Southgobi Announces Discloseable and Connected Transaction Deferral of Payment Obligation Under Prior Deferral Agreement
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April 30, 2024
SOUTHGOBI ANNOUNCES DISCLOSEABLE AND
CONNECTED TRANSACTION
DEFERRAL OF PAYMENT OBLIGATION UNDER
PRIOR DEFERRAL AGREEMENT
VANCOUVER – SouthGobi Resources Ltd. (TSX-V: SGQ, HK: 1878) (“SouthGobi” or the
“Company”) announces the deferral of payment obligation under prior deferral agreement.
Background
This announcement is made by SouthGobi Resources Ltd. (the “Company”, together with its
subsidiaries, the “Group”) pursuant to Rule 13.09(2) and Chapters 14 and 14A 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 announcements of the Company dated November 11, 2022,
November 17, 2023 and January 19, 2024 (collectively, the “Announcements”). Unless
otherwise specified, terms used in this announcemen t shall have the meaning as defined in
the Announcements.
The Company announces deferral of payment obligations under a prior deferral agreement
with JD Zhixing Fund L.P. (“ JDZF”), the registered holder of the Company’s US$250 million
Convertible Debenture issued on November 19, 2009 (the “Convertible Debenture”) and the
Company’s largest shareholder.
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The April 2024 Deferral Agreement
The Company announces that, on April 30, 2024, the Company and its subsidiaries, namely
SouthGobi Sands LLC and SGQ Coal Investment Pte. Ltd., entered into a new deferral
agreement (the “April 2024 Deferral Agreement”) with JDZF, pursuant to which JDZF agreed
to grant the Company a deferral of the remaining US$1,100,000 of payment -in-kind interest
which was payable on November 19, 2022 under the Convertible Debenture (the “November
2022 PIK Interest”), the payment of which was deferred under the November 2022 Deferral
Agreement until November 19, 2023, as well as related deferral fees under the November
2022 Deferral Agreement (collectively, the “Deferred Amounts”).
The principal terms of the April 2024 Deferral Agreement are as follows:
Effectiveness of the April 2024 Deferral Agreement
The effectiveness of the April 2024 Deferral Agreement is subject to the Company
providing notice to, and obtaining acceptance (if required) from the TSX Venture
Exchange (“TSX-V”) and requisite approval from disinterested shareholders of the
Company in accordance with the requirements of applicable Canadian securities
laws, Rule 14.33 and Rule 14A.36 of the Hong Kong Listing Rules.
The Deferral
JDZF agrees to grant the Company a deferral (the “ Deferral”) of the Deferred
Amounts until August 31, 2025 (the “Deferral Date”).
As consideration for the deferral of the Deferred Amounts, the Company agrees to
pay JDZF a deferral fee equal to 6.4% per annum on the outstanding balance of
such Deferred Amounts (the “Deferral Fees”), commencing on the date on which
each such Deferred Amounts would otherwise have been due and payable under
the Convertible Debenture.
The April 2024 Deferral Agreement does not contemplate a fixed repayment
schedule for the Deferred Amounts or related deferral fees. Instead, the April 2024
Deferral Agreement requires the Company to use its best efforts to pay the
Deferred Amounts and related deferral fees due and payable under the April 2024
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Deferral Agreement to JDZF. During the period beginning as of the effective date
of the April 2024 Deferral Agreement and ending as of the Deferral Date, the
Company will provi de JDZF with monthly updates of its financial status and
business operations, and the Company and JDZF will, on a monthly basis, discuss
and assess in good faith the amount (if any) of the Deferred Amounts and related
deferral fees that the Company may be able to repay to JDZF, having regard to the
working capital requirements of the Company’s operations and business at such
time and with the view of ensuring that the Company’s operations and business
would not be materially prejudiced as a result of any repayment.
If at any time before the Deferred Amounts and related deferral fees are fully repaid,
the Company proposes to appoint, replace or terminate one or more of its chief
executive officer, its chief financial officer or any other senior executive(s) in charge
of its principal business function or its principal subsidiary, the Company will first
consult with, and obtain written consent (such consent shall not be unreasonably
withheld) from JDZF prior to effecting such appointment, replacement or
termination.
The occurrence of a Deferral Event of Default or an Event of Default (as such term
is defined in the Convertible Debenture) will: (i) entitle JDZF to pursue any and all
remedies against the Company and the Guarantors in accordance with the
Convertible Debenture; and (ii) result in the principal, interest and other amounts
owing under the April 2024 Deferral Agreement, the Convertible Debenture and
related security agreements becoming immediately due and payable without any
requirement for JDZF to deliver notice to the Company.
The aforementioned summary of the principal terms of the April 2024 Deferral Agreement is
not comprehensive, and is qualified in its entirety by reference to the full text of the April 2024
Deferral Agreement, a copy of which has been filed on the Company’s profile on SEDAR+ at
www.sedarplus.ca.
Basis of Determination of the Deferral Fees
The Deferral Fees which are expected to be satisfied by the internal resources and/or external
borrowings of the Group were determined on an arm’s length basis (or on t erms no less
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favourable to the Group than terms available from independent third parties) among the parties
to the April 2024 Deferral Agreement, taking into account the following factors:
(i) the deferral fees stipulated under the previous deferral agreements, including the
deferral fee at the rate of 6.4% per annum as consideration for the deferred interest
payments arising from the Convertible Debenture contemplated under the March 2024
Deferral Agreement, which is the latest deferral agreement bef ore the April 2024
Deferral Agreement;
(ii) historically, the higher finance costs incurred by the Group for receiving financial
assistance from independent third parties of the Group within the past five years, the
rate of which generally fell within the range of 15% to 16%;
(iii) based on publicly available information and to the Company's understanding, the
finance costs of industry peers and listed companies in similar industry as the Group
are of a similar range as the those of the Deferral Fees, with the interest rates ranged
from 3% to 9.25% per annum; and
(iv) the reasons and benefits as set out in the section headed “Reasons for and benefits
of the April 2024 Deferral Agreement” below.
General Information of the Parties
The Group
The Company is an integrated coal mining, development and trading company. SGQ Coal
Investment Pte. Ltd. is a wholly-owned subsidiary of the Company incorporated under the laws
of Singapore, which is principally engaged in investment holding business activities.
SouthGobi Sands LLC is a wholly-owned subsidiary of the Company incorporated under the
laws of Mongolia, which is principally engaged in coal mining, development and exploration in
Mongolia.
JDZF
JDZF is an exempt limited partnership formed under the laws of the Cayman Islands, which is
principally engaged in investment holding activities. JDZF’s general partner and limited partner
are JD Dingxing Limited and Inner Mongolia Tianyu Trading Limited. To the best of the
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Company’s knowledge and belief, the ultimate beneficial owne r of the limited partner is Mr.
Yong An and the general partner is Ms. Chonglin Zhu. Mr. Yong An is the Chairman and
founder of Inner Mongolia Tianyu Innovation Investment Group Co. Ltd.* (內蒙古天宇創 新投
資集團有限公司) (“Tianyu Group”), and has conducted business in I nner Mongolia region
since 1998. Ms. Chonglin Zhu was the Chief Financial Officer of Tianyu Group from March
2015 to September 2022, and was also responsible for managing JDZF. Ms. Chonglin Zhu
has served as the executive Director and Senior Vice President of Finance of the Company
since September 8, 2022, and was appointed as the Chief Financial Officer of the Company
on February 2, 2024.
Reasons for and Benefits of the April 2024 Deferral Agreement
In evaluating the transaction contemplated under the April 2024 Deferral Agreement, the board
(the “Board”) of directors (the “ Directors”) of the Company has taken into account, among
other things, the terms of the Deferral and the April 2024 Deferral Agreement, the Company’s
financial position and the possible funding alternatives reasonably available to the Company
and considered that: (i) the Deferral is offered on reasonable commercial terms not less
advantageous to the Company than if the Company obtained similar financing from a person
dealing at arm’s length with the Company; (ii) the terms of the Deferral are reasonable in the
circumstances of the Company; (iii) the Deferral is designed to improve the financial position
of the Company; (iv) the Deferral will enhance the Company’s ability to continue as a going
concern in the near term and provide the Company with financial flexibility to consider and
explore different measures to secure additional capital or to pursue a strategic debt
restructuring or refinancing plan with JDZF; and (v) the best interests of the Company and its
shareholders (the “Shareholders”) will be served by approving the Deferral and the April 2024
Deferral Agreement.
Board Review and Approval
Based on the above, the Board (excluding (i) the Directors who are appointed by JDZF
pursuant to contractual nomination rights contained in the securityholders agreement between
the Company, JDZF and a former shareholder of the Company and certain deferral
agreements between JDZF, the Company and certain of its subsidiaries relating to the
Convertible Debenture, namely, Mr. Ruibin Xu, Ms. Chonglin Zhu and Mr. Chen Shen
(collectively, the “ Deferral Interested Directors ”); and (ii) the independent non -executive
Directors, whose views are to be contained in the letter from the independent board committee
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(the “Independent Board Committee ”) in the Company’s management proxy circular (the
“Management Proxy Circular”) to be despatched to the Shareholders) are of the view that
the April 2024 Deferral Agreement and the transaction contemplated thereunder are entered,
despite not in the ordinary and usual course of business of the Group, on normal commercial
terms (on arm’s leng th basis or terms no less favourable to the Group than terms available
from independent third parties), and are fair and reasonable and in the interests of the
Company and the Shareholders as a whole.
The Deferral Interested Directors who have a material interest in the April 2024 Deferral
Agreement and the transaction contemplated thereunder were required to abstain from voting
on the Board resolutions approving the same. Except for the Deferral Interested Directors,
none of the Company’s Directors have a ny material interest in the April 2024 Deferral
Agreement and the transaction contemplated thereunder, and none of the Directors were
required to abstain from voting on the Board resolutions approving the same.
Shareholders’ Approval Pursuant to MI 61 -101 Requirements under applicable
Canadian securities laws
Pursuant to Part 5 of Multilateral Instrument 61-101 (“MI 61-101”) under applicable Canadian
securities laws, the Company is required to seek minority shareholder approval of the April
2024 Deferral Agreement, excluding the common shares beneficially owned by JDZF (as
defined below) (the “Disinterested Shareholders” or the “Independent Shareholders”) as:
(i) JDZF is a related party of the Company for purposes of MI 61-101 for the reason that JDZF
has beneficial ownership of more than 10% of the voting rights attached to the outstanding
common shares of the Company; and (ii) the April 2024 Deferral Agreement is a related party
transaction for purposes of MI 61-101 because the April 2024 Deferral Agreement materially
amends the terms of an outstanding debt or liability owed by the Company to a related party.
To the best of the Company’s knowledge, as of the date hereof, 85,714,194 common shares,
representing approximately 28.98% of the issued and outsta nding common shares of the
Company, are beneficially owned by JDZF. Accordingly, the 85,714,194 votes attached to the
common shares beneficially owned, or over which control or direction is exercised, by JDZF
will be excluded from the vote to approve the April 2024 Deferral Agreement.
With respect to the deferral of the November 2022 PIK Interest, PIK Interest under the terms
of the Convertible Debenture must be paid and satisfied by the Company by way of issuing
common shares in the capital of the Company (“Common Shares ”) at an issue price
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determined based on the 50 -trading day volume weighted average price (“ VWAP”) of the
Company’s common shares as at the date of payment. Shareholders are cautioned that, as a
result of deferring the payment date of Novem ber 2022 PIK Interest, the final number of
Common Shares that the Company will issue to satisfy the November 2024 PIK Interest will
depend on the prevailing 50 trading day VWAP of the Common Shares as of the future
payment date, and may result in a number of Common Shares being issued that could be
greater than, or lesser than, then number of Common Shares that the Company would have
had to issue on the original payment date for the November 2024 PIK Interest.
Hong Kong Listing Rules implications
Pursuant to the Hong Kong Listing Rules, JDZF is a substantial shareholder of the Company
holding approximately 28.98% of the Company’s issued common shares and hence a
connected person of the Company. The entering into of the April 2024 Deferral Agreement
constitutes a connected transaction of the Company under Chapter 14A of the Listing Rules.
As one or more of the applicable percentage ratios (as defined under Rule 14.07 of the Hong
Kong Listing Rules) in respect of the transaction contemplated under the April 2024 Deferral
Agreement exceed 0.1% but all are less than 5%, the entering into of the April 2024 Deferral
Agreement, on a standalone basis, constitutes a connected transaction of the Company and
is subject to reporting and announcement requirements but exempt from circular Independent
Shareholders’ approval requirement under Chapter 14A of the Hong Kong Listing Rules.
Pursuant to Rules 14.22 and 14A.81 of the Hong Kong Listing Rules, as the counterparty to
the November 2023 Deferral Agreement and the Mar ch 2024 Deferral Agreement (the
“Previous Transactions”) is JDZF and such transactions are similar in nature and completed
within a 12-month period, such transactions shall be aggregated with the April 2024 Deferral
Agreement.
Accordingly, as one or more of the applicable percentage ratios (as defined under Rule 14.07
of the Hong Kong Listing Rules) in respect of the transaction contemplated under the April
2024 Deferral Agreement, upon aggregation with the Previous Transactions, exceed 5% but
all are less than 25%, the entering into of the April 2024 Deferral Agreement, on an aggregated
basis, constitutes a discloseable and connected transaction of the Company and is subject to
reporting, announcement, circular and Independent Shareholders’ approval requir ements
under Chapter 14 and Chapter 14A of the Hong Kong Listing Rules.
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The Meeting and Despatch of Management Proxy Circular
At the Company’s upcoming annual and special general meeting of shareholders (the
“Meeting”), the Company will, among other things, propose a resolution for the Independent
Shareholders to consider and, if thought fit, approve the April 2024 Deferral Agreement and
the transaction contemplated thereunder, as well as the March 2024 Deferral Agreement.
Given that the Deferral Interested Shareholder is involved in and/or interested in the April 2024
Deferral Agreement and the transaction contemplated thereunder, the Deferral Interested
Shareholder will abstain from voting at the Meeting on the resolution approving it. Accordingly,
the 85,714,194 votes attached to the Common Shares beneficially owned, or over which
control or direction is exercised, by the Deferral Interested Shareholder will be excluded from
the vote to approve the April 2024 Deferral Agreement.
Save for the aforesaid and to the Directors’ best knowledge, information and belief and having
made all reasonable enquiries, no other Shareholder has a material interest in the April 2024
Deferral Agreement and therefore no other Shareholder is required to abstain from voting on
the relevant resolution at the Meeting.
As the April 2024 Deferral Agreement and the transaction contemplated thereunder are
subject to the approval by the Independent Shareholders, the Independent Board Committee
comprising of all the independent non -executive Directors, namely Mr. Yingbin Ian He, Mr.
Mao Sun and Ms. Jin Lan Quan, has been established by the Company to advise the
Independent Shareholders in respect of the above transaction. The Company has appoint ed
an independent financial adviser (the “ Independent Financial Adviser ”) to advise the
Independent Board Committee and the Independent Shareholders in respect of the above
transaction.
The Management Proxy Circular containing, among other things, (i) details of the Deferral and
the April 2024 Deferral Agreement; (ii) a letter from the Independent Board Committee to the
Independent Shareholders; (iii) the recommendations from the Independent Financial Adviser
to the Independent Board Committee and the Inde pendent Shareholders; and (iv) the notice
of the Meeting, which will be filed under the Company’s profile on SEDAR+ at
www.sedarplus.ca and despatched to shareholders of the Company in accordance with
applicable securities laws on or before May 28, 2024 (w hich is anticipated to be more than
fifteen business days after the date of publication of this announcement) as more time is
required for the Company to compile certain information to be included in the Management