. The impairment consists of a $1.2 million provision on tires held for sale and a $1.1 million impairment of construction in progress expenditures that were not expected to be recovered.

Public infrastructure costs decreased in the third quarter of 2012 compared to the second quarter of 2012 and third quarter of 2011 due to reduced maintenance costs on transportation infrastructure from the Ovoot Tolgoi Mine to the Shivee Khuren Border Crossing and the completion of the expanded border crossing infrastructure at the Shivee Khuren Border crossing in the second quarter of 2012. Public infrastructure costs should continue to be lower than prior periods due to the completion of the expanded border crossing infrastructure at the Shivee Khuren Border Crossing.

Administration Expenses:

Administration expenses in the third quarter of 2012 were $5.2 million compared to $7.5 million in the second quarter of 2012 and $8.0 million in the third quarter of 2011. Administration expenses decreased in the third quarter of 2012 compared to the second quarter of 2012 and third quarter of 2011 primarily due to decreased corporate administration, salaries and benefits and share-based compensation expenses, partially offset by increased legal and professional fees. Legal and professional fees were higher in the third quarter of 2012 primarily due to additional legal fees as a result of the CHALCO proportional takeover bid and the Notice of Investment Dispute (refer to Notice of Investment Dispute section).

Evaluation and Exploration Expenses:

Exploration expenses in the third quarter of 2012 were $1.0 million compared to $2.1 million in the second quarter of 2012 and $10.9 million in the third quarter of 2011. Exploration expenses will vary from quarter to quarter depending on the number of projects and the related seasonality of the exploration programs. The Company continued to curtail exploration activities in the third quarter of 2012 to preserve financial resources. The majority of the exploration activities in the third quarter of 2012 related to water exploration activities. Exploration expenses in the third quarter of 2011 included a higher proportion of the 2011 exploration program expenses due to delays in receiving required government approvals in the first half of 2011.

Finance Income & Finance Costs:

The Company incurred finance costs in the third quarter of 2012 of $5.2 million compared to $4.1 million in the third quarter of 2011. Finance costs in the third quarter of 2012 primarily consisted of $3.9 million of interest expense on the China Investment Corporation (“CIC”) convertible debenture and a $1.2 million unrealized loss on FVTPL investments; whereas, finance costs in the third quarter of 2011 primarily consisted of $1.5 million of interest expense on the CIC convertible debenture and a $2.4 million unrealized loss on FVTPL investments.

The Company recorded finance income in the third quarter of 2012 of $12.9 million compared to $62.3 million in the third quarter of 2011. In the third quarter of 2012, finance income primarily consisted of a $12.9 million unrealized gain on the fair value change of the embedded derivatives in the CIC convertible debenture; whereas, in the third quarter of 2011, finance income primarily consisted of a $62.1 million unrealized gain on the fair value change of the embedded derivatives in the CIC convertible debenture.

The Company’s investment in Aspire continues to be classified as an available-for-sale financial asset. As at September 30, 2012, the Company determined that objective evidence of impairment in the Company’s investment in Aspire existed. Therefore, an impairment loss of $16.1 million was recognized in other operating expenses. Other comprehensive income for the three months ended September 30, 2011 consists of an unrealized loss (net of tax) of $15.9 million related to the Company’s investment in Aspire.

Taxes:

In the third quarter of 2012, the Company recorded a current income tax recovery of $0.9 million related to its Mongolian operations compared to a current income tax expense of $4.3 million in the third quarter of 2011. The Company has recorded a deferred income tax expense related to deductible temporary differences of $0.5 million in the third quarter of 2012 compared to a deferred income tax recovery of $3.3 million in the third quarter of 2011.

For the nine months ended September 30, 2012

The Company recorded a net loss of $51.2 million for the nine months ended September 30, 2012 compared to a net income of $76.6 million for the nine months ended September 30, 2011.

Gross Profit:

The Company’s gross profit is composed of revenue (net of royalties and selling fees) and cost of sales and relates solely to the Mongolian Coal Division. For the nine months ended September 30, 2012, gross loss was negatively impacted by $34.5 million of idled mine costs, resulting in a gross profit excluding idled mine costs of $15.8 million. The Company recorded a gross profit excluding idled mine costs of $35.1 million for the nine months ended September 30, 2011.

Revenue decreased to $51.9 million for the nine months ended September 30, 2012 from $128.0 million for the nine months ended September 30, 2011 primarily due to decreased sales volumes in the second and third quarters of 2012 and lower average realized selling prices in the third quarter of 2012, partially offset by higher sales volumes in the first quarter of 2012.

Cost of sales was $70.6 million for the nine months ended September 30, 2012 compared to $92.9 million for the nine months ended September 30, 2011. Cost of sales comprise the direct cash costs of product sold, mine administration cash costs of product sold, idled mine costs, inventory impairments, equipment depreciation, depletion of mineral properties and share-based compensation. Of the $70.6 million recorded as cost of sales for the nine months ended September 30, 2012, $36.1 million related to mine operations and $34.5 million related to idled mine costs. Cost of sales related to mine operations decreased for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 primarily due to lower sales volumes and lower unit costs, partially offset by coal stockpile impairments totaling $7.2 million.

Other Operating Expenses:

Other operating expenses for the nine months ended September 30, 2012 increased to $35.7 million compared to $4.5 million for the nine months ended September 30, 2011. The increase in other operating expenses primarily relates to provisions for doubtful trade and other receivables, an impairment loss on available-for-sale financial assets and an impairment of property, plant and equipment, partially offset by reduced public infrastructure costs.

For the nine months ended September 30, 2012, the Company recorded $32.1 million of provisions and impairments related to the following:

Trade and other receivables – the Company recorded a total loss provision of $13.7 million for certain uncollectible trade receivables. The Company anticipates full recovery of its remaining outstanding trade and other receivables.
Available-for-sale financial asset – as at September 30, 2012, the Company determined that objective evidence of impairment in the Company’s investment in Aspire existed. Therefore, an impairment loss of $16.1 million was recognized in other operating expenses.
Property, plant and equipment - the Company recorded $2.3 million of impairment charges to reduce various items of property, plant and equipment to their recoverable amounts. The impairment consists of a $1.2 million provision on tires held for sale and a $1.1 million impairment of construction in progress expenditures that were not expected to be recovered.

Public infrastructure costs decreased for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 due to reduced maintenance costs on transportation infrastructure from the Ovoot Tolgoi Mine to the Shivee Khuren Border Crossing and reduced works on the expanded border crossing infrastructure at the Shivee Khuren Border Crossing. Public infrastructure costs should continue to be lower than prior periods due to the completion of the expanded border crossing infrastructure at the Shivee Khuren Border Crossing.

Administration Expenses:

Administration expenses for the nine months ended September 30, 2012 were $18.6 million compared to $20.1 million for the nine months ended September 30, 2011. The decrease in administration expenses for the nine months ended September 30, 2012 primarily related to reduced corporate administration and share-based compensation expense, partially offset by increased salaries and benefits and legal and professional fees. Salaries and benefits increased for the nine months ending September 30, 2012 primarily due to severance payments resulting from personnel separations, while legal and professional fees were higher due to additional legal fees as a result of the CHALCO proportional takeover bid and the Notice of Investment Dispute (refer to Notice of Investment Dispute section).

Evaluation and Exploration Expenses:

Exploration expenses for the nine months ended September 30, 2012 were $8.1 million compared to $17.3 million for the nine months ended September 30, 2011. Exploration expenses will vary period to period depending on the number of projects and the related seasonality of the exploration programs. The Company continues to curtail 2012 exploration activities to preserve financial resources. The majority of the exploration activities for the nine months ended September 30, 2012 related to water exploration activities.

Finance Income & Finance Costs:

Finance costs for the nine months ended September 30, 2012 were $9.8 million compared to $11.6 million for the nine months ended September 30, 2011. Finance costs for the nine months ended September 30, 2012 primarily consisted of $5.7 million of interest expense on the CIC convertible debenture and a $3.8 million unrealized loss on FVTPL investments; whereas, finance costs for the nine months ended September 30, 2011 primarily consisted of $8.2 million of interest expense on the CIC convertible debenture and a $2.9 million unrealized loss on FVTPL investments.

Finance income for the nine months ended September 30, 2012 was $39.2 million compared to $96.7 million for the nine months ended September 30, 2011. For the nine months ended September 30, 2012, finance income primarily consisted of a $38.9 million unrealized gain on the fair value change of the embedded derivatives in the CIC convertible debenture; whereas, for the nine months ended September 30, 2011, finance income primarily consisted of a $95.7 million unrealized gain on the fair value change of the embedded derivatives in the CIC convertible debenture.

The Company’s investment in Aspire continues to be classified as an available-for-sale financial asset. As at September 30, 2012, the Company determined that objective evidence of impairment in the Company’s investment in Aspire existed. Therefore, an impairment loss of $16.1 million was recognized in other operating expenses. Other comprehensive income for the nine months ended September 30, 2011 consists of an unrealized loss (net of tax) of $4.7 million related to the Company’s investment in Aspire.

Taxes:

For the nine months ended September 30, 2012, the Company recorded a current income tax expense of $0.3 million related to its Mongolian operations compared to a current income tax expense of $7.7 million for the nine months ended September 30, 2011. The Company recorded a deferred income tax recovery related to deductible temporary differences of $0.2 million for the nine months ended September 30, 2012 compared to $6.1 million for the nine months ended September 30, 2011.

FINANCIAL POSITION AND LIQUIDITY

Cash Position and Liquidity

As at September 30, 2012, the Company had $33.5 million in cash and $30.0 million in money market investments for a total liquidity of $63.5 million compared with $123.6 million in cash and $45.0 million in money market investments for a total liquidity of $168.6 million as at December 31, 2011.

The Company’s total assets as at September 30, 2012 were $785.4 million compared with $920.3 million as at December 31, 2011. The Company’s non-current liabilities as at September 30, 2012 were $104.2 million compared with $145.6 million as at December 31, 2011.

Consistent with the Company’s overall capital management strategy, the Company continues to have sufficient liquidity and capital resources to meet its ongoing obligations and future contractual commitments. In the near term, the Company expects its liquidity to remain adequate based on residual proceeds from the CIC convertible debenture offering in 2009 and from the global equity offering in 2010. However, due to the curtailment of mining operations at the Ovoot Tolgoi Mine, the Company has suspended uncommitted capital expenditures and exploration expenditures to preserve the Company’s financial resources.

Impairment Analysis

During the three months ended September 30, 2012, the Company determined that an indicator of impairment existed for its property, plant and equipment related to the Ovoot Tolgoi Mine. The impairment indicator was the decline in the Company’s share price.

As at September 30, 2012, the Company conducted an impairment test whereby the carrying values of the Company’s property, plant and equipment, including mineral properties, related to the Ovoot Tolgoi Mine were compared to their “value in use” using a discounted future cash flow valuation model. The major assumptions incorporated in the “value in use” calculation included certain estimates and assumptions with respect to coal prices, operating costs, mine plan and life, coal quality and recovery, foreign currency exchange rates, inflation rates and an appropriate discount rate.

The analysis did not result in the identification of an impairment loss and no charge was required as at September 30, 2012.

The Company believes that the estimates and assumptions incorporated in the impairment analysis are reasonable; however, the estimates and assumptions are subject to certain risks and uncertainties which may adversely affect the future net cash flows expected to be generated.

PROPOSED TRANSACTION

On April 2, 2012, SouthGobi announced a cooperation agreement with CHALCO and received official notification of CHALCO’s intention to make a proportional takeover bid for up to 60% of the issued and outstanding common shares of SouthGobi at Cdn$8.48 per share (“Proportional Offer”). SouthGobi was also informed by its 58% major shareholder, Turquoise Hill, that Turquoise Hill had signed a lock-up agreement with CHALCO, committing to tender all of its shares held or thereafter acquired by it during the offer period of CHALCO into the Proportional Offer. The Proportional Offer was to be made by way of a takeover bid circular under British Columbia law and would be made to all SouthGobi shareholders. If shareholders tendered more than 60% of the outstanding common shares of SouthGobi to the takeover bid, a proportional amount of shares were to be taken up from each shareholder.

In conjunction with the Proportional Offer, CHALCO and SouthGobi entered into a cooperation agreement. CHALCO’s obligations under the cooperation agreement were to become effective upon CHALCO acquiring a shareholding in SouthGobi.

SouthGobi had also been notified that CHALCO entered into consultancy agreements with nine key senior executives, officers and staff to assist CHALCO with the integration and transition following CHALCO’s acquisition of a shareholding in SouthGobi.

CHALCO stated that it expected to mail the takeover bid circular in connection with the Proportional Offer on or about July 5, 2012. On July 3, 2012, CHALCO and Turquoise Hill announced a 30 day extension for CHALCO to mail the takeover bid circular. Subsequently, on August 2, 2012, an additional 30 day extension was announced by CHALCO and Turquoise Hill. Finally, on September 3, 2012, SouthGobi was notified that CHALCO’s Proportional Offer had been terminated, which also resulted in the termination of the cooperation agreement and the consultancy agreements.

REGULATORY ISSUES IN MONGOLIA

On April 16, 2012, SouthGobi announced that MRAM held a press conference announcing a request to suspend exploration and mining activity on certain licenses owned by SouthGobi Sands LLC. The request for suspension included the mining license pertaining to the Ovoot Tolgoi Mine.

The Company believes that the action was taken under the broad national security powers of the Government of Mongolia. MRAM stated that the move was in connection to the proposed proportional takeover bid by CHALCO and the agreement by Turquoise Hill to tender its controlling interest in SouthGobi to such a takeover. On September 3, 2012, the proposed proportional takeover bid by CHALCO was terminated.

The Company’s June 30, 2012 condensed consolidated interim financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) disclosed that any official notification received would require a mandatory suspension of operations and may result in the impairment of the Company’s property, plant and equipment.

On September 6, 2012, the Company received official notification from MRAM confirming that as of September 4, 2012 all exploration and mining licenses held by the Company were in good standing. As a result, the previously disclosed measurement uncertainty in the Company’s June 30, 2012 condensed consolidated interim financial statements and MD&A pertaining to the potential impairment of the Company’s property, plant and equipment was eliminated. The Notice of Investment Dispute filed by the Company pertaining to its valid Pre-Mining Agreement (“PMA”) applications remains ongoing.

In addition, after receiving official notification from MRAM that the Company’s exploration and mining licenses were in good standing, the Company received approval for its Environmental Impact Assessment for the dry coal handling facility (“DCHF”) from the Mongolian Ministry of Environment.

Subsequent to the third quarter of 2012, the Company noted several articles in Mongolian and international media regarding allegations against SouthGobi and some of its employees. To date, neither SouthGobi nor any of its employees have been charged with any wrongdoing. SouthGobi and its employees continue to cooperate with the Mongolian government agencies including the Independent Authority Against Corruption in their ongoing investigations. Given the recent changes to management and the regulatory environment the Company is experiencing, management has increased its level of scrutiny and the Board of Directors has increased their level of involvement with respect to the Company’s internal reporting policies, to ensure that all potentially material information is delivered to the Board of Directors and the Company's Disclosure Committee promptly.

NOTICE OF INVESTMENT DISPUTE

On July 11, 2012, SouthGobi announced that SGQ Coal Investment Pte. Ltd., a wholly-owned subsidiary of SouthGobi Resources Ltd. that owns 100% of the Company’s Mongolian operating subsidiary SouthGobi Sands LLC, filed a Notice of Investment Dispute on the Government of Mongolia pursuant to the Bilateral Investment Treaty between Singapore and Mongolia. The Company has filed the Notice of Investment Dispute following a determination by management that they have exhausted all other possible means to resolve an ongoing investment dispute between SouthGobi Sands LLC and the Mongolian authorities.

The Notice of Investment Dispute consists of, but is not limited to, the failure by MRAM to execute the PMAs associated with certain exploration licenses of the Company pursuant to which valid PMA applications had been lodged in 2011. The areas covered by the valid PMA applications include the Zag Suuj Deposit and certain areas associated with the Soumber Deposit outside the existing mining license.

The Notice of Investment Dispute triggers the dispute resolution process under the Bilateral Investment Treaty whereby the Government of Mongolia has a six-month cure period from the date of receipt of the notice to satisfactorily resolve the dispute through negotiations. If the negotiations are not successful, the Company will be entitled to commence conciliation/arbitration proceedings under the auspices of the International Centre for Settlement of Investment Disputes (“ICSID”) pursuant to the Bilateral Investment Treaty. However, in the event that the Government of Mongolia fails to negotiate, ICSID arbitration proceedings may be accelerated before the six months have expired. Discussions between the Company and the Government of Mongolia are ongoing.

Activities historically carried out on the exploration licenses with valid PMA applications include drilling, trenching and geological reconnaissance. The Company has no immovable assets located on these licenses and the loss of any or all of these licenses would not materially and adversely affect the existing operations.

TSAGAAN TOLGOI DEPOSIT

On March 5, 2012, SouthGobi announced an agreement to sell the Tsagaan Tolgoi Deposit to Modun, a company listed on the Australian Stock Exchange under the symbol MOU. Under the transaction, SouthGobi expected to receive $30.0 million of total consideration, comprising $7.5 million up-front in cash, $12.5 million up-front in Modun shares and deferred consideration of an additional $10.0 million also payable in Modun shares. Subsequently, on August 29, 2012, SouthGobi announced that the proposed sale of the Tsagaan Tolgoi Deposit to Modun had been cancelled by mutual agreement of both parties.

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