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Southgobi Resources Announces Fourth Quarter and Full Year 2016 Financial and Operating Results and Updated Resource Estimate and Newly Declared Reserve Estimate in Respect of Ovoot Tolgoi

Resource Estimates Production Results Financials

 March 31, 2017

SOUTHGOBI RESOURCES ANNOUNCES FOURTH QUARTER AND FULL YEAR 2016 FINANCIAL AND OPERATING RESULTS AND UPDATED RESOURCE ESTIMATE AND NEWLY DECLARED RESERVE ESTIMATE IN RESPECT OF OVOOT TOLGOI

HONG KONG – SouthGobi Resources Ltd. (TSX: SGQ, HK: 1878) (the “Company” or “SouthGobi”) today announces its financial and operating results for the quarter and the year ended December 31, 2016. All figures are in U.S. dollars (“USD”) unless otherwise stated.

SIGNIFICANT EVENTS AND HIGHLIGHTS

The Company’s significant events and highlights for the year ended December 31, 2016 and the subsequent period to March 31, 2017 are as follows:

  • Operating Results – Although the coal prices generally improved in China during 2016, the impact of negotiating coal sale agreements during lower coal price periods and the depreciation of the Renminbi against the USD negatively impacted the overall coal prices achieved by the Company. The Company sold 1.08 million tonnes of coal during the fourth quarter of 2016 compared to 0.21 million tonnes in the fourth quarter of 2015. The production for the fourth quarter of 2016 was 1.21 million tonnes, compared to 0.62 million tonnes for the fourth quarter of 2015. The Company maintained a strong safety record and completed the fourth quarter of 2016 without any lost time injury.
  • Financial Results – The Company recorded an $11.4 million loss from operations during the fourth quarter of 2016 as compared to a $105.1 million loss from operations in the fourth quarter of 2015. Revenue was $19.0 million in the fourth quarter of 2016 as compared to $2.9 million in the fourth quarter of 2015. The operations during the fourth quarter of 2016 improved over the comparative 2015 quarter given the improved market conditions in China and the $92.7 million of impairment charges that were recorded in the fourth quarter of 2015 to reduce the carrying value of various items of property, plant and equipment to their recoverable amounts.
  • Expanded Resources and Declared Reserves – As a result of the work performed by Dragon Mining Consulting Limited (“DMCL”), the Company increased its estimate of total resources at the Ovoot Tolgoi deposit from those described in the technical report the Company filed in respect of the Ovoot Tolgoi deposit in May 2016 (the “2016 Technical Report”) and has declared reserves for the Ovoot Tolgoi deposit.
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  • Settlement of Trade Receivable – During the year ended December 31, 2016, the Company entered into a settlement agreement with one of the major customers (the “Customer”) pursuant to which 200 residential units and 40 parking spaces (collectively, the “240 Units”) located in Ulaanbaatar, Mongolia, are to be transferred to the Company as partial consideration for settling an outstanding trade receivables in the amount of $12.0 million, with the balance of the receivable, totaling $7.5 million, payable in cash by the Customer to the Company by March 31, 2017 (subsequently extended to May 10, 2017). As title transfers on the agreement could not be completed prior to December 31, 2016, the transaction cannot be completed and recorded in the Company’s accounts until such titles are properly registered in the Company’s name. The settlement agreement includes an option for the Company to return any unsold units back to the Customer, until September 30, 2017, at the same price per unit for immediate payment of the balance in cash. As of the date hereof, the title transfer registration in Mongolia has been completed for a material portion of the 240 Units but additional time will be required to finalize the administrative process for the registration of the remaining portion of the 240 Units due to the number of units involved, the Company has been working closely with the government authority to facilitate the process. The Company anticipates that the title registration process will be completed shortly and the sales of the 240 Units will commence during the second quarter of 2017. To March 31, 2017, the Company has collected $3.5 million from the Customer to settle the outstanding trade receivables and on March 27, 2017 entered into a deferral agreement to extend the payment due date on the remaining uncollected balance to May 10, 2017.
  • Short-term Bridge Loan – In October 2015, the Company entered into a short term bridge loan facility with an Asian based private equity fund for maximum proceeds of $10.0 million. The Company has repaid the first tranche of the short-term bridge loan of $5.0 million (inclusive of interest) up to August 11, 2016. During June and July 2016, the Company drew the second tranche of $5.0 million. $1.5 million has been matured in March 2017 and $3.5 million will mature in April 2017. In December 2016, $1.5 million was repaid for the short-term bridge loan and a further $1.8 million and $1.6 million was subsequently repaid in January 2017 and March 2017, respectively.
  • Shareholder Loan – On May 16, 2016, Turquoise Hill Resources Ltd (“Turquoise Hill”) signed a deferral letter agreement with the Company (the “May 2016 Deferral Letter Agreement”), in which Turquoise Hill agreed to a limited deferral of repayment of all remaining amounts and obligations owing under the Turquoise Hill shareholder loan (the “TRQ Loan”). The Company has agreed to repay $0.15 million per month from May 2016 to April 2017; and $0.2 million per month from May 2017 to December 2017, at which time all remaining obligations will become due. Interest shall continue to accrue on all outstanding obligations at the 12-month US dollar LIBOR rate. To date, the Company has made all payments due under the May 2016 Deferral Letter Agreement.
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  • China Investment Corporation (“CIC”) Convertible Debenture (the “CIC Convertible Debenture”) – On December 29, 2016, the Company executed the December 2016 Deferral Agreement (“December 2016 Deferral Agreement”) with CIC for a revised repayment schedule on the $20.7 million of cash interest and associated costs originally due on December 19, 2016 (“December 2016 Deferral Amounts”). The key repayment terms of the December 2016 Deferral Agreement are: (i) the Company is required to repay $6.8 million of the cash interest and associated deferral fee costs in five monthly amounts during the period from December 2016 to April 2017; and (ii) the Company is required to repay $14.3 million of cash interest and associated costs on May 19, 2017. Although the Company has been in discussions with CIC for a further deferral, there can be no assurance that a favorable outcome can be reached. At any time before the December 2016 Deferral Amounts are fully repaid, the Company is required to consult with and obtain written consent from CIC prior to effecting a replacement or termination of either or both of its Chief Executive Officer and its Chief Financial Officer; otherwise this will constitute an event of default under the CIC Convertible Debenture, but CIC shall not withhold its consent if the board of directors proposes to replace either or both such officers with nominees selected by the Board, provided that the directors acted honestly and in good faith with a view to the best interests of the Company in the selection of the applicable replacements. To date, the Company has made all payments due under the December 2016 Deferral Agreement.
  • Class Action Lawsuit – On May 24, 2016, the Ontario Superior Court of Justice (the “Ontario Court”) granted the Company leave to appeal the decision made on November 5, 2015 (the “Corporation Appeal”), which granted the plaintiff permission to commence an action claiming damages under the Ontario Securities Act with respect to the Company’s restatement of consolidated financial statements as previously disclosed in the Company’s public filings. The plaintiff is also appealing the portion of the November 5, 2015 Ontario Court decision that dismissed the action against former officers and directors of the Company (the “Individual’s Appeal”).

The Individuals’ Appeal and the Corporation Appeal will now be verbally argued together. The appeals are scheduled to be heard by the Ontario Court of Appeal in June 2017. The Company disputes and is vigorously defending itself against the plaintiff’s claims through independent Canadian litigation counsel retained by the Company and the other defendants for this purpose. Due to the inherent uncertainties of litigation, it is not possible to predict the final outcome of the appeals or determine the amount of potential losses, if any. However, the Company has judged a provision for this matter at December 31, 2016 is not required.

  • Tax Investigation Case in Mongolia – In May 2016, Resolution No.258 of the Government of Mongolia (“Resolution 258”) was issued, which approved the Company’s proposal to settle the Tax Penalty (as defined and described under “Governmental and Regulatory Investigations” in section “Regulatory Issues and Contingencies”) by making a series of cash payments and by performing mining operations at the Tavan Tolgoi deposit in
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Southern Mongolia on behalf of Erdenes Tavan Tolgoi JSC (“Erdenes”), a company owned by the Government of Mongolia. During 2016, the Company made cash payments of $2.4 million as a partial settlement of the Tax Penalty.

In compliance with the Resolution 258, in November 2016, the Company entered into an agreement with Erdenes under which the Company agreed to perform certain mining operations equivalent to Mongolian Tugrik (“MNT”) 20.3 billion (approximately $8.1 million) in the West Tsankhi section of the Tavan Tolgoi deposit during the period from November 2016 to February 2017. As at December 31, 2016, the Company had performed mining operations consisting of drilling and blasting of rock mass, stripping and loading topsoil, selective excavation and loading coal, and creating overburden stockpiles at the Tavan Tolgoi deposit equivalent to MNT 5.2 billion (approximately $2.1 million).

As at December 31, 2016, the provision for the Tax Verdict (as defined below in “Governmental and Regulatory Investigations” of section “Regulatory Issues and Contingencies”) was reduced to $9.3 million.

As of the date hereof the Company has completed the mining operations at the Tavan Tolgoi deposit equivalent to MNT 20.3 billion (approximately $8.1 million) as set out in the agreement with Erdenes. The Company is required to make further cash payments of $3.0 million in 2017 to complete repayment of the balance of the penalty owing.

  • Notice of Arbitration – The Company is subject to arbitration proceedings with First Concept Logistics Limited (“First Concept”) with respect to a dispute with respect to the supply of coal under a coal sale agreement. The arbitration hearing with First Concept was held in the fourth quarter of 2016. The arbitration decision is expected to be released in the second quarter of 2017.
  • Settlement of Claim by Former Chief Executive Officer – The claim by Mr. Alex Molyneux (“Mr. Molyneux”), the Company’s former President and Chief Executive Officer, and the counterclaim by the Company, has been settled by a payment by the Company to Mr. Molyneux of the sum of $0.29 million, without admission of liability by either party. As a term of the settlement, the Company and Mr. Molyneux executed mutual general releases, and the action and counterclaim were dismissed as against all parties by consent without court costs payable to any party, effective on November 25, 2016.
  • Settlement of Lawsuit Notice from a Former Fuel Supplier – On January 20, 2017, the Company announced that SouthGobi Sands LLC (“SGS”), a subsidiary of the Company, had received a lawsuit notice from the Khan-Uul District Civil Court of First Instance in Mongolia (the “DC Court”) in relation to a claim from Magnai Trade LLC (“MTLLC”), a former fuel supplier of SGS, for MNT 22.2 billion (approximately $8.9 million) consisting of MNT 14.6 billion (approximately $5.8 million) of outstanding fuel supply payments and MNT 7.6 billion (approximately $3.1 million) of late payment penalties and associated interest costs.
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Following SGS’ successful challenge to the authority of the DC Court to hear the matter, the Company signed a settlement agreement with MTLLC on February 10, 2017, pursuant to which the outstanding amount of $7.9 million will be settled in equal monthly installments of $2.0 million from March 2017 to June 2017.

  • Novel Sunrise Investments Limited (“Novel Sunrise”) sold 25.8 million Shares to a Company Owned by Members of Management – On January 11, 2017, Novel Sunrise, the Company’s largest shareholder at the time, reported that it had sold 25.8 million common shares of the Company effective December 31, 2016 to Voyage Wisdom Limited (“Voyage Wisdom”), a company owned by three members of the Company’s management team, for consideration of $24 million.
  • Changes in Directors

Mr. Huiyi Wang: Mr. Wang was appointed as a Non-Executive Director on February 18, 2016.

Mr. Pierre Lebel: Mr. Lebel retired as Lead Director and an Independent Non-Executive Director on June 30, 2016.

Mr. Joseph Belan: Mr. Belan was appointed as Independent Non-Executive Director of the Company on August 16, 2016.

  • Strategic Advisor – On September 16, 2016, the Company established a Strategic Advisory Board and appointed Mr. Abraham (Braam) Jonker as its initial member. The purpose of the Strategic Advisory Board is to provide non-binding strategic guidance and advice to the Board of Directors of the Company in connection with the Company’s ongoing business activities and initiatives.
  • Going Concern – As at the date hereof, the Company has initiated a plan to change the existing product mix to higher value and higher margin outputs by washing certain grades of coal commencing in 2017 in order to produce more premium semi-soft coking coal and to initiate more processing of the lower grades of coal in order to reduce the ash content and improve the selling price and margins on its thermal coal product. The Company has also completed a new mine plan, which incorporates the coal washing and processing systems and contemplates significantly higher volumes of production in order to complement the Company’s new product mix and sales volume targets. Such plans will involve the need for a significant level of stripping activities over the next two years and require certain capital expenditures to achieve the designed production outputs. Such expenditures will require the Company to seek additional financing in the form of finance leases, debt or equity. The Company has entered into an agreement for a finance lease on the new wash plant facility but will need financing to complete the thermal coal processing facilities.
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There is no guarantee that the Company will be able to successfully secure additional sources of financing. This could result in adjustments to the amounts and classifications of assets and liabilities in the Company’s consolidated financial statements and such adjustments could be material. Unless the Company acquires additional sources of financing and/or funding in the short term, the ability of the Company to continue as a going concern is threatened. If the Company is unable to continue as a going concern, it may be forced to seek relief under applicable bankruptcy and insolvency legislation. See section “Liquidity and Capital Resources” for details. As at March 31, 2017, the Company had $5.3 million of cash.

OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS

Summary of Annual Operational Data

Year ended December 31, 2016 2015

Sales Volumes, Prices and Costs

Premium semi-soft coking coal Coal sales (millions of tonnes) 0.28 0.22 $ 31.14 $ Average realized selling price (per tonne) (i) 22.33 Standard semi-soft coking coal Coal sales (millions of tonnes) 2.52 0.59 $ 16.71 $ Average realized selling price (per tonne) (i) 19.12 Thermal coal

1.11

Coal sales (millions of tonnes) 0.26 Average realized selling price (per tonne) (i) $ 12.16 $ 10.24 Total

3.91

Coal sales (millions of tonnes) 1.07

Average realized selling price(per tonne)(i)$16.44 $17.66
Raw coal production(millions of tonnes)3.381.95
Cost of sales of product sold(per tonne)$22.26 $59.52

$ 8.66 $ Direct cash costs of product sold (per tonne) (ii) 13.63 Mine administration cash costs of product sold (per tonne) (ii) $ 2.32 $ 3.44 Total cash costs of product sold (per tonne) (ii) $ 10.98 $ 17.07

Other Operational Data

Production waste material moved (millions of bank cubic meters) 7.38 7.02 Strip ratio (bank cubic meters of waste material per tonne

2.18

of coal produced) 3.60 Lost time injury frequency rate (iii) 0.00 0.00

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(i) Average realized selling price is presented before deduction of royalties and selling fees.

(ii) A Non-International Financial Reporting Standards (“IFRS”) financial measure, see “Non-IFRS Financial Measures” section. Cash costs of product sold exclude idled mine asset cash costs.

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

Overview of Annual Operational Data

The Company ended 2016 without any lost time injury. As at December 31, 2016, the Company had a lost time injury frequency rate of nil per 200,000 man hours based on a rolling 12 month average.

The market conditions remained difficult in the first half of 2016 despite a modest recovery in the second half of 2016 following the implementation of China’s national policy of restricting coal production described above. The overall price for coal improved in China in 2016, but these improvements were negatively impacted by certain coal sale contracts negotiated at a time of lower coal prices. In addition, the depreciation of the Renminbi against the USD hindered the positive impact of increased coal prices.

The Company managed to increase its sales volume from 1.07 million tonnes in 2015 to 3.91 million tonnes in 2016; however, the average realized selling price decreased from $17.66 per tonne in 2015 to $16.44 per tonne in 2016 which was mainly a result of the product mix as well as the depreciation of the Renminbi against the USD. The product mix for 2016 consisted of approximately 7% of Premium semi-soft coking coal, 64% of Standard semi-soft coking coal and 29% of thermal coal compared to approximately 21% of Premium semi-soft coking coal, 55% of Standard semi-soft coking coal and 24% of thermal coal in 2015.

The Company’s production in 2016 was higher than 2015 as a result of ramping up production to meet the expected increase in sales, yielding 3.38 million tonnes for 2016 as compared to 1.95 million tonnes for 2015.

The Company’s unit cost of sales of product sold decreased to $22.26 per tonne for the year ended December 31, 2016 from $59.52 per tonne in the year ended December 31, 2015. The decrease was mainly driven by the increased sales and the related economies of scale while less coal stockpile inventory impairment was recorded for the year 2016.

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Summary of Annual Financial Results

Year ended December 31, $ in thousands, except per share information 2016 2015

Revenue (i), (ii) $ 58,450 $ 16,030

(87,045)

Cost of sales (ii) (63,691)

Gross loss excluding idled mine asset costs(16,490)(22,226)
Gross loss including idled mine asset costs(28,595)(47,661)
Other operating expenses(50)(18,951)

(7,888)

Administration expenses (7,509) Evaluation and exploration expenses (422) (145) Impairment of property, plant and equipment (1,152) (92,651)

(38,107)

Loss from operations (166,917)

(22,314)

Finance costs (21,371) Finance income 239 1,302 Share of earnings of a joint venture 806 225

(1,470)

Income tax expense (4)

(60,846)

Net loss (186,765) Basic and diluted loss per share $ (0.24)$ (0.79)

(i) Revenue is presented after the deduction of royalties and selling fees.

(ii) 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.

Overview of Annual Financial Results

The Company recorded a $38.1 million loss from operations in 2016 compared to a $166.9 million loss from operations in 2015. Although the general coal market remained difficult in 2016, the 2016 results were an improvement when compared to 2015 and were principally attributable to increased coal sales as well as decrease of impairment of property, plant and equipment from $92.7 million in 2015 to $1.2 million in 2016.

Revenue was $58.5 million in 2016 compared to $16.0 million in 2015. The Company sold 3.91 million tonnes of coal in 2016 as compared to 1.07 million tonnes in 2015.

The Company’s revenue is presented after deduction of royalties and selling fees. The Company’s effective royalty rate for 2016, based on the Company’s average realized selling price of $16.44 per tonne, was 7.0% or $1.14 per tonne compared to 12.7% or $2.25 per tonne based on the average realized selling price of $17.66 per tonne in 2015.

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Royalty regime in Mongolia

The royalty regime in Mongolia is evolving and has been subject to change since 2012.

On January 1, 2015, the “flexible tariff” royalty regime ended and royalty payments reverted to the previous regime which is based on a set reference price per tonne published monthly by the Government of Mongolia. The Company and other Mongolian coal producers are actively engaging the Mongolian authorities to seek the continuation of the “flexible tariff” regime.

On February 1, 2016, the Government of Mongolia issued a resolution in connection with the royalty regime. From February 1, 2016 onwards, royalties are to be calculated based on the actual contract price in which transportation cost to the Mongolia border should have been included. If such transportation cost was not included in the contract, the relevant transportation costs, custom documentation fees, insurance and loading cost should be estimated for the calculation of royalties. In the event that the calculated sales price as described above differs from the contract sales price of other entities in Mongolia (same quality of coal and same border crossing) by more than 10%, the calculated sales price will be deemed to be “non-market” under Mongolian tax law and the royalty will then be calculated based on a reference price as determined by the Government of Mongolia. No contracts of the Company were deemed as “non-market” during 2016.

Cost of sales was $87.0 million in 2016 compared to $63.7 million in 2015. Cost of sales comprises operating expenses, share-based compensation expense, equipment depreciation, depletion of mineral properties, coal stockpile inventory impairments and idled mine asset costs. Operating expenses in cost of sales reflect the total cash costs of product sold (a Non-IFRS financial measure; see section “Non-IFRS Financial Measures” for further analysis) during the year.

Year ended December 31, 2016

$ in thousands 2015

Operating expenses $ 41,452 $ 18,266

(8)

Share-based compensation expense/(recovery) 42 Depreciation and depletion 26,142 5,361

7,354

Impairment of coal stockpile inventories 14,588

74,940

Cost of sales from mine operations 38,257 Cost of sales related to idled mine assets 12,105 25,434

Cost of sales $ 87,045 $ 63,691

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Operating expenses in cost of sales were $41.5 million in 2016 compared to $18.3 million in 2015. The overall increase in operating expenses was primarily the result of the net effect of

(i) increased sales volume from 1.07 million tonnes in 2015 to 3.91 million tonnes in 2016;

(ii) reduced impairment of coal stockpile inventories and (iii) continued focus on cost saving initiatives.

Cost of sales in 2016 and 2015 included coal stockpile impairments of $7.4 million and $14.6 million, respectively, to reduce the carrying value of the Company’s coal stockpiles to their net realizable value. The coal stockpile impairments recorded in both years reflected the challenging coal market conditions and primarily related to the Company’s higher-ash content products.

Cost of sales related to idled mine asset costs primarily consisted of periodic costs, which were expensed as incurred and included mainly depreciation expense. Cost of sales related to idled mine assets in 2016 included $12.1 million related to depreciation expenses for idled equipment (2015: $22.5 million). The drop of cost of sales related to idled mine assets was mainly due to the increase in production during 2016 which results a higher utilization rate for the machinery and related assets.

Other operating expenses were negligible in 2016 compared to $19.0 million in 2015.

Year ended December 31, 2016

$ in thousands 2015

$ (5,423)$ Foreign exchange gain (896) Discount on settlement of trade payables (1,009) – Mining services, net 1,006 –

2,652

Settlement of civil claims – Provision for doubtful trade and other receivable 2,641 161

–

Loss on settlement of prepayments 712 Impairment of materials and supplies inventories – 675 Provision for court case penalty – 18,049 Other 250

$ 50 $ Other operating expenses 18,951

A foreign exchange gain of $5.4 million (2015: $0.9 million) was recorded as a result of the significant depreciation of MNT against USD during the fourth quarter of 2016. The key underlying driver of the forex gain are that most trade and other payables and the Tax Penalty are denominated in MNT.

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The Company made a provision for doubtful trade and other receivables of $2.6 million (2015: $0.2 million) for the long aged receivables. As at December 31, 2016, the Company had gross receivables of $19.2 million due from the Customer. Of this amount approximately $12.0 million is expected to be settled in due course in exchange for the 240 Units in Mongolia. See section “Overview” for details. The 240 Units are located in Ulaanbaatar, Mongolia and were constructed in 2013. The total saleable area of the residential units is approximately 13,790 square meter. The size of each residential unit ranges from 42 square meter to 94 square meter. The balance outstanding from December 31, 2016, after deducting the $12.0 million, was to be paid by March 31, 2017 pursuant to the same agreement related to the residential real estate transaction. To March 31, 2017, the Company has collected $3.5 million from the Customer and on March 27, 2017 entered into a deferral agreement to extend the payment due date on the remaining uncollected balance to May 10, 2017.

In 2015, the Company recognized an expense for the provision of the Tax Penalty of $18.0 million.

Mining services at the Tavan Tolgoi deposit were provided in connection with settlement of the Tax Penalty at a net cost of $1.0 million in 2016 (Direct mining costs and depreciation totaling $3.1 million, net of service revenue of $2.1 million) (refer to “Governmental and Regulatory Investigations” of section “Regulatory Issues and Contingencies” for details), with no similar amount incurred in 2015.

Refer to “Settlement of Lawsuit Notice from a Former Fuel Supplier” and “Settlement of Claim by Former Chief Executive Officer” of section “Regulatory Issues and Contingencies” for details of the settlement of civil claims with MTLLC of $2.4 million and with Mr. Molyneux of $0.29 million, respectively.

Administration expenses were $7.9 million in 2016 as compared to $7.5 million in 2015. The increase in corporate administration and salaries and benefits was mainly due to the operations of the new subsidiary in China, which was incorporated in June 2016 to expand the sales channels of coal in China.

Year ended December 31,

$ in thousands20162015
Corporate administration$ 2,724 $2,112
Legal and professional fees2,0222,921

2,820

Salaries and benefits 2,155 Share-based compensation expense 58 199 Depreciation 264 122

$ 7,888 $ Administration expenses 7,509

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Evaluation and exploration expenses were $0.4 million in 2016 as compared to $0.1 million in 2015. The Company continued to minimize evaluation and exploration expenditures in 2016 in order to preserve the Company’s financial resources. Evaluation and exploration activities and expenditures in 2016 were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining and exploration licenses.

Given the difficult market conditions, the associated delays in projects and the commissioning of equipment, the Company recorded $92.7 million of impairment charges to reduce various items of property, plant and equipment to their recoverable amounts for the year ended December 31, 2015. In particular, after conducting an impairment test on the Ovoot Tolgoi Mine cash generating unit, the Company recorded a $76.7 million impairment charge in 2015 (refer to “Ovoot Tolgoi Mine Impairment Analysis” of section “Liquidity and Capital Resources” for details). After a further review of the dry coal handling facility (“DCHF”) in the fourth quarter of 2015 related to the new mine plan, the Company concluded that there was no longer a plan to restart the DCHF project or to utilize the facility. As a result, the Company recorded an $8.5 million impairment charge in 2015 to reduce the carrying value of the DCHF to $nil as at December 31, 2015. For the year ended December 31, 2016, the Company again identified impairment indicators for the Ovoot Tolgoi Mine cash generating unit and conducted an impairment test. Following the slight market recovery in 2016 as well as the successful implementation of the Company’s business plan, no general impairment charges and no impairment reversal was determined. A specific impairment charge of $1.2 million of impairment charge was made for the year ended December 31, 2016 on the deposits related to pending purchases property, plant and equipment.

Finance costs were $22.3 million and $21.4 million in 2016 and 2015 respectively, which primarily consisted of the interest expense on the $250.0 million CIC Convertible Debenture.

Finance income was $0.2 million in 2016 compared to $1.3 million in 2015, which primarily related to unrealized gains on the change in fair value of the embedded derivatives in the CIC Convertible Debenture ($0.2 million and $1.1 million for 2016 and 2015, respectively). The fair value of the embedded derivatives in the CIC Convertible Debenture is driven by many factors including: the Company’s common share price, the USD and Canadian Dollar exchange rates and share price volatility.

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