Mr. Ruibin Xu reports

SOUTHGOBI ANNOUNCES UNAUDITED FIRST QUARTER 2023 FINANCIAL AND OPERATING RESULTS

SouthGobi Resources Ltd. has released its financial and operating results for the three months ended March 31, 2023. All figures are in U.S. dollars unless otherwise stated.

Significant events and highlights

The company's significant events and highlights for the three months ended March 31, 2023, and the subsequent period to May 19, 2023, are as follows.

Operating results

In late 2022, the company resumed its major mining operations, including coal mining, and the volume of coal production has gradually increased since then. The company also resumed coal washing operations in April, 2023. In response to the market demand, the company has been mixing some higher-ash-content product with its semi-soft coking coal product and selling this mixed product to the market as processed coal.

The company recorded sales volume of 600,000 for the first quarter of 2023. The company also recorded an average realized selling price of $104.10 per tonne in the first quarter as a result of an improved market conditions in China, expansion of its sales network and diversification of its customer base.

Financial results

The company recorded a $27.9-million profit from operations in the first quarter of 2023, compared with a $200,000 loss from operations in the first quarter of 2022. The financial results were impacted by increased sales volume experienced by the company and improvement of average realized selling price during the quarter.

Convertible debenture

On March 24, 2023, the company and JD Zhixing Fund LP entered into an agreement (the March, 2023, deferral agreement) pursuant to which JDZF agreed to grant the company a deferral of: (i) the cash interest payment of approximately $7.9-million (the May, 2023, cash interest), which will be due and payable on May 19, 2023, under the convertible debenture; (ii) the cash interest, management fees and related deferral fees of approximately $8.7-million (the May, 2022, deferred amounts), which are due and payable to JDZF on or before Aug. 31, 2023, under the deferral agreement dated May 13, 2022; (iii) the cash and payment-in-kind (PIK) interest and related deferral fees of approximately $13.5-million (the July, 2021, deferred amounts), which are due and payable to JDZF on or before Aug. 31, 2023, under the deferral agreement dated July 30, 2021; and (iv) the cash and PIK interest, management fees, and related deferral fees of approximately $110.4-million (the November, 20202, deferred amounts), which are due and payable to JDZF on or before Aug. 31, 2023, under the deferral agreement dated Nov. 19, 2020.

The effectiveness of the March, 2023, deferral agreement and the respective covenants, agreements and obligations of each party under the March, 2023, deferral agreement are subject to the approvals from the Toronto Stock Exchange and the disinterested shareholders of the company in accordance with the requirements of Section 501(c) of the TSX company manual and the rules governing the listing of securities on the HKEX (Hong Kong Exchanges and Clearing Market).

The principal terms of the March, 2023, deferral agreement are as follows:

• Payment of the March, 2023, deferred amounts will be deferred until Aug. 31, 2024.
• As consideration for the deferral of the March, 2023, deferred amounts which relate to the payment obligations arising from the convertible debenture, the company agreed to pay JDZF a deferral fee equal to 6.4 per cent per annum on the outstanding balance of such March, 2023, deferred amounts, commencing on the date on which each such March, 2023, deferred amounts would otherwise have been due and payable under the convertible debenture.
• As consideration for the deferral of the March, 2023, deferred amounts which relate to payment obligations arising from amended and restated co-operation agreement, the company agreed to pay JDZF a deferral fee equal to 1.5 per cent per annum on the outstanding balance of such March, 2023, deferred amounts commencing on the date on which each such March, 2023, deferred amounts would otherwise have been due and payable under the amended and restated co-operation agreement.
• The March, 2023, deferral agreement does not contemplate a fixed repayment schedule for the March, 2023, deferred amounts or related deferral fees. Instead, the March, 2023, deferral agreement requires the company to use its best efforts to pay the March, 2023, deferred amounts and related deferral fees due and payable under the March, 2023, deferral agreement to JDZF. During the period beginning as of the effective date of the March, 2023, deferral agreement and ending as of the deferral date, the company will provide 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 March, 2023, 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 March, 2023, 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 company expects to convene a special meeting of shareholders in the third quarter of 2023, to seek disinterested shareholder approval of the March, 2023, deferral agreement.
• New listing on the TSX Venture Exchange and primary listing on the HKEX: On April 17, 2023, the company announced: (i) the change of its secondary listing status to primary listing on the main board of the HKEX became effective; and (ii) the listing of the company's common shares for trading on the TSX-V was effective as of the opening of trade on April 17, 2023, in Canada. The company's trading symbol on the HKEX and the TSX-V will remain as 1878 and SGQ, respectively.
• Revolving credit facility: On March 2, 2023, an indirect wholly owned subsidiary of the company (the borrower) entered into an unsecured revolving credit facility with a related party of JDZF (the lender), which makes available to the company up to a maximum principal sum of 90 million renminbi with a maturity date of three months after the agreement was signed. The company has obtained the requisite acceptance from the TSX for the credit facility in accordance with the requirements of the TSX company manual, subject to certain standard conditions.

The principal terms of the credit facility are as follows:

• All obligations under the credit facility are due and payable on the maturity date.
• The credit facility is a revolving facility, pursuant to which the borrower will be entitled, but not obligated, to request advances under the credit facility from time to time, provided that the aggregate amount of the outstanding advances under the credit facility does not exceed the maximum loan amount at any time. The borrower is entitled to repay all or any portion of the outstanding advances under the credit facility from time to time without bonus or penalty.
• Advances under the credit facility will not accrue interest if the borrower repays any advance in full within 15 days following the date of drawdown. If the borrower fails to repay in full the amount of the advance prior to the end of the interest-free period, then the borrower will pay to the lender interest on the outstanding amount of such advance, beginning on the day immediately following the last day of the interest-free period (the interest trigger date) and ending on but excluding the day on which such advance is repaid or satisfied in full. Interest on the outstanding amount of each advance from the interest trigger date is calculated at a rate per annum equal to 5 per cent, determined daily and calculated and payable on the date on which the relevant advance is repaid in full.
• The company intends to use the proceeds of the credit facility for general corporate purposes.

As at March 31, 2023, the company did not draw down any principal under the credit facility.

Changes in management

Gang Li: Mr. Li resigned as a non-executive director on May 8, 2023.

Dong Wang: Mr. Wang was removed as chief executive officer and redesignated from an executive director to a non-executive director on May 15, 2023.

Ruibin Xu: Mr. Xu was appointed as chief executive officer on May 15, 2023.

Zaixiang Wen: Mr. Wen was appointed as a non-executive director on May 17, 2023.

Going concern

Several adverse conditions and material uncertainties relating to the company cast significant doubt upon the going concern assumption, including the deficiencies in assets and working capital.

Overview of operational data and financial results

Overview of operational data

The company ended the first quarter of 2023 without a lost-time injury.

The company recorded an average realized selling price of $104.10 per tonne in the first quarter of 2023 as a result of improved market conditions in China, expansion of its sales network and diversification of its customer base. The product mix for the first quarter of 2023 consisted of approximately 55 per cent of premium semi-soft coking coal, 2 per cent of standard semi-soft coking coal/premium thermal coal and 43 per cent of processed coal.

The company's unit cost of sales of product sold was $51.60 per tonne for the first quarter of 2023.

Overview of financial results

The company recorded a $27.9-million profit from operations in the first quarter of 2023, compared with a $200,000 loss from operations in the first quarter of 2022. The financial results were impacted by increased sales volume experienced by the company, improvement of the product mix and improvement of average realized selling price during the quarter.

Revenue was $61.8-million in the first quarter of 2023. The company's effective royalty rate, based on the company's average realized selling price of $104.10 per tonne, was 18.6 per cent, or $19.40 per tonne.

Cost of sales was $31-million in the first quarter of 2023, compared with $1-million in the first quarter of 2022. The increase in cost of sales was mainly due to the increased sales during the quarter. Cost of sales consists of operating expenses, share-based compensation expense/recovery, equipment depreciation, depletion of mineral properties, royalties and idled mine asset costs. Operating expenses in cost of sales reflect the total cash costs of product sold (a non-IFRS (international financial reporting standards) financial measure) during the quarter.

Operating expenses in cost of sales were $18.3-million in the first quarter of 2023, compared with $500,000 in the first quarter of 2022. The overall increase in operating expenses was primarily due to the increased sales volume experienced in the first quarter of 2023.

Cost of sales related to idled mine assets in the first quarter of 2023 included $100,000 related to depreciation expenses for idled equipment (first quarter of 2022: $400,000).

Other operating expenses were $800,000 in the first quarter of 2023 (first quarter of 2022: other operating income of $2.1-million). The change was mainly due to increased management fee and penalty on late settlement of trade payables of $500,000 in the first quarter of 2023, while a write-off of other payables of $1.2-million was recorded in the first quarter of 2022.

Administration expenses were $2.1-million in the first quarter of 2023, as compared with $1.2-million in the first quarter of 2022.

The company continued to minimize evaluation and exploration expenditures in the first quarter of 2023 in order to preserve the company's financial resources. Evaluation and exploration activities and expenditures in the first quarter of 2023 were limited to ensuring that the company met the Mongolian Minerals Law requirements in respect of its mining licences.

Finance costs were $11.9-million and $10-million in the first quarter of 2023 and 2022, respectively, which primarily consisted of interest expense on the $250-million convertible debenture.

Outlook

In late 2022, the company resumed its major mining operations, including coal mining, and the volume of coal production has gradually increased, which lead to a subsequent increase of coal export volume into China and resulted in significant improvements in the company's cash flow for the first quarter of 2023. The company expects that planned investments from multiple coal mining companies in 2023 to enhance the infrastructure and technologies that support cross-border exports at the Chinese-Mongolian border will result in export volume continuing to increase in 2023.

With assistance and support from JDZF, the company will focus on expanding its market reach and customer base in China to improve the profit margin earned on its coal products.

In 2023, the company expects to continue to ramp up its mining operations and capacity to capitalize on the anticipated increase in sales volume. The company will revisit the possibility of resuming coal processing at a later date.

The company remains cautiously optimistic regarding the Chinese coal market as coal is still considered to be the primary energy source that China will continue to rely on in the foreseeable future. Coal supply and coal import in China are expected to be limited due to increasingly stringent requirements relating to environmental protection and safety production, which may result in volatile coal prices in China. The company will continue to monitor and react pro-actively to the dynamic market.

In the medium term, the company will continue to adopt various strategies to enhance its product mix in order to maximize revenue, expand its customer base and sales network, improve logistics, optimize its operational cost structure, and, most importantly, operate in a safe and socially responsible manner.

The company's objectives for the medium term are as follows:

• Enhance product mix: The company will focus on improving the product mix by: (i) improving mining operations; (ii) utilizing the company's wet coal processing plant; (iii) exploring the possibility of a dry coal processing operation; and (iv) trading and blending different types of coal to produce blended coal products that are economical to the company.
• Expand market reach and customer base: The company will endeavour to increase sales volume and sales price by: (i) expanding its sales network and diversifying its customer base; (ii) increasing its coal logistics capacity to resolve the bottleneck in the distribution channel; and (iii) setting and adjusting the sales price based on a more market-oriented approach in order to maximize profit while maintaining sustainable long-term business relationships with customers.
• Increase production and optimize cost structure: The company will aim to increase coal production volume to take advantage of economies of scale. The company will also focus to reduce its production costs and optimize its cost structure through engaging sizable third party contract mining companies to enhance its operation efficiency, strengthening procurement management, continuing training and productivity enhancement.
• Operate in a safe and socially responsible manner: The company will continue to maintain the highest standards in health, safety and environmental performance and operate in a corporate socially responsible manner.

In the long term, the company will continue to focus on creating and maximizing shareholders value by leveraging its key competitive strengths, including:

• Strategic location: The Ovoot Tolgoi mine is located approximately 40 kilometres from China, which represents the company's main coal market. The company has an infrastructure advantage, being approximately 50 kilometres from a major Chinese coal distribution terminal with rail connections to key coal markets in China.
• A large reserves base: The Ovoot Tolgoi deposit has mineral reserves of more than 90 million tonnes.
• Several growth options: The company has several growth options, including the Soumber deposit and Zag Suuj deposit, located approximately 20 kilometres east and approximately 150 kilometres east of the Ovoot Tolgoi mine, respectively.
• Bridge between Mongolia and China: The company is well positioned to capture the resulting business opportunities between China and Mongolia. The company will seek assistance and support from its two largest shareholders, which are both experienced coal mining enterprises in China, and have a strong operational record for the past decade in Mongolia.

Review of interim results

The condensed consolidated interim financial statements for the company for the three months ended March 31, 2023, are unaudited and have not been reviewed by the company's independent auditor but have been reviewed by the audit committee of the company.

The company's results for the quarter ended March 31, 2023, are contained in the unaudited condensed consolidated interim financial statements and MD&A (management discussion and analysis), available on SEDAR and the company's website.

About SouthGobi Resources Ltd.

SouthGobi, listed on the Hong Kong Stock Exchange and TSX-V, owns and operates its flagship Ovoot Tolgoi coal mine in Mongolia. It also holds the mining licences of its other metallurgical and thermal coal deposits in South Gobi region of Mongolia. SouthGobi produces and sells coal to customers in China.

We seek Safe Harbor.