Mr. Ruibin Xu reports

SOUTHGOBI ANNOUNCES SECOND QUARTER 2023 UNAUDITED FINANCIAL AND OPERATING RESULTS

SouthGobi Resources Ltd. has released its financial and operating results for the three and six months ended June 30, 2023. All figures are in U.S. dollars ("USD") unless otherwise stated.

Significant Events and Highlights

The company's significant events and highlights for the three months ended June 30, 2023 and the subsequent period to August 14, 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 experienced an increase in the average selling price of coal from $66.6 per tonne in the second quarter of 2022 to $95.3 per tonne in the second quarter of 2023 as a result of improved market conditions in China, expansion of its sales network and diversification of its customer base.
• Financial Results - The company recorded a $40.5 million loss from operations in the second quarter of 2023 compared to a $2.7 million profit from operations in the second quarter of 2022. While the company experienced increased sales volume and improvement in its average realised selling price during the first half of 2023, the company's financial results were negatively offset by the provision of a tax penalty of $75.0 million imposed by the Mongolian Tax Authority ("MTA"), which the company received notice of in July 2023 (see "Provision of tax penalty imposed by MTA" below).
• Convertible Debenture - On March 24, 2023, the company and JD Zhixing Fund L.P. ("JDZF") entered into the an agreement ("2023 March 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 "2023 May 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 "2022 May Deferred Amounts") which are due and payable to JDZF on or before August 31, 2023 under the deferral agreement dated May 13, 2022; (iii) the cash and payment-in-kind interest ("PIK Interest"), and related deferral fees of approximately $13.5 million (the "2021 July Deferred Amounts") which are due and payable to JDZF on or before August 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 "2020 November Deferred Amounts", and together with the 2023 May Cash Interest, the 2022 May Deferred Amounts and the 2021 July Deferred Amounts, the "2023 March Deferred Amounts") which are due and payable to JDZF on or before August 31, 2023 under the deferral agreement dated November 19, 2020.
  • The effectiveness of the 2023 March Deferral Agreement and the respective covenants, agreements and obligations of each party under the 2023 March Deferral Agreement are subject to the approvals from the Toronto Stock Exchange ("TSX") and the disinterested shareholders of the company in accordance with the requirements of Section 501(c) of the TSX Company Manual and the Rule Governing the Listing of Securities on the HKEX (the "Listing Rules").

The principal terms of the 2023 March Deferral Agreement are as follows:

• Payment of the 2023 March Deferred Amounts will be deferred until August 31, 2024 (the "Deferral Date").
• As consideration for the deferral of the 2023 March 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 annum on the outstanding balance of such 2023 March Deferred Amounts, commencing on the date on which each such 2023 March Deferred Amounts would otherwise have been due and payable under the Convertible Debenture.
• As consideration for the deferral of the 2023 March Deferred Amounts which relate to payment obligations arising from the amended and restated mutual cooperation agreement signed on April 23, 2019 (the "Amended and Restated Cooperation Agreement"), the company agreed to pay JDZF a deferral fee equal to 1.5% per annum on the outstanding balance of such 2023 March Deferred Amounts commencing on the date on which each such 2023 March Deferred Amounts would otherwise have been due and payable under the Amended and Restated Cooperation Agreement.
• The 2023 March Deferral Agreement does not contemplate a fixed repayment schedule for the 2023 March Deferred Amounts or related deferral fees. Instead, the 2023 March Deferral Agreement requires the company to use its best efforts to pay the 2023 March Deferred Amounts and related deferral fees due and payable under the 2023 March Deferral Agreement to JDZF. During the period beginning as of the effective date of the 2023 March 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 2023 March 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 2023 March 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 will convene a special meeting of shareholders on August 23, 2023 Vancouver time (August 24, 2023, Hong Kong time), to seek disinterested shareholder approval of the 2023 March Deferral Agreement. New Listing on the TSX-V 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 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 (the "Credit Facility") with a related party of JDZF (the "Lender"), which makes available to the company up to a maximum principal sum of RMB90 million 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 ("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 fifteen (15) days following the date of drawdown (the "Interest-Free Period"). 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%, 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.

During the period ended June 30, 2023, the company did not draw down any principal under the Credit Facility and the Credit Facility expired on June 1, 2023.

Provision of tax penalty imposed by MTA

On July 18, 2023, SouthGobi Sands LLC ("SGS"), a wholly owned subsidiary of the company received an official notice (the "Notice") issued by MTA stating that MTA has recently completed a periodic tax audit (the "Audit") on the financial information of SGS between 2017 and 2020, including transfer pricing, royalty, air-pollution fee and unpaid tax payables. As a result of the Audit, the MTA has notified SGS that they are imposing a tax penalty against SGS in the amount of approximately $75.0 million. Under Mongolian law, the company has a period of 30-days from the date of receipt of the Notice to file an appeal in relation to the Audit.

The company's management is currently reviewing the Notice and actively exploring various options to resolve the issue, including, but not limited to, negotiating with the MTA and filing an appeal for the tax penalty amount. As at June 30, 2023, the company recorded a provision for a tax penalty in the amount of $75.0 million. If any subsequent event occurs that may impact the amount of the provision for tax penalty, an adjustment would be recognised in profit or loss and the carrying amount of the provision should be adjusted.Changes in Directors and Management

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

Mr. 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. He ceased to be a non-executive Director upon conclusion of the company's annual general meeting held on June 20, 2023.

Mr. Ruibin Xu: Mr. Xu was appointed as Chief Executive Officer on May 15, 2023 and elected as an executive director at the company's annual general meeting held on June 20, 2023.

Mr. 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 which includes the deficiencies in assets and working capital.

Refer to section "Liquidity and Capital Resources" of this press release for details.

Overview of Operational Data

For the three months ended June 30, 2023

The company experienced an increase in the average selling price of coal from $66.6 per tonne in the second quarter of 2022 to $95.3 per tonne in the second 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 second quarter of 2023 consisted of approximately 65% premium semi-soft coking coal, 5% standard semi-soft coking coal/premium thermal coal and 30% of processed coal compared to approximately 52% premium semi-soft coking coal, 40% standard semi-soft coking coal/premium thermal coal and 8% processed coal in the second quarter of 2022.

The company's unit cost of sales of product sold decreased from $56.3 per tonne in the second quarter of 2022 to $47.8 per tonne in the second quarter of 2023. The decrease was mainly driven by the economies of scale due to increased sales.

For the six months ended June 30, 2023

The company sold 1.5 million tonnes for the first six months of 2023 as compared to 0.1 million tonnes for the first six months of 2022. The average selling price increased from $66.6 per tonne for the first six months of 2022 to $98.9 per tonne for the first six months of 2023, due to improved market conditions in China, expansion of its sales network and diversification of its customer base.

The company's production in the first six months of 2023 was higher than the first six months of 2022 due to the company resuming its major mining operations, including coal mining in late 2022, and the volume of coal production has gradually increased since then. The company also resumed coal washing operations in April 2023.

The company's unit cost of sales of product sold decreased from $67.5 per tonne for the first six months of 2022 to $49.3 per tonne in the first six months of 2023. The decrease was mainly driven by the economies of scale due to increased sales.

Overview of Financial Results

For the three months ended June 30, 2023

The company recorded a $40.5 million loss from operations in the second quarter of 2023 compared to a $2.7 million profit from operations in the second quarter of 2022. The financial results for the second quarter of 2023 were impacted by (i) increased sales volume and improvement in the company's average realised selling price; and (ii) the company recording a provision for a tax penalty of $75.0 million imposed by MTA.

Revenue was $83.2 million in the second quarter of 2023 compared to $5.8 million in the second quarter of 2022. The increase was due to (i) during the second quarter of 2022, the Ceke Port of Entry was re-opened for coal export on a trial basis which limited the volume of coal exports, while the coal export resumed normal in the second quarter of 2023; and (ii) the company experienced an increase in the average selling price of coal from $66.6 per tonne in the second quarter of 2022 to $95.3 per tonne in the second quarter of 2023 as a result of an improved market conditions in China, expansion of its sales network and diversification of its customer base.

Cost of sales was $42.0 million in the second quarter of 2023 compared to $5.1 million in the second 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, 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 financial measure, refer to "Non-IFRS Financial Measures" section) during the quarter.

Operating expenses in cost of sales were $31.1 million in the second quarter of 2023 compared to $3.1 million in the second quarter of 2022. Cost of sales related to idled mine assets in the second quarter of 2023 included $0.1 million related to depreciation expenses for idled equipment (second quarter of 2022: $0.2 million).

Other operating expenses was $4.0 million in the second quarter of 2023 (second quarter of 2022: $3.8 million of other operating income). Foreign exchange loss of $2.9 million and management fee of $1.1 million were recorded in the second quarter of 2023. (second quarter of 2022: the company incurred a foreign exchange gain of $1.4 million and written off of other payables of $1.6 million).

Administration expenses were $2.7 million in the second quarter of 2023 compared to $1.8 million in the second quarter of 2022, the increase was mainly due to the increase in corporate administration expenses and salaries and benefits as a result of expansion of operation during the second quarter of 2023.

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

Finance costs were $11.6 million and $10.2 million in the second quarter of 2023 and 2022 respectively, which primarily consisted of interest expense on the $250.0 million Convertible Debenture.

For the six months ended June 30, 2023

The company recorded a $12.5 million loss from operations in the first six months of 2023 compared to a $2.5 million profit from operations in the first six months of 2022. The financial results for the first six months of 2023 were impacted by (i) increased sales volume and improvement in the company's average realised selling price; and (ii) the company recording a provision for a tax penalty of $75.0 million imposed by MTA.

Revenue was $145.0 million in the first six months of 2023 compared to $5.8 million in the first six months of 2022. The increase was due to (i) during the second quarter of 2022, the Ceke Port of Entry was re-opened for coal export on a trial basis which limited the volume of coal exports, while the coal export resumed normal in the second quarter of 2023; and (ii) the company experienced an increase in the average selling price of coal from $66.6 per tonne in the second quarter of 2022 to $95.3 per tonne in the second quarter of 2023 as a result of improved market conditions in China, expansion of its sales network and diversification of its customer base.

Cost of sales were $73.0 million in the first six months of 2023 compared to $6.1 million in the first six months of 2022, as follows:

Operating expenses in cost of sales were $49.4 million in the first six months of 2023 compared to $3.6 million in the first six months of 2022. The overall increase in cost of sales was primarily due to the increased sales.

Cost of sales related to idled mine assets in the first six months of 2023 included $0.1 million related to depreciation expenses for idled equipment (first six months of 2022: $0.7 million).

Other operating expenses was $4.8 million in the first six months of 2023 (first six months of 2022: $5.8 million of other operating income). Foreign exchange loss of $2.5 million and management fee of $1.9 million were recorded in the first six months of 2023. (first six months of 2022: foreign exchange gain of $1.9 million and written off of other payables of $2.8 million were recorded).

Administration expenses were $4.7 million in the first six months of 2023 compared to $3.0 million in the first six months of 2022, the increase was mainly due to the increase in corporate administration expenses and salaries and benefits as a result of expansion of operation during the second quarter of 2023.

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

Finance costs were $23.5 million and $20.3 million in the first six months of 2023 and 2022 respectively, which primarily consisted of interest expense on the $250.0 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 led to a subsequent increase of coal export volume into China, and resulted in significant improvements in the company's cash flow for the first half of 2023. The company expects that planned investments from multiple coal mining companies in 2023 to enhance the infrastructure and technologies which 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 capitalise on the anticipated increase in sales volume.

The company remains cautiously optimistic regarding the Chinese coal market, as coal is still considered to be the primary energy source which 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 proactively 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) utilising 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 endeavor 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, ongoing 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 maximising shareholders value by leveraging its key competitive strengths, including:

• Strategic location - The Ovoot Tolgoi Mine is located approximately 40km from China, which represents the company's main coal market. The company has an infrastructure advantage, being approximately 50km 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 20km east and approximately 150km 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 of the company for the three and six months ended June 30, 2023, which 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 three and six months ended June 30, 2023 are contained in the unaudited condensed consolidated interim financial statements and Management Discussion and Analysis of Financial Condition and Results of Operations, available on the SEDAR website at www.sedar.com and the company's website at www.southgobi.com.

ABOUT SOUTHGOBI

SouthGobi, listed on the HKEX and TSX-V, owns and operates its flagship Ovoot Tolgoi coal mine in Mongolia. It also holds the mining licenses 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.