Southgobi Resources Announces Second Quarter 2012 Financial and Operating Results

August 13, 2012

SOUTHGOBI RESOURCES ANNOUNCES SECOND QUARTER 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 three and six months ended June 30, 2012. All figures are in U.S. dollars unless otherwise stated.

HIGHLIGHTS

The Company’s highlights for the quarter ended June 30, 2012 and subsequent weeks are as follows:

• Sales volume and revenue declined to 0.16 million tonnes and $8.4 million, respectively, in the second quarter of 2012;
• Production declined to 0.27 million tonnes of raw coal in the second quarter of 2012 due to the curtailment of mining operations to varying degrees throughout the quarter. As at June 30, 2012, mining activities had been fully curtailed;
• The signing of a Cooperation Agreement with the Aluminum Corporation of China Limited (“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;
• 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;
• 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; and
• SGQ Coal Investment Pte. Ltd., a wholly-owned subsidiary of SouthGobi 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.

REVIEW OF QUARTERLY OPERATING RESULTS

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

	2012		2011				2010
QUARTER ENDED	30-Jun	31-Mar	31-Dec	30-Sep	30-Jun	31-Mar	31-Dec	30-Sep
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 rock 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)	0.07 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	0.41 0.35 $ 47.08 - - $ - 0.97 1.12 $ 26.75 1.38 1.47 $ 31.56 $ 18.53 $ 19.25 3.56 2.58 0.73 3 82 15 2,254 544 0.8	0.18 0.11 $ 46.04 - - $ - 0.39 0.08 $ 25.34 0.57 0.19 $ 37.15 $ 18.59 $ 22.04 2.90 5.09 0.43 2 48 12 1,727 472 0.9

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

(ii) Per 1,000,000 man hours

For the three months ended June 30, 2012

For the three months ended June 30, 2012, the Company produced 0.27 million tonnes of raw coal with a strip ratio of 4.31 compared to production of 0.87 million tonnes of raw coal for the three months ended June 30, 2011 with a strip ratio of 4.74. SouthGobi curtailed its mining activities during the three months ended June 30, 2012 to varying degrees to manage coal inventories and to maintain efficient working capital levels. As at June 30, 2012, mining activities had been fully curtailed. Due to the curtailment of its mining operations, the Company suspended uncommitted capital expenditures and exploration expenditures to preserve the Company’s financial resources.

For the three months ended June 30, 2012, the Company sold 0.16 million tonnes of coal at an average realized selling price of $62.56 per tonne compared to sales of 1.05 million tonnes of coal at an average realized selling price of $54.06 per tonne for the three months ended June 30, 2011. Sales volume declined for the three months ended June 30, 2012 due to the significant uncertainty surrounding SouthGobi’s business resulting from the proposed proportional takeover bid by CHALCO, which resulted in MRAM holding a press conference announcing a request to suspend exploration and mining activity on certain licenses, various infrastructure constraints in Mongolia and the softening of inland China coking coal markets towards the end of the second quarter. The increase in the average realized selling price is primarily related to the Company’s improved sales mix.

Direct cash costs of product sold excluding idled mine costs (a non-IFRS financial measure, see Non-IFRS Financial Measures section) were $22.57 per tonne for the three months ended June 30, 2012 compared to $26.77 per tonne for the three months ended June 30, 2011. Direct cash costs of product sold excluding idled mine costs have primarily decreased as a result of a lower strip ratio and reduced fuel prices.

For the six months ended June 30, 2012

For the six months ended June 30, 2012, the Company produced 1.33 million tonnes of raw coal with a strip ratio of 2.52 compared to production of 1.98 million tonnes of raw coal for the six months ended June 30, 2011 with a strip ratio of 4.03. The decrease in production primarily related to the curtailment of the Company’s mining operations in the second quarter of 2012; 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.

For the six months ended June 30, 2012, the Company sold 1.00 million tonnes of coal at an average realized selling price of $57.71 per tonne compared to sales of 1.50 million tonnes of coal at an average realized selling price of $52.92 per tonne for the six months ended June 30, 2011. Sales volume declined for the six months ended June 30, 2012 due to the significant uncertainty surrounding SouthGobi’s business in the second quarter of 2012, despite first quarter 2012 sales volumes increasing 84% from the first quarter of 2011.

Direct cash costs of product sold excluding idled mine costs (a non-IFRS financial measure, see Non-IFRS Financial Measures section) were $12.67 per tonne for the six months ended June 30, 2012 compared to $24.39 per tonne for the six months ended June 30, 2011. Direct cash costs of product sold excluding idled mine costs have primarily decreased as a result of a lower strip ratio and reduced fuel prices.

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				2010
QUARTER ENDED	30-Jun	31-Mar	31-Dec	30-Sep	30-Jun	31-Mar	31-Dec	30-Sep
Revenue Gross profit 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	$ 8,412 1,778 21% (13,809) (3,803) (7,497) (2,099) (27,208) 237 0.00 (0.12)	$ 40,153 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)	$ 4 1,595 3,950 9% 3,950 (2,121) (6,599) (4,144) (8,914) (28,720) (0.16) (0.16)	$ 6,597 336 5% 336 (7,586) (7,405) (6,314) (20,969) 27,495 0.15 (0.08)

	2012		2011				2010
QUARTER ENDED	30-Jun	31-Mar	31-Dec	30-Sep	30-Jun	31-Mar	31-Dec	30-Sep
Net income/(loss) Income/(loss) adjustments, net of tax Idled mine costs Share-based compensation 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)	$ 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)	$ 55,921 - 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)	$ (28,720) - 3,840 574 (1,837) 19,995 - (4,375) (10,523)	$ 27,495 - 3,695 7,010 (1,116) (49,772) - (1,735) (14,423)

(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 three months ended June 30, 2012

The Company recorded net income of $0.2 million for the three months ended June 30, 2012 compared to a net income of $3.1 million for the three months ended March 31, 2012 and a net income of $67.3 million for the three months ended June 30, 2011.

Gross Profit:

The Company’s gross profit 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 June 30, 2012, gross profit was negatively impacted by $15.6 million of idled mine costs, resulting in a gross loss of $13.8 million. The Company recorded a gross profit excluding idled mine costs of $1.8 million for the three months ended June 30, 2012 compared to $22.7 million for the three months ended March 31, 2012 and $9.7 million for the three months ended June 30, 2011.

The Company recognized revenue of $8.4 million for the three months ended June 30, 2012 compared to $40.2 million for the three months ended March 31, 2012 and $47.3 million for the three months ended June 30, 2011. For the three months ended June 30, 2012 customers were reluctant to enter into significant 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 far 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;
• Uncertainty with respect to whether SouthGobi would receive a formal request from MRAM to suspend mining activities on its Ovoot Tolgoi mining license had customers concerned that they would be unable to collect and export additional coal purchased from the Ovoot Tolgoi Mine; and
• The softening of inland China coking coal markets closest to SouthGobi’s operations towards the end of the second quarter.

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 reference prices for the second quarter of 2012, the Company was subject to an average 8% royalty based on a weighted average reference price of $97.83 per tonne. The Company’s effective royalty rate for the second quarter of 2012, based on the Company’s average realized selling price of $62.56 per tonne, was 13%.

Together with other Mongolian mining companies affected by the escalation of effective royalty rates, a dialog was opened on this topic with the appropriate Government of Mongolia authorities with a view to moving to a more equitable process for setting reference prices. There has been a successful outcome and commencing February 2012 royalty reference prices are now based on prices for coal products sold at the two main coal export border locations in Mongolia, namely Shivee Khuren-Ceke and Gashuun Sukhait- Ganqimaodao. The dialog is continuing, with the aim of having prices based on actual contract prices for sales at these locations, excluding export fees and Chinese VAT (i.e. revenue received for coal delivered to the Mongolia-China border prior to export).

Cost of sales was $22.2 million for the three months ended June 30, 2012 compared to $17.5 million for the three months ended March 31, 2012 and $37.6 million for the three months ended June 30, 2011. Cost of sales comprise the direct cash costs of product sold, mine administration cash costs of product sold, idled mine costs, equipment depreciation, depletion of mineral properties and share-based compensation. Of the $22.2 million recorded as cost of sales for the three months ended June 30, 2012, $6.6 million related to mine operations and $15.6 million related to idled mine costs. Cost of sales related to mine operations decreased in the second quarter of 2012 compared to the first quarter of 2012 and the second quarter of 2011 primarily due to lower sales volumes, partially offset by higher unit costs.

Other Operating Expenses:

Other operating expenses for the three months ended June 30, 2012 increased to $3.8 million compared to $2.6 million for the three months ended March 31, 2012 and $3.0 million for the three months ended June 30, 2011. In the second quarter of 2012, other operating expenses consisted primarily of public infrastructure costs and provisions for doubtful trade and other receivables. The loss provision relates to allowances granted to certain customers in order to expedite trade receivable cash collections. Other operating expenses consisted primarily of foreign exchange losses in the first quarter of 2012 and of public infrastructure costs in the second quarter of 2011.

Administration Expenses:

Administration expenses for the three months ended June 30, 2012 were $7.5 million compared to $5.9 million for the three months ended March 31, 2012 and $6.8 million for the three months ended June 30, 2011. The increased administration expenses in the second quarter of 2012 compared to the first quarter of 2012 primarily related to increased legal and professional fees, primarily due to increased legal activities, and increased share-based compensation. The increased administration expenses in the second quarter of 2012 compared to the second quarter of 2011 primarily related to increased salaries and benefits. In the second quarter of 2012, salaries and benefits included severance payments resulting from personnel separations.

Evaluation and Exploration Expenses:

Exploration expenses for the three months ended June 30, 2012 were $2.1 million compared to $5.0 million for the three months ended March 31, 2012 and $4.4 million for the three months ended June 30, 2011. Exploration expenses will vary from quarter to quarter depending on the number of projects and the related seasonality of the exploration programs. In the second quarter of 2012, the Company curtailed exploration activities to preserve financial resources. The majority of the exploration activities in the second quarter of 2012 related to water exploration activities.

Finance Income & Finance Costs:

The Company incurred finance costs for the three months ended June 30, 2012 of $4.0 million compared to $2.4 million for the three months ended June 30, 2011. Finance costs in the second quarter of 2012 primarily consisted of $1.6 million of interest expense on the China Investment Corporation (“CIC”) convertible debenture and a $2.3 million unrealized loss on FVTPL investments; whereas, finance costs in the second quarter of 2011 primarily consisted of $2.2 million of interest expense on the CIC convertible debenture.

The Company recorded finance income for the three months ended June 30, 2012 of $26.9 million compared to $74.4 million for the three months ended June 30, 2011. In the second quarter of 2012, finance income primarily consisted of a $26.8 million unrealized gain on the fair value change of the embedded derivatives in the CIC convertible debenture; whereas, in the second quarter of 2011, finance income primarily consisted of a $70.4 million unrealized gain on the fair value change of the embedded derivatives in the CIC convertible debenture and a $3.6 million unrealized gain on FVTPL investments.

The Company’s investment in Aspire Mining Limited (“Aspire”) continues to be classified as an availablefor-sale financial asset and for the three months ended June 30, 2012, the Company recorded an after-tax mark to market loss of $20.1 million related to Aspire that has been recorded in other comprehensive income.

Taxes:

For the three months ended June 30, 2012, the Company recorded a current income tax recovery of $3.7 million related to its Mongolian operations compared to a current tax expense of $1.7 million for the three months ended June 30, 2011. The Company has recorded a deferred income tax recovery related to deductible temporary differences of $0.6 million for the three months ended June 30, 2012 compared to $1.5 million for the three months ended June 30, 2011.

For the six months ended June 30, 2012

The Company recorded net income of $3.4 million for the six months ended June 30, 2012 compared to a net income of $20.7 million for the six months ended June 30, 2011.

Gross Profit:

The Company’s gross profit is composed of revenue (net of royalties and selling fees) and cost of sales and relates solely to the Mongolian Coal Division. For the six months ended June 30, 2012, gross profit was negatively impacted by $15.6 million of idled mine costs, resulting in a reduced gross profit of $8.9 million. The Company recorded a gross profit excluding idled mine costs of $24.5 million for the six months ended June 30, 2012 compared to $17.4 million for the six months ended June 30, 2011.

Revenue decreased to $48.6 million for the six months ended June 30, 2012 from $67.5 million for the six months ended June 30, 2011 primarily due to decreased sales volumes in the second quarter of 2012, partially offset by higher sales volumes in the first quarter of 2012 and higher average realized selling prices for the first half of 2012.

Cost of sales was $39.7 million for the six months ended June 30, 2012 compared to $50.1 million for the six months ended June 30, 2011. Cost of sales comprise the direct cash costs of product sold, mine administration cash costs of product sold, idled mine costs, equipment depreciation, depletion of mineral properties and share-based compensation. Of the $39.7 million recorded as cost of sales for the six months ended June 30, 2012, $24.1 million related to mine operations and $15.6 million related to idled mine costs. Cost of sales related to mine operations decreased for the six months ended June 30, 2012 compared to the six months ended June 30, 2011 primarily due to lower sales volumes and lower unit costs.

Other Operating Expenses:

Other operating expenses for the six months ended June 30, 2012 increased to $6.4 million compared to $4.4 million for the six months ended June 30, 2011. The increase in other operating expenses primarily relates to provisions for doubtful trade and other receivables and increased foreign exchange losses, partially offset by reduced public infrastructure costs. The increased loss provisions related to allowances granted to certain customers in order to expedite trade receivable cash collections. Public infrastructure costs decreased for the six months ended June 30, 2012 compared to the six months ended June 30, 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. Public infrastructure costs should continue to be lower than prior periods due to the completion of the expanded border crossing infrastructure at the Shivee Khuren Border Crossing.

Administration Expenses:

Administration expenses for the six months ended June 30, 2012 were $13.4 million compared to $12.1 million for the six months ended June 30, 2011. The increase in administration expenses for the six months ended June 30, 2012 primarily related to increased salaries and benefits and increased share-based compensation. In the second quarter of 2012, salaries and benefits included severance payments resulting from personnel separations.

Evaluation and Exploration Expenses:

Exploration expenses for the six months ended June 30, 2012 were $7.1 million compared to $6.3 million for the six months ended June 30, 2011. Exploration expenses will vary period to period depending on the number of projects and the related seasonality of the exploration programs. In the second quarter of 2012, the Company curtailed exploration activities to preserve financial resources. The majority of the exploration activities for the six months ended June 30, 2012 related to water exploration activities. For the six months ended June 30, 2011, exploration programs had not received all required government approvals; thus a higher proportion of expenses were incurred in the second half of 2011.

Finance Income & Finance Costs:

Finance costs for the six months ended June 30, 2012 were $4.7 million compared to $7.5 million for the six months ended June 30, 2011. Finance costs in the first half of 2012 primarily consisted of $1.8 million of interest expense on the CIC convertible debenture and a $2.6 million unrealized loss on fair value through profit or loss (“FVTPL”) investments; whereas, finance costs in the first half of 2011 primarily consisted of $6.7 million of interest expense on the CIC convertible debenture and a $0.5 million unrealized loss on FVTPL investments.

Finance income for the six months ended June 30, 2012 was $26.3 million compared to $34.4 million for the six months ended June 30, 2011. In the first half of 2012, finance income primarily consisted of a $26.0 million unrealized gain on the fair value change of the embedded derivatives in the CIC convertible debenture; whereas, in the first half of 2011, finance income primarily consisted of a $33.6 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 and for the six months ended June 30, 2012, the Company recorded an after-tax mark to market loss of $25.5 million related to Aspire that has been recorded in other comprehensive income.

Taxes:

For the six months ended June 30, 2012, the Company recorded a current income tax expense of $1.1 million related to its Mongolian operations compared to a current tax expense of $3.5 million for the six months ended June 30, 2011. The Company recorded a deferred income tax recovery related to deductible temporary differences of $0.7 million for the six months ended June 30, 2012 compared to $2.8 million for the six months ended June 30, 2011.

FINANCIAL POSITION AND LIQUIDITY

The Company’s total assets as at June 30, 2012 were $846.5 million compared with $920.3 million as at December 31, 2011.

As at June 30, 2012, the Company had $61.6 million in cash and cash equivalents and $30.0 million in money market investments for a total liquidity of $91.6 million compared with $123.6 million in cash and cash equivalents and $45.0 million in money market investments for a total liquidity of $168.6 million as at December 31, 2011.

The Company’s non-current liabilities as at June 30, 2012 were $117.1 million compared with $145.6 million as at December 31, 2011.

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 has also been informed by its 58% major shareholder, Turquoise Hill Resources Ltd. (“Turquoise Hill”), that Turquoise Hill has 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 will be made by way of a takeover bid circular under British Columbia law and will be made to all SouthGobi shareholders. If shareholders tender more than 60% of the outstanding common shares of SouthGobi to the takeover bid, a proportional amount of shares will be taken up from each shareholder. SouthGobi has not received any formal documentation relating to the Proportional Offer.

On April 25, 2012, CHALCO and Turquoise Hill announced that in the event of new foreign investment legislation being implemented by the Government of Mongolia prior to the completion of the Proportional Offer, CHALCO and Turquoise Hill will cooperate with the Government of Mongolia to ensure any requirements under such legislation are satisfied.

On May 17, 2012, the Parliament of Mongolia approved a Foreign Investment Law (“FIL”) that regulates foreign direct investment into a number of key sectors of strategic importance, which includes mineral resources. The FIL is extremely ambiguous and leaves a lot of discretion in the parliamentary approval process. If foreign shareholding exceeds 49% of an asset and the amount of the investment at the time is to exceed MNT100 billion (approximately $75.0 million), then parliamentary approval is required. In the case of state owned entities (“SOE”) there is no minimum threshold and all proposed investments from SOE’s require parliamentary approval. In addition, if a foreign entity wants to acquire one third or more of the shares in an investment in a strategic sector, then the MNT100 billion threshold is not applicable and cabinet approval for the investment is required regardless of the value. As a result, the Proportional Offer will require Government of Mongolia approval.

In conjunction with the Proportional Offer, CHALCO and SouthGobi have entered into a Cooperation Agreement. CHALCO’s obligations under the Cooperation Agreement will become effective upon CHALCO acquiring a shareholding in SouthGobi.

Key benefits under the Cooperation Agreement between SouthGobi and CHALCO include:

• Coal off-take by CHALCO – SouthGobi will have the right to offer up to 100% of its salable coal to CHALCO and CHALCO will have the obligation to purchase the coal at market prices for a period of 24 months.
• Infrastructure support – CHALCO will assist SouthGobi to procure electricity for its Mongolian business operations either through a direct connection to grid power, or through development of a conveniently located power plant. CHALCO will also provide support to SouthGobi’s coalhaul highway project.

SouthGobi has also been notified that CHALCO has entered into consultancy agreements with nine key senior executives, officers and staff to assist CHALCO with the integration and transition following CHALCO’s acquisition of a shareholding in SouthGobi. Services would be retained for 12 months from the termination of their employment or for a period of 12-months less the notice period actually served by them on their resignation, after CHALCO becomes a shareholder of SouthGobi. Following arm's length negotiation between CHALCO and the relevant individuals, it has been agreed that fees totaling $9.0 million would be paid by CHALCO for the consulting services. Consultancy agreements have been entered into with the President and Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, and key Vice Presidents, officers and staff.

CHALCO had stated that it expected to mail the takeover bid circular in connection with the Proportional Offer on or about July 5, 2012. On July 3, 2012, CHALCO and Turquoise Hill announced a 30 day extension for CHALCO to mail the takeover bid circular.

Subsequently, on August 2, 2012, an additional 30 day extension was announced by CHALCO and Turquoise Hill. CHALCO has agreed to mail the takeover bid circular on or before September 4, 2012.

MRAM REQUEST TO SUSPEND EXPLORATION AND MINING LICENSES

On April 16, 2012, SouthGobi announced that MRAM held a press conference announcing a request to suspend exploration and mining activity on certain licenses owned by SouthGobi Sands LLC. The request for suspension includes the mining license pertaining to the Ovoot Tolgoi Mine.

Advice to the Company suggests that the action has been taken under the broad national security powers of the Government of Mongolia. MRAM stated that the move is in connection to the proposed proportional takeover bid by CHALCO and the agreement by Turquoise Hill to tender its controlling interest in SouthGobi to such a takeover.

Subsequently, on May 30, 2012, the Mongolian Minister of Mineral Resources and Energy (“MRE”) commented at a press conference that “the temporary suspension has been lifted, but regarding the new (Foreign Investment) law, the license of Ovoot Tolgoi will be discussed by the cabinet and parliament.” Subsequently, the Company has written to MRAM and the MRE requesting official clarification. However, as at August 13, 2012, no such clarification has been received.

As at August 13, 2012, the Company has not received any official notification to suspend exploration and mining activity and has no reason to believe SouthGobi's licenses are not in good standing. However, the Company cautions that any official notification received will require a mandatory suspension of operations and may result in the impairment of the Company’s property, plant and equipment.

Although no official notification has been received to date, SouthGobi continues to be impacted by the uncertainty over its licenses. Many government bodies and regulatory authorities in Mongolia are reluctant to provide approvals and permits. For example, SouthGobi has been unable to receive an approval for a revision to its Environmental Impact Assessment for the dry coal handling facility (“DCHF”) from the Mongolian Ministry of Environment. As a result, SouthGobi may be unable to operate the DCHF until it receives approval for the revised Environmental Impact Assessment.

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 Mongolyn Alt Corporation (“MAK”), completed the road and construction works required on the Mongolian side of the border to match the existing Chinese infrastructure. 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 will eliminate the existing bottleneck at the Shivee Khuren Border Crossing and is expected to increase capacity to approximately 20 million tonnes or more of coal per year.

In June 2012, due to the expanded border crossing infrastructure at the Shivee Khuren Border Crossing, the Company’s customers exported 0.58 million tonnes of Ovoot Tolgoi Mine coal (mostly from customer inventories) from Mongolia to China, representing a monthly export record of coal from the Ovoot Tolgoi Mine.

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. Completion of the paved highway is expected mid-2013. The paved highway will have an intended carrying capacity upon completion in excess of 20 million tonnes of coal per year.

NOTICE OF INVESTMENT DISPUTE

SGQ Coal Investment Pte. Ltd., a wholly-owned subsidiary of SouthGobi 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. The Company has filed the Notice of Investment Dispute following a determination by management that they have exhausted all other possible means to resolve an ongoing investment dispute between SouthGobi Sands LLC and the Mongolian authorities.

The Notice of Investment Dispute consists of, but is not limited to, the failure by MRAM to execute the Pre- Mining Agreements (“PMA”) associated with certain exploration licenses of the Company pursuant to which valid PMA applications had been lodged in 2011. The areas covered by the valid PMA applications include the Zag Suuj Deposit and certain areas associated with the Soumber Deposit outside the existing mining license.

The Notice of Investment Dispute triggers the dispute resolution process under the Bilateral Investment Treaty whereby the Government of Mongolia has a six-month cure period from the date of receipt of the notice to satisfactorily resolve the dispute through negotiations. If the negotiations are not successful, the Company will be entitled to commence conciliation/arbitration proceedings under the auspices of the International Centre for Settlement of Investment Disputes (“ICSID”) pursuant to the Bilateral Investment Treaty. However, in the event that the Government of Mongolia fails to negotiate, ICSID arbitration proceedings may be accelerated before the six months have expired.

COMMON SHARE REPURCHASE PROGRAM

On June 8, 2010, the Company announced that its Board of Directors authorized a share repurchase program to purchase up to 2.5 million common shares of the Company on each or either of the TSX and the HKEX, in aggregate representing up to 5.0 million common shares of the Company. On June 8, 2011, the Company announced the renewal of its share repurchase program. The share repurchase program concluded on June 14, 2012. As at June 14, 2012, the Company had repurchased 1.6 million shares on the HKEX and 2.8 million shares on the TSX for a total of 4.4 million common shares. The Company cancelled all repurchased shares.

OUTLOOK

The announcement by CHALCO that it intends to make a proportional takeover bid for up to 60% of the issued and outstanding common shares of SouthGobi continues to create significant uncertainty for the Company’s business. Further uncertainly results from the MRAM press conference announcing a request to suspend exploration and mining activity on certain licenses owned by SouthGobi Sands LLC and general difficulty receiving permits and valid cooperation from departments of the Government of Mongolia. This uncertainty has been compounded by worsening conditions in coal markets in inland China.

Inland China coking coal markets closest to SouthGobi’s operations have continued to soften in the third quarter of 2012. The Company has observed a substantial deterioration in sentiment among its customers and a decline in key reference prices in key end-use markets.

Due to the uncertainty surrounding SouthGobi’s business, the Company anticipates its operations will remain fully curtailed in the third quarter of 2012. Further, the Company cautions that production volumes, sales volumes and pricing for the full year of 2012 cannot be estimated.

SouthGobi is uniquely positioned, with a number of key competitive strengths, including:

• Strategic location – SouthGobi is the closest major coking coal producer in the world to China. The Ovoot Tolgoi Mine is approximately 40km from China, which is approximately 190km closer than Tavan Tolgoi coal producers in Mongolia and 7,000 to 10,000km closer than Australian and North American coking coal producers. The Company has an infrastructure advantage, being approximately 50km from existing railway infrastructure, which is approximately one tenth the distance to rail of Tavan Tolgoi coal producers in Mongolia.
• Premium quality coals – Most of the Company’s coal resources have coking properties, including a mixture of semi-soft coking coals and hard coking coals. SouthGobi is also completing its investment in processing infrastructure to capture more of the value by selling ‘clean’ instead of ‘raw’ coal products.
• Sustainable volume growth – Subject to market conditions, the Ovoot Tolgoi Mine, has the potential to produce well in excess of 2011 levels. Currently undeveloped resources at the Soumber Deposit and the Zag Suuj Deposit may provide additional growth in the future.
• Expanding margins – The Company believes, subject to market conditions, it will continue expanding margins through the benefits of coal processing and increasing economies of scale.