SouthGobi Resources Announces Fourth Quarter and Full Year 2012 Financial and Operating Results

HONG KONG, CHINA--(Marketwire - Mar 25, 2013) - SouthGobi Resources Ltd. (TSX:SGQ)(HKSE:1878) (the "Company" or "SouthGobi") today announced its financial and operating results for the quarter and year ended December 31, 2012.
All figures are in U.S. Dollars unless otherwise stated.

SIGNIFICANT EVENTS

The Company's significant events for the year ended December 31, 2012 and subsequent weeks are as follows:

On March 22, 2013, SouthGobi announced the resumption of operations at its flagship Ovoot Tolgoi Mine. The Company plans to produce 3.2 million tonnes of semi-soft coking coal over the remainder of 2013. Operations had been fully curtailed since the end of June 2012;

Annual coal sales volumes and revenue declined to 1.33 million tonnes and $53.1 million, respectively, in 2012 compared to 4.02 million tonnes and $179.0 million in 2011;

Commissioned dry coal-handling facility ("DCHF") at the Ovoot Tolgoi Mine;

Received official notification of Aluminum Corporation of China Limited's ("CHALCO") intention to make a proportional takeover bid for up to 60% of the issued and outstanding common shares of SouthGobi at Cdn$8.48 per share; subsequently, SouthGobi was notified that CHALCO's proportional takeover bid had been terminated;


Mineral Resources Authority of Mongolia ("MRAM") held a press conference announcing a request to suspend exploration and mining activity on certain licenses owned by SouthGobi Sands LLC, a wholly-owned subsidiary of SouthGobi Resources Ltd. Subsequently, SouthGobi received a letter from MRAM confirming that as of September 4, 2012 all exploration and mining licenses held by SouthGobi were in good standing;


The opening of expanded border crossing infrastructure at the Shivee Khuren-Ceke crossing at the Mongolia-China border ("Shivee Khuren Border Crossing");


Ribbon cutting ceremony to commemorate the start of construction on the new paved coal highway from the Ovoot Tolgoi Complex to the Shivee Khuren Border Crossing;


SGQ Coal Investment Pte. Ltd., a wholly-owned subsidiary of SouthGobi Resources Ltd. that owns 100% of the Company's Mongolian operating subsidiary SouthGobi Sands LLC, filed a
Notice of Investment Dispute on the Government of Mongolia pursuant to the Bilateral Investment Treaty between Singapore and Mongolia;


SouthGobi announced changes to its Board of Directors and senior management team;


Provided an update on the ongoing governmental, regulatory and internal investigations;


Received a pre-mining agreement ("PMA") pertaining to the Soumber Deposit;


On March 25, 2013, SouthGobi announced updated NI 43-101 compliant resource estimates for the Soumber and Zag Suuj Deposits, which increased SouthGobi's total measured and indicated resources to 533 million tonnes (8% increase) and inferred resources to 302 million tonnes (24% increase).



REVIEW OF QUARTERLY OPERATING RESULTS

The Company's operating results for the previous eight quarters are summarized in the table below:

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For the year ended December 31, 2012

Mining activities at the Ovoot Tolgoi Mine were curtailed to varying degrees in the second quarter of 2012, with mining activities fully curtailed at the end of the second quarter, to manage coal inventories and to maintain efficient working capital levels. Mining activities remained fully curtailed for the remainder of 2012; however, operations at the Ovoot Tolgoi Mine resumed on March 22, 2013.

In 2012, the Company produced 1.33 million tonnes of raw coal with a strip ratio of 2.52 compared to production of 4.57 million tonnes of raw coal with a strip ratio of 3.63 in 2011. The decrease in production primarily related to the curtailment of the Company's mining operations in the last three quarters of the year; whereas, the decrease in the strip ratio primarily related to the below-trend strip ratio in the first quarter of 2012 which will be normalized over the life-of-mine.

In 2012, the Company sold 1.33 million tonnes of coal at an average realized selling price of $47.76 per tonne compared to sales of 4.02 million tonnes of coal at an average realized selling price of $54.03 per tonne in 2011. The Company's average realized selling price was negatively impacted by the softening of the inland China coking coal markets closest to SouthGobi's operations throughout 2012. The Company's higher-ash coals were impacted more substantially than its other products.

Direct cash costs of product sold excluding idled mine costs (a non-IFRS financial measure, see Non-IFRS Financial Measures section) were $12.02 per tonne in 2012 compared to $23.15 per tonne in 2011. Direct cash costs of product sold excluding idled mine costs primarily decreased due to a lower strip ratio, reduced fuel prices and non-cash coal stockpile impairments recorded in the second half of 2012.

For the three months ended December 31, 2012

For the three months ended December 31, 2012, the Company's mining activities remained fully curtailed; however, the Company generated revenue through the sale of existing coal stockpiles.

For the three months ended December 31, 2012, the Company sold 0.03 million tonnes of coal at an average realized selling price of $47.86 per tonne compared to sales of 1.15 million tonnes of coal at an average realized selling price of $55.51 per tonne in 2011. For the three months ended December 31, 2012, the Company's sales volumes and average realized selling price continued to be negatively impacted by the softening of the inland China coking coal markets closest to SouthGobi's operations.

Direct cash costs of product sold excluding idled mine costs (a non-IFRS financial measure, see Non-IFRS Financial Measures section) were $33.11 per tonne for the three months ended December 31, 2012 compared to $22.14 for the three months ended December 31, 2011. Direct cash costs of product sold excluding idled mine costs primarily increased for the three months ended December 31, 2012 due to higher cost coal inventory being sold.

REVIEW OF QUARTERLY FINANCIAL RESULTS

The Company's financial results for the previous eight quarters are summarized in the table below:

($ in thousands, except for per share information, unless otherwise indicated)

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For the year ended December 31, 2012

The Company recorded a net loss of $103.0 million for the year ended December 31, 2012 compared to a net income of $57.7 million for the year ended December 31, 2011.

Gross Profit/(Loss):

The Company's gross profit/(loss) is composed of revenue (net of royalties and selling fees) and cost of sales and relates solely to the Mongolian Coal Division. In 2012, the Company's gross profit/(loss) was negatively impacted by $53.0 million of idled mine costs, resulting in a gross loss of $44.0 million. The Company recorded a gross profit excluding idled mine costs of $9.0 million in 2012 compared to a gross profit excluding idled mine costs of $51.7 million in 2011. Gross profit will vary by year depending on sales volumes, sales prices and unit costs.

In 2012, SouthGobi recorded revenue of $53.1 million compared to $179.0 million in 2011. In the last three quarters of 2012, customers were reluctant to enter into new sales contracts primarily due to the following:


Customers' ability to export coal through the Shivee Khuren Border Crossing for the first half of 2012 was significantly below their projections due to: a) the delayed opening of the expanded border crossing infrastructure at the Shivee Khuren Border Crossing; b) the extended closure of the Shivee Khuren Border Crossing for the Chinese New Year and Mongolian Tsagaan Sar public holidays in the first quarter of 2012; c) the closure of the existing gravel road used to transport coal from the Ovoot Tolgoi Mine and neighboring mines to the Shivee Khuren Border Crossing for over four weeks in the second quarter of 2012;


The uncertainty with respect to whether SouthGobi would receive a formal request from MRAM to suspend mining activities on its Ovoot Tolgoi mining license, which caused customers concern that they would be unable to collect and export additional coal purchased from the Ovoot Tolgoi Mine in the second and third quarters of 2012; and


The softening of inland China coking coal markets closest to SouthGobi's operations throughout the last three quarters of 2012.



Revenues are presented net of royalties and selling fees. The Company is subject to a 5% royalty on all coal sales exported out of Mongolia based on a set reference price per tonne published monthly by the Government of Mongolia. Effective January 1, 2011, the Company is also subject to a sliding scale additional royalty of up to 5% on coal sales exported out of Mongolia based on the set reference price. Based on the 2012 reference prices, the Company was subject to an average 8% royalty based on a weighted average reference price of $88.07 per tonne. The Company's effective royalty rate for 2012, based on the Company's average realized selling price of $47.76 per tonne, was 14%.

SouthGobi, together with other Mongolian mining companies impacted by the escalation of effective royalty rates, opened a dialog with the appropriate Government of Mongolia authorities with a view of moving to a more equitable process for setting reference prices. A successful outcome was achieved and commencing October 1, 2012 (for a six month trial period) the royalty rate will be determined using the contracted sales price per tonne, not the reference price per tonne published by the Government of Mongolia. The dialog has continued with the appropriate Government of Mongolia authorities with the goal of extending the trial period until the end of 2013. In the fourth quarter of 2012 (a full quarter under the trial period), the Company's effective royalty rate was 6%, a significant reduction from prior quarters in 2012.

Cost of sales was $97.1 million in 2012 compared to $127.3 million in 2011. Cost of sales comprise the direct cash costs of product sold, mine administration cash costs of product sold, idled mine costs, inventory impairments, equipment depreciation, depletion of mineral properties and share-based compensation expense. Of the $97.1 million recorded as cost of sales in 2012, $44.2 million related to mine operations and $53.0 million related to idled mine costs. Cost of sales related to mine operations decreased in 2012 compared to 2011 primarily due to lower sales volumes and lower unit costs, partially offset by coal stockpile impairments totaling $14.2 million. Cost of sales related to idled mine costs primarily consist of period costs, which are expensed as incurred and depreciation expense. The depreciation expense relates to the Company's idled plant and equipment.

Other Operating Expenses:

Other operating expenses in 2012 increased to $54.3 million compared to $29.2 million in 2011. The increase in other operating expenses primarily relates to provisions for doubtful trade and other receivables, an impairment loss on available-for-sale financial assets and an impairment of property, plant and equipment, partially offset by reduced public infrastructure costs.

In 2012, the Company recorded $52.8 million of provisions and impairments in other operating expenses related to the following:


Trade and other receivables - the Company recorded a loss provision of $18.4 million in 2012. The loss provision relates to provisions for certain uncollectible trade receivables of $17.4 million and a reduction in the expected insurance proceeds of $1.0 million. The Company anticipates full recovery of its remaining outstanding trade and other receivables.
Available-for-sale financial asset - in 2012, the Company determined that objective evidence of impairment in the Company's investment in Aspire Mining Limited ("Aspire") existed. Therefore, an impairment loss of $19.2 million was recognized in other operating expenses.
Property, plant and equipment - the Company recorded $15.2 million of impairment charges to reduce various items of property, plant and equipment to their recoverable amounts. The impairment charges consist of a $13.0 million impairment pertaining to non- refundable prepayments made on cancelled mobile equipment orders to preserve the
Company's financial resources, a $1.1 million provision on tires held for sale and a $1.1 million impairment of construction in progress expenditures that were not expected to be recovered.

Public infrastructure costs decreased in 2012 compared to 2011 due to reduced maintenance costs on transportation infrastructure from the Ovoot Tolgoi Mine to the Shivee Khuren Border Crossing and reduced works on the expanded border crossing infrastructure at the Shivee Khuren Border Crossing.

In 2011, other operating expenses primarily consisted of a $16.0 million impairment charge on various capitalized construction projects and $8.1 million of public infrastructure costs.

Administration Expenses:

Administration expenses in 2012 were $24.6 million compared to $28.7 million in 2011. The decrease in administration expenses primarily related to reduced corporate administration and share-based compensation expense, partially offset by increased legal and professional fees. Legal and professional fees were higher due to additional legal fees as a result of the CHALCO proportional takeover bid, the Notice of Investment Dispute and in support of the ongoing investigations (refer to Regulatory Issues section).

Evaluation and Exploration Expenses:

Exploration expenses in 2012 were $8.6 million compared to $31.8 million in 2011. Exploration expenses will vary period to period depending on the number of projects and the related seasonality of the exploration programs. The 2012 exploration program was suspended in the second quarter of 2012 in order to preserve the Company's financial resources while mining operations at the Ovoot Tolgoi Mine were curtailed, with the exception of certain water exploration activities and minimum exploration activities required on exploration licenses held by the Company.

Finance Income & Finance Costs:

The Company incurred finance costs for the year ended December 31, 2012 of $15.4 million compared to $12.8 million for the year ended December 31, 2011. Finance costs for the year ended December 31, 2012 primarily consisted of $10.5 million of interest expense on the China Investment Corporation ("CIC") convertible debenture and a $4.5 million unrealized loss on FVTPL investments; whereas, finance costs for the year ended December 31, 2011 primarily consisted of $9.1 million of interest expense on the CIC convertible debenture and a $3.1 million unrealized loss on FVTPL investments.

The Company recorded finance income for the year ended December 31, 2012 of $39.9 million compared to $107.7 million for the year ended December 31, 2011. For the year ended December 31, 2012, finance income primarily consisted of a $39.5 million unrealized gain on the fair value change of the embedded derivatives in the CIC convertible debenture; whereas, in the year ended December 31, 2011, finance income primarily consisted of a $106.5 million unrealized gain on the fair value change of the embedded derivatives in the CIC convertible debenture.

The Company's investment in Aspire continues to be classified as an available-for-sale financial asset. In the third quarter of 2012, the Company determined that objective evidence of impairment in the Company's investment in Aspire existed. Therefore, an impairment loss of $19.2 million was recognized in other operating expenses. Other comprehensive income for the year ended December 31, 2011 consists of an unrealized loss (net of tax) of $11.2 million related to the Company's investment in Aspire.

Taxes:

For the year ended December 31, 2012, the Company recorded a current income tax expense of $0.4 million related to its Mongolian operations compared to a current income tax expense of $7.3 million for the year ended December 31, 2011. The Company has recorded a deferred income tax recovery related to deductible temporary differences of $3.7 million for the year ended December 31, 2012 compared to a deferred income tax recovery of $8.1 million for the year ended December 31, 2011.

For the three months ended December 31, 2012

The Company recorded a net loss of $51.8 million for the three months ended December 31, 2012 compared to a net loss of $18.9 million for the three months ended December 31, 2011.

Gross Profit/(Loss):

The Company's gross profit/(loss) is composed of revenue (net of royalties and selling fees) and cost of sales and relates solely to the Mongolian Coal Division. For the three months ended December 31, 2012, gross profit was negatively impacted by $18.4 million of idled mine costs, contributing to a gross loss of $25.3 million. The Company recorded a gross loss excluding idled mine costs of $6.9 million in the fourth quarter of 2012 compared to a gross profit of $16.6 million in the fourth quarter of 2011. Gross profit will vary by quarter depending on sales volumes, sales prices and unit costs.

The Company recognized revenue of $1.2 million in the fourth quarter of 2012 compared $51.1 million in the fourth quarter of 2011. The significant decrease in revenue for the three months ended December 31, 2012 compared to the three months ended December 31, 2011 can be attributed to decreased sales volume and a reduction in the Company's average realized selling price. In the fourth quarter of 2012, the Company's sales volumes and average realized selling price continued to be negatively impacted by the softening of the inland China coking coal markets closest to SouthGobi's operations. However, subsequent to year-end, the Company signed contracts with a number of customers to sell the majority of its remaining coal stockpiles.

SouthGobi's effective royalty rate in the fourth quarter of 2012 was 6%, a significant reduction from prior quarters in 2012. Effective October 1, 2012 (for a six month trial period) the royalty rate is determined using the contracted sales price per tonne, not the reference price per tonne published by the Government of Mongolia. SouthGobi, together with other Mongolian mining companies, have continued their dialog with the appropriate Government of Mongolia authorities with the goal of extending the trial period until the end of 2013.

Cost of sales was $26.5 million for the three months ended December 31, 2012 compared to $34.4 million for the three months ended December 31, 2011. Cost of sales comprise the direct cash costs of product sold, mine administration cash costs of product sold, idled mine costs, inventory impairments, equipment depreciation, depletion of mineral properties and share-based compensation expense. Of the $26.5 million recorded as cost of sales for the three months ended December 31, 2012, $8.1 million related to mine operations and $18.4 million related to idled mine costs. Cost of sales related to mine operations decreased for the three months ended December 31, 2012 compared to the three months ended December 31, 2011 primarily due to lower sales volumes, partially offset by higher unit cost and coal stockpile impairments totaling $7.0 million. For the three months ended December 31, 2012, the Company recorded a coal stockpile impairment of $7.0 million to reduce the carrying value to its net realizable value.

Other Operating Expenses:

Other operating expenses for the three months ended December 31, 2012 decreased to $18.7 million compared to $24.6 million for the three months ended December 31, 2011. The decrease in other operating expenses compared to the three months ended December 31, 2011 primarily relates to recognizing a smaller impairment of property, plant and equipment.

For the three months ended December 31, 2012, the Company recorded $20.8 million of provisions and impairments in other operating expenses related to the following:


Trade and other receivables - the Company recorded a loss provision of $4.7 million related to provisions for certain uncollectible trade receivables of $3.7 million and a reduction in the expected insurance proceeds of $1.0 million. The Company anticipates full recovery of its remaining outstanding trade and other receivables.
Available-for-sale financial asset - in the third quarter of 2012, the Company determined that objective evidence of impairment in the Company's investment in Aspire existed.
Therefore, a further impairment loss of $3.1 million was recognized in other operating expenses.
Property, plant and equipment - the Company recorded $13.0 million of impairment charges to reduce non-refundable prepayments made on cancelled mobile equipment orders to their recoverable amounts. The mobile equipment orders were cancelled to preserve the Company's financial resources.

Administration Expenses:

Administration expenses for the three months ended December 31, 2012 were $6.1 million compared to $8.6 million for the three months ended December 31, 2011. Administration expenses decreased for the three months ended December 31, 2012 compared to the three months ended December 31, 2011 primarily due to decreased salaries and benefits and share-based compensation expenses, partially offset by increased legal and professional fees.

Evaluation and Exploration Expenses:

Exploration expenses for the three months ended December 31, 2012 were $0.5 million compared to $14.5 million for the three months ended December 31, 2011. Exploration expenses will vary from quarter to quarter depending on the number of projects and the related seasonality of the exploration programs. The Company curtailed exploration activities in the fourth and third quarters of 2012 to preserve financial resources. The majority of the exploration activities in the fourth quarter of 2012 related to water exploration activities. Exploration expenses in the fourth quarter of 2011 included a higher proportion of the 2011 exploration program expenses due to delays in receiving required government approvals in the first half of 2011.

Finance Income & Finance Costs:

Finance costs for the three months ended December 31, 2012 were $5.6 million compared to $1.1 million for the three months ended December 31, 2011. Finance costs for the three months ended December 31, 2012 primarily consisted of $4.8 million of interest expense on the CIC convertible debenture and a $0.7 million unrealized loss on FVTPL investments; whereas, finance costs for the three months ended December 31, 2011 primarily consisted of $0.9 million of interest expense on the CIC convertible debenture.

Finance income for the three months ended December 31, 2012 was $0.7 million compared to $11.0 million for the three months ended December 31, 2011. For the three months ended December 31, 2012, finance income primarily consisted of a $0.7 million unrealized gain on the fair value change of the embedded derivatives in the CIC convertible debenture; whereas, for the three months ended December 31, 2011, finance income primarily consisted of a $10.8 million unrealized gain on the fair value change of the embedded derivatives in the CIC convertible debenture.

The Company's investment in Aspire continues to be classified as an available-for-sale financial asset. In the third quarter of 2012, the Company determined that objective evidence of impairment in the Company's investment in Aspire existed. Therefore, in the fourth quarter of 2012, a further impairment loss of $3.1 million was recognized in other operating expenses. Other comprehensive income for the three months ended December 31, 2011 consists of an unrealized loss (net of tax) of $6.5 million related to the Company's investment in Aspire.

Taxes:

For the three months ended December 31, 2012, the Company recorded a current income tax expense of $0.1 million related to its Mongolian operations compared to a current income tax recovery of $0.4 million for the three months ended December 31, 2011. The Company has recorded a deferred income tax recovery related to deductible temporary differences of $3.5 million for the three months ended December 31, 2012 compared to a deferred income tax recovery of $2.0 million for the three months ended December 31, 2011.

FINANCIAL POSITION AND LIQUIDITY

Cash Position and Liquidity

As at December 31, 2012, the Company had cash of $19.7 million and short term money market investments of $15.0 million for a total of $34.7 million in cash and money market investments compared to cash of $123.6 million and long term money market investments of $45.0 million for a total of $168.6 million in cash and money market investments as at December 31, 2011. Working capital (excess current assets over current liabilities) was $127.2 million as at December 31, 2012 compared to $236.1 million as at December 31, 2011.

The Company's total assets as at December 31, 2012 were $729.4 million compared with $920.3 million as at December 31, 2011. The Company's non-current liabilities as at December 31, 2012 were $103.8 million compared with $145.6 million as at December 31, 2011.

Consistent with the Company's capital risk management strategy, the Company expects to have sufficient liquidity and capital resources to meet its ongoing obligations and future contractual commitments for at least twelve months from the end of the December 31, 2012 reporting period. The Company expects its liquidity to remain sufficient based on existing capital resources and income from mining operations. Liquidity beyond the twelve month period is dependent on the success of the recommencement of operations and ongoing demand and prices in the coal market. On March 22, 2013, the Company recommenced mining activities at the Ovoot Tolgoi Mine. The Company continues to minimize uncommitted capital expenditures and exploration expenditures in order to preserve the Company's financial resources.

Subsequent to December 31, 2012, the IAAC informed the Company that orders, placing restrictions on certain of its Mongolian assets, had been imposed in connection with its continuing investigation (refer to Regulatory Issues section).

The orders placing restrictions on certain of the Company's Mongolia assets could ultimately result in an event of default of the Company's convertible debenture. This matter remains under review by the Company and its advisers but to date, it is the Company's view that this would not result in an event of default as defined under the convertible debenture terms. However, in the event that the orders result in an event of default of the Company's convertible debenture that remains uncured for ten business days, the principal amount owing and all accrued and unpaid interest will become immediately due and payable upon notice to the Company by CIC.

The orders relate to certain items of operating equipment and infrastructure and the Company's Mongolian bank accounts. The orders related to the operating equipment and infrastructure restricts the sale of these items; however, the orders do not restrict the use of these items in the Company's mining activities. The orders related to the Company's Mongolian bank accounts restrict the use of in-country funds. While the orders restrict the use of in-country funds pending outcome of the investigation, they are not expected to have any material impact on the Company's activities.

Impairment Analysis

As at December 31, 2012, the Company determined that the decline in the Company's common share price and continued curtailment of mining activities at the Ovoot Tolgoi Mine constituted impairment indicators. Therefore, the Company conducted an impairment test whereby the carrying values of the Company's property, plant and equipment, including mineral properties, related to the Ovoot Tolgoi Mine were compared to their "value-in-use" using a discounted future cash flow valuation model as at December 31, 2012. The Company's property, plant and equipment, including mineral properties, totaled $521.5 million as at December 31, 2012.

Key estimates and assumptions incorporated in the valuation model included the following:


Inland Chinese coking coal market coal prices;
Life-of-mine coal production and operating costs; and
A discount rate based on an analysis of market, country and company specific factors

The impairment analysis did not result in the identification of an impairment loss and no charge was required as at December 31, 2012. The Company believes that the estimates and assumptions incorporated in the impairment analysis are reasonable; however, the estimates and assumptions are subject to significant uncertainties and judgments.

DRY COAL-HANDLING FACILITY

On February 13, 2012, the Company announced the successful commissioning of the DCHF at the Ovoot Tolgoi Mine. The DCHF has capacity to process nine million tonnes of run-of-mine ("ROM") coal per year. The DCHF includes a 300-tonne-capacity dump hopper, which receives ROM coal from the Ovoot Tolgoi Mine and feeds a coal rotary breaker that sizes coal to a maximum of 50 millimeters ("mm") and rejects oversize ash. Prior to the commissioning of the rotary breaker, temporary screening operations were used at the Ovoot Tolgoi Mine to process higher-ash coals. Screening performed a similar function to the rotary breaker, namely rejecting oversize ash and sizing the coal to a maximum of 50mm; however, the rotary breaker is anticipated to reduce screening costs and improve yield recoveries.

The Company has received all permits to operate the DCHF. However, the 2013 mine plan considers only limited utilization of the DCHF at the latter end of 2013 due to higher quality coals being mined that likely will not require processing through the DCHF and can be sold raw or processed directly through the wet washing facility. The 2013 mine plan assumes a conservative resumption of operations, designed to achieve a cost effective approach that will allow operations to continue on a sustainable basis.

The Company has delayed construction to upgrade the DCHF to include dry air separation modules and covered load out conveyors with fan stackers to take processed coals to stockpiles and enable more efficient blending. Uncommitted capital expenditures have been minimized to preserve the Company's financial resources.

REGIONAL INFRASTRUCTURE

In July 2009, Chinese and Mongolian authorities agreed to create designated coal transportation corridors at the Shivee Khuren Border Crossing. In 2011, SouthGobi, together with other companies, completed the road and construction works required on the Mongolian side of the border to match the existing Chinese infrastructure.

Further, on May 28, 2012, the expanded border crossing infrastructure, consisting of eight new border gates exclusively for coal transportation, opened at the Shivee Khuren Border Crossing. The expanded border crossing infrastructure eliminated the previous bottleneck at the Shivee Khuren Border Crossing and is expected to increase capacity to approximately 20 million tonnes or more of coal per year.

On August 2, 2011, the State Property Committee of Mongolia awarded the tender to construct a paved highway from the Ovoot Tolgoi Complex to the Shivee Khuren Border Crossing to consortium partners NTB LLC and SouthGobi Sands LLC (together referred to as "RDCC"). SouthGobi Sands LLC holds a 40% interest in RDCC. On October 26, 2011, RDCC signed a concession agreement with the State Property Committee of Mongolia. RDCC now has the right to conclude a 17 year build, operate and transfer agreement under the Mongolian Law on Concessions. RDCC has engaged a contractor and construction on the paved highway has commenced; however, as planned, the contractor has demobilized until the second quarter of 2013 due to winter weather conditions. Completion of the paved highway is expected late 2013. The paved highway will have an intended carrying capacity upon completion in excess of 20 million tonnes of coal per year.

TSAGAAN TOLGOI DEPOSIT

On March 5, 2012, SouthGobi announced an agreement to sell the Tsagaan Tolgoi Deposit to Modun Resources Limited ("Modun"), a company listed on the Australian Stock Exchange under the symbol MOU. Under the transaction, SouthGobi expected to receive $30.0 million of total consideration, comprising $7.5 million up-front in cash, $12.5 million up-front in Modun shares and deferred consideration of an additional $10.0 million also payable in Modun shares. Subsequently, on August 29, 2012, SouthGobi announced that the proposed sale of the Tsagaan Tolgoi Deposit to Modun had been cancelled by mutual agreement of both parties.

PROPOSED TRANSACTION

On April 2, 2012, SouthGobi announced a cooperation agreement with CHALCO and received official notification of CHALCO's intention to make a proportional takeover bid for up to 60% of the issued and outstanding common shares of SouthGobi at Cdn$8.48 per share ("Proportional Offer"). SouthGobi was also informed by its 58% major shareholder, Turquoise Hill Resources Ltd. ("Turquoise Hill"), that Turquoise Hill had signed a lock-up agreement with CHALCO, committing to tender all of its shares held or thereafter acquired by it during the offer period of CHALCO into the Proportional Offer. The Proportional Offer was to be made by way of a takeover bid circular under British Columbia law and would be made to all SouthGobi shareholders. If shareholders tendered more than 60% of the outstanding common shares of SouthGobi to the takeover bid, a proportional amount of shares were to be taken up from each shareholder.

In conjunction with the Proportional Offer, CHALCO and SouthGobi entered into a cooperation agreement. CHALCO's obligations under the cooperation agreement were to become effective upon CHALCO acquiring a shareholding in SouthGobi.

SouthGobi had also been notified that CHALCO entered into consultancy agreements with nine key senior executives, officers and staff to assist CHALCO with the integration and transition following CHALCO's acquisition of a shareholding in SouthGobi.

CHALCO stated that it expected to mail the takeover bid circular in connection with the Proportional Offer on or about July 5, 2012. On July 3, 2012, CHALCO and Turquoise Hill announced a 30 day extension for CHALCO to mail the takeover bid circular. Subsequently, on August 2, 2012, an additional 30 day extension was announced by CHALCO and Turquoise Hill. Finally, on September 3, 2012, SouthGobi was notified that CHALCO's Proportional Offer had been terminated, which also resulted in the termination of the cooperation agreement and the consultancy agreements.

REGULATORY ISSUES

Status of Mining and Exploration Licenses

On April 16, 2012, SouthGobi announced that MRAM held a press conference announcing a request to suspend exploration and mining activity on certain licenses owned by SouthGobi Sands LLC. The request for suspension included the mining license pertaining to the Ovoot Tolgoi Mine.

The Company believed that the action was taken under the broad national security powers of the Government of Mongolia. MRAM stated that the move was in connection with the proposed proportional takeover bid by CHALCO and the agreement by Turquoise Hill to tender its controlling interest in SouthGobi to such a takeover. On September 3, 2012, the proposed proportional takeover bid by CHALCO was terminated (refer to Proposed Transaction section).

Subsequently, on September 6, 2012, the Company received official notification from MRAM confirming that as of September 4, 2012 all exploration and mining licenses held by the Company were in good standing. The Notice of Investment Dispute filed by the Company pertaining to its valid PMA applications remains ongoing (refer to Notice of Investment Dispute section).

Governmental, Regulatory and Internal Investigations

The Company is subject to continuing investigations by the Mongolian Independent Authority Against Corruption (the "IAAC") and other governmental and regulatory authorities in the Republic of Mongolia regarding allegations against SouthGobi and some of its employees involving possible breaches of Mongolian laws, including anti-corruption and taxation laws. Certain of those allegations (including allegations of bribery, money laundering and tax evasion) have been the subject of public statements and Mongolian media reports, both prior to and in connection with the recent trial and conviction of the former Chairman and the former director of the Geology, Mining and Cadastral Department of the MRAM, and others. SouthGobi was not a party to that case. The Company understands that the court's decision is the subject of an appeal.

A number of the media reports referred to above suggest that, in its decision, the court in the above- mentioned case referred to two matters specifically involving SouthGobi Sands LLC.

In respect of the first matter, being an alleged failure to meet minimum expenditure requirements under the Mongolian Minerals Law in relation to four exploration licenses, the Company is investigating these allegations, but advises that three of the four licenses were considered to be non-material and allowed to lapse between November 2009 and December 2011. Activities historically carried out on the fourth (and the only currently-held) license include drilling, trenching and geological reconnaissance. The Company has no immovable assets located on this license and it does not contain any of SouthGobi's NI 43-101 reserves or resources. This license does not relate to the Company's Ovoot Tolgoi Mine and SouthGobi does not consider this license to be material to its business.

The second matter referred to by the court was an alleged impropriety in the transfer of License 5261X by SouthGobi Sands LLC to a third party in March 2010 in violation of Mongolian anti-corruption laws. The Company understands, based on media reports, that the court has invalidated the transfer of this license, and so the license's current status is unclear.

In addition, the IAAC has advised the Company that it is investigating other alleged improprieties by SouthGobi Sands LLC as described above. Neither SouthGobi nor any of its employees have been charged in connection with the IAAC's investigation, but certain current and former employees have been advised that they are suspects. The IAAC has imposed orders placing a travel ban on those employees, and administrative restrictions on certain of the Company's Mongolian assets, including local bank accounts, in connection with its continuing investigation of those allegations. While the orders restrict the use of in- country funds pending the outcome of the investigation, they are not expected to have a material impact on the Company's activities in the short term, although they could create operational difficulties for the Company in the medium to long term. SouthGobi is taking and intends to take all necessary steps to protect its ability to continue to conduct its business activities in the ordinary course.

Through its Audit Committee (comprised solely of independent directors), SouthGobi is conducting an internal investigation into possible breaches of law, internal corporate policies and codes of conduct arising from the allegations that have been raised. The Audit Committee has the assistance of independent legal counsel in connection with its investigation. The Chair of the Audit Committee is also participating in a tripartite committee, comprised of the Audit Committee Chairs of the Company and Turquoise Hill and a representative of Rio Tinto, which is focused on the investigation of those allegations, including possible violations of anti-corruption laws. Independent legal counsel and forensic accountants have been engaged by this committee to assist it with its investigation. All of these investigations are ongoing but are not yet complete. Information that has been provided to the IAAC by the Company has also been provided by the tripartite committee to Canadian and United States regulatory authorities that are monitoring the Mongolian investigations. The Company continues to cooperate with all relevant regulatory agencies in respect of the ongoing investigations.

The investigations referred to above could result in one or more Mongolian, Canadian, United States or other governmental or regulatory agencies taking civil or criminal action against the Company, its affiliates or its current or former employees. The likelihood or consequences of such an outcome are unclear at this time but could include financial or other penalties, which could be material, and which could have a material adverse effect on the Company.

Pending the completion of the investigations, the Company, through its Board of Directors and new management, has taken a number of steps to focus ongoing compliance by employees with all applicable laws, internal corporate policies and codes of conduct, and with the Company's disclosure controls and procedures and internal controls over financial reporting.

NOTICE OF INVESTMENT DISPUTE

On July 11, 2012, SouthGobi announced that SGQ Coal Investment Pte. Ltd., a wholly-owned subsidiary of SouthGobi Resources Ltd. that owns 100% of the Company's Mongolian operating subsidiary SouthGobi Sands LLC, filed a Notice of Investment Dispute on the Government of Mongolia pursuant to the Bilateral Investment Treaty between Singapore and Mongolia. The Company filed the Notice of Investment Dispute following a determination by management that they had exhausted all other possible means to resolve an ongoing investment dispute between SouthGobi Sands LLC and the Mongolian authorities.

The Notice of Investment Dispute consists of, but is not limited to, the failure by MRAM to execute the PMAs associated with certain exploration licenses of the Company pursuant to which valid PMA applications had been lodged in 2011. The areas covered by the valid PMA applications include the Zag Suuj Deposit and certain areas associated with the Soumber Deposit outside the existing mining license.

The Notice of Investment Dispute triggers the dispute resolution process under the Bilateral Investment Treaty whereby the Government of Mongolia has a six-month cure period from the date of receipt of the notice to satisfactorily resolve the dispute through negotiations. If the negotiations are not successful, the Company will be entitled to commence conciliation/arbitration proceedings under the auspices of the International Centre for Settlement of Investment Disputes ("ICSID") pursuant to the Bilateral Investment Treaty. However, in the event that the Government of Mongolia fails to negotiate, ICSID arbitration proceedings may be accelerated before the six months have expired. The Company continues to have the right to commence conciliation/arbitration proceedings under the auspices of the ICSID pursuant to the Bilateral Investment Treaty. On January 18, 2013, MRAM issued the Company a PMA pertaining to the Soumber Deposit; however, four valid PMA applications remain outstanding.

Activities historically carried out on the exploration licenses with valid PMA applications include drilling, trenching and geological reconnaissance. The Company has no immovable assets located on these licenses and the loss of any or all of these licenses would not materially and adversely affect the existing operations.

BOARD OF DIRECTORS AND SENIOR MANAGEMENT

On September 4, 2012, SouthGobi announced changes to its Board of Directors, accepting the resignations of Mr. Edward Flood, the Honourable Robert Hanson and Mr. Peter Meredith (Chairman) and subsequently appointing Ms. Kay Priestly (Chairman), Mr. Sean Hinton (Deputy Chairman), Mr. Lindsay Dove, Mr. Brett Salt and Mr. Kelly Sanders. On September 17, 2012, Mr. Alexander Molyneux tendered his resignation as a director of the Company. Further, on November 8, 2012, Mr. Ross Tromans was appointed as an Executive Director.

In the third and fourth quarters of 2012, the Company also announced senior management changes with the departures of Mr. Alexander Molyneux, former President and Chief Executive Officer, Mr. Curtis Church, former Chief Operating Officer and Mr. Matthew O'Kane, former Chief Financial Officer. Mr. Tromans was appointed as President and Chief Executive Officer. Mr. Tromans also assumed the duties formerly handled by the Chief Operating Officer. The Company is in the process of identifying a candidate for the Chief Financial Officer role. In the interim, Mr. Tromans has acted as the Company's principal financial officer.

COMMON SHARE REPURCHASE PROGRAM

On June 8, 2010, the Company announced that its Board of Directors authorized a share repurchase program to purchase up to 2.5 million common shares of the Company on each or either of the Toronto Stock Exchange ("TSX") and the Hong Kong Stock Exchange ("HKEX"), in aggregate representing up to 5.0 million common shares of the Company. On June 8, 2011, the Company announced the renewal of its share repurchase program. The share repurchase program concluded on June 14, 2012. As at June 14, 2012, the Company had repurchased 1.6 million shares on the HKEX and 2.8 million shares on the TSX for a total of 4.4 million common shares. The Company cancelled all repurchased shares.

COMPLIANCE WITH THE CODE ON CORPORATE GOVERNANCE PRACTICES

The Company has, throughout the year ended December 31, 2012, applied the principles and complied with the requirements of its corporate governance practices as defined by the Board of Directors and all applicable statutory, regulatory and stock exchange listings standards (old Corporate Governance Code from January 1, 2012 to March 31, 2012 and new Corporate Governance Code from April 1, 2012 to December 31, 2012).

COMPLIANCE WITH THE MODEL CODE FOR SECURITIES TRANSACTIONS BY DIRECTORS OF LISTED COMPANIES

The Company has adopted policies regarding directors' securities transactions in its Corporate Disclosure, Confidentiality and Securities Trading policy that has terms that are no less exacting than those set out in the Model Code of Appendix 10 of the rules governing the listing of securities on the Hong Kong Stock Exchange.

The Board of Directors confirms that all of the Directors of the Company have complied with the required policies in the Company's Corporate Disclosure, Confidentiality and Securities Trading policy throughout the year ended December 31, 2012.

OUTLOOK

The year ended December 31, 2012 has been a tumultuous year for the Company with full curtailment of production from the end of June 2012 with the position unchanged at year end, the announcement of a proportional takeover bid by CHALCO and subsequent termination of the bid, ongoing investigations by the Mongolian authorities and claims of wrongdoing and involvement in investigations against Mongolian public figures. In addition, there were significant changes at the board and senior management level within the organization and the year culminated in the necessity to reduce the Company's overall workforce by nearly one third. The subsequent net loss of $103.0 million recorded by the Company in 2012 reflects these conditions.

The curtailment of production necessitated taking actions to suspend uncommitted capital expenditure and reduce spending in other areas in order to preserve the Company's financial resources whilst at the same time protecting the Company's existing assets. Exploration expenditure was reduced to the level required to protect the Company's rights under existing licenses and moneys were spent in defending the Company from ongoing investigations.

The outlook for 2013 still has a number of uncertainties that need to be overcome but the position going forward is much more positive. The Mongolian coal industry is quite dependent on the Chinese market and this market has been waiting for the conclusion of the Chinese Lunar New Year to get some direction as to what economic changes are likely to occur in China. Generally, most commentators' view is that the coking coal market is improving with demand in China to increase at levels which will support better market conditions for the producer. The strength of the potential supply response to this demand is likely to cap price increases and lead to less volatility in pricing and market conditions throughout 2013.

In March 2013, the Company recommenced mining activities at the Ovoot Tolgoi Mine; however, the production levels will reflect both market conditions and the Company's capability to produce. Production is forecast to be 3.2 million tonnes in 2013. The capability to begin supplying a washed semi-soft product in the second half of the year is another important step in improving both the Company's market position and access to end customers. Once toll washing commences, it will enable SouthGobi to develop a predominantly two product strategy of a premium and standard semi-soft coal product from the Ovoot Tolgoi Mine. The premium product will be washed and the standard product will be predominantly unwashed product. Although production has recommenced, the Company continues to minimize uncommitted capital expenditures and exploration expenditures in order to preserve the Company's financial resources. The Company's liquidity beyond December 31, 2013 is dependent on the success of the recommencement of operations and ongoing demand and prices in the coal market.

Longer term, SouthGobi remains well positioned, with a number of key competitive strengths, including:


Strategic location - SouthGobi is the closest major coking coal producer in the world to China. The Ovoot Tolgoi Mine is approximately 40km from China, which is approximately 190km closer than Tavan Tolgoi coal producers in Mongolia and 7,000 to 10,000km closer than Australian and North American coking coal producers. The Company has an infrastructure advantage, being approximately 50km from existing railway infrastructure, which is approximately one tenth the distance to rail of Tavan Tolgoi coal producers in Mongolia.
Premium quality coals - Most of the Company's coal resources have coking properties, including a mixture of semi-soft coking coals and hard coking coals. SouthGobi is also completing its investment in infrastructure to capture more of the value from the products it sells.
Favorable cost structure - The long-term cost structure of SouthGobi provides a strong base for sustainable growth when access to end-user markets is obtained even though competition from other Chinese and Mongolian semi-soft coals indicate that capturing margins relative to other international coals is difficult.
Substantial resource base - The Company's aggregate coal resources (including reserves) include measured and indicated resources of 533 million tonnes and inferred resources of 302 million tonnes.

Objectives

SouthGobi's objectives for 2012 were impacted by the external conditions faced by the Company. SouthGobi has attempted to mitigate the issues by reducing capital expenditures, operating costs and exploration to preserve the Company's financial resources.

The Company's objectives for 2013 are as follows:


Resume production at the Ovoot Tolgoi Mine - The Company has reviewed the overall structure of its workforce and market conditions and has recommenced mining activities at the Ovoot Tolgoi Mine in March 2013 with the capacity to produce 3.2 million tonnes in 2013. The focus is to do this in a safe manner that provides a sustainable long-term operating base.
Continue to develop regional infrastructure - The Company's priority is to complete the construction of the paved highway from Ovoot Tolgoi to the Shivee Khuren Border Crossing as part of the existing consortium that was awarded the tender by the end of 2013.
Advance the Soumber Deposit - The Company intends to substantially advance the feasibility, planning and physical preparation for a mine at Soumber by 2014.
Value-adding/upgrading coal - Implement an effective and profitable utilization of the wet washing facility contracted with Ejin Jinda to toll-wash coal from the Ovoot Tolgoi Mine and further develop the Company's marketing plans on product mix and seek to expand the
Company's customer base.
Re-establish the Company's reputation - The Company's vision is to be a respected and profitable Mongolian coal company. This will require re-establishing good working relationships with all our external stakeholders.
Operations - Continuing to focus on production safety, environmental protection, operational excellence and community relations.

NON-IFRS FINANCIAL MEASURES

Cash Costs:

The Company uses cash costs to describe its cash production costs. Cash costs incorporate all production costs, which include direct and indirect costs of production, with the exception of idled mine costs which are excluded. Non-cash adjustments include share-based compensation expense, inventory impairments, depreciation and depletion of mineral properties.

The Company uses this performance measure to monitor its operating cash costs internally and believes this measure provides investors and analysts with useful information about the Company's underlying cash costs of operations. The Company believes that conventional measures of performance prepared in accordance with IFRS do not fully illustrate the ability of its mining operations to generate cash flows. The Company reports cash costs on a sales basis. This performance measure is commonly utilized in the mining industry.

The cash costs of product sold may differ from cash costs of product produced depending on the timing of stockpile inventory turnover.

Adjusted Net Income/(Loss):

Adjusted net income/(loss) excludes idled mine costs, share-based compensation expense, net impairment loss/(recovery) on assets, unrealized foreign exchange losses/(gains), unrealized loss/(gain) on the fair value change of the embedded derivatives in the CIC convertible debenture, realized losses/(gains) on the disposal of FVTPL investments and unrealized losses/(gains) on FVTPL investments. The Company excludes these items from net income/(loss) to provide a measure which allows the Company and investors to evaluate the results of the underlying core operations of the Company and its profitability from operations. The items excluded from the computation of adjusted net income/(loss), which are otherwise included in the determination of net income/(loss) prepared in accordance with IFRS, are items that the Company does not consider to be meaningful in evaluating the Company's past financial performance or the future prospects and may hinder a comparison of its period-to-period results.

CONSOLIDATED FINANCIAL STATEMENTS

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SELECT INFORMATION FROM THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Additional information required by the Hong Kong Stock Exchange and not disclosed elsewhere in this announcement is as follows. All amounts are expressed in thousands of U.S. Dollars and shares in thousands, unless otherwise indicated.

1.BASIS OF PREPARATION

1.1Corporate information and liquidity

The Company curtailed its mining activities at the Ovoot Tolgoi Mine during the three months ended June 30, 2012 to varying degrees to manage coal inventories and to maintain efficient working capital levels. As at June 30, 2012, mining activities had been fully curtailed. The Company's mining activities remained fully curtailed during the remainder of the year ended December 31, 2012.

The Company had cash and short term investments of $34,674 and working capital of $127,230 at December 31, 2012. These consolidated financial statements have been prepared on a going concern basis which assumes that the Company will continue operating for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations as they come due. The Company has in place a planning, budgeting and forecasting process to help determine the funds required to support the Company's normal operations on an ongoing basis and its expansionary plans. The Company expects to have sufficient liquidity and capital resources to meet its ongoing obligations and future contractual commitments for at least twelve months from the end of the December 31, 2012 reporting period. The Company expects its liquidity to remain sufficient based on existing capital resources and income from mining operations. Liquidity beyond the twelve month period is dependent on the success of the recommencement of operations and ongoing demand and prices in the coal market. On March 22, 2013, the Company recommenced mining activities at the Ovoot Tolgoi Mine. The Company continues to minimize uncommitted capital expenditures and exploration expenditures in order to preserve the Company's financial resources.

1.2Statement of compliance

The Company's consolidated financial statements, including comparatives, have been prepared in accordance with and using accounting policies in full compliance with the International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board ("IASB") and Interpretations of the IFRS Interpretations Committee.

1.3Basis of presentation

The consolidated financial statements have been prepared on a historical cost basis except for certain financial assets and financial liabilities which are measured at fair value. The Company's reporting currency and the functional currency of all of its operations is the U.S. Dollar as this is the principal currency of the economic environment in which the Company operates.

2.SEGMENTED INFORMATION

The Company's one reportable operating segment is its Mongolian Coal Division. The Company's Corporate Division does not earn revenues and therefore does not meet the definition of an operating segment.

The carrying amounts of the Company's assets, liabilities, reported income or loss and revenues analyzed by operating segment are as follows:

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3.COST OF SALES

The Company's cost of sales consists of the following amounts:

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4.OTHER OPERATING EXPENSES

The Company's other operating expenses consist of the following amounts:

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5.ADMINISTRATION EXPENSES

The Company's administration expenses consist of the following amounts:

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6.EVALUATION AND EXPLORATION EXPENSES

The Company's evaluation and exploration expenses consist of the following amounts:

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7. FINANCE COSTS AND INCOME

The Company's finance costs consist of the following amounts:

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The Company's finance income consists of the following amounts:

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8. TAXES

8.1 Income tax recognized in profit or loss

The Company and its subsidiaries are subject to income or profits tax in the jurisdictions in which the Company operates, including Canada, Hong Kong, Singapore and Mongolia. Income or profits tax was not provided for the Company's operations in Canada, Hong Kong or Singapore as the Company had no assessable income or profit arising in or derived from these jurisdictions. The Company's tax balances reflect income tax assessed on its Mongolian operations. A reconciliation between the Company's tax recovery and the product of the Company's income or loss from operations before tax multiplied by the Company's domestic tax rate is as follows:

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8.2Income tax recognized in other comprehensive income

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8.3Deferred tax balances

The Company's deferred tax assets/(liabilities) consist of the following amounts:

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8.4Unrecognized deductible temporary differences and unused tax losses

The Company's deductible temporary differences and unused tax losses for which no deferred tax asset is recognized consist of the following amounts:

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8.5Expiry dates

The expiry dates of the Company's unused tax losses are as follows:

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9.EARNINGS/(LOSS) PER SHARE

The calculation of basic earnings/(loss) and diluted loss per share is based on the following data:

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Potentially dilutive items not included in the calculation of diluted earnings/(loss) per share for the year ended December 31, 2012 were 7,507 stock options that were anti-dilutive.

10. TRADE AND OTHER RECEIVABLES

The Company's trade and other receivables consist of the following amounts:

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The aging of the Company's trade and other receivables is as follows:

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For the year ended December 31, 2012, the Company recorded a $18,430 loss provision on its trade and other receivables (2011: $1,892). The loss provision relates to provisions for certain uncollectible trade receivables of $17,419 and a reduction in the expected insurance proceeds of $1,011. The Company anticipates full recovery of its remaining outstanding trade and other receivables; therefore, no further loss provisions have been recorded in respect of the Company's trade and other receivables.

11.TRADE AND OTHER PAYABLES

Trade and other payables of the Company primarily consists of amounts outstanding for trade purchases relating to coal mining, development and exploration activities and mining royalties payable. The usual credit period taken for trade purchases is between 30 to 90 days.

The aging of the Company's trade and other payables is as follows:

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12.CONVERTIBLE DEBENTURE

On November 19, 2009, the Company issued a convertible debenture to a wholly owned subsidiary of the China Investment Corporation for $500,000.

The convertible debenture is presented as a liability since it contains no equity components. The convertible debenture is a hybrid instrument, containing a debt host component and three embedded derivatives - the investor's conversion option, the issuer's conversion option and the equity based interest payment provision (the 1.6% share interest payment) (the "embedded derivatives"). The debt host component is classified as other-financial-liabilities and is measured at amortized cost using the effective interest rate method and the embedded derivatives are classified as FVTPL and all changes in fair value are recorded in profit or loss. The difference between the debt host component and the principal amount of the loan outstanding is accreted to profit or loss over the expected life of the convertible debenture.

The embedded derivatives were valued upon initial measurement and subsequent periods using a Monte Carlo simulation valuation model. A Monte Carlo simulation model is a valuation model that relies on random sampling and is often used when modeling systems with a large number of inputs and where there is significant uncertainty in the future value of inputs and where the movement of the inputs can be independent of each other. Some of the key inputs used by the Company in its Monte Carlo simulation include: the floor and ceiling conversion prices, the Company's common share price, the risk-free rate of return, expected volatility of the stock price, forward foreign exchange rate curves (between the Cdn$ and U.S. Dollar) and spot foreign exchange rates.

12.1Partial conversion

On March 29, 2010, pursuant to the convertible debenture conversion terms, the Company exercised its conversion right and completed the conversion of $250,000 of the convertible debenture into 21,471 shares at a conversion price of $11.64 (Cdn$11.88).

12.2 Presentation

Based on the Company's valuations as at December 31, 2012, the fair values of the embedded derivatives decreased by $39,512 compared to December 31, 2011. The decrease was recorded as finance income for the year ended December 31, 2012.

For the year ended December 31, 2012, the Company recorded interest expense of $20,094 (2011: $20,076) related to the convertible debenture of which $9,628 was capitalized as borrowing costs and the remaining $10,466 was recorded as a finance cost. The interest expense consists of the interest at the contract rate and the accretion of the debt host component of the convertible debenture. To calculate the accretion expense, the Company uses the contract life of 30 years and an effective interest rate of 22.2%.

The movements of the amounts due under the convertible debenture are as follows:

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The convertible debenture balance consists of the following amounts:

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12.3 Convertible debenture share interest payment and application of Mongolian Foreign Investment Law

On May 17, 2012, the Parliament of Mongolia approved a Foreign Investment Law that regulates foreign direct investment into a number of key sectors of strategic importance, which includes mineral resources. If foreign shareholding exceeds 49% of an asset and the amount of the investment at the time is to exceed 100 billion Mongolian Tugriks (approximately $71,500), then parliamentary approval is required. In the case of state owned entities there is no minimum threshold and all proposed investments from state owned entities require parliamentary approval. In addition, if a foreign entity wants to acquire one third or more of the shares in an investment in a strategic sector, then the 100 billion Mongolian Tugrik threshold is not applicable and cabinet approval for the investment is required regardless of the value.

The terms of the convertible debenture provide for the 1.6% share interest payment of $4,000 to be paid annually in common shares of the Company. As a result of the Foreign Investment Law, the Company expected it would require parliamentary approval for the shares to be issued for the November 19, 2012 share interest payment. Subsequent to December 31, 2012, the Company settled the 1.6% share interest payment of $4,000 in cash.

13. ACCUMULATED DEFICIT AND DIVIDENDS

At December 31, 2011, the Company has accumulated a deficit of $501,934 (2011: $398,820). No dividends have been paid or declared by the Company since inception.

REVIEW OF RESULTS AND RELEASE OF AUDITED RESULTS

The consolidated financial statements for the Company for the year ended December 31, 2012, were reviewed by the Audit Committee of the Company.

The figures in respect of the Company's consolidated statement of financial position, consolidated statement of comprehensive income and the related notes thereto for the year ended December 31, 2012, as set out in the Fourth Quarter and Full Year 2012 Financial and Operating Results have been agreed by the Company's auditor, PricewaterhouseCoopers LLP ("PwC"), to the amounts set out in the Company's audited consolidated financial statements for the year. The work performed by PwC in this respect did not constitute an assurance engagement in accordance with Hong Kong Standards on Auditing, Hong Kong Standards on Review Engagements or Hong Kong Standards on Assurance Engagements issued by the Hong Kong Institute of Certified Public Accountants and consequently no assurance has been expressed by PwC on the Fourth Quarter and Full Year 2012 Financial and Operating Results announcement.

SouthGobi's results for the year ended December 31, 2012, 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 25, 2013 on the SEDAR website at www.sedar.com and SouthGobi's website at www.southgobi.com. Copies of SouthGobi's 2012 Annual Report, containing the audited financial statements and MD&A, and the Annual Information Form ("AIF") will be available at www.southgobi.com under the corporate page. Shareholders with registered addresses in Hong Kong who have elected to receive a copy of SouthGobi's Annual Report will receive one. Other shareholders may request a hard copy of the Annual Report free of charge by contacting our investor relations department by phone at +852 2156 7022 or +1 604 681 6799 or by email at info@southgobi.com.

ABOUT SOUTHGOBI RESOURCES

SouthGobi Resources is listed on the Toronto and Hong Kong stock exchanges, in which Turquoise Hill Resources Ltd., also publicly listed in Toronto and New York, has a 58% 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 Resources 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.

Disclosure of a scientific or technical nature in this release and the Company's MD&A with respect to the Company's Mongolian Coal Division was prepared by, or under the supervision of RungePincockMinarco ("RPM"). The professionals at RPM meet the definition of a "qualified person" for the purposes of National Instrument 43-101 of the Canadian Securities Administrators.

Forward-Looking Statements: This document includes forward-looking statements. Forward-looking statements include, but are not limited to: the statement that gross profit will vary by year depending on sales volume, sales price and unit costs; statements relating to the determination of the royalty rate on coal sales exported out of Mongolia; statements regarding future variances in exploration expenses; the statement that the Company anticipates full recovery of its remaining outstanding trade and other receivables; the statement that the Company expects to have sufficient liquidity and capital resources to meet its ongoing obligations and future contractual commitments for at least twelve months from the end of the December 31, 2012 reporting period; the statement that the Company expects its liquidity to remain sufficient based on existing capital resources and income from mining operations; statements regarding the estimates and assumptions incorporated into the impairment analysis on the carrying values of certain assets related to the Ovoot Tolgoi Mine; the statement that completion of the paved highway is expected late 2013; the statement that the capacity of the paved highway in excess of 20 million tonnes of coal per year; statements regarding the Company's entitlement to conciliation or arbitration proceedings under ICSID; statements regarding the outlook for 2013; statements regarding the supply and demand of the coking coal market; statements regarding the production forecast for the Ovoot Tolgoi mine; statements regarding the Company's objectives for 2013 (including the production of the Ovoot Tolgoi Mine, plans to continue to develop regional infrastructure from Ovoot Tolgoi to the Shivee Khuren Border Crossing, plans regarding the implementation of the wet washing facility to toll-wash coal from the Ovoot Tolgoi mine, plans to re-establish the Company's reputation and plans regarding operations); the assumption that the Company will continue to operate for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations as they come due; and other statements that are not historical facts. When used in this document, the words such as "plan", "estimate", "expect", "intend", "may", and similar expressions are forward-looking statements. Although SouthGobi 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's Management's Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2012 which are available at www.sedar.com.

Mongolia:
SouthGobi Sands LLC (Mongolia)
Altanbagana Bayarsaikhan
+976 9910 7589
Altanbagana.Bayarsaikhan@southgobi.com
Hong Kong:
Brunswick Group (Hong Kong)
Joseph Lo
+852 9850 5033
Hong Kong:
Brunswick Group (Hong Kong)
Joanna Donne
+852 9221 3930
southgobi@brunswickgroup.com
www.southgobi.com

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