Completion of Land Breeze Sale Transaction

On July 28, 2022, the Company received an acknowledgment from the HKEX in respect of the Delisting issued pursuant to paragraph 3.34 of the HKEX’s Guidance Letter (HKEX-GL-112-22), which informed the Company that, upon the effective date of the Delisting, the Hong Kong Stock Exchange will regard the Company as having a primary (rather than secondary) listing status on the HKEX pursuant to Rule 19C.13A of the HKEX Listing Rules and the dis-application of the stock marker “S” from the Company’s trading symbol on the HKEX will take effect. While it was disclosed in the Company’s management proxy circular dated June 29, 2022 that the anticipated effective date of the Delisting would be July 29, 2022, the Company wishes to update its shareholders and investors that, subject to obtaining the said approvals from the TSX and TSX-V, the Company is targeting to complete the Delisting prior to mid-September 2022.

• Sale by CIC of its Interests in the Company- On May 27, 2022, the Company announced that as disclosed in the press release issued by CIC on May 26, 2022 (the “CIC Press Release”), CIC has entered into an agreement to sell (the “CIC Sale Transaction”) all of its interests in the Company, including its 64,766,591 common shares of the Company and the Convertible Debenture, to JD Zhixing Fund L.P. (the “Buyer”). The Company has been advised that the Buyer is an exempted limited partnership formed under the laws of Cayman Islands. The Buyer’s general partner is JD Dingxing Limited, a corporation formed under the laws of the Cayman Islands. The Buyer’s limited partner is Inner Mongolia Tianyu Trading Limited, a corporation formed under the laws of Hong Kong. As disclosed in the CIC Press Release, completion of the CIC Sale Transaction is subject to the satisfaction of certain conditions precedent.

In connection with the CIC Sale Transaction, CIC has agreed to assign (the “Assignment”) to the Buyer all of CIC’s rights in and obligations under: (i) the Convertible Debenture and related security documents; (ii) the Amended and Restated Cooperation Agreement and related documents; (iii) the deferral agreements between CIC, the Company and certain of its subsidiaries in connection with the deferral of interest payments and other outstanding fees under the Convertible Debenture and the Amended and Restated Cooperation Agreement (the “Deferral Agreements”); and (iv) the Securityholders Agreement.

Subject to completion of the CIC Sale Transaction and related Assignment, the Buyer has agreed to reduce the service fee payable by the Company under the Amended and Restated Cooperation Agreement from 2.5% to 1.5% of all net revenues realized by the Company and all of its subsidiaries derived from sales into China.

Upon the completion of the CIC Sale Transaction and related Assignment:

• while the Convertible Debenture is outstanding, or while the Buyer has a minimum 15% direct or indirect stake in the Company, the Buyer will have the right to nominate one director to the board of directors (the “Board”) pursuant to the board nomination rights contained in the Securityholders Agreement;
• the buyer also will have the right to nominate two additional directors to the Board if it and its affiliates have a minimum 20% direct or indirect stake in Company, or one additional director to the Board if it and its affiliate have a minimum 10% direct or indirect stake in Company, pursuant to the board nomination rights contained in the Deferral Agreements; and
• while the Convertible Debenture is outstanding, or while the buyer has a minimum 15% direct or indirect stake in Company, the buyer will have certain pre-emption rights on a pro-rata basis to subscribe for any new shares to be allotted and issued by Company. The pre-emption rights do not apply to new shares issued pursuant to pro-rata public equity offerings made to all shareholders, exercise of stock options and shares issued to achieve a 25% public float.
• Going Concern – Several adverse conditions and material uncertainties relating to the Company cast significant doubt upon the going concern assumption which includes the deficiencies in assets and working capital.

Refer to section “Liquidity and Capital Resources” of this press release for details.

OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS

Summary of Operational Data

1. A Non-International Financial Reporting Standards (“non-IFRS”) financial measure. Refer to “Non-IFRS Financial Measures” section. Cash costs of product sold exclude idled mine asset cash costs.
2. Per 200,000 man hours and calculated based on a rolling 12 month average.

Overview of Operational Data

For the three months ended June 30, 2022

The Company experienced an increase in the average selling price of coal from $47.9 per tonne in the second quarter of 2021 to $66.6 per tonne in the second quarter of 2022, as a result of improved market conditions in China. The product mix for the second quarter of 2022 consisted of approximately 52% premium semi-soft coking coal, 40% standard semi-soft coking coal/premium thermal coal and 8% of washed coal compared to approximately 72% premium semi-soft coking coal, 27% standard semi-soft coking coal/premium thermal coal and 1% washed coal in the second quarter of 2021.

In response to the increase in the number of COVID-19 cases in Ejinaqi, a region in China’s Inner Mongolia Autonomous Region where the custom and border crossing are located, reported in late October 2021, the local government authorities imposed stringent preventive measures throughout the region, including the temporary closure of the Ceke Port of Entry located at the border of Mongolia and China. Accordingly, the Company’s coal exports into China were suspended from November 2021 to May 2022. On May 25, 2022, the Ceke Port of Entry re-opened for coal export on a trial basis. As a result, the Company recorded 0.1 million tonnes of sales in the second quarter of 2022.

Since May 25, 2022, the number of trucks permitted to cross the Chinese-Mongolian border, as well as the volume of coal exports, have increased. As a result, the Company has gradually resumed mining operations beginning on July 15, 2022. The Company’s major mining operations, including coal mining, have resumed and the Company expects to increase the volume of coal production in a gradual manner, while coal processing shall remain suspended for the time being. The Company will revisit the possibility of resuming coal processing at a later date.

The Company’s unit cost of sales of product sold increased from $41.4 per tonne in the second quarter of 2021 to $56.3 per tonne in the second quarter of 2022. The increase was mainly driven by the diseconomies of scale due to decreased sales as well as the increase in the effective royalty rate.

For the six months ended June 30, 2022

The Company sold 0.1 million tonnes for the first six months of 2022 as compared to 0.8 million tonnes for the first six months of 2021. The average selling price increased from $44.1 per tonne for the first six months of 2021 to $66.6 per tonne for the first six months of 2022, due to improved market conditions in China.

The Company’s production in the first six months of 2021 was higher than the first six months of 2022 as a result of the temporary suspension of the Company’s major mining operations (including coal mining) which took effect from November 2021 to July 2022 for the purpose of mitigating the financial impact of the border closures on the Company and preserving the Company’s working capital.

The Company’s unit cost of sales of product sold increased from $30.5 per tonne for the first six months of 2021 to $67.5 per tonne in the first six months of 2022. The increase was mainly driven by the diseconomies of scale due to decreased sales as well as the increase in the effective royalty rate.

1. Revenue and cost of sales related to the Company’s Ovoot Tolgoi Mine within the Coal Division operating segment. Refer to note 3 of the condensed consolidated interim financial statements for further analysis regarding the Company’s reportable operating segments.
2. A non-IFRS financial measure, idled mine asset costs represents the depreciation expense relates to the Company’s idled plant and equipment.

Overview of Financial Results

For the three months ended June 30, 2022

The Company recorded a $2.7 million profit from operations in the second quarter of 2022 compared to a $1.0 million loss from operations in the second quarter of 2021. The financial results for the second quarter of 2022 were impacted by the foreign exchange gain of $1.4 million, a write off of other payables of $1.6 million and by the decreased sales resulting from the temporary closure of the Ceke Port of Entry experienced by the Company during the second quarter.

Revenue was $5.8 million in the second quarter of 2022 compared to $5.2 million in the second quarter of 2021. The Company’s effective royalty rate for the second quarter of 2022, based on the Company’s average realized selling price of $66.6 per tonne, was 26.4% or $17.6 per tonne, compared to 21.9% or $10.5 per tonne in the second quarter of 2021 (based on the average realized selling price of $47.9 per tonne).

Cost of sales was $5.1 million in the second quarter of 2022 compared to $4.6 million in the second quarter of 2021. The increase in cost of sales was mainly due to the increase in royalties during the quarter. Cost of sales consists of operating expenses, share-based compensation expense, equipment depreciation, depletion of mineral properties, royalties and idled mine asset costs. Operating expenses in cost of sales reflect the total cash costs of product sold (a Non-IFRS financial measure, refer to “Non-IFRS Financial Measures” section) during the quarter.

Operating expenses in cost of sales were $3.1 million in the second quarter of 2022 compared to $2.3 million in the second quarter of 2021. Cost of sales related to idled mine assets in the second quarter of 2022 included $0.2 million related to depreciation expenses for idled equipment (second quarter of 2021: $0.9 million).

Other operating income was $3.8 million in the second quarter of 2022 (second quarter of 2021: $0.1 million of other operating expenses). Foreign exchange gain of $1.4 million and write off of other payables of $1.6 million were recorded in the second quarter of 2022. (second quarter of 2021: the Company incurred a foreign exchange loss of $0.2 million).

Administration expenses were $1.8 million in the second quarter of 2022 compared to $1.5 million in the second quarter of 2021, the increase in the balance was mainly due to the increase in legal and professional fees for the second quarter of 2022.

The Company continued to minimize evaluation and exploration expenditures in the second quarter of 2022 in order to preserve the Company’s financial resources. Evaluation and exploration activities and expenditures in the second quarter of 2022 were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining licenses.

Finance costs were $10.2 million and $8.9 million in the second quarter of 2022 and 2021 respectively, which primarily consisted of interest expense on the $250.0 million Convertible Debenture.

For the six months ended June 30, 2022

The Company recorded a $2.5 million profit from operations in the first six months of 2022 compared to a $6.5 million in the first six months of 2021. The financial results were impacted by (i) the higher selling price achieved by the Company; and (ii) decreased sales volume resulting from the temporary closure of the Ceke Port of Entry experienced by the Company during the first six months of 2022.

Revenue was $5.8 million in the first six months of 2022 compared to $33.3 million in the first six months of 2021. The Company’s effective royalty rate for the first six months of 2022, based on the Company’s average realized selling price of $66.6 per tonne, was 26.4% or $17.6 per tonne, compared to 16.0% or $7.1 per tonne in the first six months of 2021 (based on the average realized selling price of $44.1 per tonne).

Cost of sales were $6.1 million in the first six months of 2022 compared to $22.9 million in the first six months of 2021, as follows:

Operating expenses in cost of sales were $3.6 million in the first six months of 2022 compared to $14.6 million in the first six months of 2021. The overall decrease in cost of sales was primarily due to the reduced sales.

Cost of sales related to idled mine assets in the first six months of 2022 included $0.7 million related to depreciation expenses for idled equipment (first six months of 2021: $1.4 million).

Other operating income was $5.8 million in the first six months of 2022 (first six months of 2021: $0.4 million of other operating expenses). Foreign exchange gain of $1.9 million and write off of other payables of $2.8 million were recorded in the first six months of 2022. (first six months of 2021: foreign exchange loss of $0.2 million).

Administration expenses were $3.0 million in the first six months of 2022 compared to $3.3 million in the first six months of 2021, as follows:

The Company continued to minimize evaluation and exploration expenditures in the first six months of 2022 in order to preserve the Company’s financial resources. Evaluation and exploration activities and expenditures in the first six months of 2022 were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining licenses.

Finance costs were $20.3 million and $21.0 million in the first six months of 2022 and 2021 respectively, which primarily consisted of interest expense on the $250.0 million Convertible Debenture.

Summary of Quarterly Operational Data

1. A non-IFRS financial measure. Refer to section “Non-IFRS Financial Measures”. Cash costs of product sold exclude idled mine asset cash costs.
2. Per 200,000 man hours and calculated based on a rolling 12 month average.
3. Not presented as nil sales was noted for the quarter.

Summary of Quarterly Financial Results

The Company’s consolidated financial statements are reported under International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board. The following table provides highlights, extracted from the Company’s annual and interim consolidated financial statements, of quarterly results for the past eight quarters.

1. Revenue and cost of sales relate to the Company’s Ovoot Tolgoi Mine within the Coal Division operating segment. Refer to note 3 of the condensed consolidated interim financial statements for further analysis regarding the Company’s reportable operating segments.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Capital Management

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.

Costs reimbursable to Turquoise Hill

Prior to the completion of a private placement with Novel Sunrise Investments Limited (“Novel Sunrise”) on April 23, 2015, Rio Tinto plc (“Rio Tinto”) was the Company’s ultimate parent company. In the past, Rio Tinto sought reimbursement from the Company for the salaries and benefits of certain Rio Tinto employees who were assigned by Rio Tinto to work for the Company, as well as certain legal and professional fees incurred by Rio Tinto in relation to the Company’s prior internal investigation and Rio Tinto’s participation in the tripartite committee. Subsequently Rio Tinto transferred and assigned to Turquoise Hill its right to seek reimbursement for these costs and fees from the Company.

On January 20, 2021, the Company and Turquoise Hill entered into a settlement agreement, whereby Turquoise Hill agreed to a repayment schedule in settlement of certain secondment costs in the amount of $2.8 million (representing a portion of the TRQ Reimbursable Amount) pursuant to which the Company agreed to make monthly payments to Turquoise Hill in the amount of $0.1 million per month from January 2021 to June 2022. The Company is contesting the validity of the remaining balance of the TRQ Reimbursable Amount claimed by Turquoise Hill.

As at June 30, 2022, the amount of reimbursable costs and fees claimed by Turquoise Hill (the “TRQ Reimbursable Amount”) amounted to $6.8 million (such amount is included in the trade and other payables).

Going concern considerations

The Company’s condensed consolidated interim financial statements have been prepared on a going concern basis which assumes that the Company will continue to operate until at least June 30, 2023 and will be able to realize its assets and discharge its liabilities in the normal course of operations as they come due. However, in order to continue as a going concern, the Company must generate sufficient operating cash flows, secure additional capital or otherwise pursue a strategic restructuring, refinancing or other transactions to provide it with sufficient liquidity.

Several adverse conditions and material uncertainties cast significant doubt upon the Company’s ability to continue as a going concern and the going concern assumption used in the preparation of the Company’s condensed consolidated interim financial statements. The Company incurred a loss attributable to equity holders of the Company of $17.8 million for the first six months of 2022 (compared to a profit attributable to equity holders of the Company of $5.8 million for the first six months of 2021), and as of that date, had a deficiency in assets of $121.2 million as at June 30, 2022 as compared to a deficiency in assets of $90.5 million as at December 31, 2021 while the working capital deficiency (excess current liabilities over current assets) reached $43.6 million as at June 30, 2022 compared to a working capital deficiency of $42.5 million as at December 31, 2021.

Included in the working capital deficiency as at June 30, 2022 are significant obligations, represented by trade and other payables of $64.6 million, which includes $23.0 million in unpaid taxes that are repayable on demand to the Mongolian Tax Authority (“MTA”).

Furthermore, the Company may not be able to settle all trade and other payables on a timely basis, and as a result any continuing postponement in settling of certain trade and other payables owed to suppliers and creditors may impact the ability of the Company to resume its mining operations and may result in potential lawsuits and/or bankruptcy proceedings being filed against the Company. Except as disclosed elsewhere in this press release, no such lawsuits or proceedings were pending as at August 12, 2022.

As disclosed in the section “Impact of the COVID-19 pandemic”, the Chinese-Mongolian border was re-opened for coal export on a trial basis on May 25, 2022 but there can be no guarantee that the Company will be able to continue exporting coal to China, or the Chinese-Mongolian border crossings would not be the subject of additional closure as a result of COVID-19 or any variants thereof in the future. The Company has been proactively adjusting its sales strategy and exploring opportunities to expand its sales.

There are significant uncertainties as to the outcomes of the above events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern and, therefore, the Company may be unable to realize its assets and discharge its liabilities in the normal course of business. Should the use of the going concern basis in preparation of the condensed consolidated interim financial statements be determined to be not appropriate, adjustments would have to be made to write down the carrying amounts of the Company’s assets to their realizable values, to provide for any further liabilities which might arise and to reclassify non-current assets and non-current liabilities as current assets and current liabilities, respectively. The effects of these adjustments have not been reflected in the condensed consolidated interim financial statements. If the Company is unable to continue as a going concern, it may be forced to seek relief under applicable bankruptcy and insolvency legislation.

For the purpose of assessing the appropriateness of the use of the going concern basis to prepare the financial statements, management of the Company has prepared a cash flow projection covering a period of 12 months from June 30, 2022. The cash flow projection has considered the anticipated cash flows to be generated from the Company’s business during the period under projection including cost saving measures. In particular, the Company has taken into account the following measures for improvement of the Company’s liquidity and financial position, which include: (a) entering into three deferral agreements with CIC on November 19, 2020, (the “2020 November Deferral Agreement”) for a deferral of (i) deferred cash interest and deferral fees of $75.2 million which were due and payable to CIC on or before September 14, 2020, under the deferral agreement signed on June 19, 2020 (the “2020 June Deferral Agreement”); (ii) semi-annual cash interest payments in the aggregate amount of $16.0 million payable to CIC on November 19, 2020 and May 19, 2021; (iii) $4.0 million worth of PIK Interest shares (“2020 November PIK Interest”) issuable to CIC on November 19, 2020 under the Convertible Debenture; and (iv) the management fee which payable to CIC on November 14, 2020, February 14, 2021, May 15, 2021, August 14, 2021 and November 14, 2021 under the Amended and Restated Cooperation Agreement (collectively, the “2020 November Deferral Amounts”), on July 30, 2021, the 2021 July Deferral Agreement for a deferral of the 2021 Deferral Amounts and on May 13, 2022, the 2022 May Deferral Agreement for a deferral of the 2022 Deferral Amounts respectively until August 31, 2023; (b) communicating with vendors in agreeing repayment plans of the outstanding payable; (c) continuously assessing through communication with MTA its acceptability to a prolonged settlement schedule of the outstanding tax payable and making settlement based on that assessment and the liquidity position of the Company; and (d) obtaining an avenue of financial support from a prospective shareholder for a maximum amount of $73.0 million during the period covered in the cash flow projection. Regarding these plans and measures, there is no guarantee that the suppliers and MTA would agree the settlement plan as communicated by the Company, Nevertheless, after considering the above, the directors of the Company believe that there will be sufficient financial resources to continue its operations and to meet its financial obligations as and when they fall due in the next 12 months from June 30, 2022 and therefore are satisfied that it is appropriate to prepare the condensed consolidated interim financial statements on a going concern basis.

Factors that impact the Company’s liquidity are being closely monitored and include, but are not limited to, the impact of the COVID-19 pandemic, restrictions on the Company’s ability to import its coal products for sale in China, Chinese economic growth, market prices of coal, production levels, operating cash costs, capital costs, exchange rates of currencies of countries where the Company operates and exploration and discretionary expenditures.

As at June 30, 2022 and December 31, 2021, the Company was not subject to any externally imposed capital requirements.

Impact of the COVID-19 Pandemic

In response to the increase in the number of COVID-19 cases in Ejinaqi, a region in China’s Inner Mongolia Autonomous Region, reported in late October 2021, the local government authorities imposed stringent preventive measures throughout the region, including the temporary closure of the Ceke Port of Entry located at the border of Mongolia and China. Accordingly, the Company’s coal exports into China were suspended from November 2021 to May 2022.

On May 25, 2022, the Ceke Port of Entry re-opened for coal export on a trial basis, with a limited number of trucks permitted to cross the border during the trial period.

Since May 25, 2022, the number of trucks permitted to cross the Chinese-Mongolian border, as well as the volume of coal exports have increased. As a result, the Company has gradually resumed mining operations beginning on July 15, 2022. The Company’s major mining operations, including coal mining, have resumed and the Company expects to increase the volume of coal production in a gradual manner, while coal processing shall remain suspended for the time being. The Company will revisit the possibility of resuming coal processing at a later date.

The Company has been proactively adjusting its sales strategy and exploring opportunities to expand its sales. Although the export of coal from Mongolia to China has resumed as of the date hereof, there can be no guarantee that the Company will be able to continue exporting coal to China, or the Chinese-Mongolian border crossings would not be the subject of additional closure as a result of COVID-19 or any variants thereof in the future. The Company anticipates that its revenue, liquidity and profitability will continue to be adversely impacted until such time as the coal exports into China are allowed to resume at normal levels.

The Company will continue to closely monitor the development of the COVID-19 pandemic and the situation at the Ceke Port of Entry, including the number of trucks that are permitted to cross the border and the impact on the operations and financials of the Company.

Convertible Debenture

In November 2009, the Company entered into a financing agreement with CIC for $500 million in the form of a secured, convertible debenture bearing interest at 8.0% (6.4% payable semi-annually in cash and 1.6% payable annually in the Company’s Common Shares) with a maximum term of 30 years. The Convertible Debenture is secured by a first ranking charge over the Company’s assets, including shares of its material subsidiaries. The financing was used primarily to support the accelerated investment program in Mongolia and for working capital, repayment of debts, general and administrative expenses and other general corporate purposes.

On March 29, 2010, the Company exercised its right to call for the conversion of up to $250.0 million of the Convertible Debenture into approximately 21.5 million shares at a conversion price of $11.64 (CAD$11.88).

On November 19, 2020, the Company and CIC entered into the 2020 November Deferral Agreement pursuant to which CIC agreed to grant the Company a deferral of the 2020 November Deferral Amounts. The 2020 November Deferral Agreement became effective on January 21, 2021, being the date on which the 2020 November Deferral Agreement was approved by shareholders at the Company’s annual and special meeting of shareholders.

The principal terms of the 2020 November Deferral Agreement are as follows:

• Payment of the 2020 November Deferral Amounts will be deferred until August 31, 2023.
• CIC agreed to waive its rights arising from any default or event of default under the Convertible Debenture as a result of trading in the Common Shares being halted on the TSX beginning as of June 19, 2020 and suspended on the HKEX beginning as of August 17, 2020, in each case for a period of more than five trading days.
• As consideration for the deferral of the 2020 November Deferral Amounts, the Company agreed to pay CIC: (i) a deferral fee equal to 6.4% per annum on the 2020 November Deferral Amounts payable under the Convertible Debenture and the 2020 June Deferral Agreement, commencing on the date on which each such 2020 November Deferral Amounts would otherwise have been due and payable under the Convertible Debenture or the 2020 June Deferral Agreement, as applicable; and (ii) a deferral fee equal to 2.5% per annum on the 2020 November Deferral Amounts payable under the Amended and Restated Cooperation Agreement, commencing on the date on which the management fee would otherwise have been due and payable under the Amended and Restated Cooperation Agreement.
• The 2020 November Deferral Agreement does not contemplate a fixed repayment schedule for the 2020 November Deferral Amounts and related deferral fees. Instead, the Company and CIC would agree to assess in good faith the Company’s financial condition and working capital position on a monthly basis and determine the amount, if any, of the 2020 November Deferral Amounts and related deferral fees that the Company is able to repay under the Convertible Debenture, the 2020 June Deferral Agreement or the Amended and Restated Cooperation Agreement, having regard to the working capital requirements of the Company’s operations and business at such time and with the view of ensuring that the Company’s operations and business would not be materially prejudiced as a result of any repayment.
• Commencing as of November 19, 2020 and until such time as the 2020 November PIK Interest is fully repaid, CIC reserves the right to require the Company to pay and satisfy the amount of the 2020 November PIK Interest, either in full or in part, by way of issuing and delivering PIK interest shares in accordance with the Convertible Debenture provided that, on the date of issuance of such shares, the Common Shares are listed and trading on at least one stock exchange.
• If at any time before the 2020 November Deferral Amounts and related deferral fees are fully repaid, the Company proposes to appoint, replace or terminate one or more of its Chief Executive Officer, its Chief Financial Officer or any other senior executive(s) in charge of its principal business function or its principal subsidiary, then the Company must first consult with, and obtain written consent from CIC prior to effecting such appointment, replacement or termination.

On July 30, 2021, the Company and CIC entered into the 2021 July Deferral Agreement pursuant to which CIC agreed to grant the Company a deferral of: (i) semi-annual cash interest payments of $8.1 million payable to CIC on November 19, 2021; and (ii) $4.0 million in PIK Interest shares issuable to CIC on November 19, 2021 under the Convertible Debenture.

The principal terms of the 2021 July Deferral Agreement are as follows:

• Payment of the 2021 Deferral Amounts will be deferred until August 31, 2023.
• As consideration for the deferral of the 2021 Deferral Amounts, the Company agreed to pay CIC a deferral fee equal to 6.4% per annum on the 2021 Deferral Amounts payable under the Convertible Debenture, commencing on November 19, 2021.

On May 15, 2022, the Company and CIC entered into the 2022 May Deferral Agreement, pursuant to which CIC agreed to grant the Company a deferral of (i) the Deferred Amounts; and (ii) the Deferred Management Fee under the Amended and Restated Cooperation Agreement under the Convertible Debenture.

The principal terms of the 2022 May Deferral Agreement are as follows:

• Payment of the 2022 Deferral Amounts will be deferred until August 31, 2023.
• As consideration for the deferral of the 2022 Deferral Amounts, the Company agreed to pay CIC a deferral fee equal to 6.4% per annum on the Deferred Amounts payable under the Convertible Debenture, commencing on May 19, 2022.
• As consideration for the deferral of the Deferred Management Fee, the Company agreed to pay CIC a deferral fee equal to 2.5% per annum on the outstanding balance of the Deferred Management Fee payable under the Amended and Restated Cooperation Agreement, commencing on the date on which each such 2022 May Deferred Management Fee would otherwise have been due and payable under the Amended and Restated Cooperation Agreement.
• The Company agreed to provide CIC with monthly updates regarding its operational and financial affairs.
• If at any time before the 2022 Deferral Amounts and related deferral fee are fully repaid, the Company proposes to appoint, replace or terminate one or more of its chief executive officer, its chief financial officer or any other senior executive(s) in charge of its principal business function or its principal subsidiary, the Company will first consult with, and obtain written consent (such consent shall not be unreasonably withheld) from CIC prior to effecting such appointment, replacement or termination.
• The Company and CIC agreed that nothing in the 2022 May Deferral Agreement prejudices CIC’s rights to pursue any of its remedies at any time pursuant to the prior deferral agreements.

Ovoot Tolgoi Mine Impairment Analysis

The Company determined that an indicator of impairment existed for its Ovoot Tolgoi Mine cash generating unit as at June 30, 2022. The impairment indicator was the fact that the Company suffered continuous loss for the period and potential closure of border crossings due to the COVID-19 pandemic in the future. Since the recoverable amount was higher than carrying value of the Ovoot Tolgoi Mine cash generating unit, there was no impairment of non-financial asset recognized during the six months ended June 30, 2022.

REGULATORY ISSUES AND CONTINGENCIES

Class Action Lawsuit

In January 2014, Siskinds LLP, a Canadian law firm, filed a class action (the “Class Action”) against the Company, certain of its former senior officers and directors, and its former auditors (the “Former Auditors”), in the Ontario Court in relation to the Company’s restatement of certain financial statements previously disclosed in the Company’s public fillings (the “Restatement”).

To commence and proceed with the Class Action, the plaintiff was required to seek leave of the Court under the Ontario Securities Act (“Leave Motion”) and certify the action as a class proceeding under the Ontario Class Proceedings Act. The Ontario Court rendered its decision on the Leave Motion on November 5, 2015, dismissing the action against the former senior officers and directors and allowing the action to proceed against the Company in respect of alleged misrepresentation affecting trades in the secondary market for the Company’s securities arising from the Restatement. The action against the Former Auditors was settled by the plaintiff on the eve of the Leave Motion.

Both the plaintiff and the Company appealed the Leave Motion decision to the Ontario Court of Appeal. On September 18, 2017, the Ontario Court of Appeal dismissed the Company’s appeal of the Leave Motion to permit the plaintiff to commence and proceed with the Class Action. Concurrently, the Ontario Court of Appeal granted leave for the plaintiff to proceed with their action against the former senior officers and directors in relation to the Restatement.

The Company filed an application for leave to appeal to the Supreme Court of Canada in November 2017, but the leave to appeal to the Supreme Court of Canada was dismissed in June 2018.

In December 2018, the parties agreed to a consent Certification Order, whereby the action against the former senior officers and directors was withdrawn and the Class Action would only proceed against the Company.

Counsel for the plaintiff and defendants have agreed on and the case management judge has ordered a trial to commence in December 2022 (subject to court availability). To accomplish all steps necessary for trial preparation, counsels have agreed to the following proposed schedule under the case management of the judge: (i) document production and pleading amendments by October 31, 2021; (ii) oral examinations for discovery ending by December 31, 2022; (iii) expert reports of plaintiff complete by April 25, 2022 and expert reports of defendants complete by August 22, 2022; and (iv) pre-trial agreements, filings and motions by August 31, 2022. The Company has urged for a trial to begin as early as possible.

The Company firmly believes that it has a strong defense on the merits and will continue to vigorously defend itself against the Class Action through independent Canadian litigation counsel retained by the Company for this purpose. Due to the inherent uncertainties of litigation, it is not possible to predict the final outcome of the Class Action or determine the amount of potential losses, if any. However, the Company has determined that a provision for this matter as at June 30, 2022 was not required.

Toll Wash Plant Agreement with Ejin Jinda

In 2011, the Company entered into an agreement with Ejin Jinda, a subsidiary of China Mongolia Coal Co. Ltd., to toll-wash coal from the Ovoot Tolgoi Mine. The agreement had a duration of five years from the commencement of the contract and provided for an annual washing capacity of approximately 3.5 million tonnes of input coal.

Under the agreement with Ejin Jinda, which required the commercial operation of the wet washing facility to commence on October 1, 2011, the additional fees payable by the Company under the wet washing contract would have been $18.5 million. At each reporting date, the Company assesses the agreement with Ejin Jinda and has determined it is not probable that this $18.5 million will be required to be paid. Accordingly, the Company has determined that a provision for this matter as at June 30, 2022 was not required.

Special Needs Territory in Umnugobi

On February 13, 2015, the Soumber mining licenses (MV-016869, MV-020436 and MV-020451) (the “License Areas”) were included into a special protected area (to be further referred as Special Needs Territory, the “SNT”) newly set up by the Umnugobi Aimag’s Civil Representatives Khural (the “CRKh”) to establish a strict regime on the protection of natural environment and prohibit mining activities in the territory of the SNT.

On July 8, 2015, SouthGobi Sands LLC, a wholly owned subsidiary of the Company (“SGS”) and the chairman of the CRKh, in his capacity as the respondent’s representative, reached an agreement (the “Amicable Resolution Agreement”) to exclude the License Areas from the territory of the SNT in full, subject to confirmation of the Amicable Resolution Agreement by the session of the CRKh. The parties formally submitted the Amicable Resolution Agreement to the appointed judge of the Administrative Court for her approval and requested a dismissal of the case in accordance with the Law of Mongolia on Administrative Court Procedure. On July 10, 2015, the judge issued her order approving the Amicable Resolution Agreement and dismissing the case, while reaffirming the obligation of CRKh to take necessary actions at its next session to exclude the License Areas from the SNT and register the new map of the SNT with the relevant authorities. Mining activities at the Soumber property cannot proceed unless and until the Company obtains a court order restoring the Soumber mining licenses and until the License Areas are removed from the SNT.

On July 24, 2021, SGS was notified by the Implementing Agency of Mongolian Government that the license area covered by two mining licenses (MV-016869 and MV-020451) are no longer overlapping with the SNT. The Company will continue to work with the Mongolian authorities regarding the license area covered by the mining license (MV-020436).

Importing F-Grade Coal into China

As a result of import coal quality standards established by Chinese authorities, the Company has not been able to export its F-grade coal products into China since December 15, 2018 because the F-grade coal products do not meet the quality requirement.

TRANSPORTATION INFRASTRUCTURE

On August 2, 2011, the State Property Committee of Mongolia awarded the tender to construct a paved highway from the Ovoot Tolgoi Mine to the Shivee Khuren Border Crossing (the “Paved Highway”) to consortium partners NTB LLC and SGS (together referred to as “RDCC LLC”) with an exclusive right of ownership of the Paved Highway for 30 years. The Company has an indirect 40% interest in RDCC LLC through its Mongolian subsidiary SGS. The toll rate is MNT 1,500 per tonne.

The Paved Highway has a carrying capacity in excess of 20 million tonnes of coal per year.

For the three and six months ended June 30, 2022, RDCC LLC recognized toll fee revenue of $0.2 million (2021: $0.4 million) and $0.2 million (2021: $1.6 million), respectively.

PLEDGE OF ASSETS

As at June 30, 2022, one of the Company’s property, plant and equipment with a carrying value of $nil (December 31, 2021: $nil) was pledged as security for a bank loan granted to the Company.

PURCHASE, SALE OR REDEMPTION OF LISTED SECURITIES OF THE COMPANY

The Company did not redeem its listed securities, nor did the Company or any of its subsidiaries purchase or sell suchsecurities during the six months ended June 30, 2022.