Southgobi Resources Announces Fourth Quarter and Full Year 2012 Financial and Operating Results

March 25, 2013

SOUTHGOBI RESOURCES ANNOUNCES FOURTH QUARTER AND FULL YEAR 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 quarter and year ended December 31, 2012. All figures are in U.S. Dollars unless otherwise stated.

SIGNIFICANT EVENTS

The Company’s significant events for the year ended December 31, 2012 and subsequent weeks are as follows:

• On March 22, 2013, SouthGobi announced the resumption of operations at its flagship Ovoot

Tolgoi Mine. The Company plans to produce 3.2 million tonnes of semi-soft coking coal over the remainder of 2013. Operations had been fully curtailed since the end of June 2012;

• Annual coal sales volumes and revenue declined to 1.33 million tonnes and $53.1 million,

respectively, in 2012 compared to 4.02 million tonnes and $179.0 million in 2011;

• Commissioned dry coal-handling facility (“DCHF”) at the Ovoot Tolgoi Mine;
• Received official notification of Aluminum Corporation of China Limited’s (“CHALCO”)

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. Subsequently, SouthGobi was notified that CHALCO’s proportional takeover bid had been terminated;

• Mineral Resources Authority of Mongolia (“MRAM”) held a press conference announcing a

request to suspend exploration and mining activity on certain licenses owned by SouthGobi Sands LLC, a wholly-owned subsidiary of SouthGobi Resources Ltd. Subsequently, SouthGobi received a letter from MRAM confirming that as of September 4, 2012 all exploration and mining licenses held by SouthGobi were in good standing;

• The opening of expanded border crossing infrastructure at the Shivee Khuren-Ceke crossing

at the Mongolia-China border (“Shivee Khuren Border Crossing”);

• Ribbon cutting ceremony to commemorate the start of construction on the new paved coal

highway from the Ovoot Tolgoi Complex to the Shivee Khuren Border Crossing;

• 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;

• SouthGobi announced changes to its Board of Directors and senior management team;
• Provided an update on the ongoing governmental, regulatory and internal investigations;
• Received a pre-mining agreement (“PMA”) pertaining to the Soumber Deposit;
• On March 25, 2013, SouthGobi announced updated NI 43-101 compliant resource estimates

for the Soumber and Zag Suuj Deposits, which increased SouthGobi’s total measured and indicated resources to 533 million tonnes (8% increase) and inferred resources to 302 million tonnes (24% increase).

REVIEW OF QUARTERLY OPERATING RESULTS

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

	2012				2011
QUARTER ENDED	31-Dec	30-Sep	30-Jun	31-Mar	31-Dec	30-Sep	30-Jun	31-Mar
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)	- 0.03 $ 4 7.86 - - $ - - - $ - - 0.03 $ 4 7.86 $ 3 3.11 $ 3 8.17 - - - 5 113 27 4,743 465 0.5	- - $ - - - $ - - 0.31 $ 15.79 - 0.31 $ 15.79 $ 8.23 $ 12.12 - - - 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

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

(ii) Per 1,000,000 man hours

For the year ended December 31, 2012

Mining activities at the Ovoot Tolgoi Mine were curtailed to varying degrees in the second quarter of 2012, with mining activities fully curtailed at the end of the second quarter, to manage coal inventories and to maintain efficient working capital levels. Mining activities remained fully curtailed for the remainder of 2012; however, operations at the Ovoot Tolgoi Mine resumed on March 22, 2013.

In 2012, the Company produced 1.33 million tonnes of raw coal with a strip ratio of 2.52 compared to production of 4.57 million tonnes of raw coal with a strip ratio of 3.63 in 2011. The decrease in production primarily related to the curtailment of the Company’s mining operations in the last three quarters of the year; 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.

In 2012, the Company sold 1.33 million tonnes of coal at an average realized selling price of $47.76 per tonne compared to sales of 4.02 million tonnes of coal at an average realized selling price of $54.03 per tonne in 2011. The Company’s average realized selling price was negatively impacted by the softening of the inland China coking coal markets closest to SouthGobi’s operations throughout 2012. The Company’s higher-ash coals were impacted more substantially than its other products.

Direct cash costs of product sold excluding idled mine costs (a non-IFRS financial measure, see Non-IFRS Financial Measures section) were $12.02 per tonne in 2012 compared to $23.15 per tonne in 2011. Direct cash costs of product sold excluding idled mine costs primarily decreased due to a lower strip ratio, reduced fuel prices and non-cash coal stockpile impairments recorded in the second half of 2012.

For the three months ended December 31, 2012

For the three months ended December 31, 2012, the Company’s mining activities remained fully curtailed; however, the Company generated revenue through the sale of existing coal stockpiles.

For the three months ended December 31, 2012, the Company sold 0.03 million tonnes of coal at an average realized selling price of $47.86 per tonne compared to sales of 1.15 million tonnes of coal at an average realized selling price of $55.51 per tonne in 2011. For the three months ended December 31, 2012, the Company’s sales volumes and average realized selling price continued to be negatively impacted by the 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 $33.11 per tonne for the three months ended December 31, 2012 compared to $22.14 for the three months ended December 31, 2011. Direct cash costs of product sold excluding idled mine costs primarily increased for the three months ended December 31, 2012 due to higher cost coal inventory being sold.

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
QUARTER ENDED	31-Dec	30-Sep	30-Jun	31-Mar	31-Dec	30-Sep	30-Jun	31-Mar
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	$ 1 ,213 (6,894) -568% (25,336) (18,664) (6,079) (508) (50,586) (51,818) (0.28) (0.28)	$ 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)

	2012				2011
QUARTER ENDED	31-Dec	30-Sep	30-Jun	31-Mar	31-Dec	30-Sep	30-Jun	31-Mar
Net income/(loss) Income/(loss) adjustments, net of tax Idled mine costs Share-based compensation expense/(recovery) 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)	$ (51,818) 14,474 (1,144) 22,814 750 (662) 15 664 (14,907)	$ (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)

(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 year ended December 31, 2012

The Company recorded a net loss of $103.0 million for the year ended December 31, 2012 compared to a net income of $57.7 million for the year ended December 31, 2011.

Gross Profit/(Loss):

The Company’s gross profit/(loss) is composed of revenue (net of royalties and selling fees) and cost of sales and relates solely to the Mongolian Coal Division. In 2012, the Company’s gross profit/(loss) was negatively impacted by $53.0 million of idled mine costs, resulting in a gross loss of $44.0 million. The Company recorded a gross profit excluding idled mine costs of $9.0 million in 2012 compared to a gross profit excluding idled mine costs of $51.7 million in 2011. Gross profit will vary by year depending on sales volumes, sales prices and unit costs.

In 2012, SouthGobi recorded revenue of $53.1 million compared to $179.0 million in 2011. In the last three quarters of 2012, customers were reluctant to enter into new sales contracts primarily due to the following:

• Customers’ ability to export coal through the Shivee Khuren Border Crossing for the first half of 2012 was significantly below their projections due to: a) the delayed opening of the expanded border crossing infrastructure at the Shivee Khuren Border Crossing; b) the extended closure of the Shivee Khuren Border Crossing for the Chinese New Year and Mongolian Tsagaan Sar public holidays in the first quarter of 2012; c) the closure of the existing gravel road used to transport coal from the Ovoot Tolgoi Mine and neighboring mines to the Shivee Khuren Border Crossing for over four weeks in the second quarter of 2012;
• The 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 in the second and third quarters of 2012; and
• The softening of inland China coking coal markets closest to SouthGobi’s operations throughout the last three quarters of 2012.

Revenues are presented net of royalties and selling fees. The Company is subject to a 5% royalty on all coal sales exported out of Mongolia based on a set reference price per tonne published monthly by the Government of Mongolia. Effective January 1, 2011, the Company is also subject to a sliding scale additional royalty of up to 5% on coal sales exported out of Mongolia based on the set reference price. Based on the 2012 reference prices, the Company was subject to an average 8% royalty based on a weighted average reference price of $88.07 per tonne. The Company’s effective royalty rate for 2012, based on the Company’s average realized selling price of $47.76 per tonne, was 14%.

SouthGobi, together with other Mongolian mining companies impacted 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. A successful outcome was achieved and commencing October 1, 2012 (for a six month trial period) the royalty rate will be determined using the contracted sales price per tonne, not the reference price per tonne published by the Government of Mongolia. The dialog has continued with the appropriate Government of Mongolia authorities with the goal of extending the trial period until the end of 2013. In the fourth quarter of 2012 (a full quarter under the trial period), the Company’s effective royalty rate was 6%, a significant reduction from prior quarters in 2012.

Cost of sales was $97.1 million in 2012 compared to $127.3 million in 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 expense. Of the $97.1 million recorded as cost of sales in 2012, $44.2 million related to mine operations and $53.0 million related to idled mine costs. Cost of sales related to mine operations decreased in 2012 compared to 2011 primarily due to lower sales volumes and lower unit costs, partially offset by coal stockpile impairments totaling $14.2 million. Cost of sales related to idled mine costs primarily consist of period costs, which are expensed as incurred and depreciation expense. The depreciation expense relates to the Company’s idled plant and equipment.

Other Operating Expenses:

Other operating expenses in 2012 increased to $54.3 million compared to $29.2 million in 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.

In 2012, the Company recorded $52.8 million of provisions and impairments in other operating expenses related to the following:

• Trade and other receivables – the Company recorded a loss provision of $18.4 million in 2012. The loss provision relates to provisions for certain uncollectible trade receivables of $17.4 million and a reduction in the expected insurance proceeds of $1.0 million. The Company anticipates full recovery of its remaining outstanding trade and other receivables.
• Available-for-sale financial asset – in 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 $19.2 million was recognized in other operating expenses.
• Property, plant and equipment – the Company recorded $15.2 million of impairment charges to reduce various items of property, plant and equipment to their recoverable amounts. The impairment charges consist of a $13.0 million impairment pertaining to nonrefundable prepayments made on cancelled mobile equipment orders to preserve the Company’s financial resources, a $1.1 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 2012 compared to 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.

In 2011, other operating expenses primarily consisted of a $16.0 million impairment charge on various capitalized construction projects and $8.1 million of public infrastructure costs.

Administration Expenses:

Administration expenses in 2012 were $24.6 million compared to $28.7 million in 2011. The decrease in administration expenses primarily related to reduced corporate administration and share-based compensation expense, partially offset by increased legal and professional fees. Legal and professional fees were higher due to additional legal fees as a result of the CHALCO proportional takeover bid, the Notice of Investment Dispute and in support of the ongoing investigations (refer to Regulatory Issues section).

Evaluation and Exploration Expenses:

Exploration expenses in 2012 were $8.6 million compared to $31.8 million in 2011. Exploration expenses will vary period to period depending on the number of projects and the related seasonality of the exploration programs. The 2012 exploration program was suspended in the second quarter of 2012 in order to preserve the Company’s financial resources while mining operations at the Ovoot Tolgoi Mine were curtailed, with the exception of certain water exploration activities and minimum exploration activities required on exploration licenses held by the Company.

Finance Income & Finance Costs:

The Company incurred finance costs for the year ended December 31, 2012 of $15.4 million compared to $12.8 million for the year ended December 31, 2011. Finance costs for the year ended December 31, 2012 primarily consisted of $10.5 million of interest expense on the China Investment Corporation (“CIC”) convertible debenture and a $4.5 million unrealized loss on FVTPL investments; whereas, finance costs for the year ended December 31, 2011 primarily consisted of $9.1 million of interest expense on the CIC convertible debenture and a $3.1 million unrealized loss on FVTPL investments.

The Company recorded finance income for the year ended December 31, 2012 of $39.9 million compared to $107.7 million for the year ended December 31, 2011. For the year ended December 31, 2012, finance income primarily consisted of a $39.5 million unrealized gain on the fair value change of the embedded derivatives in the CIC convertible debenture; whereas, in the year ended December 31, 2011, finance income primarily consisted of a $106.5 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. In the third quarter of 2012, the Company determined that objective evidence of impairment in the Company’s investment in Aspire existed. Therefore, an impairment loss of $19.2 million was recognized in other operating expenses. Other comprehensive income for the year ended December 31, 2011 consists of an unrealized loss (net of tax) of $11.2 million related to the Company’s investment in Aspire.

Taxes:

For the year ended December 31, 2012, the Company recorded a current income tax expense of $0.4 million related to its Mongolian operations compared to a current income tax expense of $7.3 million for the year ended December 31, 2011. The Company has recorded a deferred income tax recovery related to deductible temporary differences of $3.7 million for the year ended December 31, 2012 compared to a deferred income tax recovery of $8.1 million for the year ended December 31, 2011.

For the three months ended December 31, 2012

The Company recorded a net loss of $51.8 million for the three months ended December 31, 2012 compared to a net loss of $18.9 million for the three months ended December 31, 2011.

Gross Profit/(Loss):

The Company’s gross profit/(loss) 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 December 31, 2012, gross profit was negatively impacted by $18.4 million of idled mine costs, contributing to a gross loss of $25.3 million. The Company recorded a gross loss excluding idled mine costs of $6.9 million in the fourth quarter of 2012 compared to a gross profit of $16.6 million in the fourth quarter of 2011. Gross profit will vary by quarter depending on sales volumes, sales prices and unit costs.

The Company recognized revenue of $1.2 million in the fourth quarter of 2012 compared $51.1 million in the fourth quarter of 2011. The significant decrease in revenue for the three months ended December 31, 2012 compared to the three months ended December 31, 2011 can be attributed to decreased sales volume and a reduction in the Company’s average realized selling price. In the fourth quarter of 2012, the Company’s sales volumes and average realized selling price continued to be negatively impacted by the softening of the inland China coking coal markets closest to SouthGobi’s operations. However, subsequent to year-end, the Company signed contracts with a number of customers to sell the majority of its remaining coal stockpiles.

SouthGobi’s effective royalty rate in the fourth quarter of 2012 was 6%, a significant reduction from prior quarters in 2012. Effective October 1, 2012 (for a six month trial period) the royalty rate is determined using the contracted sales price per tonne, not the reference price per tonne published by the Government of Mongolia. SouthGobi, together with other Mongolian mining companies, have continued their dialog with the appropriate Government of Mongolia authorities with the goal of extending the trial period until the end of 2013.

Cost of sales was $26.5 million for the three months ended December 31, 2012 compared to $34.4 million for the three months ended December 31, 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 expense. Of the $26.5 million recorded as cost of sales for the three months ended December 31, 2012, $8.1 million related to mine operations and $18.4 million related to idled mine costs. Cost of sales related to mine operations decreased for the three months ended December 31, 2012 compared to the three months ended December 31, 2011 primarily due to lower sales volumes, partially offset by higher unit cost and coal stockpile impairments totaling $7.0 million. For the three months ended December 31, 2012, the Company recorded a coal stockpile impairment of $7.0 million to reduce the carrying value to its net realizable value.

Other Operating Expenses:

Other operating expenses for the three months ended December 31, 2012 decreased to $18.7 million compared to $24.6 million for the three months ended December 31, 2011. The decrease in other operating expenses compared to the three months ended December 31, 2011 primarily relates to recognizing a smaller impairment of property, plant and equipment.

For the three months ended December 31, 2012, the Company recorded $20.8 million of provisions and impairments in other operating expenses related to the following:

• Trade and other receivables – the Company recorded a loss provision of $4.7 million related to provisions for certain uncollectible trade receivables of $3.7 million and a reduction in the expected insurance proceeds of $1.0 million. The Company anticipates full recovery of its remaining outstanding trade and other receivables.
• Available-for-sale financial asset – in the third quarter of 2012, the Company determined that objective evidence of impairment in the Company’s investment in Aspire existed. Therefore, a further impairment loss of $3.1 million was recognized in other operating expenses.
• Property, plant and equipment – the Company recorded $13.0 million of impairment charges to reduce non-refundable prepayments made on cancelled mobile equipment orders to their recoverable amounts. The mobile equipment orders were cancelled to preserve the Company’s financial resources.

Administration Expenses:

Administration expenses for the three months ended December 31, 2012 were $6.1 million compared to $8.6 million for the three months ended December 31, 2011. Administration expenses decreased for the three months ended December 31, 2012 compared to the three months ended December 31, 2011 primarily due to decreased salaries and benefits and share-based compensation expenses, partially offset by increased legal and professional fees.

Evaluation and Exploration Expenses:

Exploration expenses for the three months ended December 31, 2012 were $0.5 million compared to $14.5 million for the three months ended December 31, 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 curtailed exploration activities in the fourth and third quarters of 2012 to preserve financial resources. The majority of the exploration activities in the fourth quarter of 2012 related to water exploration activities. Exploration expenses in the fourth 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:

Finance costs for the three months ended December 31, 2012 were $5.6 million compared to $1.1 million for the three months ended December 31, 2011. Finance costs for the three months ended December 31, 2012 primarily consisted of $4.8 million of interest expense on the CIC convertible debenture and a $0.7 million unrealized loss on FVTPL investments; whereas, finance costs for the three months ended December 31, 2011 primarily consisted of $0.9 million of interest expense on the CIC convertible debenture.

Finance income for the three months ended December 31, 2012 was $0.7 million compared to $11.0 million for the three months ended December 31, 2011. For the three months ended December 31, 2012, finance income primarily consisted of a $0.7 million unrealized gain on the fair value change of the embedded derivatives in the CIC convertible debenture; whereas, for the three months ended December 31, 2011, finance income primarily consisted of a $10.8 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. In the third quarter of 2012, the Company determined that objective evidence of impairment in the Company’s investment in Aspire existed. Therefore, in the fourth quarter of 2012, a further impairment loss of $3.1 million was recognized in other operating expenses. Other comprehensive income for the three months ended December 31, 2011 consists of an unrealized loss (net of tax) of $6.5 million related to the Company’s investment in Aspire.

Taxes:

For the three months ended December 31, 2012, the Company recorded a current income tax expense of $0.1 million related to its Mongolian operations compared to a current income tax recovery of $0.4 million for the three months ended December 31, 2011. The Company has recorded a deferred income tax recovery related to deductible temporary differences of $3.5 million for the three months ended December 31, 2012 compared to a deferred income tax recovery of $2.0 million for the three months ended December 31, 2011.

FINANCIAL POSITION AND LIQUIDITY

Cash Position and Liquidity

As at December 31, 2012, the Company had cash of $19.7 million and short term money market investments of $15.0 million for a total of $34.7 million in cash and money market investments compared to cash of $123.6 million and long term money market investments of $45.0 million for a total of $168.6 million in cash and money market investments as at December 31, 2011. Working capital (excess current assets over current liabilities) was $127.2 million as at December 31, 2012 compared to $236.1 million as at December 31, 2011.

The Company’s total assets as at December 31, 2012 were $729.4 million compared with $920.3 million as at December 31, 2011. The Company’s non-current liabilities as at December 31, 2012 were $103.8 million compared with $145.6 million as at December 31, 2011.

Consistent with the Company’s capital risk management strategy, the Company expects to have sufficient liquidity and capital resources to meet its ongoing obligations and future contractual commitments for at least twelve months from the end of the December 31, 2012 reporting period. The Company expects its liquidity to remain sufficient based on existing capital resources and income from mining operations. Liquidity beyond the twelve month period is dependent on the success of the recommencement of operations and ongoing demand and prices in the coal market. On March 22, 2013, the Company recommenced mining activities at the Ovoot Tolgoi Mine. The Company continues to minimize uncommitted capital expenditures and exploration expenditures in order to preserve the Company’s financial resources.

Subsequent to December 31, 2012, the IAAC informed the Company that orders, placing restrictions on certain of its Mongolian assets, had been imposed in connection with its continuing investigation (refer to Regulatory Issues section).

The orders placing restrictions on certain of the Company’s Mongolia assets could ultimately result in an event of default of the Company’s convertible debenture. This matter remains under review by the Company and its advisers but to date, it is the Company's view that this would not result in an event of default as defined under the convertible debenture terms. However, in the event that the orders result in an event of default of the Company’s convertible debenture that remains uncured for ten business days, the principal amount owing and all accrued and unpaid interest will become immediately due and payable upon notice to the Company by CIC.

The orders relate to certain items of operating equipment and infrastructure and the Company’s Mongolian bank accounts. The orders related to the operating equipment and infrastructure restricts the sale of these items; however, the orders do not restrict the use of these items in the Company’s mining activities. The orders related to the Company’s Mongolian bank accounts restrict the use of in-country funds. While the orders restrict the use of in-country funds pending outcome of the investigation, they are not expected to have any material impact on the Company’s activities.

Impairment Analysis

As at December 31, 2012, the Company determined that the decline in the Company’s common share price and continued curtailment of mining activities at the Ovoot Tolgoi Mine constituted impairment indicators. Therefore, 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 as at December 31, 2012. The Company’s property, plant and equipment, including mineral properties, totaled $521.5 million as at December 31, 2012.

Key estimates and assumptions incorporated in the valuation model included the following:

• Inland Chinese coking coal market coal prices;
• Life-of-mine coal production and operating costs; and
• A discount rate based on an analysis of market, country and company specific factors

The impairment analysis did not result in the identification of an impairment loss and no charge was required as at December 31, 2012. The Company believes that the estimates and assumptions incorporated in the impairment analysis are reasonable; however, the estimates and assumptions are subject to significant uncertainties and judgments.

DRY COAL-HANDLING FACILITY

On February 13, 2012, the Company announced the successful commissioning of the DCHF at the Ovoot Tolgoi Mine. The DCHF has capacity to process nine million tonnes of run-of-mine (“ROM”) coal per year. The DCHF includes a 300-tonne-capacity dump hopper, which receives ROM coal from the Ovoot Tolgoi Mine and feeds a coal rotary breaker that sizes coal to a maximum of 50 millimeters (“mm”) and rejects oversize ash. Prior to the commissioning of the rotary breaker, temporary screening operations were used at the Ovoot Tolgoi Mine to process higher-ash coals. Screening performed a similar function to the rotary breaker, namely rejecting oversize ash and sizing the coal to a maximum of 50mm; however, the rotary breaker is anticipated to reduce screening costs and improve yield recoveries.

The Company has received all permits to operate the DCHF. However, the 2013 mine plan considers only limited utilization of the DCHF at the latter end of 2013 due to higher quality coals being mined that likely will not require processing through the DCHF and can be sold raw or processed directly through the wet washing facility. The 2013 mine plan assumes a conservative resumption of operations, designed to achieve a cost effective approach that will allow operations to continue on a sustainable basis.

The Company has delayed construction to upgrade the DCHF to include dry air separation modules and covered load out conveyors with fan stackers to take processed coals to stockpiles and enable more efficient blending. Uncommitted capital expenditures have been minimized to preserve the Company’s financial resources.

REGIONAL INFRASTRUCTURE

In July 2009, Chinese and Mongolian authorities agreed to create designated coal transportation corridors at the Shivee Khuren Border Crossing. In 2011, SouthGobi, together with other companies, completed the road and construction works required on the Mongolian side of the border to match the existing Chinese infrastructure.

Further, on May 28, 2012, the expanded border crossing infrastructure, consisting of eight new border gates exclusively for coal transportation, opened at the Shivee Khuren Border Crossing. The expanded border crossing infrastructure eliminated the previous bottleneck at the Shivee Khuren Border Crossing and is expected to increase capacity to approximately 20 million tonnes or more of coal per year.

On August 2, 2011, the State Property Committee of Mongolia awarded the tender to construct a paved highway from the Ovoot Tolgoi Complex to the Shivee Khuren Border Crossing to consortium partners NTB LLC and SouthGobi Sands LLC (together referred to as “RDCC”). SouthGobi Sands LLC holds a 40% interest in RDCC. On October 26, 2011, RDCC signed a concession agreement with the State Property Committee of Mongolia. RDCC now has the right to conclude a 17 year build, operate and transfer agreement under the Mongolian Law on Concessions. RDCC has engaged a contractor and construction on the paved highway has commenced; however, as planned, the contractor has demobilized until the second quarter of 2013 due to winter weather conditions. Completion of the paved highway is expected late 2013. The paved highway will have an intended carrying capacity upon completion in excess of 20 million tonnes of coal per year.

TSAGAAN TOLGOI DEPOSIT

On March 5, 2012, SouthGobi announced an agreement to sell the Tsagaan Tolgoi Deposit to Modun Resources Limited (“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.

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 Resources Ltd. (“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.