Mr. Ruibin Xu reports

CONNECTED TRANSACTION - DEFERRAL OF PAYMENT OBLIGATIONS UNDER CONVERTIBLE DEBENTURE

On Oct. 13, 2023, SouthGobi Resources Ltd. and its subsidiaries, namely SouthGobi Sands LLC and SGQ Coal Investment Pte. Ltd., entered into a new deferral agreement with JD Zhixing Fund LP.

Background

This announcement is made by SouthGobi Resources (together with its subsidiaries, the group) pursuant to Rule 13.09(2) and Chapter 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 announcement of the company dated Nov. 11, 2022, the announcement of the company dated Aug. 30, 2023, 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 management proxy circular.

The November, 2023, deferral agreement

The company announces that, on Oct. 13, 2023, the company and its subsidiaries, namely SouthGobi Sands and SGQ Coal Investment, entered into a new deferral agreement with JD Zhixing Fund (JDZF), pursuant to which JDZF agreed to grant the company (i) a deferral of the payment-in-kind interest payment payable to JDZF on Nov. 19, 2023, under the convertible debenture; (ii) a deferral of the management fees payable to JDZF on Nov. 15, 2023, Feb. 15, 2024, May 16, 2024, and Aug. 15, 2024, respectively, under the amended and restated co-operation agreement, in each case until Aug. 31, 2024. JDZF is the registered holder of the company's $250-million (U.S.) convertible debenture issued on Nov. 19, 2009, and the company's largest shareholder.

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

• JDZF agreed to grant the company a deferral of the following payments until the deferral date:
  • A deferral of the payment-in-kind (PIK) interest payment of $4-million (U.S.) which will be due and payable to JDZF on Nov.19, 2023, under the convertible debenture;
  • A deferral of the management fees which will be due and payable to JDZF on Nov. 15, 2023, Feb. 15, 2024, May 16, 2024, and Aug. 15, 2024, respectively, under the amended and restated co-operation agreement.
• As consideration for the deferral of the November, 2023, PIK interest, the company agreed to pay JDZF a deferral fee equal to 6.4 per cent per annum on the outstanding balance of the November, 2023, PIK interest, commencing on the date on which each such November, 2023, deferred amounts would otherwise have been due and payable under the convertible debenture.
• As consideration for the deferral of the deferred management fees, the company agreed to pay JDZF a deferral fee equal to 1.5 per cent per annum on the outstanding balance of the deferred management fees, commencing on the date on which each such November, 2023, deferral amounts would otherwise have been due and payable under the amended and restated co-operation agreement.
• The November, 2023, deferral agreement does not contemplate a fixed repayment schedule for the November, 2023, deferred amounts or related deferral fees. Instead, the November, 2023, deferral agreement requires the company to use its best efforts to pay the November, 2023, deferred amounts and related deferral fees due and payable under the November, 2023, deferral agreement to JDZF. During the period beginning as of the effective date of the November, 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 November, 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 November, 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 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 November, 2023, 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 March, 2023, deferral agreement, which is the latest deferral agreement before the November, 2023, 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. The finance costs of comparable listed companies on the Hong Kong Stock Exchange, 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 November, 2023, deferral agreement" below.

General information of the parties

The group

The company is an integrated coal mining, development and trading company. SGQ Coal Investment 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 is a wholly owned subsidiary of the company incorporated under the laws of Mongolia, which is principally engaged in coal mining, 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 of the company since Sept.8, 2022.

Hong Kong listing rules implications

JDZF is a substantial shareholder of the company holding approximately 29.03 per cent of the company issued common shares and hence a connected person of the company. The entering into of the November, 2023, deferral agreement constitutes a connected transaction under Chapter 14A of the listing rules.

Pursuant to rules 14.22 and 14A.81 of the Hong Kong listing rules, a series of transactions will be aggregated and treated as if they were one transaction if they were all entered into or completed (as the case may be) within a 12-month period or were otherwise related. The counterparties to the November, 2022, deferral agreement, the March, 2023, deferral agreement and the November, 2023, deferral agreement are all JDZF and such transactions are similar in nature. Accordingly, such transactions shall normally be aggregated. One or more of the applicable percentage ratios (as defined in Rule 14.07 of the Hong Kong listing rules) of the November, 2023, deferral agreement upon aggregation with the previous transactions exceeds 25 per cent but all are less than 100 per cent. Nevertheless, as the company has complied with all the applicable requirements for major and connected transactions under chapters 14 and 14A of the listing rules (including the independent shareholders' approval requirement) in respect of the previous transactions, the November, 2023, deferral agreement is not required to be reclassified by aggregating with the previous transactions.

As one or more of the applicable percentage ratios (as defined in Rule 14.07 of the Hong Kong listing rules) calculated for the November, 2023, deferral agreement (on a stand-alone basis) is more than 0.1 per cent but less than 5 per cent, the November, 2023, deferral agreement is exempt from the independent shareholders' approval requirement, and is subject only to the reporting, announcement and annual review requirements in respect of connected transactions set out in Chapter 14A of the Hong Kong listing rules.

Reasons and benefits of the November, 2023, deferral agreement

In evaluating the terms of the November, 2023, deferral agreement and reaching its conclusion in support of the deferral, the board of directors of the company (excluding the company's 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, being Ruibin Xu, Ms. Zhu and Chen Shen) considered a number of factors, including the following: (i) the deferral is designed to improve the financial position of the company; and (ii) 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.

Board review and approval

The November, 2023, deferral agreement and the transactions contemplated thereunder were reviewed and approved by the disinterested members of the board (that is, excluding the deferral interested directors). After considering, among other things, the terms of the deferral and the November, 2023, deferral agreement, the company's financial position and the possible financing alternatives reasonably available to the company, the board (including the independent non-executive directors of the company, excluding the deferral interested directors who abstained) is of the view that: (i) whilst the deferral is not conducted on the ordinary and usual course of business of the group, the deferral is offered on normal commercial terms (on arm's-length basis or terms no less favourable to the group than terms available from independent third parties) or better; and (ii) the terms of the deferral are fair and reasonable in the circumstances of the company and in the interests of the shareholders of the company as a whole.

The deferral interested directors who have a material interest in the November, 2023, deferral agreement and the transactions 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 November, 2023, deferral agreement and the transactions contemplated thereunder, and none of the company's directors were required to abstain from voting on the board resolutions approving the same.

The company will make further announcements regarding the potential of further future deferrals of its payment obligations under the convertible debenture as and when appropriate. There can be no assurance, however, that any agreement for future deferrals will be reached with the major shareholder of the company either at all or on favourable terms.

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.