SouthGobi Resources Limited
TSX : SGQ
HKSE : 1878

SouthGobi Resources Limited

October 15, 2014 20:05 ET

SouthGobi Resources Announces Select Third Quarter 2014 Operating Results

HONG KONG, CHINA--(Marketwired - Oct. 15, 2014) - SouthGobi Resources Ltd. (TSX:SGQ)(HKSE:1878) (the "Company" or "SouthGobi") today announced select third quarter 2014 operating results. All figures are in U.S. Dollars unless otherwise stated.

Select Operating Results

The Company's select operating results for the three months ended September 30, 2014, including comparative periods, are summarized in the table below:

Three months ended
30-Sep
2014
30-Jun
2014
30-Sep
2013
Raw coal production (millions of tonnes) 0.17 0.55 1.13
Sales volumes (millions of tonnes)
Premium semi-soft coking coal - - 0.04
Standard semi-soft coking coal 0.31 0.12 0.87
Thermal coal 0.34 0.51 0.03
Total 0.65 0.63 0.94

The Company continues to operate under difficult market conditions. Coal prices in China and sales volumes remained under pressure in the third quarter of 2014 as a result of strong seaborne and domestic supply coupled with soft demand for coal in China. These difficult market conditions are expected to continue through the end of 2014.

In June 2014, following a review of operations in response to current market conditions, the Company reduced its production and placed approximately half of its workforce on furlough. The furlough has been extended and is anticipated to remain in place until the end of November 2014 subject to market conditions. Contracted sales volumes are expected to be met from the combination of the existing coal stockpile and reduced production volumes.

Other Information

Cash Position and Liquidity

The Company's cash position and liquidity as at September 30, 2014, including comparative periods, is summarized in the table below. Amounts are presented in millions of U.S. Dollars.

As at

30-Sep
2014
30-Jun
2014
31-Mar
2014
30-Sep
2013
Cash and cash equivalents $ 4.8 $ 8.8 $ 9.9 $ 16.1

As a result of the continued Mongolian tax investigations against the Company and three (3) of its former employees, there is increased uncertainty as to the timing of the release of cash placed under restrictions by the Mongolian authorities. Therefore, the cash and cash equivalents balance as at September 30, 2014 no longer includes $1.5 million of restricted cash held in Mongolia. The restricted cash has been reclassified within current assets in the Company's financial statements.

The changes in the Company's cash position in periods noted above are inclusive of cash interest paid on the China Investment Corporation ("CIC") convertible debenture in the amount of $nil in the third quarter of 2014, $7.9 million in the second quarter of 2014, $nil in the first quarter of 2014 and $4.1 million in the third quarter of 2013. The next cash interest payment on the CIC convertible of approximately $8 million is due on November 19, 2014.

The $10 million revolving credit facility ("the Facility") from Turquoise Hill Resources Ltd. ("Turquoise Hill") matured on August 30, 2014 and is no longer available for further drawdowns by the Company. Subject to certain terms and conditions as announced on August 31, 2014 and filed on SEDAR (www.sedar.com) on September 2, 2014 Turquoise Hill has accepted the deferral of repayments of amounts and obligations due by the Company under the Facility as follows:

  1. $1.9 million in principal and all interest that has accrued on and under the Facility up to and including December 31, 2014 shall become due and payable on December 31, 2014; and
  2. $1.9 million in principal and all interest that has accrued on and under the Facility from January 1, 2015 up to and including March 31, 2015 shall become due and payable on March 31, 2015.

The Company continues to actively seek additional sources of financing to continue operating and meet its objectives, which includes increasing the level of prepaid coal sales.

As at October 15, 2014, the Company had a cash balance of $4.8 million which excludes the $1.5 million restricted cash.

Transportation Infrastructure

As announced by the Company on September 28, 2014 the construction of a paved highway from the Ovoot Tolgoi Complex to the Shivee Khuren Border Crossing has been completed. The completion of the highway was one of the Company's key objectives for 2014 and will significantly increase the safety of coal transportation, reduce environmental impacts and improve the efficiency and capacity of coal transportation.

Outlook

Coal production for the remainder of 2014 will be paced to meet contracted sales volumes.

The Company continues to experience negative impacts on its margins and liquidity and there can be no assurance that the Company will have sufficient funding for the balance of 2014 to be able to continue as a going concern, as more fully detailed in its Management's Discussion and Analysis for the quarter ended June 30, 2014, available on SEDAR at www.sedar.com, and, in particular, section 5 "Liquidity and Capital Resources" and section 11 "Risk Factors" thereof. Therefore the Company is actively seeking additional sources of financing to continue operating and meet its objectives. The Company remains focused on minimizing uncommitted capital expenditures while preserving its growth options.

About SouthGobi

SouthGobi is listed on the Toronto and Hong Kong stock exchanges, in which Turquoise Hill Resources Ltd. ("Turquoise Hill"), also publicly listed in Toronto and New York, has a 56% shareholding. Turquoise Hill took management control of SouthGobi in September 2012 and made changes to the board and senior management. Rio Tinto has a majority shareholding in Turquoise Hill.

SouthGobi is focused on exploration and development of its metallurgical and thermal coal deposits in Mongolia's South Gobi Region. It has a 100% shareholding in SouthGobi Sands LLC, the Mongolian registered company that holds the mining and exploration licenses in Mongolia and operates the flagship Ovoot Tolgoi coal mine. Ovoot Tolgoi produces and sells coal to customers in China.

Except for statements of fact relating to the Company, certain information contained herein constitutes forward-looking statements. Forward-looking statements are frequently characterized by words such as "plan", "expect", "project", "intend", "believe", "anticipate" and other similar words, or statements that certain events or conditions "may" or "will" occur. Forward-looking statements are based on the opinions and estimates of management at the dates the statements are made, and are subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those projected in the forward-looking statements. These factors include the Company's expectations of sufficient liquidity and capital resources to meets its ongoing obligations and future contractual commitments; including the Company's ability to secure additional and immediate funding, to meet its obligations under the China Investment Corporation ("CIC") convertible debenture as the same become due, the estimates and assumptions included in the Company's impairment analysis; the ability of the Company to increase its market penetration in the People's Republic of China ("China"); the ability for higher-ash product to be sold as a thermal coal product; the ability to preserve liquidity and continue on a sustainable basis; the Company's expectation that its royalty per tonne calculated under the new "flexible tariff" royalty regime will decrease compared to the prior reference price royalty regime; the ability of the Company to meet the targeted annual capacity of run-of-mine production; the ability of the Company to successfully review the utilization of the wet washing facility and enhance the quality of its coal products through wet washing; the possibility of the CIC convertible debenture and all accrued and unpaid interest becoming immediately due; the continued pressure on the coal prices in China, and the related impact on the Company's margins and liquidity; the outcome of the issues described in the section "Regulatory Issues and Contingencies"; statements regarding the outlook for 2014; the completion of the share purchase transaction between Turquoise Hill and National United Resources Holdings Limited ("NUR"); statements regarding the Company's objectives for 2014 and beyond; the statement that the capacity of the paved highway is in excess of 20 million tonnes of coal per year; and other statements that are not historical facts. Except as required by law, the Company undertakes no obligation to update forward-looking statements if circumstances or management's estimates or opinions should change. The reader is cautioned not to place undue reliance on forward-looking statements.

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