SGQ.V · 2022-03-30

SouthGobi announces fourth quarter and full year 2021 unaudited financial and operating results and postpones filing of 2021 audited consolidated financial statements and annual filings

Production Results Financials Regulatory & Compliance

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

SouthGobi announces fourth quarter and full year 2021 unaudited financial and operating results and postpones filing of 2021 audited consolidated financial statements and annual filings

HONG KONG – SouthGobi Resources Ltd. (Toronto Stock Exchange (“TSX”): SGQ, Hong Kong Stock Exchange (“HKEX”): 1878) (the “Company” or “SouthGobi”) today announces its unaudited 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.

This announcement is made by the Company pursuant to Rule 13.09(2) of the Rules Governing the Listing of Securities on the Hong Kong Stock Exchange (the “Hong Kong Listing Rules”) and the Inside Information Provisions under Part XIVA of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong).

Reference is made to the announcement of the Company dated March 11 and 24, 2022 (the “Announcements”). As disclosed in the Announcements, the Company has been advised by the Company auditors (the “Auditors”) that they will not be in a position to render an unmodified opinion on the Company’s 2021 financial statements prior to the filing deadline of March 31, 2022 because they have not been able to obtain sufficient evidence to support management’s going concern assumptions. Accordingly, the Company cautions that the financial results for its financial year ended December 31, 2021 disclosed herein are unaudited and have not been agreed upon with the Auditors. The unaudited financial results of the Company for the financial year ended December 31, 2021 disclosed herein were reviewed by the Audit Committee of the Company and approved and authorized for issue by the Board of Directors of the Company (the “Board”) on March 30, 2022.

The Company is postponing the filing of its audited consolidated financial statements for its financial year ended December 31, 2021, the accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operation and its Annual Information Form for the financial year ended December 31, 2021 (collectively, the “2021 Annual Filings”), as a result of the Auditors being unable to complete the audit process for the Company’s annual results for the year ended 2021 prior to the filing deadline for the 2021 Annual Filings.

On March 17, 2022, the Company made an application to the British Columbia Securities Commission (“BCSC”), the Company’s principal securities regulator in Canada, requesting that a management cease trade order (a “MCTO”) be granted in respect of the late filing of the 2021 Annual Filings. As of the date hereof, the BCSC has not issued a decision in respect of the Company’s MCTO application. There is no guarantee that a MCTO will be granted. For more information on the potential outcome of the BCSC’s decision to either grant or refuse to grant the MCTO, see “Management Cease Trade Order” below.

Until such time as the Company files its 2021 Annual Filings, shareholders and potential investors of the Company are advised to exercise caution when dealing in the 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 March 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.

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 as well as the closure of the Ceke Port of Entry experienced by the Company during the year.
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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 have been suspended and such suspension remains in effect as of the date hereof. The Company anticipates the temporary closure of the Ceke Port of Entry will have a material adverse impact on the Company’s sales and cash flow until such time as coal exports into China are allowed to resume. 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.

The Company will continue to closely monitor the development of the COVID-19 pandemic and the impact it has on coal exports to China and will continue to react promptly to preserve the working capital of the Company and mitigate any negative impacts on the business and operations of the Company.

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 (“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.
Management Cease Trade Order – On March 17, 2022, the Company made an application to the BCSC under National Policy 12-203 of the Canadian Securities Administrators (“NP 12-203”) requesting that a MCTO be granted in respect of the late filing of the 2021 Annual Filings. As of the date hereof, the BCSC has not issued a decision in respect of the Company’s MCTO application. There is no guarantee that a MCTO will be granted.
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If a MCTO is granted, the Company will attempt to obtain and provide to the Auditors sufficient evidence to support management’s going concern assumptions, and will attempt to obtain an unmodified opinion from the Auditors on the 2021 Financial Statements prior to the expiry of the MCTO. While the MCTO is in effect, the Company’s Chief Executive Officer and Chief Financial Officer will be and, subject to the BCSC’s discretion, the Company’s other senior officers, directors and insiders may be, restricted from trading in the Company’s securities. The Company will be required to comply with the provisions of the alternative information guidelines as set out in NP 12-203 for so long as the MCTO remains in effect, including the issuance of bi-weekly de-fault status reports by way of press releases. If a MCTO is granted, the MCTO would not affect the ability of investors who are not directors, officers and insiders to trade in the securities of the Company on the TSX and the HKEX.

However, if a MCTO is not granted, it is anticipated that the BCSC will issue a general “failure to file” cease trade order (“CTO”) shortly after the filing deadline of March 31, 2022 prohibiting the trading by any person of any securities of the Company in Canada, including trades in the Company’s common shares made through the TSX. The CTO will remain in place until such time as the 2021 Annual Filings are filed by the Company.

As a result of CTO, the Company anticipates that the trading in the Company’s common shares will be halted on the TSX, and the trading in the common shares of the Company on the HKEX will also be suspended until such time as the CTO is lifted and trading resumes on the TSX.

The issuance of a CTO would have a significant adverse impact on the liquidity of the Company’s common shares and shareholders may suffer a significant decline or total loss in value of its investment in the Company’s common shares as a result.

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 include 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

The Company cautions that the financial results for its financial year ended December 31, 2021 set forth below are unaudited and have not been agreed upon with the Auditors.

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. 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 (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 expense (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 relate to the Company’s Ovoot Tolgoi Mine within the Coal Division operating segment. Refer to note 4 of 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 closure of the Mongolia-China 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 comprised 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)

Recharge of mine camp service expenses –

(891)

Discount on settlement of trade payables –

(691)

Written off of other payable –

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	$	1,259 $	1,268
Legal and professional fees		1,098	1,363
Salaries and benefits		2,847	3,518
Share-based compensation expense		204	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.

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 have been suspended and such suspension remains in effect as of the date hereof. 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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Summary of Quarterly Financial Results

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

$ in thousands, except per share information 2021 2020 Quarter Ended 31-Dec 30-Sep 30-Jun 31-Mar 31-Dec 30-Sep 30-Jun 31-Mar

Financial Results

Revenue ⁽ⁱ⁾ $ 848 $ 9,295 $ 5,191 $ 28,064 $ 33,879 $ 30,960 $ 14,975 $ 6,137 Cost of sales ⁽ⁱ⁾ (1,539) (6,866) (4,552) (18,347) (22,193) (20,027) (10,366) (6,071) Gross profit/(loss) excluding idled mine asset costs ⁽ⁱⁱ⁾ (51) 3,269 1,565 10,228 12,610 11,789 6,286 1,462 Gross profit/(loss) including idled

mine asset costs	(691)	2,429	639	9,717	11,686	10,933	4,609	66
Other operating income/(expenses), net	(1,078)	100	(113)	(335)	434	(575)	(5,150)	470
Administration expenses	(1,336)	(1,467)	(1,484)	(1,781)	(2,120)	(1,789)	(1,291)	(1,771)
Evaluation and exploration expenses	(75)	(36)	(47)	(65)	(55)	(63)	(52)	(56)
Profit/(loss) from operations	(3,180)	1,026	(1,005)	7,536	9,945	8,506	(1,884)	(1,291)
Finance costs	(9,702)	(11,457)	(8,870)	(14,637)	(7,442)	(9,885)	(7,258)	(7,135)
Finance income	3,178	2,040	2,494	21,001	13	2,583	2	43

Share of earnings/(loss) of

a joint venture		(137)	(261)	(35)	274	431	660	268	(46)
Income tax expense		(1,579)	(78)	139	(1,120)	(5,174)	(793)	(900)	(732)
Net profit/(loss)		(11,420)	(8,730)	(7,277)	13,054	(2,227)	1,071	(9,772)	(9,161)
Basic earnings/(loss) per share	$	(0.04) $	(0.03) $	(0.03) $	0.05 $	(0.01) $	– $	(0.04) $	(0.03)
Diluted earnings/(loss) per share	$	(0.04) $	(0.03) $	(0.03) $	0.02 $	(0.01) $	– $	(0.04) $	(0.03)

(i) Revenue and cost of sales relate 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.

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