Mr. Ruibin Xu reports

SOUTHGOBI ANNOUNCES DISCLOSEABLE AND CONNECTED TRANSACTION DEFERRAL OF PAYMENT OBLIGATIONS UNDER CONVERTIBLE DEBENTURE

SouthGobi Resources Ltd. has arranged the deferral of payment obligations under its convertible debenture.

Background

This announcement is made by SouthGobi Resources (together with its subsidiaries, the group) pursuant to Rule 13.09(2) and chapters 14 and 14A of the rules governing the listing of securities on the Hong Kong Stock Exchange, and the inside information provisions under Part XIVA of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong).

Reference is made to the announcements of the company dated Nov. 11, 2022, Aug. 30, 2023, Oct. 13, 2023, Nov. 17, 2023, and Jan. 19, 2024, and the management proxy circular of the company dated July 20, 2023, in relation to the deferral agreements under the convertible debenture. Unless otherwise specified, terms used in this announcement shall have the meaning as defined in the announcements and the July, 2023, management proxy circular.

The March, 2024, deferral agreement

The company announces that, on March 19, 2024, the company and its subsidiaries, namely SouthGobi Sands LLC and SGQ Coal Investment Pte. Ltd., entered into a new deferral agreement with JD Zhixing Fund LP, the registered holder of the company's $250-million (U.S.) convertible debenture issued on Nov. 19, 2009, and the company's largest shareholder, pursuant to which JDZF agreed to grant the company:

1. A deferral of the cash interest, payment-in-kind interest (PIK interest), management fees and related deferral fees of approximately $96.5-million (U.S.) (the 2023 deferred amounts), which will be due and payable to JDZF on or before Aug. 31, 2024, pursuant to the deferral agreements dated March 24, 2023, and Oct. 13, 2023;
2. A deferral of the cash interest payment of approximately $7.9-million (U.S.) (the May, 2024, cash interest), which will be due and payable on May 19, 2024, under the convertible debenture;
3. A deferral of the cash interest payment of approximately $8.1-million (U.S.) and PIK interest payment (the November, 2024, PIK interest) of approximately $4-million (U.S.) (collectively, the November, 2024, cash and PIK interest), which will, in each case, be due and payable on Nov. 19, 2024, under the convertible debenture; and
4. A deferral of the management fees of approximately $2.2-million (U.S.), which will be due and payable to JDZF on Nov. 15, 2024, and Feb. 15, 2025 (the deferred management fees, and, together, with the 2023 deferred amounts, the May, 2024, cash interest, the November, 2024, cash and PIK interest, and the deferred management fees, the deferred amounts) under the amended and restated co-operation agreement dated April 23, 2019.

The principal terms of the March, 2024, deferral agreement are as follows:

• Effectiveness of the March, 2024, deferral agreement:
  • The effectiveness of the March, 2024, deferral agreement is subject to the company providing notice to, and obtaining acceptance (if required) from the TSX Venture Exchange and requisite approval from disinterested shareholders of the company, in accordance with the requirements of applicable Canadian securities laws, and Rule 14.33 and Rule 14A.36 of the Hong Kong listing rules.
• The deferral:
  • JDZF agreed to grant the company a deferral of the deferred amounts until Aug. 31, 2025.
  • As consideration for the deferral of the deferred amounts which relate to 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 deferred amounts, commencing on the date on which each such deferred amounts would otherwise have been due and payable under the convertible debenture.
  • As consideration for the deferral of the deferred amounts which relate to payment obligations arising from the amended and restated co-operation agreement, the company agreed to pay JDZF a deferral fee equal to 1.5 per cent per annum (together with the convertible debenture deferral fee, the deferral fees) on the outstanding balance of such deferred amounts, commencing on the date on which each such deferred amounts would otherwise have been due and payable under the amended and restated co-operation agreement.
  • The March, 2024, deferral agreement does not contemplate a fixed repayment schedule for the deferred amounts or related deferral fees. Instead, the March, 2024, deferral agreement requires the company to use its best efforts to pay the deferred amounts and related deferral fees due and payable under the March, 2024, deferral agreement to JDZF. During the period beginning as of the effective date of the March, 2024, 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 deferred amounts and related deferral fees that the company may be able to repay to JDZF, having regard to the working capital requirements of the company's operations and business at such time, and with the view of ensuring that the company's operations and business would not be materially prejudiced as a result of any repayment.
  • If at any time before the deferred amounts and related deferral fees are fully repaid, the company proposes to appoint, replace or terminate one or more of its chief executive officer, its chief financial officer or any other senior executive(s) in charge of its principal business function or its principal subsidiary, the company will first consult with, and obtain written consent (such consent shall not be unreasonably withheld) from JDZF prior to effecting such appointment, replacement or termination.
  • The occurrence of a deferral event of default, or an event of default (as such term is defined in the convertible debenture) will: (i) entitle JDZF to pursue any and all remedies against the company and the guarantors, in accordance with the convertible debenture; and (ii) result in the principal, interest and other amounts owing under the March, 2024, deferral agreement, the convertible debenture and related security agreements becoming immediately due and payable, without any requirement for JDZF to deliver notice to the company.

The aforementioned summary of the principal terms of the March, 2024, deferral agreement is not comprehensive, and is qualified in its entirety by reference to the full text of the March, 2024, deferral agreement, a copy of which has been filed on the company's profile on SEDAR+.

Basis of determination of the deferral fees

The deferral fees which are expected to be satisfied by the internal resources and/or external borrowings of the group were determined on an arm's-length basis (or on terms no less favourable to the group than terms available from independent third parties) among the parties to the March, 2024, deferral agreement, taking into account the following factors:

1. The deferral fees stipulated under the previous deferral agreements, including the deferral fee at the rate of 6.4 per cent per annum as consideration for the deferred interest payments arising from the convertible debenture and 1.5 per cent per annum as consideration for the deferred management fees arising from the amended and restated co-operation agreement contemplated under the November, 2023, deferral agreement, which is the latest deferral agreement before the March, 2024, deferral agreement.
2. Historically, the higher finance costs incurred by the group for receiving financial assistance from independent third parties of the group within the past five years, the rate of which generally fell within the range from 15 per cent to 16 per cent.
3. Based on the publicly available information and to the company's understanding, the finance costs of industry peers and listed companies in similar industry as the group are of a similar range as the those of the deferral fees, with the interest rates ranged from 3 per cent to 9.25 per cent per annum.
4. The reasons and benefits as set out in the section headed "Reasons and benefits of the March, 2024, deferral agreement" below.

General information of the parties

The group

The company is an integrated coal mining, development and trading company. SGQ Coal Investment Pte. Ltd. is a wholly owned subsidiary of the company incorporated under the laws of Singapore, which is principally engaged in the investment holding business activities. SouthGobi Sands LLC is a wholly owned subsidiary of the company incorporated under the laws of Mongolia, which is principally engaged in coal mining, and the development and exploration of properties in Mongolia.

JDZF

JDZF is an exempt limited partnership formed under the laws of the Cayman Islands, which is principally engaged in investment holding activities. JDZF's general partner and limited partner are JD Dingxing Ltd. and Inner Mongolia Tianyu Trading Ltd. To the best of the company's knowledge and belief, the ultimate beneficial owner of the limited partner is Yong An and that of the general partner is Chonglin Zhu. Mr. An is the chairman and founder of Inner Mongolia Tianyu Innovation Investment Group Co. Ltd. (Tianyu Group), and has conducted business in the Inner Mongolia region since 1998. Ms. Zhu was the chief financial officer of Tianyu Group from March, 2015, to September, 2022, and was also responsible for managing JDZF. Ms. Zhu has served as the executive director and senior vice-president of finance for the company since Sept. 8, 2022, and was appointed as the chief financial officer of the company on Feb. 2, 2024.

Reasons for and benefits of the March, 2024, deferral agreement

In evaluating the transaction contemplated under the March, 2024, deferral agreement, the board of directors of the company has taken into account, among other things, the terms of the deferral and the March, 2024, deferral agreement, the company's financial position, and the possible financing alternatives reasonably available to the company, and considered that: (i) the deferral is offered on reasonable commercial terms not less advantageous to the company than if the company obtained similar financing from a person dealing at arm's-length with the company; (ii) the terms of the deferral are reasonable in the circumstances of the company; (iii) the deferral is designed to improve the financial position of the company; (iv) the deferral will enhance the company's ability to continue as a going concern in the near term, and provide the company with financial flexibility to consider and explore different measures to secure additional capital, or to pursue a strategic debt restructuring or refinancing plan with JDZF; and (v) the best interests of the company and its shareholders will be served by approving the deferral and the March, 2024, deferral agreement.

Board review and approval

Based on the above, the board (excluding (i) the directors who are appointed by JDZF pursuant to contractual nomination rights contained in the securityholders agreement between the company, JDZF and a former shareholder of the company, and certain deferral agreements between JDZF, the company and certain of its subsidiaries relating to the convertible debenture, namely, Ruibin Xu, Ms. Zhu and Chen Shen; and (ii) the independent non-executive directors, whose views are to be contained in the letter from the independent board committee in the company's management proxy circular to be dispatched to the shareholders) is of the view that the March, 2024, deferral agreement and the transaction contemplated thereunder are entered, despite not in the ordinary and usual course of business of the group, on normal commercial terms (on arm's-length basis or terms no less favourable to the group than terms available from independent third parties), and are fair and reasonable, and in the interests of the company and the shareholders as a whole.

The deferral interested directors who have a material interest in the March, 2024, deferral agreement and the transaction contemplated thereunder were required to abstain from voting on the board resolutions approving the same. Except for the deferral interested directors, none of the company's directors have any material interest in the March, 2024, deferral agreement and the transaction contemplated thereunder, and none of the directors were required to abstain from voting on the board resolutions approving the same.

Shareholders' approval pursuant to MI 61-101 requirements under applicable Canadian securities laws

Pursuant to Part 5 of Multilateral Instrument 61-101, under applicable Canadian securities laws, the company is required to seek minority shareholder approval of the March, 2024, deferral agreement, excluding the common shares beneficially owned by JDZF (as defined below) because: (i) JDZF is a related party of the company for purposes of MI 61-101 because JDZF has beneficial ownership of more than 10 per cent of the voting rights attached to the outstanding common shares of the company; and (ii) the March, 2024, deferral agreement is a related-party transaction for purposes of MI 61-101 because the March, 2024, deferral agreement materially amends the terms of an outstanding debt or liability owed by the company to a related party.

To the best of the company's knowledge, as of the date hereof, 85,714,194 common shares, representing approximately 28.98 per cent of the issued and outstanding common shares of the company, are beneficially owned by JDZF. Accordingly, the 85,714,194 votes attached to the common shares beneficially owned, or over which control or direction is exercised, by JDZF will be excluded from the vote to approve the March, 2024, deferral agreement.

With respect to the deferral of the PIK interest portion of the 2023 deferred amounts and the November, 2024, PIK interest, PIK interest under the terms of the convertible debenture must be paid and satisfied by the company by way of issuing common shares in the capital of the company at an issue price determined based on the 50-trading-day volume-weighted average price (VWAP) of the company's common shares as at the date of payment. Shareholders are cautioned that, as a result of deferring the payment date of the PIK interest portion of the 2023 deferred amounts and the November, 2024, PIK interest, the final number of common shares that the company will issue to satisfy the PIK interest portion of the 2023 deferred amounts and the November, 2024, PIK interest will depend on the prevailing 50-trading-day VWAP of the common shares as of the future payment date, and may result in a number of common shares being issued that could be greater than, or lesser than, the number of common shares that the company would have had to issue on the original payment date for the PIK interest portion of the 2023 deferred amounts and the November, 2024, PIK interest.

Hong Kong listing rules implications

Pursuant to the Hong Kong listing rules, JDZF is a substantial shareholder of the company, holding approximately 28.98 per cent of the company's issued common shares and, hence, a connected person of the company. The entering into of the March, 2024, deferral agreement constitutes a connected transaction of the company under Chapter 14A of the listing rules.

As one or more of the applicable percentage ratios (as defined under Rule 14.07 of the Hong Kong listing rules) in respect of the transaction contemplated under the March, 2024, deferral agreement exceed 0.1 per cent, but all are less than 5 per cent, the entering into of the March, 2024, deferral agreement, on a stand-alone basis, constitutes a connected transaction of the company and is subject to reporting and announcement requirements, but exempt from circular independent shareholders' approval requirement under Chapter 14A of the Hong Kong listing rules.

However, pursuant to rules 14.22 and 14A.81 of the Hong Kong listing rules, as the counter parties to the March, 2023, deferral agreement, the November, 2023, deferral agreement and the March, 2024, deferral agreement are JDZF, and such transactions are similar in nature and completed within a 12-month period, such transactions shall be aggregated.

Accordingly, as one or more of the applicable percentage ratios (as defined under Rule 14.07 of the Hong Kong listing rules) in respect of the transaction contemplated under the March, 2024, deferral agreement, upon aggregation with the previous transactions, exceed 5 per cent but all are less than 25 per cent, the entering into of the March, 2024, deferral agreement, on an aggregated basis, constitutes a discloseable and connected transaction of the company, and is subject to reporting, announcement, circular and independent shareholders' approval requirements under Chapter 14 and Chapter 14A of the Hong Kong listing rules.

The meeting and dispatch of management proxy circular

At the company's upcoming annual general meeting of shareholders, the company will, among other things, propose a resolution for the independent shareholders to consider and, if thought fit, approve the March, 2024, deferral agreement and the transaction contemplated thereunder.

Given that the deferral interested shareholder is involved in and/or interested in the March, 2024, deferral agreement and the transaction contemplated thereunder, the deferral interested shareholder will abstain from voting at the meeting on the resolution approving it. Accordingly, the 85,714,194 votes attached to the common shares beneficially owned, or over which control or direction is exercised, by the deferral interested shareholder will be excluded from the vote to approve the March, 2024, deferral agreement.

Save for the aforesaid, and to the directors' best knowledge, information and belief, and having made all reasonable enquiries, no other Shareholder has a material interest in the March, 2024, deferral agreement and therefore no other shareholder is required to abstain from voting on the relevant resolution at the meeting.

As the March, 2024, deferral agreement and the transaction contemplated thereunder are subject to the approval by the independent shareholders, the independent board committee comprising of all the independent non-executive directors, namely Yingbin Ian He, Mao Sun and Jin Lan Quan, has been established by the company to advise the independent shareholders in respect of the above transaction. The company will appoint an independent financial adviser to advise the independent board committee and the independent shareholders in respect of the above transaction.

The management proxy circular containing, among other things: (i) details of the deferral and the March, 2024, deferral agreement; (ii) a letter from the independent board committee to the independent shareholders; (iii) the recommendations from the independent financial adviser to the independent board committee and the independent shareholders; and (iv) the notice of the meeting, which will be filed under the company's profile on SEDAR+ and dispatched to shareholders of the company in accordance with applicable securities laws on or before May 28, 2024 (which is anticipated to be more than 15 business days after the date of publication of this announcement) as more time is required for the company to compile certain information to be included in the management proxy circular for the company's annual general meeting. The company will make a further announcement to shareholders with respect to the date, time and venue of the meeting as soon as it is fixed by the board.

If there is any inconsistency or discrepancy between the English and Chinese version, the English version shall prevail.

About SouthGobi Resources Ltd.

SouthGobi, listed on the Hong Kong Stock Exchange and the TSX Venture Exchange, 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.