SGQ.V · 2022-05-30

SouthGobi announces fourth quarter and full year 2021 financial and operating results

Production Results Financials

R E S O U R C E S May 30, 2022

SouthGobi announces fourth quarter and full year 2021 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, 2021. All figures are in U.S. dollars (“USD”) unless otherwise stated.

Reference is made to the press release of the Company dated March 30, 2022 in relation to the unaudited financial and operating results for the year ended December 31, 2021 (the “Unaudited Annual Results Press Release”) and the press releases dated March 31, 2022, April 14, 2022, April 29, 2022, May 17, 2022 and May 27, 2022 in relation to, among other things, the further delay in publication of the audited annual results press release and the dispatch of the annual report for the year ended December 31, 2021 (collectively the “Press Release”). Unless otherwise defined, capitalised terms used in this press release shall have the same meanings as those defined in the Unaudited Annual Results Press Release and the Press Release.

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, 2021 in accordance with the Canadian generally accepted auditing standards and would like to announce the audited annual results of the Company for the year ended December 31, 2021 together with the comparative figures for the previous year and the respective notes in this press release.

Shareholders and potential investors should be aware that this press release of audited financial results for the year ended 31 December 2021 was made to replace the Unaudited Financial Results Press Release which has not been agreed with the auditor of the Company. The Board would like to draw attention to the shareholders and potential investors that, there were no changes contained in the consolidated statement of profit or loss and other comprehensive income and the consolidated statement of financial position, the 2021 audited annual results are consistent with the unaudited financial results contained in the Unaudited Financial Results Press Release. Shareholders and potential investors are advised to exercise caution when dealing in the shares and other securities of the Company.

SIGNIFICANT EVENTS AND HIGHLIGHTS

The Company’s significant events and highlights for the year ended December 31, 2021 and the subsequent period to May 30, 2022 are as follows:

Operating Results – In response to the increase in the Coronavirus Disease 2019 (“COVID-19”) case numbers in Mongolia, the Chinese authorities has been restricting the number of trucks permitted to cross the Ceke Port of Entry, and such restriction has severely impacted the sales volume of the Company in the third and fourth quarters of 2021. As a result, the Company’s sales volume decreased from 2.6 million tonnes in 2020 to 0.9 million tonnes in 2021.
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In response to the restrictions on the number of trucks crossing the Mongolian border into China which began as of the second quarter of 2021, the Company temporarily suspended its major mining operations (including coal mining) in the second quarter of 2021 in order to control the inventory level and preserve the Company’s working capital. Mining operations (including coal mining) resumed in the third quarter of 2021. However, mining operations were temporarily suspended again by the Company beginning in November 2021 in response to the temporary closure of the Ceke Port of Entry in the fourth quarter of 2021. See “Impact of the COVID-19 Pandemic” below.

Financial Results – The Company recorded a $4.4 million profit from operations in 2021 compared to a $15.3 million profit in 2020. The financial results were impacted by the decreased sales resulting from the export volume limitations and temporary closure of the Ceke Port of Entry experienced by the Company during the year.
Impact of the COVID-19 Pandemic – Since the second quarter of 2021, additional precautionary measures were imposed by the Chinese authorities at the Ceke Port of Entry in response to the increase of COVID-19 cases in Mongolia, which included restricting the number of trucks crossing the Mongolian border into China. The restrictions on trucking volume have had an adverse impact on the Company’s ability to import its coal products into China 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 have 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. In order to control the inventory level and preserve the Company’s working capital, the Company temporarily suspended mining operations (including coal mining) beginning in early November 2021.

On May 25, 2022, the Ceke Port of Entry re-opened for coal export on a trial basis, with a limited number of trucks permitted to cross the border during the trial period. The Company has been proactively adjusting its sales strategy in response and exploring opportunities to expand its sales accordingly. Although the export of coal from Mongolia to China has resumed as of the date hereof, 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 anticipates that its revenue, liquidity and profitability will continue to be adversely impacted until such time as the coal exports into China are allowed to resume at normal levels.

The Company will continue to closely monitor the situation at the Ceke Port of Entry, including the number of trucks that are permitted to cross the border and the impact on the operations and financials of the Company, and will evaluate the most suitable time for the resumption of its mining operation.

In the event that the Company’s ability to export coal into the Chinese market continues to be restricted or limited, this is expected to have a material adverse effect on the business and operations of the Company and may negatively affect the price and volatility of the Common Shares and any investment in such shares could suffer a significant decline or total loss in value.

China Investment Corporation (together with its wholly-owned subsidiaries and affiliates, “CIC”) Convertible Debenture (“CIC Convertible Debenture”) – On July 30, 2021, the Company and CIC entered into an agreement (the “2021 July Deferral Agreement”) pursuant to which CIC agreed to grant the Company a deferral of: (i) semi-annual cash interest payments of $8.1 million payable to CIC on November 19, 2021; and (ii) $4.0 million worth of payment in kind interest (“PIK Interest”) shares (collectively, the “2021 Deferral Amounts”) issuable to CIC on November 19, 2021 under the CIC Convertible Debenture.

The principal terms of the 2021 July Deferral Agreement are as follows:

Payment of the 2021 Deferral Amounts will be deferred until August 31, 2023.
As consideration for the deferral of the 2021 Deferral Amounts, the Company agreed to pay CIC a deferral fee equal to 6.4% per annum on the 2021 Deferral Amounts payable under the CIC Convertible Debenture, commencing on November 19, 2021.

On May 15, 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 CIC 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 CIC 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.
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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.
Management Cease Trade Order (“MCTO”) – On March 11, 2022, the Company announced that it was advised by its external auditors that they would not be in a position to render an unmodified opinion on the Company’s annual consolidated financial statements for the year ended December 31, 2021 (the “2021 Financial Statements”) prior to the filing deadline of March 31, 2022 because they were not able to obtain sufficient evidence to support management’s going concern assumptions. As a result, the Company was unable to file: (i) the 2021 Financial Statements, accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and chief executive officer and chief financial officer certificates prior to the filing deadline of March 31, 2022; and (ii) the Annual Information Form for the financial year ended December 31, 2021 prior to the filing deadline of March 31, 2022 (collectively, the “2022 Required Filings”). The Company was also unable to file its 2021 Annual Report prior to the filing deadline of March 31, 2022 as required under applicable HKEX listing rules.

On March 17, 2022, the Company applied for a management cease trade order with the applicable Canadian securities regulators in connection with the anticipated delayed filing of the 2022 Required Filings. A MCTO was issued by the BCSC, the Company’s principal securities regulator in Canada, on April 1, 2022 (the “2022 MCTO”).

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, 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.
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 Sale Transaction is subject to the satisfaction of certain conditions precedent.
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In connection with the 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 Sale Transaction and related Assignment, the Buyer has agreed, effective as of July 1, 2022, 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 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 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.
Changes in Management

Mr. Weiguo Zhang: Mr. Zhang resigned as Chief Financial Officer on February 10, 2021.

Mr. Alan Ho: Mr. Ho was appointed as acting Chief Financial Officer on February 10, 2021.

Mr. Aiming Guo: Mr. Guo resigned as Chief Operating Officer on February 10, 2021.

Mr. Tao Zhang: Mr. Zhang has been re-designated from Vice President to Vice President of Sales on February 10, 2021.

Mr. Munkhbat Chuluun: Mr. Chuluun was appointed as Vice President of Public Relations on February 10, 2021.

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, 2021

2020

Sales Volumes, Prices and Costs

Premium semi-soft coking coal

0.60

Coal sales (millions of tonnes) 1.01 $ 51.80 $ Average realized selling price (per tonne) 33.22 Standard semi-soft coking coal/premium thermal coal

0.33

Coal sales (millions of tonnes) 1.43 $ 35.01 $ Average realized selling price (per tonne) 31.69 Washed coal

0.01

Coal sales (millions of tonnes) 0.19 $ 48.53 $ Average realized selling price (per tonne) 41.96 Total

0.94

Coal sales (millions of tonnes) 2.63 $ 46.02 $ Average realized selling price (per tonne) 33.01

1.36

Raw coal production (millions of tonnes) 1.49

$ 33.30 $ Cost of sales of product sold (per tonne) 22.30 $ 17.81 $ Direct cash costs of product sold (per tonne) ⁽ⁱ⁾ 12.73 $ 1.53 $ Mine administration cash costs of product sold (per tonne) ⁽ⁱ⁾ 1.33 $ 19.34 $ Total cash costs of product sold (per tonne) ⁽ⁱ⁾ 14.06

Other Operational Data 5.94

Production waste material moved (millions of bank cubic meters) 5.34 Strip ratio (bank cubic meters of waste material per tonne of

4.36

coal produced) 3.59

0.00

Lost time injury frequency rate ⁽ⁱⁱ⁾ 0.03

(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 2021 without a lost time injury. In comparison, as at December 31, 2020, the Company had a lost time injury frequency rate of 0.03 per 200,000 man hours based on a rolling 12-month average.

The Company sold 0.9 million tonnes in 2021 as compared to 2.6 million tonnes in 2020. The average selling price increased from $33.0 per tonne for 2020 to $46.0 per tonne for 2021, as a result of improved market conditions in China and an improvement of the overall product mix.

The product mix for 2021 consisted of approximately 64% of premium semi-soft coking coal, 34% of standard semi-soft coking coal/premium thermal coal and 2% of washed coal compared to approximately 39% of premium semi-soft coking coal, 54% of standard semi-soft coking coal/ premium thermal coal and 7% of washed coal in 2020.

The Company’s production in 2021 was lower than 2020 as a result of the Company’s major mining operations (including coal mining) being temporarily suspended for a relatively longer period in 2021 in order to mitigate the financial impact of the border closures and to preserve the Company’s working capital, yielding 1.4 million tonnes for 2021 as compared to 1.5 million tonnes for 2020.

The Company’s unit cost of sales of product sold increased from $22.3 per tonne in 2020 to $33.3 per tonne in 2021. The increase was mainly driven by the increase in the effective royalty rate.

Summary of Annual Financial Results

Year ended December 31, 2021

$ in thousands, except per share information 2020

$ 43,398 $ Revenue ⁽ⁱ⁾ 85,951

(31,304)

Cost of sales ⁽ⁱ⁾ (58,657)

15,011

Gross profit excluding idled mine asset costs ⁽ⁱⁱ⁾ 32,147

12,094

Gross profit 27,294

(1,426)

Other operating expenses, net (4,821)

(6,068)

Administration expenses (6,971)

(223)

Evaluation and exploration expenses (226)

4,377

Profit from operations 15,276

(39,118)

Finance costs (31,692)

23,165

Finance income 2,613

(159)

Share of earnings/(loss) of a joint venture 1,313

(2,638)

Current income tax expenses (7,599)

(14,373)

Net loss attributable to equity holders of the Company (20,089) $ (0.05) $ Basic and diluted loss per share (0.07)

(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 $4.4 million profit from operations in 2021 compared to a $15.3 million profit in 2020. The financial results were impacted by (i) the export volume limitations experienced by the Company during the year and (ii) the temporary closure of the Chinese-Mongolia border which resulted in the Company being unable to export its coal products to China during the fourth quarter of 2021.

Revenue was $43.4 million in 2021 compared to $86.0 million in 2020. The Company’s effective royalty rate for 2021, based on the Company’s average realized selling price of $46.0 per tonne, was 18.7% or $8.6 per tonne, compared to 12.2% or $4.0 per tonne in 2020 (based on the average realized selling price of $33.0 per tonne).

Royalty regime in Mongolia

On June 23, 2021, the Government of Mongolia issued a new resolution in connection with the royalty regime. From July 1, 2021 onwards, the royalty payable is to be calculated based on the reference price as determined by the Government of Mongolia, and the reference to the contract sales price will be removed.

Cost of sales was $31.3 million in 2021 compared to $58.7 million in 2020. The decrease in cost of sales in 2021 was mainly due to the effect of decreased sales volume. 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.

Year ended December 31, 2021

$ in thousands 2020

$ 18,176 $ Operating expenses 36,974 Share-based compensation expense 24

2,034

Depreciation and depletion 6,243

8,125

Royalties 10,563

Cost of sales from mine operations	28,387	53,804
Cost of sales related to idled mine assets	2,917	4,853
Cost of sales	$ 31,304 $	58,657

Operating expenses in cost of sales were $18.2 million in 2021 compared to $37.0 million in 2020. The overall decrease in operating expenses was primarily due to the decreased sales volume from 2.6 million tonnes in 2020 to 0.9 million tonnes in 2021.

Cost of sales related to idled mine assets in 2021 included $2.9 million related to depreciation expenses for idled equipment (2020: $4.9 million).

Other operating expenses were $1.4 million in 2021 (2020: $4.8 million), which mainly comprises of the impairment of materials and supplies inventories of $2.4 million in 2021.

Year ended December 31, 2021

$ in thousands 2020

$ 967 $ CIC management fee 2,170 Provision/(reversal of provision) for doubtful trade and other receivables (336)

–

Provision for commercial arbitration 4,634

–

Impairment of prepaid expenses 8 Foreign exchange loss/(gain), net (1,586)

(299)

Gain on disposal of items of property, plant and equipment, net (69)

2,411

Impairment on materials and supplies inventories –

(587)

Rental income from short term leases –

(891)

Discount on settlement of trade payables –

(691)

Written off of other payables –

Other operating expenses $ 1,426 $ 4,821

Administration expenses were $6.1 million in 2021 as compared to $7.0 million in 2020, as follows:

Year ended December 31,

$ in thousands	2021	2020
Corporate administration	$ 1,312 $	1,268
Legal and professional fees	1,098	1,363

2,847

Salaries and benefits 3,518

Share-based compensation expense	151	89
Depreciation	660	733
Administration expenses	$ 6,068 $	6,971

Administration expenses were lower for 2021 compared to 2020 primarily due to decrease in salaries and benefits incurred during the year.

The Company continued to minimize evaluation and exploration expenditures in 2021 in order to preserve the Company’s financial resources. Evaluation and exploration activities and expenditures in 2021 were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining licenses.

Finance costs were $39.1 million and $31.7 million in 2021 and 2020, respectively, which primarily consisted of interest expense on the $250.0 million CIC Convertible Debenture.

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Summary of Quarterly Operational Data

2021 2020 Quarter Ended 31-Dec 30-Sep 30-Jun 31-Mar 31-Dec 30-Sep 30-Jun 31-Mar

Sales Volumes, Prices and Costs

Premium semi-soft coking coal Coal sales (millions of tonnes) 0.01 0.11 0.08 0.40 0.38 0.35 0.21 0.07 Average realized selling price $ 69.73 $ (per tonne) 64.25 $ 52.11 $ 47.88 $ 39.34 $ 30.17 $ 28.69 $ 28.46 Standard semi-soft coking coal/ premium thermal coal Coal sales (millions of tonnes) 0.01 0.06 0.03 0.23 0.50 0.54 0.26 0.13 Average realized selling price $ 34.84 $ (per tonne) 33.56 $ 36.71 $ 35.17 $ 31.66 $ 30.80 $ 33.12 $ 32.71 Washed coal Coal sales (millions of tonnes) – – – 0.01 0.07 0.10 0.02 – Average realized selling price (per tonne) $ – $ – $ – $ 49.62 $ 42.51 $ 41.30 $ 43.26 $ – Total Coal sales (millions of tonnes) 0.02 0.17 0.11 0.64 0.95 0.99 0.49 0.20 Average realized selling price (per tonne) $ 55.44 $ 53.52 $ 47.93 $ 43.46 $ 35.53 $ 31.63 $ 31.66 $ 31.18 Raw coal production

0.06

(millions of tonnes) 0.26 – 1.04 0.96 0.52 – 0.01 Cost of sales of product sold (per tonne) $ 76.95 $ 40.39 $ 41.38 $ 28.67 $ 23.36 $ 20.23 $ 21.16 $ 30.36 Direct cash costs of product sold (per tonne) ⁽ⁱ⁾ $ 17.47 $ 17.50 $ 16.39 $ 18.15 $ 14.78 $ 12.38 $ 9.90 $ 11.69 Mine administration cash costs of product sold (per tonne) ⁽ⁱ⁾ $ 1.23 $ 1.62 $ 4.26 $ 1.04 $ 1.07 $ 1.15 $ 1.70 $ 2.50 Total cash costs of product sold (per tonne) ⁽ⁱ⁾ $ 18.70 $ 19.12 $ 20.65 $ 19.19 $ 15.85 $ 13.53 $ 11.60 $ 14.19

Other Operational Data

Production waste material moved (millions of bank cubic meters) 0.31 0.59 – 5.04 3.10 1.67 – 0.57 Strip ratio (bank cubic meters of waste material per tonne of

5.61

coal produced) 2.23 – 4.83 3.24 3.20 – 85.08 Lost time injury frequency rate ⁽ⁱⁱ⁾ 0.00 0.00 0.00 0.00 0.00 0.00 0.04 0.09

(i) A 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.

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Overview of Quarterly Operational Data

The Company ended the fourth quarter of 2021 without a lost time injury.

The Company experienced an increase in the average selling price of coal from $35.5 per tonne in the fourth quarter of 2020 to $55.4 per tonne in the fourth quarter of 2021, as a result of improved market conditions in China and an improvement of the overall product mix. The product mix for the fourth quarter of 2021 consisted of approximately 59% premium semi-soft coking coal and 41% standard semi-soft coking coal/premium thermal coal compared to approximately 40% premium semi-soft coking coal, 53% standard semi-soft coking coal/premium thermal coal and 7% washed coal in the fourth quarter of 2020.

In response to the increase in the number of COVID-19 cases in Ejinaqi, the Ceke Port of Entry was closed in October 2021. Accordingly, the Company’s coal exports into China were suspended from November 2021 to May 2022. As a result, the Company’s sales volume decreased from 1.0 million tonnes in the fourth quarter of 2020 to less than 0.1 million tonnes in the fourth quarter of 2021.

In order to control the inventory level and preserve the Company’s working capital, the Company temporarily suspended mining operations (including coal mining) beginning in early November 2021. See “Significant Events and Highlights – Impact of the COVID-19 Pandemic” above.

The Company’s unit cost of sales of product sold increased from $23.4 per tonne in the fourth quarter of 2020 to $77.0 per tonne in the fourth quarter of 2021. The increase was mainly driven by the diseconomies of scale due to decreased sales as well as the increase in the effective royalty rate.

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