SouthGobi Resources Limited
TSX : SGQ
PINK SHEETS : SGQRF
SEHK : 1878

SouthGobi Resources Limited

October 26, 2009 08:30 ET

SouthGobi Energy Resources Announces Major Expansion of Coal Mining and Exploration in Southern Mongolia

Investment in coal production and processing to create 300 jobs and drive the development of regional infrastructure

Expansion supported by US$500 million convertible debenture financing by China Investment Corporation

HONG KONG, CHINA--(Marketwire - Oct. 26, 2009) - Alexander Molyneux, President and CEO of SouthGobi Energy Resources Ltd. (TSX VENTURE:SGQ), announced today that SouthGobi will accelerate the development of its Mongolian coal projects through its wholly-owned Mongolian operating subsidiary, Southgobi sands LLC.

SouthGobi's Mongolian investment program during the next three to five years is planned to include:

- Expansion of the Ovoot Tolgoi Mine. SouthGobi intends to expand the Ovoot Tolgoi open-pit mine to a targeted eight million tonnes of high-quality coal per year from the current sales target of 1.5 million tonnes for 2009. The mine is in Mongolia's South Gobi Region, approximately 40 kilometres north of the Mongolia-China border.

- Development of the Soumber deposit. SouthGobi intends to develop a separate coal mining operation at Soumber, approximately 20 kilometres east of the Ovoot Tolgoi Mine. Work is subject to completion of feasibility studies and securing appropriate licenses and permits.

- Development of regional transportation infrastructure. SouthGobi will continue investing in improvements to the regional road network at and around the Ovoot Tolgoi Mine. It also will evaluate opportunities to participate in the development of a cross-border rail link between the Ovoot Tolgoi Mine and the Mongolia-China border crossing at Shivee Khuren-Ceke. Ceke, on the China side of the border, is a major coal shipment terminal with rail connections to industrial customers.

- Construction of a coal washing facility. SouthGobi is conducting preliminary testing of the washability of its coals. Testing so far indicates that value, and jobs, can be added by processing some of its coal products in Mongolia to reduce sulphur and ash content and upgrade other specifications.

- Creation of approximately 300 new jobs. Based on studies of the planned investments, SouthGobi believes that its coal operations can play an even more significant role in expanding the regional economy through new jobs, skills training and new contracts with Mongolian suppliers for goods and services.

Mr. Molyneux said financing for the investment program has been secured from a wholly-owned subsidiary of China Investment Corporation ("CIC"), which will provide US$500 million in the form of a secured, convertible debenture bearing interest at 8.0%.

"Our continued exploration successes have significantly expanded our coal resources in Mongolia's South Gobi – and now we are in a position to develop our company into a prominent regional producer and exporter," Mr. Molyneux added.

"We recently announced our Measured and Indicated coal resource base, compliant with the Canadian NI 43-101 reporting standard, has increased from 221.2 million tonnes to 307.6 million tonnes, a jump of 39%. We also announced the initial resource at Soumber, an entirely new coal deposit in the South Gobi, and there is significant potential for other discoveries."

Mr. Molyneux said SouthGobi also was encouraged by the improving investment climate in Mongolia that has enabled the company to secure an attractive financing package.

"Through this expanded investment program, we can accelerate the transformation of Mongolian coal resources into jobs, enhanced prosperity and sustainable development for Mongolia. This is not just about expanding our mining capacity. This investment program will see us take the first step toward establishing value-added processing in Mongolia, which now is a priority for the Mongolian Government. SouthGobi's plans include building a large and sophisticated coal-washing facility to sell processed coal products. We also will work with Mongolian partners in building transportation infrastructure in the region."

Higher Mongolian government revenues, skills training and added-value products

SouthGobi's accelerated investment program will provide many benefits for Mongolia and the Mongolian people, including:

- Increased revenues to the Government of Mongolia through royalties, fees and taxes.

- Additional training, employment and professional development opportunities. As at the end of September, a total of 97% of Southgobi sands' 278 employees are Mongolian nationals and the company now expects to double its total employee base by 2014.

- The introduction of modern technologies to Mongolia to add value by manufacturing processed coal products.

- The stimulation of economic growth in the South Gobi Region and elsewhere in Mongolia. Southgobi sands already sources more than 90% of its supplies within Mongolia.

Key terms of the new financing facility

Following an extensive review of financing options and discussions with a number of major funds and financiers, SouthGobi has entered into an agreement with a wholly-owned investment subsidiary of CIC, which will provide US$500 million in financing required primarily to support the accelerated investment program in Mongolia. Up to US$120 million of the financing may also be used for working capital, repayment of debt due on funding, general and administrative expenses and other general corporate purposes. The proposed financing has received conditional approval from Canada's TSX Venture Exchange.

Key commercial terms of the financing include:

- Interest. 8% per annum (6.4% payable in cash and 1.6% payable in SouthGobi shares, where the number of shares to be issued is calculated based on the 50-day volume-weighted average price (VWAP).

- Term. Maximum of 30 years.

- Security. First charge over SouthGobi's assets, including shares of its material subsidiaries. 

- Conversion price. The conversion price is set as the lower of C$11.88 or the 50-day VWAP at the date of conversion, with a floor price of C$8.88 per share. Assuming full conversion at the base price of C$11.88 and that any conversion occurs following SouthGobi achieving a 25% public float (on an as converted for the debenture loan basis), CIC's overall shareholding interest in SouthGobi would be approximately 22%.

- Conversion timing. SouthGobi and CIC each have various rights to call conversion of the debenture into common shares. CIC has the right to convert the debenture, in whole or in part, into common shares 12 months after the date of issue. SouthGobi has the right to call for the conversion of up to US$250 million of the debenture on the earlier of 24 months after the issue date, if the market price of its common shares is greater than C$10.66, or upon SouthGobi achieving a public float of 25% of its common shares under certain agreed circumstances. If SouthGobi fully exercises its conversion right immediately following its achieving a 25% public float (on an as converted for the debenture loan basis) and assuming conversion at the C$11.88 base price, CIC's initial shareholding interest in SouthGobi would be approximately 11%.

- Representation on SouthGobi Board. While the debenture loan is outstanding, or while CIC has a minimum 15% direct or indirect stake in SouthGobi, CIC has the right to nominate one director to SouthGobi's Board. SouthGobi currently has eight Board members.

- Voting restriction. CIC has agreed that it will not have any voting rights in SouthGobi beyond 29.9% if CIC ever acquires ownership of such a shareholder stake through exercising the debenture.

- Pre-emption rights. While the debenture loan is outstanding, or while CIC has a 15% direct or indirect stake in SouthGobi, CIC has certain pre-emption rights on a pro-rata basis to subscribe for any new shares to be allotted and issued by SouthGobi for the period which the debenture is outstanding. The pre-emption rights will not apply to new shares issued pursuant to pro-rata public equity offerings made to all shareholders, exercise of stock options and shares issued to achieve a 25% public float.

- Right of first offer. While a portion of the debenture is outstanding, or while CIC has a 15% direct or indirect stake in SouthGobi, CIC has the right of first offer for any direct and indirect sale of Ivanhoe Mines' ownership stake in SouthGobi. Ivanhoe Mines currently owns directly and indirectly approximately 105.8 million SouthGobi shares, or approximately 79.13% of SouthGobi's current issued and outstanding shares.

- Registration Rights. CIC has registration rights under applicable Canadian provincial securities laws in connection with the common shares issuable upon conversion of the debenture.

In conjunction with the financing, SouthGobi will also enter into a mutual co-operation agreement with a subsidiary of CIC. Under the terms of the agreement, CIC's subsidiary will provide advice and services to SouthGobi on matters that include sales to China, procurement and logistics, and will receive a customary commercial payment for such services based on product sales from Mongolia to China. If cumulative coal sales fall below 10 million tonnes during an initial five-year period (an average of two million tonnes per year), SouthGobi would be obliged to pay CIC's subsidiary a compensatory payment, less any amount previously paid under the co-operation agreement. This amount would be payable at SouthGobi's option in cash or common shares valued on the basis of the 50-day VWAP.

China Investment Corporation

CIC is the sovereign wealth fund of the People's Republic of China.

Information about CIC is available on its website: www.china-inv.cn/cicen/about_cic/aboutcic_overview.html

Transaction advisers

SouthGobi's financial adviser for the financing facility was Macquarie Capital Advisers. CIC was advised by Citigroup Global Markets Asia Limited.

About SouthGobi Energy Resources

SouthGobi Energy Resources is focused on exploration and development of its Permian-age metallurgical and thermal coal deposits in Mongolia's South Gobi Region. The company's flagship coal mine, Ovoot Tolgoi, is producing and selling coal to customers in China. The company plans to supply a wide range of coal products to markets in Asia.

Forward-Looking Statements: This document includes forward-looking statements. Forward-looking statements include, but are not limited to, Expansion of Ovoot Tolgoi Mine; Development of the Soumber Deposit; Development of regional transportation infrastructure; Construction of a coal washing facility; Plans to supply a wide range of coal products to markets in Asia; Conversion price; Conversion timing; and other statements that are not historical facts. When used in this document, the words such as "could," "plan," "estimate," "expect," "intend," "may," "potential," "should" and similar expressions are forward-looking statements. Although SouthGobi Energy Resources believes that the expectations reflected in these forward-looking statements are reasonable, such statements involve risks and uncertainties and no assurance can be given that actual results will be consistent with these forward-looking statements. Important factors that could cause actual results to differ from these forward-looking statements are disclosed under the heading "Risk Factors" in SouthGobi Energy's Management's Discussion and Analysis of Financial Condition and Results of Operations for the year ended Dec. 31, 2008, and each of the months ended March 31, 2009, and June 30, 2009, all of which are available at www.sedar.com.

The TSX Venture Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of this release.

Contact Information

  • SouthGobi Energy Resources Ltd.
    Alexander Molyneux
    President & CEO
    +852 6111 4281
    or
    SouthGobi Energy Resources Ltd.
    Steven Feldman
    Investor Relations Manager
    +1 604 681 6799
    www.southgobi.com