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

SouthGobi Resources Announces Fourth Quarter and Full Year 2012 Financial and 
Operating Results 
HONG KONG, CHINA -- (Marketwire) -- 03/25/13 -- 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 subsidiar
y 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: 


 
                                --------------------------------------------
                                                    2012                    
----------------------------------------------------------------------------
QUARTER ENDED                        31-Dec     30-Sep     30-Jun     31-Mar
----------------------------------------------------------------------------
Volumes and prices                                                          
Raw semi-soft coking coal                                                   
  Raw coal production (millions                                             
   of tonnes)                             -          -       0.07       0.28
  Coal sales (millions of                                                   
   tonnes)                             0.03          -       0.12       0.31
  Average realized selling price                                            
   (per tonne)                   $    47.86 $        - $    67.17 $    67.59
Raw medium-ash coal                                                         
  Raw coal production (millions                                             
   of tonnes)                             -          -       0.11       0.64
  Coal sales (millions of                                                   
   tonnes)                                -          -       0.04       0.53
  Average realized selling price                                            
   (per tonne)                   $        - $        - $    49.91 $    50.40
Raw higher-ash coal                                                         
  Raw coal production (millions                                             
   of tonnes)                             -          -       0.09       0.15
  Coal sales (millions of                                                   
   tonnes)                                -       0.31       0.00          -
  Average realized selling price                                            
   (per tonne)                   $        - $    15.79 $    38.80 $        -
Total                                                                       
  Raw coal production (millions                                             
   of tonnes)                             -          -       0.27       1.07
  Coal sales (millions of                                                   
   tonnes)                             0.03       0.31       0.16       0.84
  Average realized selling price                                            
   (per tonne)                   $    47.86 $    15.79 $    62.56 $    56.79
                                                                            
Costs                                                                       
  Direct cash costs of product                                              
   sold excluding idled mine                                                
   costs                         $    33.11 $     8.23 $    22.57 $    10.80
  (per tonne) (i)                                                           
  Total cash costs of product                                               
   sold excluding idled mine                                                
   costs                         $    38.17 $    12.12 $    31.49 $    15.04
  (per tonne) (i)                                                           
                                                                            
Waste movement and stripping                                                
 ratio                                                                      
  Production waste material                                                 
   moved (millions of bank cubic                                            
   meters)                                -          -       1.16       2.20
  Strip ratio (bank cubic meters                                            
   of waste material per tonne                                              
   of coal                                                                  
  produced)                               -          -       4.31       2.07
  Pre-production waste material                                             
   moved (millions of bank cubic                                            
   meters)                                -          -          -          -
Other operating capacity                                                    
 statistics                                                                 
  Capacity                                                                  
  Number of mining                                                          
   shovels/excavators available                                             
   at period end                          5          4          4          3
  Total combined stated mining                                              
   shovel/excavator capacity at                                             
   period end                                                               
  (cubic meters)                        113         98         98         64
  Number of haul trucks                                                     
   available at period end               27         27         27         27
  Total combined stated haul                                                
   truck capacity at period end                                             
   (tonnes)                           4,743      4,743      4,743      4,743
  Employees and safety                                                      
  Employees at period end               465        644        693        720
  Lost time injury frequency                                                
   rate (ii)                            0.5        0.8        1.1        1.4
----------------------------------------------------------------------------
 
                                --------------------------------------------
                                                    2011                    
----------------------------------------------------------------------------
QUARTER ENDED                        31-Dec     30-Sep     30-Jun     31-Mar
----------------------------------------------------------------------------
Volumes and prices                                                          
Raw semi-soft coking coal                                                   
  Raw coal production (millions                                             
   of tonnes)                          0.47       0.55       0.52       0.48
  Coal sales (millions of                                                   
   tonnes)                             0.53       0.66       0.60       0.34
  Average realized selling price                                            
   (per tonne)                   $    67.62 $    66.83 $    65.96 $    56.50
Raw medium-ash coal                                                         
  Raw coal production (millions                                             
   of tonnes)                          0.37       0.20          -          -
  Coal sales (millions of                                                   
   tonnes)                             0.37       0.20          -          -
  Average realized selling price                                            
   (per tonne)                   $    48.59 $    48.17 $        - $        -
Raw higher-ash coal                                                         
  Raw coal production (millions                                             
   of tonnes)                          0.50       0.50       0.35       0.63
  Coal sales (millions of                                                   
   tonnes)                             0.25       0.51       0.45       0.11
  Average realized selling price                                            
   (per tonne)                   $    40.30 $    39.74 $    38.32 $    31.68
Total                                                                       
  Raw coal production (millions                                             
   of tonnes)                          1.34       1.25       0.87       1.11
  Coal sales (millions of                                                   
   tonnes)                             1.15       1.37       1.05       0.45
  Average realized selling price                                            
   (per tonne)                   $    55.51 $    54.01 $    54.06 $    50.29
                                                                            
Costs                                                                       
  Direct cash costs of product                                              
   sold excluding idled mine                                                
   costs                         $    22.14 $    22.64 $    26.77 $    18.91
  (per tonne) (i)                                                           
  Total cash costs of product                                               
   sold excluding idled mine                                                
   costs                         $    23.09 $    23.17 $    27.61 $    20.61
  (per tonne) (i)                                                           
                                                                            
Waste movement and stripping                                                
 ratio                                                                      
  Production waste material                                                 
   moved (millions of bank cubic                                            
   meters)                             4.58       4.10       4.08       3.85
  Strip ratio (bank cubic meters                                            
   of waste material per tonne                                              
   of coal                                                                  
  produced)                            3.42       3.28       4.74       3.47
  Pre-production waste material                                             
   moved (millions of bank cubic                                            
   meters)                                -       0.39       0.80       0.49
Other operating capacity                                                    
 statistics                                                                 
  Capacity                                                                  
  Number of mining                                                          
   shovels/excavators available                                             
   at period end                          3          3          4          3
  Total combined stated mining                                              
   shovel/excavator capacity at                                             
   period end                                                               
  (cubic meters)                         64         64         98         83
  Number of haul trucks                                                     
   available at period end               25         16         16         16
  Total combined stated haul                                                
   truck capacity at period end                                             
   (tonnes)                           4,561      2,599      2,599      2,599
  Employees and safety                                                      
  Employees at period end               720        695        658        600
  Lost time injury frequency                                                
   rate (ii)                            1.2        0.9        0.6        0.7
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(i)  A non-IFRS financial measure, see Non-IFRS Financial Measures section  
(ii) Per 1,000,000 man hours                                                

 
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) 


 
----------------------------------------------------------------------------
                                                    2012                    
                                --------------------------------------------
QUARTER ENDED                       31-Dec     30-Sep     30-Jun     31-Mar 
----------------------------------------------------------------------------
Revenue                          $   1,213  $   3,337  $   8,412  $  40,153 
Gross profit/(loss) excluding                                               
 idled mine costs                   (6,894)    (8,601)     1,778     22,674 
 Gross profit margin excluding                                              
  idled mine costs                    -568%      -258%        21%        56%
Gross profit/(loss) including                                               
 idled mine costs                  (25,336)   (27,532)   (13,809)    22,674 
Other operating expenses           (18,664)   (29,301)    (3,803)    (2,578)
Administration expenses             (6,079)    (5,178)    (7,497)    (5,882)
Evaluation and exploration                                                  
 expenses                             (508)      (958)    (2,099)    (5,033)
Income/(loss) from operations      (50,586)   (62,969)   (27,208)     9,181 
Net income/(loss)                  (51,818)   (54,564)       237      3,126 
Basic income/(loss) per share        (0.28)     (0.30)      0.00       0.02 
Diluted income/(loss) per share      (0.28)     (0.30)     (0.12)      0.02 
----------------------------------------------------------------------------
 
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                                                    2011                    
                                --------------------------------------------
QUARTER ENDED                       31-Dec     30-Sep     30-Jun     31-Mar 
----------------------------------------------------------------------------
Revenue                          $  51,064  $  60,491  $  47,336  $  20,158 
Gross profit/(loss) excluding                                               
 idled mine costs                   16,637     17,635      9,744      7,690 
 Gross profit margin excluding                                              
  idled mine costs                      33%        29%        21%        38%
Gross profit/(loss) including                                               
 idled mine costs                   16,637     17,635      9,744      7,690 
Other operating expenses           (24,644)      (138)    (3,024)    (1,383)
Administration expenses             (8,612)    (7,993)    (6,808)    (5,336)
Evaluation and exploration                                                  
 expenses                          (14,513)   (10,908)    (4,356)    (1,991)
Income/(loss) from operations      (31,132)    (1,404)    (4,444)    (1,020)
Net income/(loss)                  (18,897)    55,921     67,323    (46,602)
Basic income/(loss) per share        (0.10)      0.31       0.37      (0.25)
Diluted income/(loss) per share      (0.14)     (0.02)         -      (0.25)
----------------------------------------------------------------------------
                                                                            
                                                                            
                                --------------------------------------------
                                                   2012                     
----------------------------------------------------------------------------
QUARTER ENDED                       31-Dec     30-Sep     30-Jun     31-Mar 
----------------------------------------------------------------------------
Net income/(loss)                $ (51,818) $ (54,564) $     237  $   3,126 
                                                                            
Income/(loss) adjustments, net                                              
 of tax                                                                     
 Idled mine costs                   14,474     13,572     10,966          - 
 Share-based compensation                                                   
  expense/(recovery)                (1,144)     1,490      4,383      3,799 
 Net impairment loss/(recovery)                                             
  on assets                         22,814     34,299      2,583          - 
 Unrealized foreign exchange                                                
  losses/(gains)                       750        179       (511)      (950)
 Unrealized loss/(gain) on                                                  
  embedded derivatives in CIC                                               
  debenture                           (662)   (12,856)   (26,770)       776 
 Realized loss/(gain) on                                                    
  disposal of FVTPL investments                                             
  (i)                                   15          -         46        (85)
 Unrealized loss/(gain) on FVTPL                                            
  investments                          664      1,197      2,282        339 
                                                                            
Adjusted net income/(loss) (ii)    (14,907)   (16,683)    (6,784)     7,005 
----------------------------------------------------------------------------
 
                                                                            
                                                                            
                                --------------------------------------------
                                                    2011                    
----------------------------------------------------------------------------
QUARTER ENDED                       31-Dec     30-Sep     30-Jun     31-Mar 
----------------------------------------------------------------------------
Net income/(loss)                $ (18,897) $  55,921  $  67,323  $ (46,602)
                                                                            
Income/(loss) adjustments, net                                              
 of tax                                                                     
 Idled mine costs                        -          -          -          - 
 Share-based compensation                                                   
  expense/(recovery)                 4,050      4,296      3,349      2,715 
 Net impairment loss/(recovery)                                             
  on assets                         23,818     (2,925)         -          - 
 Unrealized foreign exchange                                                
  losses/(gains)                        34        103        263       (993)
 Unrealized loss/(gain) on                                                  
  embedded derivatives in CIC                                               
  debenture                        (10,790)   (62,058)   (70,422)    36,780 
 Realized loss/(gain) on                                                    
  disposal of FVTPL investments                                             
  (i)                                    -          -          -          - 
 Unrealized loss/(gain) on FVTPL                                            
  investments                          155      2,449     (3,629)     4,116 
                                                                            
Adjusted net income/(loss) (ii)     (1,630)    (2,214)    (3,116)    (3,984)
----------------------------------------------------------------------------
(i)  FVTPL is defined as "fair value through profit or loss"                
(ii) A non-IFRS financial measure, see Non-IFRS Financial Measures section  

 
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   


 
Consolidated Statements of Comprehensive Income
(Expressed in thousands of U.S. Dollars,
 except for share and per share amounts)
 
                                                 Year ended December 31,    
                                              ----------------------------- 
                                        Notes           2012           2011 
                                       ------ -------------- -------------- 
Revenue                                         $     53,116   $    179,049 
Cost of sales                               3        (97,118)      (127,343)
--------------------------------------------- -------------- -------------- 
Gross profit/(loss)                                  (44,002)        51,706 
--------------------------------------------- -------------- -------------- 
                                                                            
Other operating expenses                    4        (54,345)       (29,189)
Administration expenses                     5        (24,637)       (28,749)
Evaluation and exploration expenses         6         (8,598)       (31,768)
--------------------------------------------- -------------- -------------- 
Loss from operations                                (131,582)       (38,000)
--------------------------------------------- -------------- --------------
                                                                            
Finance costs                               7        (15,385)       (12,765)
Finance income                              7         39,942        107,732 
Share of earnings of joint venture                       635              - 
--------------------------------------------- -------------- -------------- 
Income/(loss) before tax                            (106,390)        56,967 
Current income tax expense                  8           (354)        (7,340)
Deferred income tax recovery                8          3,725          8,118 
--------------------------------------------- -------------- -------------- 
Net income/(loss) attributable to                                           
 equity holders of the Company                      (103,019)        57,745 
--------------------------------------------- -------------- --------------
                                                                            
OTHER COMPREHENSIVE INCOME/(LOSS)                                           
Loss on available-for-sale financial                                        
 asset, net of tax                                         -        (11,202)
Reclassification of gain on available-                                      
 for-sale financial asset, net of tax                (16,559)             - 
------------------------------------------------------------ -------------- 
Net comprehensive income/(loss)                                             
 attributable to equity holders of the                                      
 Company                                        $   (119,578)  $     46,543 
--------------------------------------------------------------------------- 
--------------------------------------------------------------------------- 
                                                                            
                                                                            
BASIC INCOME/(LOSS) PER SHARE               9   $      (0.57)  $       0.32 
DILUTED LOSS PER SHARE                      9   $      (0.63)  $      (0.19)
 
 
 
Consolidated Statements of Financial Position                               
(Expressed in thousands of U.S. Dollars)                                    
                                                                            
                                                      As at December 31,    
                                                  --------------------------
                                         Notes          2012           2011 
                                        ------    ----------     ---------- 
ASSETS                                                                      
Current assets                                                              
Cash                                             $    19,674    $   123,567 
Trade and other receivables                 10        17,430         80,285 
Short term investments                                15,000              - 
Inventories                                           53,661         52,443 
Prepaid expenses and deposits                         37,982         38,308 
----------------------------------------------------------------------------
Total current assets                                 143,747        294,603 
Non-current assets                                                          
Prepaid expenses and deposits                         16,778          8,389 
Property, plant and equipment                        521,473        498,533 
Long term investments                                 24,084         99,238 
Deferred income tax assets                   8        23,285         19,560 
----------------------------------------------------------------------------
Total non-current assets                             585,620        625,720 
----------------------------------------------------------------------------
Total assets                                     $   729,367    $   920,323 
----------------------------------------------------------------------------
                                                                            
EQUITY AND LIABILITIES                                                      
Current liabilities                                                         
Trade and other payables                    11   $    10,216    $    52,235 
Current portion of convertible debenture    12         6,301          6,301 
----------------------------------------------------------------------------
Total current liabilities                             16,517         58,536 
Non-current liabilities                                                     
Convertible debenture                       12        99,667        139,085 
Deferred income tax liabilities              8             -          2,366 
Decommissioning liability                              4,104          4,156 
----------------------------------------------------------------------------
Total non-current liabilities                        103,771        145,607 
----------------------------------------------------------------------------
Total liabilities                                    120,288        204,143 
                                                                            
Equity                                                                      
Common shares                                      1,059,710      1,054,298 
Share option reserve                                  51,303         44,143 
Investment revaluation reserve                             -         16,559 
Accumulated deficit                         13      (501,934)      (398,820)
----------------------------------------------------------------------------
Total equity                                         609,079        716,180 
                                                                            
----------------------------------------------------------------------------
Total equity and liabilities                     $   729,367    $   920,323 
----------------------------------------------------------------------------
                                                                            
Net current assets                               $   127,230    $   236,067 
Total assets less current liabilities            $   712,850    $   861,787 

 
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  
1.1  Corporate 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.  
1.2  Statement 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. 
1.3  Basis 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: 


 
                                                                            
                                                                            
                                    Mongolian    Unallocated   Consolidated 
                                Coal Division            (i)          Total 
                               -------------- -------------- -------------- 
Segment assets                                                              
  As at December 31, 2012         $   673,896    $    55,471    $   729,367 
  As at December 31, 2011             696,732        223,591        920,323 
Segment liabilities                                                         
  As at December 31, 2012         $    11,315    $   108,973    $   120,288 
  As at December 31, 2011              51,256        152,887        204,143 
Segment income/(loss)                                                       
  For the year ended December                                               
   31, 2012                       $   (90,509)   $   (12,510)   $  (103,019)
  For the year ended December                                               
   31, 2011                           (14,043)        71,788         57,745 
Segment revenues                                                            
  For the year ended December                                               
   31, 2012                       $    53,116    $         -    $    53,116 
  For the year ended December                                               
   31, 2011                           179,049              -        179,049 
Impairment charge on assets                                                 
 (ii), (iii)                                                                
  For the year ended December                                               
   31, 2012                       $    47,871    $    19,184    $    67,055 
  For the year ended December                                               
   31, 2011                            20,893              -         20,893 
                                                                            
(i)   The unallocated amount contains all amounts associated with the       
      Corporate Division                                                    
(ii)  The impairment charge on assets for the year ended December 31, 2012  
      relates to trade and other receivables, investments, inventories and  
      property, plant and equipment                                         
(iii) The impairment charge on assets for the year ended December 31, 2011  
      relates to trade and other receivables, inventories and property,     
      plant and equipment                                                   

 
3. COST OF SALES 
The Company's cost of sales consists of the following amounts:  


 
                                                     Year ended December 31,
                                              ------------------------------
                                                         2012           2011
                                              ---------------    -----------
Operating expenses                               $     22,277   $     97,671
Share-based compensation expense                        1,205          1,942
Depreciation and depletion                              6,482         27,730
Impairment of inventories                              14,196              -
----------------------------------------------------------------------------
Cost of sales during mine operations                   44,160        127,343
Cost of sales during idled mine period (i)             52,958              -
----------------------------------------------------------------------------
Cost of sales                                    $     97,118   $    127,343
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i)  Cost of sales during idled mine period for the year ended December 31, 
    2012 includes $33,358 of depreciation expense and other non-cash costs  
    and $942 of share-based compensation expense. The depreciation expense  
    relates to the Company's idled plant and equipment.                     

 
4. OTHER OPERATING EXPENSES  
The Company's other operating expenses consist of the following
amounts:  


 
                                                   Year ended December 31,  
                                                  ------------------------- 
                                                        2012           2011 
                                                  ----------     ---------- 
Public infrastructure                            $     1,273    $     8,069 
Sustainability and community relations                   894          1,017 
Foreign exchange (gain)/loss                           2,729           (790)
Provision for doubtful trade and other                18,430          1,892 
 receivables                                                                
Impairment loss on available-for-sale                 19,184              - 
 financial asset                                                            
Impairment of inventories                                  -          2,396 
Impairment of property, plant and equipment           15,245         16,605 
Other                                                 (3,410)             - 
----------------------------------------------------------------------------
Other operating expenses                         $    54,345    $    29,189 
----------------------------------------------------------------------------
----------------------------------------------------------------------------

 
5. ADMINISTRATION EXPENSES                  
The Company's administration expenses consist of the following
amounts:            


 
                                                                            
                                                     Year ended December 31,
                                                 ---------------------------
                                                          2012          2011
                                                 ------------- -------------
Corporate administration                           $     5,525   $     7,136
Legal and professional fees                              7,293         4,279
Salaries and benefits                                    5,556         5,538
Share-based compensation expense                         6,048        11,474
Depreciation                                               215           322
----------------------------------------------------------------------------
Administration expenses                            $    24,637   $    28,749
----------------------------------------------------------------------------
----------------------------------------------------------------------------

 
6. EVALUATION AND EXPLORATION EXPENSES  
The Company's evaluation and exploration expenses consist of the
following amounts:  


 
                                                     Year ended December 31,
                                               -----------------------------
                                                         2012           2011
                                               -------------- --------------
 Drilling and trenching                           $     3,708    $    21,842
 Other direct expenses                                  1,428          4,801
 Share-based compensation expense                         333            994
 Overhead and other                                     3,129          4,131
----------------------------------------------------------------------------
 Evaluation and exploration expenses              $     8,598    $    31,768
----------------------------------------------------------------------------
----------------------------------------------------------------------------

 
7.  FINANCE COSTS AND INCOME               
The Company's finance costs consist of the following amounts:         


 
                                                                            
                                                    Year ended December 31, 
                                                 ---------------------------
                                                          2012          2011
                                                 ------------- -------------
Interest expense on convertible debenture          $    10,466   $     9,137
Unrealized loss on FVTPL investments                     4,482         3,091
Interest expense on line of credit facility                322           351
Accretion of decommissioning liability                     115           186
----------------------------------------------------------------------------
Finance costs                                      $    15,385   $    12,765
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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


 
                                                                            
                                                    Year ended December 31, 
                                                 ---------------------------
                                                          2012          2011
                                                 ------------- -------------
Unrealized gain on embedded derivatives in                                  
convertible debenture                              $    39,512   $   106,489
Interest income                                            406         1,243
Realized gain on disposal of FVTPL investments              24             -
----------------------------------------------------------------------------
Finance income                                     $    39,942   $   107,732
----------------------------------------------------------------------------
----------------------------------------------------------------------------

 
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: 


 
                                                   Year ended December 31,  
                                                 ---------------------------
                                                         2012          2011 
                                                 ------------- -------------
(Income)/loss before tax                           $  106,390    $  (56,967)
                                                                            
Statutory tax rate                                      25.00%        26.50%
Income tax (recovery)/expense based on combined                             
Canadian federal and provincial statutory rates       (26,598)       15,096 
Deduct:                                                                     
Lower effective tax rate in foreign jurisdictions         323           502 
Tax effect of tax losses and temporary                                      
 differences not recognized                            15,564        12,281 
Non-taxable (income)/non-deductible expenses            7,340       (28,657)
----------------------------------------------------------------------------
Income tax recovery                                $   (3,371)   $     (778)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

 
8.2  Income tax recognized in other comprehensive income              


 
                                                                            
                                                  Year ended December 31,   
                                               -----------------------------
                                                        2012           2011 
                                               -------------- --------------
Fair value remeasurement of available-for-sale                              
 financial asset                                 $    (2,366)   $    (1,600)
----------------------------------------------------------------------------
Deferred tax recovery                            $    (2,366)   $    (1,600)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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


 
                                                                            
                                                      As at December 31,    
                                                 ---------------------------
                                                          2012          2011
                                                 ------------- -------------
 Tax loss carryforwards                            $     8,473   $         -
 Property, plant and equipment                           5,048         8,647
 Other assets                                            9,764        10,913
 Available-for-sale financial assets                         -       (2,366)
----------------------------------------------------------------------------
 Total deferred tax balances                       $    23,285   $    17,194

 
8.4  Unrecognized 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: 


 
                                                      As at December 31,    
                                                 ---------------------------
                                                          2012          2011
                                                 ------------- -------------
Non-capital losses                                 $    46,130   $   119,212
Capital losses                                               -        63,649
Deductible temporary differences                       110,945       107,997
----------------------------------------------------------------------------
Total unrecognized amounts                         $   157,075   $   290,858
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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


 
                                                  As at December 31, 2012   
                                             -------------------------------
                                                  U.S. Dollar         Expiry
                                                   Equivalent          dates
                                             ----------------  -------------
Non-capital losses                                                          
Canada                                         $       33,715           2032
Mongolia                                               33,892           2016
Hong Kong                                              12,302     indefinite
Singapore                                                 113     indefinite
                                             ----------------               
                                               $       80,022               
                                             ----------------               
                                             ----------------               

 
9. EARNINGS/(LOSS) PER SHARE  
The calculation of basic earnings/(loss) and diluted loss per share
is based on the following data:  


 
                                                 Year ended December 31,    
                                              ----------------------------- 
                                                        2012           2011 
                                              -------------- -------------- 
Net income/(loss)                               $   (103,019)  $     57,745 
Weighted average number of shares                    181,859        182,970 
--------------------------------------------------------------------------- 
Basic income/(loss) per share                   $      (0.57)  $       0.32 
--------------------------------------------------------------------------- 
--------------------------------------------------------------------------- 
                                                                            
Income/(loss)                                                               
Net income/(loss)                               $   (103,019)  $     57,745 
Interest expense on convertible debenture             10,466          9,137 
Unrealized gain on embedded derivatives                                     
in convertible debenture                             (39,512)      (106,489)
--------------------------------------------------------------------------- 
Diluted net loss                                $   (132,065)  $    (39,607)
--------------------------------------------------------------------------- 
--------------------------------------------------------------------------- 
                                                                            
Number of shares                                                            
Weighted average number of shares                    181,859        182,970 
Convertible debenture                                 28,406         20,931 
--------------------------------------------------------------------------- 
Diluted weighted average number of shares            210,265        203,901 
--------------------------------------------------------------------------- 
--------------------------------------------------------------------------- 
Diluted loss per share                          $      (0.63)  $      (0.19)
--------------------------------------------------------------------------- 
--------------------------------------------------------------------------- 

 
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:  


 
                                                     As at December 31,     
                                                ----------------------------
                                                         2012           2011
                                                -------------  -------------
Trade receivables                                 $    15,577    $    64,051
VAT/HST receivable                                         86            144
Insurance proceeds receivable                             500         12,913
Other receivables                                       1,267          3,177
----------------------------------------------------------------------------
Total trade and other receivables                 $    17,430    $    80,285
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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


 
                                                      As at December 31,    
                                                 ---------------------------
                                                          2012          2011
                                                 ------------- -------------
Less than 1 month                                  $     2,136   $    50,824
1 to 3 months                                               95         3,337
3 to 6 months                                              159        23,699
Over 6 months                                           15,040         2,425
----------------------------------------------------------------------------
Total trade and other receivables                  $    17,430   $    80,285
----------------------------------------------------------------------------
----------------------------------------------------------------------------

 
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:  


 
                                                     As at December 31,     
                                               -----------------------------
                                                         2012           2011
                                               -------------- --------------
Less than 1 month                                $      8,999   $     52,032
1 to 3 months                                             176             76
3 to 6 months                                               -            105
Over 6 months                                           1,041             22
----------------------------------------------------------------------------
Total trade and other payables                   $     10,216   $     52,235
----------------------------------------------------------------------------
----------------------------------------------------------------------------

 
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.  
12.1  Partial 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: 


 
                                                 Year ended December 31,    
                                             ------------------------------ 
                                                       2012            2011 
                                             --------------  -------------- 
Balance, beginning of year                     $    145,386    $    251,810 
Interest expense on convertible debenture            20,094          20,076 
Decrease in fair value of embedded                                          
 derivatives                                        (39,512)       (106,489)
Interest paid                                       (20,000)        (20,011)
--------------------------------------------------------------------------- 
Balance, end of year                           $    105,968    $    145,386 
--------------------------------------------------------------------------- 
--------------------------------------------------------------------------- 

 
The convertible debenture balance consists of the following amounts:  


 
                                                      As at December 31,    
                                                 ---------------------------
                                                          2012          2011
                                                 ------------- -------------
Debt host                                          $    90,791   $    90,696
Fair value of embedded derivatives                       8,876        48,389
Interest payable                                         6,301         6,301
----------------------------------------------------------------------------
Convertible debenture                              $   105,968   $   145,386
----------------------------------------------------------------------------
----------------------------------------------------------------------------

 
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.
Contacts:
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