SGQ.V · 2024-07-15 12:00:00

Southgobi Announces Discloseable Transaction - Entering into a Build-Operate-Transfer Agreement IN Relation to the DRY Coal Separation System

Mergers & Acquisitions

July 15, 2024

SOUTHGOBI ANNOUNCES DISCLOSEABLE

TRANSACTION -

ENTERING INTO A BUILD-OPERATE-TRANSFER

AGREEMENT IN RELATION TO

THE DRY COAL SEPARATION SYSTEM

VANCOUVER – SouthGobi Resources Ltd. (TSX-V: SGQ, HK: 1878) (“SouthGobi” or the

“Company”)

INTRODUCTION

The Board hereby announces that on July 15, 2024, the Company's wholly-owned Mongolian

subsidiary, Southgobi Sands LLC (" SGS"), entered into a Build -Operate-Transfer agreement

(the "BOT Agreement") with Tangshan Shenzhou Manufacturing Group Co., Ltd (唐山神州機

械集團有限公司) (" Tangshan Shenzhou "), pursuant to which Tangshan Shenzhou is

responsible for the construction, operation, and quality management of a new dry coal

separation system, including the key equipment of CZM1000 超級乾選主機 and IDS2400A 智

能乾選機 , which, for transliteration purpose only, mean super dry selection machine and

intelligent dry selection machine , respectively (collectively, the " Dry Coal Separation

System") at the Company's Ovoot Tolgoi Mine in Mongolia, which will be a stand-alone plant

separate from the Company's existing dry processing plant. Tangshan Shenzhou is also

responsible for the construction of all related facilities for the Dry Coal Separation System (the

"Related Facilities"). Under the BOT Agreement, SGS has the right to supervise and manage

the overall work of coal quality assurance and operation, including , but not limited to , the

supervision and management of operational safety, production planning, and operations

management.

The total consideration payable by the Company over the term of the BOT Agreement is

approximately RMB79.0 million (equivalent to approximately HK$84.9 million or USD$10.9

million) (the "Consideration"), together with certain additional processing volume-based fees

(as more particularly described below). Subject to the terms as set out therein, the BOT

Agreement is effective from July 15, 2024 until October 1, 2029.

HONG KONG LISTING RULES IMPLICATIONS

As one or more of the applicable percentage ratio(s) (as defined under the Listing Rules) in

respect of the transactions contemplated under the BOT Agreement is/are more than 5% but

less than 25%, the entering into of the BOT Agreement constitutes a discloseable transaction

on the part of the Company under Chapter 14 of the Listing Rules and is thus subject to the

reporting and announcement requirements. None of the Directors has any material interest in

the BOT Agreement or is required to abs tain from voting on the board resolutions approving

the BOT Agreement.

INTRODUCTION

The Board hereby announces that on July 15, 2024, the Company's wholly-owned Mongolian

subsidiary, SGS, entered into a BOT Agreement with Tangshan Shenzhou, pursuant to which

Tangshan Shenzhou is responsible for the construction, operation, and quality management

of the Dry Coal Separation System at the Company's Ovoot Tolgoi Mine in Mongolia.

Tangshan Shenzhou is also responsible for the construction of all Related Facilities. Under

the BOT Agreement, SGS has the right to supervise and manage the overall work of coal

quality assurance and operation, including , but not limited to , the supervision and

management of operational safety, production planning, and operations management.

The total Consideration payable by the Company over the term of the BOT Agreement is

approximately RM B79.0 million (equivalent to approximately HK$84.9 million or USD$10.9

million). Subject to the terms as set out therein, the BOT Agreement is effective from July 15,

2024 until October 1, 2029.

PRINCIPAL TERMS OF THE BOT AGREEMENT

Date

July 15, 2024

Parties

(1) Southgobi Sands LLC; and

(2) Tangshan Shenzhou Manufacturing Group Co., Ltd.

To the best of the Directors' knowledge, information and belief , having made all reasonable

enquiries, each of the Tangshan Shenzhou and its respective ultimate beneficial owner(s) are

Independent Third Parties and are at arm's length to the Company.

Scope of Work

Pursuant to the terms of the BOT Agreement, the key responsibilities of Tangshan Shenzhou

include:

i. engineering survey, design, construction, equipment supply, transportation and

installation of the Dry Coal Separation System and the Related Facilities;

ii. commissioning, debugging and technology services for the Dry Coal Separation

System;

iii. operation, maintenance, quality management and safety protection of the Dry Coal

Separation System; and

iv. establishment of a Mongolian operating entity and personnel according to the

requirements of SGS, deployment of production personnel, and submission of the

organizational structure to SGS for record, supervision and inspection

(altogether the "Agreed Project").

The construction period for the Agreed Project is anticipated to be three (3) months, the

completion of which will be determined by SGS through a quality inspection. Only after a

written acceptance document has been signed by both parties can Tangshan Shenzhou start

formal production and operation.

The production and operation period ("Production and Operation Period ") shall be five (5)

years from the date of initial production and operation.

Consideration

The Consideration was agreed to be RMB79.0 million, which consists of:

i. RMB13.0 million as prepayment (equivalent to approximately HK$14.0 million or

USD$1.8 million) (the "Prepayment") according to the following schedule:

a. RMB3.0 million to be paid on the date of signing;

b. RMB4.0 million to be paid within ten (10) days of signing;

c. RMB3.0 million to be paid within ten (10) days after the main equipment

arrives in Mongolia; and

d. RMB3.0 million to be paid within ten (10) days after the completion and

installation of all equipment and facilities are approved by SGS.

ii. RMB66.0 million as fixed fees (equivalent to approximately HK$70.9 million or

USD$9.0 million), decreasing each year, will be paid as follows:

a. year one: RMB14.8 million (equivalent to approximately HK$15.9

million or USD$2.0 million);

b. year two: RMB14.0 million (equivalent to approximately HK$15.0 million

or USD$1.9 million);

c. year three: RMB13.2 million (equivalent to approximately HK$14.2

million or USD$1.8 million);

d. year four: RMB12.4 million (equivalent to approximately HK$13.3 million

or USD$1.7 million); and

e. year five: RMB11.6 million (equivalent to approximately HK$12.5 million

or USD$1.6 million).

Commencing from the fourth year of operation (from the 37th month), the Prepayment can be

used to offset the fees calculated on the basis of processed tonnage (the “Volume-Based

Fees”) at RMB1.0 million per month until the Prepayment is fully offset;

Volume-Based Fees are calculated based on Tangshan Shenzhou's operation of the Dry Coal

Separation System, including all associated costs such as wages, insurance, management

fees, and materials. They are measured by the run-of-mine coal belt scale and settled monthly

at RMB 12.3/ton ne (excluding VAT). Adjustments are made annually at the fol lowing tiered

rates:

a. ≤1.5 million tonnes/year: RMB 13.0/tonne;

b. >1.5 to ≤3 million tonnes/year: RMB 12.5/tonne;

c. >3 to ≤4.5 million tonness/year: RMB 12.0/tonne; and

d. >4.5 million tonness/year: RMB 11.5/tonne.

Basis for determining the Consideration

The Consideration was determined after assessing (i) the previous experience of Tangshan

Shenzhou in working with the Company on the existing dry coal processing plant; (ii) the

experience, competency and market position of Tangshan Shenzhou in dry coal processing ,

which is suitable for the Company's bu siness; and (iii) the expected scope, complexity and

quality of the Agreed Project based on the agreement terms with Tangshan Shenzhou for

carrying out similar construction works of comparable scale and complexity as the new Dry

Coal Separation System.

Therefore, the Company determined the Consideration is on normal commercial terms and on

arm's length basis. The Directors consider the Consideration to be issued are fair and

reasonable and in the interests of the Company and the Shareholders as a whole.

Information on Tangshan Shenzhou

Tangshan Shenzhou is headquartered in Tangshan City, Hebei Province, PRC. It is principally

engaged in the research, development, manufacturing, construction and installation of dry coal

preparation equipment. It is owned 66.7% and 33.3% by Mr. Li Gongmin ( 李功民) and Ms. Li

Shan (李姍), respectively.

Founded in 2001, Tangshan Shenzhou has a registered capital of RMB90 million and has

various experience in manufacturing and construction of advanced large-scale machinery and

manufacturing equipment. Tangshan Shenzhou is designated as a national high -tech

enterprise with operations covering (i) new process of dry coal beneficiation technology; (ii)

research and development of new equipment; (iii) coal preparation engineering design and

consulting; and (iv) coal preparation equipment manufacturing. Tangshan Shenzhou has

obtained more than 100 authorised patents, including invention patents and international

patents for its products, including but not limited to "a kind of high -efficiency automated dry

coal separator for coal mines" (一種煤礦用高效率自動化乾法選煤機), "a kin d of dry coal

beneficiation screening equipment and its use method" (⼀種乾式選煤篩分設備及其使用方

法) and "a kind of mobile dry coal separating and de-dusting machine"(一種移動式乾式選煤

除塵機).

Information on SGS

SGS is a wholly-owned subsidiary of the Company incorporated under the laws of Mongolia,

which is principally engaged in coal mining, development and exploration of mineral properties

in Mongolia. SGS holds the mining and exploration licences in Mongolia a nd operates the

flagship Ovoot Tolgoi Mine.

Reasons for and Benefits of Entering into the BOT Agreement

The Company is an integrated coal mining, development and trading company. SGS is a

wholly-owned subsidiary of the Company incorporated under the laws of Mongolia, which is

principally engaged in coal mining, development and exploration of properties in Mongolia.

The BOT Agreement falls within the Company's scope of principal business of coal mining,

which will be beneficial to the Company in expanding its market share through the utilizing of

the dry coal separation coal in Mongolia while increasing its revenue and profit. The Dry Coal

Separation System will increase the selection capacity and improve the precision of the sorting

process, thereby further enhancing the quality of the processed coal. The BOT Agreement will

be of great significance to the Company in increasing the influence in the local communities

and expanding the overall mining capacity , in line with the development strategy of the

Company. The operation of the BOT Agreement will enable the Company to fully utilize its

management and technical personnel resources , enhance coal processing efficiency,

optimize product quality, and improve the overall performance of the production line, the reby

enhance the Company's competitiveness and sustainable development capabilities.

The terms of the BOT Agreement were determined after arm's length negotiations among the

parties thereto. Having considered all of the above reasons, the Directors (inclu ding the

independent non -executive Directors) believe that the BOT Agreement is in line with the

overall business direction of the Company, and the terms of the BOT Agreement are on normal

commercial terms and fair and reasonable, and are in the interests of the Company and the

Shareholders as a whole.

HONG KONG LISTING RULES IMPLICATIONS

As one or more of the applicable percentage ratio(s) (as defined under the Listing Rules) in

respect of the transactions contemplated under the BOT Agreement is/are more than 5% but

less than 25%, the entering into of the BOT Agreement constitutes a discloseable transaction

on the part of the Company under Chapter 14 of the Listing Rules and is thus subject to the

reporting and announcement requirements. None of the Directors has any material interest in

the BOT Agreement or is required to abstain from voting on the board resolutions approving

the BOT Agreement.

Shareholders and potential investors of the Company are advised to exercise caution when

dealing in the Shares.

DEFINITIONS

"Agreed Project" total scope of work agreed to under the BOT Agreement

terms

"Board" the board of Directors

"BOT Agreement" the Build-Operate-Transfer agreement between SGS and

Tangshan Shenzhou on the construction, processing,

safety and quality management of dry coal separation

system at the Ovoot Tolgoi Mine

"Company" SouthGobi Resources Ltd., a company continued under

the laws of British Columbia, Canada with limited liability,

the issued shares of which are listed on the Main Board

of the Stock Exchange (stock code: 1878) and the TSX

Venture Exchange (stock symbol: SGQ)

"Consideration" RMB79.0 million payable by SGS to Tangshan Shenzhou

"connected person(s)" has the same meaning ascribed to it under the Listing

Rules

"Directors" directors of the Company

"Dry Coal Separation

System"

full-scale dry beneficiation system used for coal

upgrading, including key equipment of CZM1000 super

dry selection machine ( CZM1000 超級乾選主機) and

IDS2400A intelligent dry selection machine (IDS2400A 智

能乾選機)

"HK$" Hong Kong dollar(s), the lawful currency of Hong Kong

"Hong Kong" the Hong Kong Special Administrative Region of the PRC

"Independent Third

Party(ies)"

party(ies) independent of and not connected with the

Company and its connected persons

"Listing Rules" the Rules Governing the Listing of Securities on the Stock

Exchange

"Ovoot Tolgoi Mine" the Company's operating coal mine located approximately

40km from the Shivee Khuren -Ceke crossing at the

Mongolia-China border and is the Company's flagship

asset.

"percentage ratio(s)" has the same meaning as ascribed to it under the Listing

Rules

"PRC" the People's Republic of China, which for the purpose of

this announcement excludes Hong Kong, the Macao

Special Administrative Region of the People's Republic of

China and Taiwan

"Production and Operation

Period"

five years from the date of initial production and operation

"Related Facilities" any auxiliary production systems and facilities required to

support the operation of the Dry Coal Separation System

"RMB" Renminbi, the lawful currency of the PRC

"Share(s)" shares of the Company

"Shareholder(s)" holders(s) of the Shares

"Stock Exchange" The Stock Exchange of Hong Kong Limited

"Tangshan Shenzhou" Tangshan Shenzhou Manufacturing Group Co., Ltd. (唐⼭

神州機械集團有限公司 ), a company incorporated in the

PRC with limited liabilities

"%"

USD$

per cent.

United States dollar(s), the lawful currency of the United

States

VAT value-added tax

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