Mr. Ruibin Xu reports

SOUTHGOBI ANNOUNCES FOURTH QUARTER AND FULL YEAR 2023 FINANCIAL AND OPERATING RESULTS

SouthGobi Resources Ltd. has released its financial and operating results for the quarter and the year ended Dec. 31, 2023. All figures are in U.S. dollars unless otherwise stated.

The board of directors wishes to inform that the company's independent auditor, BDO Ltd., has completed its audit of the consolidated financial statements of the company for the year ended Dec. 31, 2023, in accordance with Canadian generally accepted auditing standards and would like to announce the audited annual results of the company for the year ended Dec. 31, 2023, together with the comparative figures for the previous year and the respective notes in this announcement.

Significant events and highlights

The company's significant events and highlights for the year ended Dec. 31, 2023, and the subsequent period to March 28, 2024, 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 $65.7 per tonne in 2022 to $93 per tonne in 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 $75.9-million profit from operations in 2023 compared with a $13.6-million profit from operations in 2022. The financial results for 2023 were impacted by the improved market conditions in China, expansion of its sales network and diversification of its customer base.
• Deferral agreements -- on Oct. 13, 2023, the company and JD Zhixing Fund LP (JDZF) entered into an agreement pursuant to which JDZF agreed to grant the company a deferral of (i) payment-in-kind interest (PIK interest) of approximately $4-million which is due and payable on Nov. 19, 2023, under the company's convertible debenture; and (ii) 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 mutual co-operation agreement signed on April 23, 2019.

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

• Payment of the 2023 November deferred amounts will be deferred until Aug. 31, 2024.
• As consideration for the deferral of the 2023 November 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 cent per annum on the outstanding balance of such 2023 November deferred amounts, commencing on the date on which each such 2023 November deferred amounts would otherwise have been due and payable under the convertible debenture.
• As consideration for the deferral of the 2023 november 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 on the outstanding balance of such 2023 November deferred amounts, commencing on the date on which each such 2023 November deferred amounts would otherwise have been due and payable under the amended and restated co-operation agreement.
• The 2023 November deferral agreement does not contemplate a fixed repayment schedule for the 2023 November deferred amounts or related deferral fees. Instead, the 2023 November deferral agreement requires the company to use its best efforts to pay the 2023 November deferred amounts and related deferral fees due and payable under the 2023 November deferral agreement to JDZF. During the period beginning as of the effective date of the 2023 November deferral agreement and ending as of the 2023 November deferral agreement 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 November 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 November 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.

On March 19, 2024, the company and JDZF entered into an agreement pursuant to which JDZF agreed to grant the company a deferral of (i) the cash and PIK interest, management fees and related deferral fees in aggregate amount of $96.5-million which will be due and payable to JDZF on or before Aug. 31, 2024, under the deferral agreement signed on March 24, 2023, and the 2023 November deferral agreement; (ii) semi-annual cash interest payment of $7.9-million payable to JDZF on May 19, 2024, under the convertible debenture; (iii) semi-annual cash interest payments of $8.1-million payable to JDZF on Nov. 19, 2024, and the $4-million in PIK interest shares issuable to JDZF on Nov. 19, 2024, under the convertible debenture; and (iv) management fees in the aggregate amount of $2.2-million payable to JDZF on Nov. 15, 2024, and Feb. 15, 2025, respectively, under the amended and restated co-operation agreement.

The effectiveness of the 2024 March deferral agreement and the respective covenants, agreements and obligations of each party under the 2024 March deferral agreement are subject to the approval (if any) from the TSX Venture Exchange and requisite approval from the disinterested shareholders of the company in accordance with applicable Canadian securities laws and the rules governing the listing of securities on the Stock Exchange of Hong Kong Ltd. The company will be seeking approval of the 2024 March deferral agreement from disinterested shareholders at the company's coming annual general meeting of shareholders, which will be held at a future date to be set by the board.

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

• Payment of the 2024 March deferred amounts will be deferred until Aug. 31, 2025.
• As consideration for the deferral of the 2024 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 cent per annum on the outstanding balance of such 2024 March deferred amounts, commencing on the date on which each such 2024 March deferred amounts would otherwise have been due and payable under the convertible debenture.
• As consideration for the deferral of the 2024 March deferred amounts which relate to payment obligations arising from amended and restated co-operation agreement, the company agreed to pay JDZF a deferral fee equal to 1.5 per cent per annum on the outstanding balance of such 2024 March Deferred amounts commencing on the date on which each such 2024 March deferred amounts would otherwise have been due and payable under the amended and restated co-operation agreement.
• The 2024 March deferral agreement does not contemplate a fixed repayment schedule for the 2024 March deferred amounts or related deferral fees. Instead, the 2024 March deferral agreement requires the company to use its best efforts to pay the 2024 March deferred amounts and related deferral fees due and payable under the 2024 March deferral agreement to JDZF. During the period beginning as of the effective date of the 2024 March deferral agreement and ending as of the 2024 March deferral agreement 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 2024 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 2024 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.
• 2023 March deferral agreement -- on Aug. 29, 2023, the company convened a special meeting of shareholders during which the company obtained the requisite approval from disinterested shareholders for the 2023 March deferral agreement.
• Additional tax and tax penalty imposed by the Mongolian Tax Authority (MTA) -- On July 18, 2023, SouthGobi Sands LLC (SGS), a wholly owned subsidiary of the company, received an official notice issued by the MTA stating that the MTA had completed a periodic tax audit on the financial information of SGS for the tax assessment years between 2017 and 2020, including transfer pricing, royalty, air pollution fee and unpaid tax payables. As a result of the audit, the MTA notified SGS that it is imposing a tax penalty against SGS in the amount of approximately $75-million. The penalty mainly relates to the different view on the interpretation of tax law between the company and the MTA. Under Mongolian law, the company had a period of 30 days from the date of receipt of the notice to file an appeal in relation to the audit. Subsequently the company engaged an independent tax consultant in Mongolia to provide tax advice and support to the company and filed an appeal letter in relation to the audit with the MTA in accordance with Mongolian laws on Aug. 17, 2023.

As at Dec. 31, 2023, the company recorded an additional tax and tax penalty in the amount of $85.1-million, which consists of a tax penalty payable of $75-million and a provision of additional late tax penalty of $10.1-million. The company has paid the MTA an aggregate of $1.2-million in relation to the aforementioned tax penalty. According to Mongolian tax law, the MTA has a legal authority to demand payment from the company irrespective of any potential appeal process that may change the aforesaid tax penalty. Based on the advice from tax professionals and the best estimate from the management, in the event that the company's appeal is to be successful in future, it is probable that the company may recover a portion of the tax penalty payable to the MTA, which is approximately $46-million. However, there are inherent uncertainties surrounding the development and outcome of the appeal. The company cannot determine with virtually certainty the exact recoverability or recoverable amount of the tax penalty paid in future. If any subsequent event occurs that may impact the amount of the additional tax and tax penalty, an adjustment would be recognized in profit or loss and the carrying amount of the tax liabilities shall be adjusted.

On Feb. 8, 2024, SGS received notice from the Tax Dispute Resolution Council (TDRC) which stated that, after the TDRC's review, the TDRC issued a decision in relation to SGS's appeal of the audit, and ordered that the audit assessments set forth in the notice of July 18, 2023, be sent back to the MTA for review and reassessment.

On Feb. 22, 2024, SGS received another notice from the MTA stating that the MTA anticipates commencing the reassessment process on or about March 7, 2024, and the duration of such process will be approximately 45 working days. Any decision of the MTA following the reassessment process may not be conclusive as the company retains the right to appeal such decision under Mongolian laws.

Changes in directors and management:

• Gang Li: Mr. Li resigned as a non-executive director on May 8, 2023.
• 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 AGM held on June 20, 2023.
• Ruibin Xu: Mr. Xu was appointed as chief executive officer on May 15, 2023, and elected as an executive director at the company's AGM held on June 20, 2023.
• Zaixiang Wen: Mr. Wen was appointed as a non-executive director on May 17, 2023.
• Chonglin Zhu: Ms. Zhu was appointed as chief financial officer on Feb. 2, 2024.
• Alan Ho: Mr. Ho was redesignated from chief financial officer to a new management position within the company on Feb. 2, 2024.

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.

Overview of annual operational data

The company experienced an increase in the average selling price of coal from $65.7 per tonne for 2022 to $93 per tonne for 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 2023 consisted of approximately 58 per cent of premium semi-soft coking coal, 15 per cent of standard semi-soft coking coal/premium thermal coal and 27 per cent of processed coal compared with approximately 25 per cent of premium semi-soft coking coal, 6 per cent of standard semi-soft coking coal/premium thermal coal and 69 per cent of processed coal in 2022.

The company's unit cost of sales of product sold decreased from $52 per tonne in 2022 to $44.1 per tonne in 2023. The decrease was mainly driven by the economies of scale due to increased sales.

Overview of annual financial results

The company recorded a $75.9-million profit from operations in 2023 compared with a $13.6-million profit from operations in 2022. The financial results were impacted by increased sales volume and improvement in the company's average realized selling price.

Revenue was $331.5-million in 2023 compared with $73.1-million in 2022. The increase was due to (i) coal export volumes through the Ceke Port of Entry gradually increased since the second quarter of 2023; and (ii) the company experienced an increase in the average selling price of coal from $65.7 per tonne for 2022 to $93 per tonne for 2023, as a result of improved market conditions in China, expansion of its sales network and diversification of its customer base.

Cost of sales was $158.2-million in 2023 compared with $57.8-million in 2022. 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 during the year.

Operating expenses in cost of sales were $114.3-million in 2023 compared with $40.1-million in 2022. The overall increase in cost of sales was primarily due to the increased sales.

Cost of sales related to idled mine assets in 2023 included $200,000 related to depreciation expenses for idled equipment (2022: $900,000).

Other operating expenses were $900,000 in 2023 (2022: other operating income of $5.3-million). Management fee of $4.9-million and foreign exchange loss of $1.2-million were recorded and largely offset by reversal of impairment on materials and supplies inventories of $5-million.

Administration expenses were $10.4-million in 2023 as compared with $6.9-million in 2022, as follows:

Administration expenses were higher for 2023 compared with 2022, mainly due to increase in corporate administration expenses and salaries and benefits as a result of expansion of operation since the second quarter of 2023.

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

Finance costs were $49.1-million and $42.2-million in 2023 and 2022, respectively, which primarily consisted of interest expense on the $250-million convertible debenture.

Overview of quarterly operational data

The company experienced an increase in the average selling price of coal from $65.9 per tonne in the fourth quarter of 2022 to $92.9 per tonne in the fourth quarter of 2023, as a result of improved market conditions in China. The product mix for the fourth quarter of 2023 consisted of approximately 56 per cent premium semi-soft coking coal, 30 per cent standard semi-soft coking coal/premium thermal coal and 14 per cent of processed coal compared with approximately 13 per cent premium semi-soft coking coal, 1 per cent standard semi-soft coking coal/premium thermal coal and 86 per cent of processed coal in the fourth quarter of 2022.

The company sold one million tonnes for the fourth quarter of 2023, compared with 500,000 tonnes for the fourth quarter of 2022.

The company's unit cost of sales of product sold decreased from $41.8 per tonne in the fourth quarter of 2022 to $38.2 per tonne in the fourth quarter of 2023. The decrease was mainly driven by the economies of scale due to increased sales.

Overview of quarterly financial results

The company recorded a $42-million profit from operations in the fourth quarter of 2023 compared with a $7.6-million profit from operations in the fourth quarter of 2022. The financial results for the fourth quarter of 2023 were impacted by (i) the higher selling price achieved by the company; and (ii) increased sales experienced by the company following the reopening of the Ceke Port of Entry during the second quarter of 2022.

Revenue was $88.5-million in the fourth quarter of 2023 compared with $30.5-million in the fourth quarter of 2022. The increase was due to: (i) an increase in coal export volumes through the Ceke Port of Entry since the second quarter of 2023; and (ii) the company experienced an increase in the average selling price of coal from $65.9 per tonne in the fourth quarter of 2022 to $92.9 per tonne in the fourth 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 was $36.6-million in the fourth quarter of 2023 compared with $19.7-million in the fourth quarter of 2022. The increase in cost of sales in the fourth quarter of 2023 was mainly due to the effect of increased sales volume.

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 during the quarter.

Cost of sales related to idled mine assets in the fourth quarter of 2023 included $100,000 related to depreciation expenses for idled equipment (fourth quarter of 2022: $100,000).

Other operating income was $4.3-million in the fourth quarter of 2023 (fourth quarter of 2022: other operating expenses of $1.1-million). A reversal of impairment on materials and supplies inventories of $4.7-million and gain on a contract offsetting arrangement of $700,000 were recorded and offset by management fee of $1.2-million in the fourth quarter of 2023 (fourth quarter of 2022: foreign exchange gain of $500,000 and impairment on materials and supplies inventories of $1.5-million).

Administration expenses increased from $2.1-million in the fourth quarter of 2022 to $3.9-million in the fourth quarter of 2023, due to an increase in legal and professional fees and salaries and benefits incurred during the quarter.

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

Finance costs were $12.3-million in the fourth quarter of 2023 compared with $11.2-million in the fourth quarter of 2022, which primarily consisted of interest expense on the $250-million convertible debenture.

Outlook

The company had been increasing the scale of its mining operations in 2023, and had resumed wet washing operations since April, 2023. The gradual increase in production volume led to subsequent growth of coal export volume into China, and resulted in significant improvements in the company's cash flow in 2023.

Both Chinese and Mongolian governments played a significant role in strengthening their ties on coal trade. The development of new cross-border railways, expansion of road infrastructure, deployment of automated technologies in export operations and streamlined customs clearances underscore the collaborative efforts to facilitate cross-border trade. These strategic initiatives position Mongolian coal favourably in the evolving dynamics of China's coal imports.

With the continuous 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 2024, the company will continue to ramp up its mining operations and production capacity to capitalize 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 pro-actively 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) utilizing the company's wet and dry coal processing plants; and (iii) 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 endeavour 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, continuing 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 maximizing shareholders value by leveraging its key competitive strengths, including:

• Strategic location -- the Ovoot Tolgoi mine is located approximately 40 kilometres from China, which represents the company's main coal market. The company has an infrastructure advantage, being approximately 50 km 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 20 km east and approximately 150 km east of the Ovoot Tolgoi mine, respectively.
• Bridge between China and Mongolia -- the company is well positioned to capture the resulting business opportunities between China and Mongolia. The company will seek potential strategic opportunities to collaborate with 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.

Publication of annual results

The company's results for the year ended Dec. 31, 2023, are contained in the audited consolidated financial statements and management's discussion and analysis of financial condition and results of operations (MD&A), which will be available on March 28, 2024, on the SEDAR+ website and the company's website. Copies of the company's 2023 annual report containing the audited consolidated financial statements and the MD&A, and the annual information form will be available on the SouthGobi website. Shareholders with registered addresses in Hong Kong who have elected to receive a copy of the company's annual report will receive one. Other shareholders of the company may request a hard copy of the 2023 annual report free of charge by contacting its investor relations department by e-mail at info@southgobi.com.

Qualified persons

Disclosure of a scientific or technical nature in this press release in respect of the company's material mineral project, the Ovoot Tolgoi mine, was prepared by or under the supervision of the individuals set out in the attached table, each of whom is a qualified person as that term is defined in National Instrument 43-101 -- Standards of Disclosure for Mineral Projects of the Canadian Securities Administrator.

Disclosure of a scientific or technical nature relating to the Ovoot Tolgoi mine contained in this press release is derived from a technical report prepared in accordance with NI 43-101 on the Ovoot Tolgoi mine dated May 15, 2017, prepared by Dr. Wang, Vincent Li and Larry Li of Dragon Mining Consulting Ltd. (DMCL). A copy of the Ovoot Tolgoi technical report is available under the company's profile on SEDAR+. DMCL has not reviewed or updated the Ovoot Tolgoi technical report since the date of publishing.

About SouthGobi Resources Ltd.

SouthGobi, listed on the HKEX and TSX-V, 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.