SouthGobi Resources Ltd. — Management Reports 2020

Nov 26, 2020

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SouthGobi Resources Ltd. Management’s Discussion and Analysis of Financial Condition and Results of Operations

December 31, 2019 (Expressed in U.S. dollars)

SouthGobi Resources Ltd. Management’s Discussion and Analysis

FORWARD-LOOKING STATEMENTS

Except for statements of fact relating to SouthGobi Resources Ltd. and its subsidiaries (collectively, the “Company”), certain information contained herein constitutes forward-looking statements. Forward-looking statements are frequently characterized by words such as “plan”, “expect”, “project”, “intend”, “believe”, “anticipate”, "could", "should", "seek", "likely", "estimate" and other similar words or statements that certain events or conditions “may” or “will” occur. Forward-looking statements relate to management’s future outlook and anticipated events or results and are based on the opinions and estimates of management at the time the statements are made. Forward-looking statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) include, but are not limited to, statements regarding:

• the Company continuing as a going concern and its ability to realize its assets and discharge its liabilities in the normal course of operations as they become due;

• adjustments to the amounts and classifications of assets and liabilities in the Company's consolidated financial statements and the impact thereof;

• the Company’s expectations of sufficient liquidity and capital resources to meet its ongoing obligations and future contractual commitments, including the Company’s ability to settle its trade payables, to secure additional funding and to meet its obligations under each of the China Investment Corporation (together with its wholly-owned subsidiaries and affiliates, “CIC”) convertible debenture (the “CIC Convertible Debenture”), the 2020 June Deferral Agreement (as defined below), the 2020 May Deferral Agreement (as defined below), the 2020 April Deferral Agreement (as defined below), the 2020 March Deferral Agreement (as defined below), the 2020 February Deferral Agreement (as defined below), the 2020 November Deferral Agreement (as defined below), the 2019 Deferral Agreement (as defined below), the Amended and Restated Cooperation Agreement (as defined below) and the 2018 Bank Loan (as defined below), as the same become due;

• the Company's anticipated financing needs, development plans and future production levels;

• the ability of the Company to successfully apply for a revocation of the CTO (as defined below);

• the possibility of the TSX granting an extension to the deadline date for the Company to demonstrate that it has remedied the Delisting Criteria (as defined below);

• the resumption of trading in the Common Shares on the TSX or HKEX;

• the Company entering into discussions with CIC regarding a potential debt restructuring plan with respect to the amounts owing to CIC;

• the results and impact of the Ontario class action (as described under Section 7 of this MD&A under the heading entitled " Regulatory Issues and Contingencies – Class Action Lawsuit ");

• the impact of the internal investigation conducted by the Special Committee (as defined below) on the Suspicious Transactions (as defined below);

• the estimates and assumptions included in the Company’s impairment analysis and the possible impact of changes thereof;

• the agreement with Ejin Jinda and the payments thereunder (as described under Section 7 of this MD&A under the heading entitled " Regulatory Issues and Contingencies – Toll Wash Plant Agreement with Ejin Jinda”);

• the ability of the Company to successfully recover the balance of its doubtful trade and notes receivables;

• the ability of the Company to enhance the operational efficiency and output throughput of the washing facilities at Ovoot Tolgoi;

• the ability to enhance the product value by conducting coal processing and coal washing;

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SouthGobi Resources Ltd.

Management’s Discussion and Analysis

• the impact of the Company’s activities on the environment and actions taken for the purpose of mitigation of potential environmental impacts and planned focus on health, safety and environmental performance;

• the impact of the delays in the custom clearance process at the Ceke border on the Company’s operations and the restrictions established by Chinese authorities on the import of F-grade coal into China;

• the impact of the Coronavirus Disease 2019 (“COVID-19”) pandemic and closure of Mongolia’s southern border with China on the Company’s business, financial condition and operations;

• the ability of the Company to successfully appeal the decision of Mineral Resources and Petroleum Authority of Mongolia (“MRAM”) to terminate the Soumber Licenses (as defined below) and the anticipated timing of the High Court of the Capital City’s (the “High Court”) ruling on the appeal;

• the ability of the Company to successfully negotiate an extension of the agreement with the third party contractor relating to the operation of the wash plant at the Ovoot Tolgoi mine site;

• the ability of the Company to successfully reinstate the Soumber Licenses;

• the future demand for coal in China;

• future trends in the Chinese coal industry;

• the Company’s outlook and objectives for 2020 and beyond (as more particularly described under Section 15 of this MD&A under the heading entitled “ Outlook ”); and

• other statements that are not historical facts.

Forward-looking information is based on certain factors and assumptions described below and elsewhere in this MD&A, including, among other things: the current mine plan for the Ovoot Tolgoi mine; mining, production, construction and exploration activities at the Company’s mineral properties; the costs relating to anticipated capital expenditures; the capacity and future toll rate of the paved highway; plans for the progress of mining license application processes; mining methods; the Company's anticipated business activities, planned expenditures and corporate strategies; management’s business outlook, including the outlook for 2020 and beyond; currency exchange rates; operating, labour and fuel costs; the ability of the Company to successfully apply for a revocation of the CTO; the ability to remedy the Delisting Criteria (as defined below) of the TSX and to satisfy the Resumption Guidance (as defined below) of the HKEX; the ability of the Company to raise additional financing; the anticipated royalties payable under Mongolia’s royalty regime; the future coal market conditions in China and the related impact on the Company’s margins and liquidity; the anticipated impact of the COVID-19 pandemic; the assumption that the border crossings with China will remain open for coal exports; the anticipated demand for the Company’s coal products; future coal prices, and the level of worldwide coal production. While the Company considers these assumptions to be reasonable based on the information currently available to it, they may prove to be incorrect. Forward-looking statements are subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those projected in the forward-looking statements. These risks and uncertainties include, among other things: the uncertain nature of mining activities, actual capital and operating costs exceeding management’s estimates; variations in mineral resource and mineral reserve estimates; failure of plant, equipment or processes to operate as anticipated; the possible impacts of changes in mine life, useful life or depreciation rates on depreciation expenses; risks associated with, or changes to regulatory requirements (including environmental regulations) and the ability to obtain all necessary regulatory approvals; the potential expansion of the list of licenses published by the Government of Mongolia covering areas in which exploration and mining are purportedly prohibited on certain of the Company's mining licenses; the Government of Mongolia designating any one or more of the Company’s mineral projects in Mongolia as a Mineral Deposit of Strategic Importance; the risk that the Company is unable to successfully apply for a revocation of the CTO; the risk that the TSX does not grant an extension to the deadline date for the Company to demonstrate that it has remedied the Delisting Criteria; the risk that the Company is unable to remedy the Delisting Criteria within the deadline established by the TSX and the Common Shares becoming delisted from the TSX; the risk that the Company is unable to fulfill the conditions of the Resumption Guidance and the Common Shares becoming delisted from the HKEX;

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

the risk of continued delays in the custom clearance process at the Ceke border; the restrictions established by Chinese authorities on the import of F-grade coal into China; the risk that Mongolia’s southern borders with China will be the subject of further closures; the negative impact of the COVID-19 pandemic on the demand for coal and the economy generally in China; the risk that the COVID-19 pandemic is not effectively controlled in China and Mongolia; the risk that the Company’s existing coal inventories are unable to sufficiently satisfy expected sales demand; the possible impact of changes to the inputs to the valuation model used to value the embedded derivatives in the CIC Convertible Debenture; the risk of the Company failing to successfully negotiate favorable repayment terms on the TRQ Reimbursable Amount (as described under Section 6 of this MD&A under the heading entitled “Liquidity and Capital Management – Costs Reimbursable to Turquoise Hill Resources Ltd”); the risk of CIC accelerating all amounts outstanding under the CIC Convertible Debenture and enforcing payment thereof; the risk of the Company or its subsidiaries defaulting under its existing debt obligations, including the 2020 June Deferral Agreement, the 2020 May Deferral Agreement, the 2020 April Deferral Agreement, the 2020 March Deferral Agreement, the 2020 February Deferral Agreement, the 2020 November Deferral Agreement, the 2019 Deferral Agreement, the Amended and Restated Cooperation Agreement and the 2018 Bank Loan; the impact of amendments to, or the application of, the laws of Mongolia, China and other countries in which the Company carries on business; modifications to existing practices so as to comply with any future permit conditions that may be imposed by regulators; delays in obtaining approvals and lease renewals; the risk of fluctuations in coal prices and changes in China and world economic conditions; the outcome of the Class Action (as described under Section 7 of this MD&A under the heading entitled " Regulatory Issues and Contingencies – Class Action Lawsuit ") and any damages payable by the Company as a result; the impact of the internal investigation conducted by the Special Committee; the risk that the Company is unable to successfully negotiate a debt restructuring plan with respect to the amounts owing to CIC; the risk that the calculated sales price determined by the Company for the purposes of determining the amount of royalties payable to the Mongolian government is deemed as being “non-market” under Mongolian tax law; customer credit risk; cash flow and liquidity risks; risks relating to the Company’s decision to suspend activities relating to the development of the Ceke Logistics Park project, including the risk that its investment partner may initiate legal action against the Company for failing to comply with the underlying agreements governing project development; risks relating to the ability of the Company to enhance the operational efficiency and the output throughput of the washing facilities at Ovoot Tolgoi; risks relating to the Company’s ability to successfully appeal MRAM’s decision to terminate the Soumber Licenses and delays in receiving the High Court’s ruling on the appeal; the risk that the Company is unable to successfully negotiate an extension of the agreement with the third party contractor relating to the operation of the wash plant at the Ovoot Tolgoi mine site and risks relating to the Company’s ability to raise additional financing and to continue as a going concern. Please see Section 14 of this MD&A under the heading entitled “ Risk Factors ” for a discussion of these and other risks and uncertainties relating to the Company and its operations. This list is not exhaustive of the factors that may affect any of the Company’s forward-looking statements.

Due to assumptions, risks and uncertainties, including the assumptions, risks and uncertainties identified above and elsewhere in this MD&A, actual events may differ materially from current expectations. The Company uses forward-looking statements because it believes such statements provide useful information with respect to the currently expected future operations and financial performance of the Company, and cautions readers that the information may not be appropriate for other purposes. Except as required by law, the Company undertakes no obligation to update forward-looking statements if circumstances or management’s estimates or opinions should change. The reader is cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this MD&A; they should not rely upon this information as of any other date.

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Management’s Discussion and Analysis

SouthGobi Resources Ltd.

TABLE OF CONTENTS

		Page
1.	Overview................................................................................................................................................	7
	Significant Events and Highlights....................................................................................................	7
2.	Selected Annual Information..................................................................................................................	16
3.	Overview of Operational Data and Financial Results............................................................................	17
4.	Non-IFRS Financial Measures...............................................................................................................	24
5.	Properties...............................................................................................................................................	25
	Operating Mines..............................................................................................................................	26
	Mining Operations...........................................................................................................................	26
	Development Projects and Exploration Program.............................................................................	27
6.	Liquidity and Capital Resources............................................................................................................	28
7.	Regulatory Issues and Contingencies....................................................................................................	39
8.	Environment...........................................................................................................................................	42
9.	Emolument Policy...................................................................................................................................	43
10.	Outstanding Share Data........................................................................................................................	43
11.	Disclosure Controls and Procedures and Internal Controls Over Financial Reporting..........................	43
12.	Critical Accounting Estimates and Judgments.......................................................................................	44
13.	Recent Accounting Pronouncements.....................................................................................................	45
14.	Risk Factors...........................................................................................................................................	46
15.	Outlook...................................................................................................................................................	67

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

INTRODUCTION

This MD&A is dated as of November 26, 2020 and should be read in conjunction with the consolidated financial statements of the Company and the notes thereto for the year ended December 31, 2019. The Company’s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

The consolidated financial statements are presented in the U.S. Dollar, which is the functional currency of SouthGobi Resources Ltd. and its controlled subsidiaries, except as subsequently mentioned.

The functional currency of the Company’s Chinese subsidiaries (SouthGobi Trading (Beijing) Co., Ltd., Inner Mongolia SouthGobi Energy Co., Ltd. (“IMSGE”), Inner Mongolia SouthGobi Mining Development Co., Ltd. and Inner Mongolia SouthGobi Enterprise Co., Ltd.) was Renminbi (“RMB”) and the functional currency of the Company’s Mongolian operations (SouthGobi Sands LLC (“SGS”), Mazaalai Resources LLC and RDCC LLC), was the Mongolian Tugrik (“MNT”).

All figures in this MD&A are presented in U.S. dollars unless otherwise stated.

Disclosure of a scientific or technical nature in this MD&A in respect of the Company’s material mineral projects was prepared by or under the supervision of the individuals set out in the table below, each of whom is a “Qualified Person” as that term is defined in National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”) of the Canadian Securities Administrators:

Property	Qualified Persons	Field of Expertise	Relationship to Company
Ovoot Tolgoi	Dr. Weiliang Wang	Resources	Independent Consultant
Ovoot Tolgoi	Vincent Li	Reserves	Independent Consultant
Zag Suuj	Merryl Peterson	Resources	Independent Consultant

Disclosure of a scientific or technical nature relating to the Ovoot Tolgoi Mine contained in this MD&A is derived from a technical report (the “Ovoot Tolgoi Technical Report”) prepared in accordance with NI 43101 on the Ovoot Tolgoi Mine dated May 15, 2017, prepared by Dr. Weiliang Wang, Mr. Vincent Li and Mr. Larry Li of Dragon Mining Consulting Limited (“DMCL”). A copy of the Ovoot Tolgoi Technical Report is available under the Company’s profile on SEDAR at www.sedar.com . DMCL has not reviewed or updated the Ovoot Tolgoi Technical Report since the date of publishing.

Disclosure of a scientific or technical nature relating to the Zag Suuj Deposit contained in this MD&A is derived from a technical report (the "Zag Suuj Technical Report") prepared in accordance with NI 43-101 on the Zag Suuj Deposit dated March 25, 2013, prepared by Minarco-MineConsult. A copy of the Zag Suuj Technical Report is available under the Company’s profile on SEDAR at www.sedar.com. The Zag Suuj Technical Report is effective as at March 25, 2013. Minarco-MineConsult has not reviewed or updated the Zag Suuj Technical Report since the date of publishing.

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

1. OVERVIEW

The Company is an integrated coal mining, development and exploration company with 471 employees as at December 31, 2019. The Company’s common shares (“Common Shares”) are listed for trading on the Toronto Stock Exchange (“TSX”) under the symbol SGQ and on the Hong Kong Stock Exchange (“HKEX”) under the stock code symbol 1878.

The Company owns a 100% interest in the Ovoot Tolgoi open pit coal mine (the “Ovoot Tolgoi Mine”) and the Zag Suuj Deposit. These projects are located in the Umnugobi Aimag (South Gobi Province) of Mongolia, all of which are located within 150 kilometers (“km”) of each other and in close proximity to the MongoliaChina border.

The Ovoot Tolgoi Mine, strategically located approximately 40km from the Shivee Khuren-Ceke crossing at the Mongolia-China border (“Shivee Khuren Border Crossing”), is the Company’s flagship asset. The Company commenced mining at the Ovoot Tolgoi Mine in 2008. The Company sells a portion of its coal at the mine-gate to Chinese customers, while the remaining coal inventory is transported to China and sold via its Chinese subsidiaries at the stockyards in Ceke (Ceke, on the Chinese side of the Shivee Khuren Border Crossing, which is a major Chinese coal distribution terminal with rail connections to key coal markets in China) or certain designated locations in China as requested by customers.

Saleable products from the Ovoot Tolgoi Mine primarily consist of SouthGobi standard (“Standard”) and SouthGobi premium (“Premium”) semi-soft coking coal products. Some higher ash content product is washed and sold as semi-soft coking coal product while some of the unwashed product is sold as a thermal coal product, as and when the market allows.

Significant Events and Highlights

The Company’s significant events and highlights for the year ended December 31, 2019 and the subsequent period to November 26, 2020 are as follows:

• Operating Results – The Company’s sales volume increased from 2.8 million tonnes in 2018 to 3.7 million tonnes in 2019. The average selling price of coal decreased from $37.1 per tonne in 2018 to $34.9 per tonne in 2019. The decrease in the average selling price was principally attributable to (i) a change of the Company’s product mix, as sales of premium semi-soft coking coal represented a smaller proportion of total sales in 2019; and (ii) a higher portion of sales made at the mine gate instead of transporting the coal to the Company’s Inner Mongolia subsidiary and selling to third party customers within China.

• Financial Results – The Company recorded a $29.8 million profit from operations in 2019 compared to a $10.5 million loss from operations in 2018. The improvement in profit from operations was principally attributable to (i) a lower provision for doubtful trade and other receivables being made during the year ($0.5 million and $20.9 million for 2019 and 2018, respectively); and (ii) increased sales volume.

• Impact of the COVID-19 Pandemic – The Company was informed that effective as of February 11, 2020, the Mongolian State Emergency Commission closed Mongolia’s southern border with China in order to prevent the spread of COVID-19. Accordingly, the Company suspended coal exports to China beginning as of February 11, 2020 as a result of the border closure.

On March 28, 2020, the Mongolian-Chinese border was re-opened for coal export on a trial basis, with a limit imposed on the total volume of coal that was permitted to be exported during this trial period. The Company has experienced a continuous improvement in the volume of coal exported to China since March 28, 2020. During the period between April to October 2020, an aggregate of 1.9 million

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

tonnes of coal was exported by the Company from Mongolia to China, as compared to an aggregate of 2.0 million tonnes of coal during the same period in the 2019 calendar year.

The border closure has had an adverse impact on the Company’s sales and cash flows in the first and second quarter of 2020. In order to mitigate the financial impact of the border closures and preserve its working capital, the Company temporarily ceased major mining operations (including coal mining), reduced production to only coal-blending activities and placed approximately half of its workforce on furlough from February 2020. Since August 2, 2020, the Company has resumed its mining operations, which includes mining, blending and washing of coal. As at October 31, 2020, SGS employed 208 employees at the Ovoot Tolgoi Mine site (December 31, 2019: 383 employees). The Company produced 1.1 million tonnes from August to October 2020, as compared to 1.3 million tonnes from August to October 2019. There were a few COVID-19 cases reported in Ulaanbaatar (being the capital city of Mongolia) on November 11, 2020. As a result, the Mongolian local authorities have taken certain precautionary steps to minimize further transmission and announced a lockdown of Ulaanbaatar until December 2, 2020. Although the Company’s mining operations and the export of coal from Mongolia to China continues as of the date hereof, there can be no guarantee that the Company will be able to continue exporting coal to China, or the border crossings would not be the subject of additional closures as a result of COVID-19 in the future. The Company will continue to closely monitor the development of the COVID-19 pandemic and the impact it has on coal exports to China and will react promptly to preserve the working capital of the Company.

Based on a preliminary review of the information and operational data of the Company currently available, the Company expects to record a net loss for the three months ended March 31, 2020 and for the six months ended June 30, 2020. The anticipated net loss was principally attributable to decreased sales volumes in the first quarter of 2020 as a result of the closure of the Mongolian-Chinese border crossings which took effect in February 2020 and therefore, the Company was unable to export coal into China as a result. In the event that the Company’s ability to export coal into the Chinese market becomes restricted or limited again as a result of any future restrictions which may be implemented at the Mongolian-Chinese border crossing, this is expected to have a material adverse effect on the business and operations of the Company and may negatively affect the price and volatility of the Common Shares and any investment in such shares could suffer a significant decline or total loss in value.

• CIC Convertible Debenture – On April 23, 2019, the Company executed a deferral agreement (the “2019 Deferral Agreement”) with CIC in relation to a deferral and revised repayment schedule in respect of (i) $41.8 million of outstanding cash and payment in kind interest (“PIK Interest”) and associated costs due and payable to CIC on November 19, 2018 (the “Outstanding Interest Payable”) under the CIC Convertible Debenture and a deferral agreement executed with CIC on June 12, 2017 (the “June 2017 Deferral Agreement”); and (ii) $27.9 million of cash and PIK Interest payments payable to CIC under the CIC Convertible Debenture from April 23, 2019 to and including May 19, 2020 (the “Deferral”). Pursuant to Section 501(c) of the TSX Company Manual, the 2019 Deferral Agreement was approved at the Company’s adjourned annual and special meeting of shareholders on June 13, 2019.

The key repayment terms of the 2019 Deferral Agreement are: (i) the Company agreed to pay a total of $14.3 million over eight instalments from November 2019 to June 2020; (ii) the Company agreed to pay the PIK Interest covered by the Deferral by way of cash payments, rather than the issuance of Common Shares; and (iii) the Company agreed to pay the remaining balance of $62.6 million on June 20, 2020. The Company agreed to pay a deferral fee at a rate of 6.4% per annum in consideration of the deferred amounts.

As a condition to agreeing to the Deferral, CIC required that the mutual co-operation agreement (the “Cooperation Agreement”) dated November 19, 2009 between SGS and CIC, be amended and restated

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

(the “Amended and Restated Cooperation Agreement”) to clarify the manner in which the service fee (the “Management Fee”) payable to CIC under the Cooperation Agreement is calculated, with effect as of January 1, 2017. Specifically, the Management Fee under the Amended and Restated Cooperation Agreement is determined based on the net revenues realized by the Company and all of its subsidiaries derived from sales into China (rather than the net revenues realized by the Company and its Mongolian subsidiaries as currently contemplated under the Cooperation Agreement). As consideration for deferring payment of the additional Management Fee payable to CIC as a result of the Amended and Restated Cooperation Agreement, the Company agreed to pay to CIC a deferral fee at the rate of 2.5% on the outstanding Management Fee. Pursuant to the Amended and Restated Cooperation Agreement, the Company agreed to pay CIC the total outstanding Management Fee and related accrued deferral fee of $4.2 million over six instalments from June 2019 to November 2019. The Company executed the Amended and Restated Cooperation Agreement with CIC on April 23, 2019.

Pursuant to their terms, both the 2019 Deferral Agreement and the Amended and Restated Cooperation Agreement became effective on June 13, 2019, being the date on which the 2019 Deferral Agreement was approved by shareholders at the Company’s adjourned annual and special meeting of shareholders.

In connection with the 2019 Deferral Agreement, the Company also announced that it intends to discuss a potential debt restructuring plan with respect to amounts owing to CIC which is mutually beneficial to the Company and CIC; and to form a special committee comprised of independent directors to ensure that the interests of its minority shareholders are fairly considered in the negotiation and review of any such restructuring; however, there can be no assurance that a favorable outcome will be reached. As of the date hereof, there has not been any significant progress in relations to the restructuring plan.

On February 19, 2020, the Company and CIC entered into an agreement (the “2020 February Deferral Agreement”) pursuant to which CIC agreed to grant the Company a deferral of: (i) deferred cash interest and deferral fees of $1.3 million and $2.0 million (collectively, the “2020 February Deferral Amounts”) which were due and payable to CIC on January 19, 2020 and February 19, 2020, respectively, under the 2019 Deferral Agreement; and (ii) approximately $0.7 million of the Management Fee which was due and payable on February 14, 2020 to CIC under the Amended and Restated Cooperation Agreement. The 2020 February Deferral Agreement became effective on March 10, 2020, being the date on which the Company obtained the requisite acceptance of the 2020 February Deferral Agreement from the TSX as required under applicable TSX rules.

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

• Payment of the 2020 February Deferral Amounts will be deferred until June 20, 2020, while the Management Fee will be deferred until they are repaid by the Company.

• As consideration for the deferral of these amounts, the Company agreed to pay CIC: (i) a deferral fee equal to 6.4% per annum on the 2020 February Deferral Amounts, commencing on the date on which each such 2020 February Deferral Amount would otherwise have been due and payable under the 2019 Deferral Agreement; and (ii) a deferral fee equal to 2.5% per annum on the Management Fee, commencing on the date on which the 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.

• As the Company anticipated prior to agreeing to the 2020 February Deferral Agreement that a deferral was likely required in respect of the monthly payments due and payable in the period between April 2020 and June 2020 under the 2019 Deferral Agreement and Amended and Restated Cooperation Agreement, the Company and CIC agreed to discuss in good faith a deferral of these payments on a monthly basis as they become due.

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

• The Company agreed to comply with all of its obligations under the 2019 Deferral Agreement and the Amended and Restated Cooperation Agreement, as amended by the 2020 February Deferral Agreement.

• The Company and CIC agreed that nothing in the 2020 February Deferral Agreement prejudices CIC’s rights to pursue any of its remedies at any time pursuant to the 2019 Deferral Agreement and Amended and Restated Cooperation Agreement, respectively.

On March 10, 2020, the Company agreed with CIC (the “2020 March Deferral Agreement”) that the $2.0 million of deferred cash interest and deferral fees which were due and payable to CIC on March 19, 2020 under the 2019 Deferral Agreement (the “2020 March Deferral Amount”) will be deferred until June 20, 2020. The terms of the 2020 March Deferral Agreement are substantially the same as the terms of the 2020 February Deferral Agreement, including that the Company agreed to pay CIC a deferral fee equal to 6.4% per annum on the 2020 March Deferral Amount, commencing on March 19, 2020. The 2020 March Deferral Agreement became effective on March 25, 2020, being the date on which the Company obtained the requisite acceptance of the 2020 March Deferral Agreement from the TSX as required under applicable TSX rules.

On April 10, 2020, the Company agreed with CIC (the “2020 April Deferral Agreement”) that the $2.0 million of deferred cash interest and deferral fees which were due and payable to CIC on April 19, 2020 under the 2019 Deferral Agreement (the “2020 April Deferral Amount”) will be deferred until June 20, 2020. The terms of the 2020 April Deferral Agreement are substantially the same as the terms of the 2020 February Deferral Agreement, including that the Company agreed to pay CIC a deferral fee equal to 6.4% per annum on the 2020 April Deferral Amount, commencing on April 19, 2020. The 2020 April Deferral Agreement became effective on April 29, 2020, being the date on which the Company obtained the requisite acceptance of the 2020 April Deferral Agreement from the TSX as required under applicable TSX rules.

On May 8, 2020, the Company agreed with CIC (the “2020 May Deferral Agreement”) that the deferred cash interest and deferral fees of $2.0 million which were due and payable to CIC on May 19, 2020 under the 2019 Deferral Agreement; and approximately $0.2 million of Management Fees which were due and payable on May 15, 2020 to CIC under the Amended and Restated Cooperation Agreement (collectively, the “2020 May Deferral Amount”) will be deferred until June 20, 2020. The terms of the 2020 May Deferral Agreement are substantially the same as the terms of the 2020 February Deferral Agreement, including that the Company agreed to pay CIC a deferral fee equal to 6.4% per annum on the deferred cash interest and deferral fees commencing on May 19, 2020 and a deferral fee equal to 2.5% per annum on the deferred Management Fees commencing on May 15, 2020. The 2020 May Deferral Agreement became effective on June 8, 2020, being the date on which the Company obtained the requisite acceptance of the 2020 May Deferral Agreement from the TSX as required under applicable TSX rules.

On June 19, 2020, the Company agreed with CIC (the “2020 June Deferral Agreement”) that the deferred cash interest and deferral fees in the aggregate amount of approximately $74.0 million (the “2020 June Deferral Amount”) which were due and payable to CIC on June 19, 2020 under the 2019 Deferral Agreement and the prior deferral agreements entered into during the period between February to May 2020 will be deferred until September 14, 2020. The terms of the 2020 June Deferral Agreement are substantially the same as the terms of the 2020 February Deferral Agreement, including that the Company agreed to pay CIC a deferral fee equal to 6.4% per annum on the 2020 June Deferral Amount commencing on June 19, 2020. The 2020 June Deferral Agreement became effective on July 17, 2020, being the date on which the Company obtained the requisite acceptance of the 2020 June Deferral Agreement from the TSX as required under applicable TSX rules.

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

On November 19, 2020, the Company and CIC entered into an agreement (the “2020 November Deferral Agreement”) pursuant to which CIC agreed to grant the Company a deferral of: (i) deferred cash interest and deferral fees of approximately $75.2 million which were due and payable to CIC on or before September 14, 2020, under 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 CIC Convertible Debenture; and (iv) the Management Fees 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”). The effectiveness of the 2020 November Deferral Agreement and the respective covenants, agreements and obligations of each party under the 2020 November Deferral Agreement are subject to the Company obtaining the requisite approval of the 2020 November Deferral Agreement from the Company’s shareholders in accordance with applicable TSX rules. On October 29, 2020, the Company obtained an order from the British Columbia Securities Commission (“BCSC”), the Company’s principal securities regulator in Canada, which partially revoked the CTO (as defined below) to, amongst other things, permit the Company to execute the 2020 November Deferral Agreement.

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 default under the CIC 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 CIC Convertible Debenture and the 2020 June Deferral Agreement, commencing on the date on which each such 2020 November Deferral Amount would otherwise have been due and payable under the CIC Convertible Debenture or the June 2020 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 CIC Convertible Debenture, the June 2020 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 November 2020 PIK Interest is fully repaid, CIC reserves the right to require the Company to pay and satisfy the amount of the November 2020 PIK Interest, either in full or in part, by way of issuing and delivering PIK interest shares in accordance with the CIC 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.

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

• Settlement with First Concept Industrial Group Limited (“First Concept”) – On June 7, 2020, SGS entered into a settlement agreement with First Concept, pursuant to which SGS agreed to pay to First Concept a settlement sum in the amount of $8.0 million in full and final settlement of any and all claims which First Concept may have against SGS in relation to Arbitration Award (as defined below), the subject matter of the Arbitration Award including any claims for interests and costs and the fees and expenses of the Arbitration Award, and any and all enforcement proceedings and applications in any jurisdictions, and in relation to the deed of settlement with First Concept (the “Full Settlement Sum”). The Full Settlement Sum was fully satisfied by the Company in June 2020 and the outstanding payable to First Concept as of the date hereof is $nil.

• Termination of Soumber Deposit Mining Licenses – On August 26, 2019, SGS received a letter (the “Notice Letter”) from MRAM notifying that the Company’s three mining licenses (MV-016869, MV020436 and MV-020451) (the “Soumber Licenses”) for the Soumber Deposit have been terminated by the Head of Cadastre Division of MRAM effective as of August 21, 2019.

According to the Notice Letter, the Soumber Licenses have been terminated pursuant to Clause 56.1.5 of Article 56 of the Minerals Law, Clauses 4.2.1 and 4.2.5 of Article 4 and Clause 28.1.1 of Article 28 of the General Administrative Law and a decision order of a working group established under an order of the Minister of Environment and Tourism (Mongolia). According to this decision order, the working group determined that SGS had violated its environmental reclamation obligations with respect to the Soumber Deposit. The Soumber Deposit is an undeveloped coal deposit covering approximately 22,263 hectares located approximately 20 kilometers east of the Company’s Ovoot Tolgoi coal mine in Mongolia. The Company owned a 100% interest in the Soumber Deposit.

The Company believes the cancellation of the Soumber Licenses is without merit. The Company is not aware of any failure on its part to fulfill its environmental reclamation duties as they relate to the Soumber Deposit. On October 4, 2019, SGS filed a claim against MRAM and the Ministry of Environment and Tourism of Mongolia in the Administration Court seeking an order to restore the Soumber Licenses. The Appeal Court issued the ruling in October 2020 and made an order to accept SGS’s claim and restore the Soumber Licenses. The case was transferred to the High Court for final ruling. The Company anticipates that the High Court will issue its ruling before the end of the first quarter of 2021. The Company will take all such actions, including additional legal actions, as it considers necessary to reinstate the Soumber Licenses. However, there can be no assurance that a favorable outcome will be reached. The termination of the Soumber Licenses does not have any impact on the Company’s current mining operations at the Ovoot Tolgoi mine site.

• Key Findings of Formal Investigation – Following the learning of certain information relating to past conduct engaged in by former senior executive officers and employees of the Company (“Former Management and Employees”) which raised suspicions of serious fraud, misappropriation of Company assets and other criminal acts by the Former Management and Employees relating to prior transactions (“Suspicious Transactions”) between 2016 and the first half of 2018 involving the Company, IMSGE and certain coal trading and transportation companies, some of which are allegedly related to or controlled by the Former Management and Employees or their related persons, the Board expanded the mandate of its special committee of independent non-executive directors (the “Special Committee”) to include a formal investigation (the “Formal Investigation”) of the Suspicious Transactions, the implicated Former Management and Employees, and their impact, if any, on the business and affairs of the Company. The Special Committee engaged Blake, Cassels & Graydon LLP as independent Canadian legal counsel, and Ernst & Young (China) Advisory Limited (the “Forensic Accountant”), as forensic accountants, to assist in the Formal Investigation. The Special Committee and the Forensic Accountant jointly engaged Zhong Lun Law Firm, as independent Chinese legal counsel.

On March 30, 2019, the Company announced that the Special Committee concluded the Formal

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

Investigation and delivered a final report summarizing its key findings to the Board, which was adopted and approved at a meeting held on March 30, 2019. Please refer to the Company’s MD&A for the three months ended March 31, 2019 for a summary of the key findings of the Formal Investigation, a copy of which is available under the Company’s profile on SEDAR at www.sedar.com.

Based on the key findings of and information obtained from the Formal Investigation, the Company considered the resulting financial impact on its prior financial statements and restated certain items in the Company’s financial statements for the years ended December 31, 2016 and December 31, 2017 (the “Prior Restatement”), as disclosed in the Company’s audited annual consolidated financial statements and related management’s discussion and analysis for the year ended December 31, 2018, copies of which are available under the Company’s profile on SEDAR at www.sedar.com. The Prior Restatement reflects the impact of the misappropriation of assets as well as the reclassification of certain balances of assets in the prior years. During the year ended December 31, 2018, sales were made to certain coal trading companies involved with the Suspicious Transactions totaling $12.2 million.

• Remedial Actions and Preventative Measures – On April 30, 2019, the Company announced that the Special Committee, with the assistance of the Forensic Accountant, completed its assessment of the potential remedial actions and preventative measures to improve and strengthen the Company’s commitment to a culture of honesty, integrity and accountability and compliance with the highest standards of professional and ethical conduct. The Special Committee delivered its report setting out a set of recommended remedial actions and preventative measures (the “Remedial Actions and Preventative Measures”) to the Board which was approved at a meeting of the Board held on April 28, 2019. Please refer to the Company’s MD&A for the three months ended March 31, 2019 for a summary of the Remedial Actions and Preventative Measures which were adopted and approved by the Board and the actions that the Company has taken to implement the Remedial Actions and Preventative Measures, a copy of which is available under the Company’s profile on SEDAR at www.sedar.com.

• Resumption of Trading on HKEX and TSX in May 2019 – On May 30, 2019, the Company announced that it had fulfilled the trading resumption guidance to the satisfaction of the HKEX and the HKEX and the TSX had accepted the Company’s trading resumption application. Trading in the Common Shares on the TSX and the HKEX resumed on May 30, 2019 and May 31, 2019, respectively.

• Cease Trade Order and Halt Trading on TSX – On June 19, 2020, the BCSC issued a general “failure to file” cease trade order (“CTO”), to prohibit the trading by any person of any securities of the Company in Canada. Trading in the Common Shares on the TSX was halted as a result of the CTO. The CTO was issued as of result of the Company’s failure to file: (i) its annual consolidated financial statements for the year ended December 31, 2019 and the accompanying Management’s Discussion & Analysis; (ii) its Annual Information Form for the year ended December 31, 2019; and (iii) its interim consolidated financial statements for the three-month period ended March 31, 2020 and accompanying Management’s Discussion & Analysis, in each case prior to the filing deadline of June 15, 2020.

The CTO will remain in effect until such time as the Company fully remedies its filing defaults under applicable Canadian securities laws, including filing of its 2019 Annual Information Form and its interim financial statements for the three-month period ended March 31, 2020 and three and six-month period ended June 30, 2020 and the accompanying Management’s Discussion & Analysis, and makes a successful application to the BCSC to have the CTO revoked. While the Company is taking such actions as it considers necessary in order to remedy its filing defaults as soon as possible, there can be no assurance that the Company will have the CTO lifted in a timely manner or at all. For so long as the CTO remains in effect, it will have a significant adverse impact on the liquidity of the Common Shares and shareholders may suffer a significant decline or total loss in value of its investment in the Common Shares as a result .

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

• Suspension of Trading on HKEX – At the request of the Company, trading in the shares of the Company on the HKEX was suspended with effect as of August 17, 2020 pending the publication of the audited annual results of the Company for the year ended December 31, 2019.

On September 2, 2020, the Company received a letter from the HKEX setting out the following resumption guidance for the resumption of trading in the Common Shares on the HKEX (the “Resumption Guidance”): (i) publish all outstanding financial results and address any audit modifications; (ii) inform the market of all material information for the Company’s shareholders and investors to appraise its position; and (iii) announce quarterly updates on the Company’s developments under Rules 13.24A of the HKEX’s Listing Rules, including, amongst other relevant matters, its business operations, its resumption plan and the progress of implementation.

On September 30, 2020, the Company was notified by the Hong Kong Stock Exchange of the following additional condition which must be satisfied in order for trading in the Common Shares on the HKEX to resume: resolve issues arising from the CTO and/or the TSX Delisting Review (as defined below), or take steps to the satisfaction of the HKEX that the Company will be eligible for a primary listing on the HKEX.

If the Company fails to remedy the issues causing its trading suspension, fully comply with the Listing Rules to the HKEX’s satisfaction and resume trading in its shares on the HKEX by February 16, 2022, the HKEX’s Listing Division will recommend to the HKEX’s Listing Committee that it proceed with the cancellation of the Company’s HKEX listing. Under Rules 6.01 and 6.10 of the Listing Rules, the HKEX also has the right to impose a shorter specific remedial period, where appropriate.

• TSX Delisting Review – On September 11, 2020, the TSX notified the Company that it is reviewing the eligibility for continued listing of the Common Shares on the TSX pursuant to the TSX’s Remedial Review Process (“TSX Delisting Review”). The Company has been granted until January 11, 2021 to remedy the following delisting criteria, as well as any other delisting criteria that become applicable during the Remedial Review Process: (i) financial condition and/or operating results; (ii) adequate working capital and appropriate capital structure; and (iii) disclosure issues (collectively, the “Delisting Criteria”).

The TSX Continued Listing Committee has scheduled a meeting to be held on January 7, 2021 to consider whether or not to suspend trading in and delist the Common Shares on the TSX. If the Company fails to demonstrate to the TSX that it has remedied the Delisting Criteria on or before January 11, 2021, the Common Shares will be delisted from the TSX 30 days from such date, unless an extension is granted by the TSX prior to the January 11, 2021 deadline.

• Changes in Management and Directors

Ms. Lan Cheng : Ms. Cheng did not stand for re-election at the Company’s annual and special meeting of shareholders (the “AGM”) held on May 30, 2019 and ceased to be a non-executive director following the conclusion of the AGM.

Mr. Ben Niu : On May 30, 2019, Mr. Niu was elected as a non-executive director of the Company at the AGM.

Mr. Wen Yao : Mr. Yao resigned as a non-executive director on March 11, 2020.

Mr. Jianmin Bao : On March 18, 2020, Mr. Bao was appointed as a non-executive director of the Company by CIC pursuant to a contractual nomination right granted to CIC pursuant to a securityholders’ agreement by and among the Company, CIC and Turquoise Hill Resources Ltd.

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Management’s Discussion and Analysis

SouthGobi Resources Ltd.

Mr. Shougao Wang : Mr. Wang resigned as Chief Executive Officer and an executive director on March 31, 2020.

Mr. Dalanguerban : Mr. Dalanguerban was appointed as Chief Executive Officer and an executive director on March 31, 2020.

Mr. Xiaoxiao Li : Mr. Li resigned as a non-executive director on November 13, 2020.

• 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.

See Section 6 of this MD&A under the heading entitled “Liquidity and Capital Resources” and Section 14 of this MD&A under the heading entitled “Risk Factors” for details.

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SouthGobi Resources Ltd.

Management’s Discussion and Analysis

2. SELECTED ANNUAL INFORMATION

$ in thousands, except per share and per tonne information Revenue Profit/(loss) from operations Net profit/(loss) attributable to equity holders of the Company Basic and diluted earnings/(loss) per share Cash from operating activities Cash used in investing activities Cash used in financing activities Coal sales volumes_(millions of tonnes)(i) Average realized selling price(per tonne) $ in thousands_ Cash and cash equivalents Total working capital deficiency Total assets Total non-current liabilities	2019 2018 2017 129,712 $ 103,804 $ 120,973 $ 29,832 (10,534) (14,637) 4,201 (41,125) (37,594) 0.02 $ (0.15) $ (0.14) $ 32,568 40,420 25,731 (18,508) (26,656) (18,686) (13,850) (13,649) (1,661) 3.74 2.78 4.65 34.88 $ 37.12 $ 28.31 $ As at December 31, Year ended December 31,	2019 2018 2017 129,712 $ 103,804 $ 120,973 $ 29,832 (10,534) (14,637) 4,201 (41,125) (37,594) 0.02 $ (0.15) $ (0.14) $ 32,568 40,420 25,731 (18,508) (26,656) (18,686) (13,850) (13,649) (1,661) 3.74 2.78 4.65 34.88 $ 37.12 $ 28.31 $ As at December 31, Year ended December 31,
	2019	2018 2017 6,959 $ 6,471 $ (203,083) (169,033) 227,606 253,436 6,882 5,554
	7,164 $ (114,711) 228,427 98,581

(i) Coal sales volumes are from the Ovoot Tolgoi Mine.

Although total sales volume dropped for 2018, the Company was able to preserve its working capital and improve its financial results as a result of tighter cost control measures, as well as achieving a higher average selling price of coal. Loss from operations for 2018 was reduced by more than 28% when compared to 2017, while the average selling price of coal increased by more than 31%.

Following the commissioning of the wash plant in 2018 and the continued effort to bring down operational costs and administration costs, together with a lower provision for doubtful trade and other receivables being made during 2019, the Company recorded a net profit of $4.2 million in 2019, compared to a net loss of $41.1 million in 2018.

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

3. OVERVIEW OF OPERATIONAL DATA AND FINANCIAL RESULTS

Summary of Annual Operational Data

Summary of Annual Operational Data
Sales Volumes, Prices and Costs Premium semi-soft coking coal Coal sales_(millions of tonnes) Average realized selling price(per tonne) Standard semi-soft coking coal/ premium thermal coal Coal sales(millions of tonnes) Average realized selling price(per tonne) Standard thermal coal Coal sales(millions of tonnes) Average realized selling price(per tonne) Washed coal Coal sales(millions of tonnes) Average realized selling price(per tonne) Total Coal sales(millions of tonnes) Average realized selling price(per tonne) Raw coal production (millions of tonnes) Cost of sales of product sold(per tonne) Direct cash costs of product sold(per tonne) (i) Mine administration cash costs of product sold(per tonne) (i) Total cash costs of product sold(per tonne)(i) Other Operational Data Production waste material moved(millions of bank cubic_ meters) Strip ratio_(bank cubic meters of waste material per tonne of_ coal produced) Lost time injury frequency rate_(ii)_	December 31, Year ended
	2019 2018 0.67 0.59 32.96 $ 50.34 $ 2.35 1.26 33.54 $ 37.61 $ 0.09 0.78 29.43 $ 25.07 $ 0.63 0.15 43.05 $ 44.02 $ 3.74 2.78 34.88 $ 37.12 $ 5.05 4.34 22.57 $ 28.72 $ 14.84 $ 14.90 $ 1.08 $ 1.50 $ 15.92 $ 16.40 $ 18.22 18.16 3.61 4.17 0.06 0.05

(i) A non-IFRS financial measure, see section 4. Cash costs of product sold exclude idled mine asset cash costs.

(ii) Per 200,000 man hours and calculated based on a rolling 12-month average.

Overview of Annual Operational Data

As at December 31, 2019, the Company had a lost time injury frequency rate of 0.06 per 200,000 man hours based on a rolling 12-month average.

The Company experienced a decrease in the average selling price of coal from $37.1 per tonne in 2018 to $34.9 per tonne in 2019. The decrease in the average selling price was principally attributable to (i) a change of the Company’s product mix, as sales of premium semi-soft coking coal represented a smaller proportion of total sales in 2019; and (ii) a higher portion of sales made at the mine gate instead of transporting the coal to the Company’s Inner Mongolia subsidiary and selling to third party customers within China. The product mix for 2019 consisted of approximately 18% of premium semi-soft coking coal, 63% of standard semi-soft coking coal/premium thermal coal, 17% of washed coal and 2% of standard thermal coal compared to approximately 21% of premium semi-soft coking coal, 46% of standard semi-soft coking coal/premium thermal coal, 5% of washed coal and 28% of standard thermal coal in 2018.

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

Sales volume increased from 2.8 million tonnes in 2018 to 3.7 million tonnes in 2019. The Company’s production in 2019 was higher than that in 2018 as a result of a decrease in strip ratio for 2019, yielding 5.1 million tonnes for 2019 as compared to 4.3 million tonnes for 2018.

The Company’s unit cost of sales of product sold decreased from $28.7 per tonne in 2018 to $22.6 per tonne in 2019. The decrease was mainly driven by a higher amount of impairment of coal stockpile inventories being recorded in 2018 (2018: impairment of $5.4 million; 2019: reversal of impairment of $1.8 million).

Summary of Annual Financial Results

$ in thousands, except per share information Revenue_(i) Cost of sales(i) Gross profit excluding idled mine asset costs(ii)_ Gross profit Other operating expenses Administration expenses Evaluation and exploration expenses Profit/(loss) from operations Finance costs Finance income Share of earnings of a joint venture Income tax expense Net profit/(loss) attributable to equity holders of the Company Basic and diluted earnings/(loss) per share

Year ended December 31,

2019 2018 129,712 $ 103,804 $ (84,400) (79,835) 49,310 36,829 45,312 23,969 (5,581) (23,607) (9,447) (10,540) (452) (356) 29,832 (10,534) (28,010) (28,578) 4,417 184 1,329 1,631 (3,367) (3,828) 4,201 (41,125) 0.02 $ (0.15) $

(i) Revenue and cost of sales related to the Company’s Ovoot Tolgoi Mine within the Coal Division operating segment. Refer to note 4 of the consolidated financial statements for further analysis regarding the Company’s reportable operating segments.

(ii) A non-IFRS financial measure, idled mine asset costs represents the depreciation expense relates to the Company’s idled plant and equipment.

Overview of Annual Financial Results

The Company recorded a $29.8 million profit from operations in 2019 compared to a $10.5 million loss from operations in 2018. The improvement in profit from operations was principally attributable to (i) the lower provision for doubtful trade and other receivables being made during the year ($0.5 million and $20.9 million for 2019 and 2018, respectively); and (ii) increased sales volume.

Revenue was $129.7 million in 2019 compared to $103.8 million in 2018. The Company’s effective royalty rate for 2019, based on the Company’s average realized selling price of $34.9 per tonne, was 8.9% or $3.1 per tonne, compared to 7.9% or $3.0 per tonne in 2018 (based on the average realized selling price of $37.1 per tonne in 2018).

Royalty expenses were $11.6 million in 2019 compared to $8.2 million in 2018. The increase in royalty expenses was mainly due to the new royalty regime introduced by the Government of Mongolia in the third quarter of 2019.

Royalty regime in Mongolia

The royalty regime in Mongolia is evolving and has been subject to change since 2012.

On February 1, 2016, the Government of Mongolia issued a resolution in connection with the royalty regime. From February 1, 2016 onwards, royalties are to be calculated based on the actual contract price including

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

transportation costs to the Mongolia border. If such transportation costs have not been included in the contract, the relevant transportation costs, customs documentation fees, insurance and loading costs should be estimated for the calculation of royalties. In the event that the calculated sales price as described above differs from the contract sales price of other entities in Mongolia (same quality of coal and same border crossing) by more than 10%, the calculated sales price will be deemed to be “non-market” under Mongolian tax law and the royalty will then be calculated based on a reference price as determined by the Government of Mongolia.

On September 4, 2019, the Government of Mongolia issued a further resolution in connection with the royalty regime. From September 1, 2019 onwards, in the event that the contract sales price is less than the reference price as determined by the Government of Mongolia by more than 30%, then the royalty payable will be calculated based on the Mongolian government’s reference price instead of the contract sales price.

See the section entitled “ Risk Factors - Company’s Projects in Mongolia ”.

Cost of sales was $84.4 million in 2019 compared to $79.8 million in 2018. The increase in cost of sales in 2019 was mainly due to the effect of (i) increased sales volume; and (ii) a reversal of impairment of coal stockpile inventories of $1.8 million was recorded for 2019 as compared to $5.4 million of impairment being recorded in 2018. Cost of sales consists of operating expenses, share-based compensation expense, equipment depreciation, depletion of mineral properties, royalties, coal stockpile inventory impairment/(reversal of impairment) and idled mine asset costs. Operating expenses in cost of sales reflect the total cash costs of product sold (a Non-IFRS financial measure, see Section 4 of this MD&A for further analysis) during the year.

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Year ended December 31,
$ in thousands 2019 2018
Operating expenses $ 59,549 $ 45,604
Share-based compensation expense 9 4
Depreciation and depletion 11,028 7,693
Royalties 11,639 8,237
Impairment/(reversal of impairment) of coal stockpile inventories (1,823) 5,437
Cost of sales from mine operations 80,402 66,975
Cost of sales related to idled mine assets 3,998 12,860
Cost of sales $ 84,400 $ 79,835
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Operating expenses in cost of sales were $59.5 million in 2019 compared to $45.6 million in 2018. The overall increase in operating expenses was primarily due to the combined effect of: (i) increased sales volume from 2.8 million tonnes in 2018 to 3.7 million tonnes in 2019; and (ii) higher inventory carrying costs given less deferred stripping cost was capitalized in 2019.

Cost of sales in 2019 included a reversal of impairment of coal stockpile inventories of $1.8 million, to increase the carrying value of the Company’s coal stockpiles to the lower of the cost and the net realizable value. The reversal of impairment of coal stockpile inventories recorded in 2019 reflected the enhancement in the wash plant capacity and its continuous operation at the expected level. A coal stockpile impairment of $5.4 million was recorded in 2018 to reduce the carrying value of the Company’s stockpile to their net realizable value. The coal stockpile impairment recorded primarily related to the Company’s higher-ash content products.

Cost of sales related to idled mine assets in 2019 included $4.0 million related to depreciation expenses for idled equipment (2018: $12.9 million).

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

Other operating expenses were $5.6 million in 2019 (2018: $23.6 million), as follows:

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Year ended December 31,
$ in thousands 2019 2018
CIC management fee $ 3,185 $ 2,098
Other taxes on foreign payments 1,881 599
Provision for doubtful trade and other receivables 501 20,892
Provision for commercial arbitration 485 124
Impairment of prepaid expenses 253 134
Loss on disposal of properties for resale 36 179
Foreign exchange loss/(gain) (706) 643
Gain on disposal of property, plant and equipment (29) (994)
Impairment of properties for resale - 2,239
Penalty on late settlement of trade payables - 427
-
Gain on settlement of trade payables (2,392)
-
Net reversal of impairment of items of property, plant and equipment (346)
Others (25) 4
Other operating expenses $ 5,581 $ 23,607
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The Company made a provision for doubtful trade and other receivables of $0.5 million in 2019 (2018: $20.9 million) for certain long aged receivables based on its expected credit loss model.

Administration expenses were $9.4 million in 2019 as compared to $10.5 million in 2018, as follows:

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Year ended December 31,
$ in thousands 2019 2018
Corporate administration $ 2,111 $ 2,639
Professional fees 3,076 2,685
Salaries and benefits 3,522 5,004
Share-based compensation expense 38 75
Depreciation 700 137
Administration expenses $ 9,447 $ 10,540
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Administration expenses were lower for 2019 compared to 2018 primarily due to lower salaries and benefits incurred during the year.

Evaluation and exploration expenses were $0.5 million and $0.4 million in 2019 and 2018, respectively. The Company continued to minimize evaluation and exploration expenditures in 2019 in order to preserve the Company’s financial resources. Evaluation and exploration activities and expenditures in 2019 were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining licenses.

Finance costs were $28.0 million and $28.6 million in 2019 and 2018, respectively, which primarily consisted of interest expense on the $250.0 million CIC Convertible Debenture.

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Management’s Discussion and Analysis

SouthGobi Resources Ltd.

Summary of Quarterly Operational Data

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2019 2018
Quarter Ended 31-Dec 30-Sep 30-Jun 31-Mar 31-Dec 30-Sep 30-Jun 31-Mar
Sales Volumes, Prices and Costs
Premium semi-soft coking coal
Coal sales (millions of tonnes) 0.39 0.05 0.12 0.11 0.24 0.25 0.07 0.03
Average realized selling price (per tonne) $ 29.18 $ 31.49 $ 32.72 $ 47.34 $ 47.37 $ 48.15 $ 59.98 $ 67.94
Standard semi-soft coking coal/ premium thermal coal
Coal sales (millions of tonnes) 0.40 0.51 0.59 0.85 0.40 0.26 0.19 0.41
Average realized selling price (per tonne) $ 31.88 $ 31.67 $ 35.67 $ 33.34 $ 32.60 $ 34.40 $ 33.80 $ 46.34
Standard thermal coal
Coal sales (millions of tonnes) - - - 0.09 0.12 0.22 0.32 0.12
Average realized selling price (per tonne) $ - $ - $ - $ 34.88 $ 24.26 $ 23.49 $ 26.32 $ 25.40
Washed coal
Coal sales (millions of tonnes) 0.20 0.25 0.17 0.01 0.15 - - -
Average realized selling price (per tonne) $ 42.95 $ 42.37 $ 44.20 $ 45.07 $ 44.02 $ - $ - $ -
Total
Coal sales (millions of tonnes) 0.99 0.81 0.88 1.06 0.91 0.73 0.58 0.56
Average realized selling price (per tonne) $ 33.04 $ 34.98 $ 36.80 $ 34.91 $ 37.32 $ 35.77 $ 32.81 $ 43.02
Raw coal production (millions of tonnes) 1.48 1.21 1.33 1.03 1.87 1.11 0.98 0.38
Cost of sales of product sold (per tonne) $ 23.68 $ 19.16 $ 25.04 $ 22.08 $ 30.80 $ 23.44 $ 29.27 $ 31.64
Direct cash costs of product sold (per tonne) (i) $ 13.61 $ 18.03 $ 17.18 $ 10.82 $ 14.41 $ 11.90 $ 14.93 $ 19.60
Mine administration cash costs of product sold (per tonne) (i) $ 1.29 $ 1.09 $ 1.39 $ 1.41 $ 2.19 $ 1.24 $ 1.00 $ 1.24
Total cash costs of product sold ( per tonne) (i) $ 14.90 $ 19.12 $ 18.57 $ 12.23 $ 16.60 $ 13.14 $ 15.93 $ 20.84
Other Operational Data
Production waste material moved (millions of bank 3.61 4.36 5.34 4.91 5.54 4.56 5.18 2.88
cubic meters)
Strip ratio (bank cubic meters of waste material per tonne of 2.44 3.61 4.01 4.76 2.97 4.11 5.26 7.55
coal produced)
Lost time injury frequency rate (ii) 0.08 0.08 0.06 0.00 0.00 0.00 0.06 0.13
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(i) A non-IFRS financial measure, see section 4. Cash costs of product sold exclude idled mine asset cash costs.

(ii) Per 200,000 man hours and calculated based on a rolling 12-month average.

Overview of Quarterly Operational Data

For the fourth quarter of 2019, the Company had a lost time injury frequency rate of 0.08 per 200,000 man hours based on a rolling 12-month average.

The Company experienced a decrease in the average selling price of coal from $37.3 per tonne in the fourth quarter of 2018 to $33.0 per tonne in the fourth quarter of 2019. The product mix for the fourth quarter of 2019 consisted of approximately 39% of premium semi-soft coking coal, 41% of standard semi-soft coking coal/premium thermal coal and 20% of washed coal compared to approximately 27% of premium semi-soft coking coal, 44% of standard semi-soft coking coal/premium thermal coal, 16% of washed coal and 13% of standard thermal coal in the fourth quarter of 2018.

The Company sold 1.0 million tonnes for the fourth quarter of 2019 as compared to 0.9 million tonnes for the fourth quarter of 2018.

The Company’s production in the fourth quarter of 2019 was lower than the fourth quarter of 2018 as a result of management’s decision to pace production to meet expected sales, yielding 1.5 million tonnes for the fourth quarter of 2019 as compared to 1.9 million tonnes for the fourth quarter of 2018.

The Company’s unit cost of sales of product sold decreased to $23.7 per tonne in the fourth quarter of 2019 from $30.8 per tonne in the fourth quarter of 2018. The decrease was mainly driven by a higher amount of impairment of coal stockpile inventories being recorded in the fourth quarter of 2018 (fourth quarter of 2018: $5.4 million; fourth quarter of 2019: $nil).

December 31, 2019

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

Summary of Quarterly Financial Results

The Company’s annual financial statements are reported under IFRS issued by the IASB. The following table provides highlights, extracted from the Company’s annual and interim financial statements, of quarterly results for the past eight quarters:

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$ in thousands, except per share information 2019 2018
31-Dec 30-Sep 30-Jun 31-Mar 31-Dec 30-Sep 30-Jun 31-Mar
Quarter Ended (Restated) (Restated) (Restated)
Financial Results
Revenue (i) $ 32,113 $ 28,309 $ 32,479 $ 36,811 $ 33,814 $ 26,277 $ 19,278 $ 24,435
Cost of sales (i) (23,446) (15,518) (22,031) (23,405) (28,027) (17,110) (16,979) (17,719)
Gross profit excluding idled mine asset costs 9,971 13,664 11,318 14,357 7,305 13,195 6,079 10,250
Gross profit including idled mine asset costs 8,667 12,791 10,448 13,406 5,787 9,167 2,299 6,716
Other operating expenses (1,589) (1,245) (2,333) (414) (2,921) (3,417) (16,512) (757)
Administration expenses (1,386) (2,074) (2,878) (3,109) (1,583) (2,724) (3,856) (2,377)
Evaluation and exploration expenses (382) (22) (23) (25) (36) (40) (156) (124)
Profit/(loss) from operations 5,310 9,450 5,214 9,858 1,247 2,986 (18,225) 3,458
Finance costs (7,095) (7,184) (7,001) (6,739) (10,899) (5,758) (5,958) (6,006)
Finance income 36 68 4,305 17 13 106 8 100
Share of earnings of a joint venture 225 277 375 452 416 247 628 340
Income tax expense (659) (468) (801) (1,439) (1,023) (267) (1,609) (929)
Net profit/(loss) (2,183) 2,143 2,092 2,149 (10,246) (2,686) (25,156) (3,037)
Basic and diluted earnings/(loss) per share $ (0.01) $ 0.01 $ 0.01 $ 0.01 $ (0.04) $ (0.01) $ (0.09) $ (0.01)
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(i) Revenue and cost of sales relate to the Company’s Ovoot Tolgoi Mine within the Mongolian Coal Division operating segment. Refer to note 4 of the consolidated financial statements for further analysis regarding the Company’s reportable operating segments.

(ii) The financial results for the three month periods ended September 30, 2018, June 30, 2018, and March 31, 2018 were restated as a result of the net effect of the Prior Restatement. Refer to Section 1 of this MD&A under the heading entitled Key Findings of Formal Investigation, as well as the MD&A for the periods ended September 30, 2019, June 30, 2019 and March 31, 2019, copies of which are available under the Company’s profile on SEDAR at www.sedar.com.

Overview of Quarterly Financial Results

The Company recorded a $5.3 million profit from operations in the fourth quarter of 2019 compared to a $1.2 million profit from operations in the fourth quarter of 2018. The improvement in overall financial results was principally attributable to the Company recognizing a lower amount of impairment charges and provisions during the fourth quarter of 2019 as compared to the fourth quarter in 2018. In particular, during the fourth quarter of 2018, an impairment charge of $5.4 million was recorded on coal stockpile inventories (fourth quarter of 2019: $nil).

Revenue was $32.1 million in the fourth quarter of 2019 compared to $33.8 million in the fourth quarter of 2018. The Company’s effective royalty rate for the fourth quarter of 2019, based on the Company’s average realized selling price of $33.0 per tonne, was 14.7% or $4.8 per tonne, compared to 9.9% or $3.7 per tonne in the fourth quarter of 2018 (based on the average realized selling price of $37.3 per tonne in the fourth quarter of 2018). The increase was mainly attributed to the new Mongolian royalty regime which became effective in September 2019. Please see “ Royalty Regime in Mongolia ” for details.

Cost of sales was $23.4 million in the fourth quarter of 2019 compared to $28.0 million in the fourth quarter of 2018. The decrease in cost of sales was mainly due to a lower amount of impairment of coal stockpile inventories being made during the fourth quarter of 2019 (fourth quarter of 2018: $5.4 million; fourth quarter of 2019: $nil).

Cost of sales consists of operating expenses, share-based compensation expense, equipment depreciation, depletion of mineral properties, royalties, coal stockpile inventory impairment and idled mine asset costs. Operating expenses in cost of sales reflect the total cash costs of product sold (a Non-IFRS financial measure, see Section 4 of this MD&A for further analysis) during the quarter.

December 31, 2019

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SouthGobi Resources Ltd.

Management’s Discussion and Analysis

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Three months ended
December 31,
$ in thousands 2019 2018
Operating expenses $ 14,754 $ 15,110
Share-based compensation expense 2 3
Depreciation and depletion 2,649 2,626
Royalties 4,737 3,333
Impairment of coal stockpile inventories - 5,437
Cost of sales from mine operations 22,142 26,509
Cost of sales related to idled mine assets 1,304 1,518
Cost of sales $ 23,446 $ 28,027
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Operating expenses in cost of sales were $14.8 million in the fourth quarter of 2019 compared to $15.1 million in the fourth quarter of 2018, as the sales volume in both quarters were at similar levels.

Cost of sales in the fourth quarter of 2018 included coal stockpile impairment of $5.4 million to reduce the carrying value of the Company’s coal stockpiles to their net realizable value. The coal stockpile impairment recorded in the fourth quarter of 2018 primarily related to the Company’s higher-ash content products.

Cost of sales related to idled mine assets in the fourth quarter of 2019 included $1.3 million related to depreciation expenses for idled equipment (fourth quarter of 2018: $1.5 million).

Other operating expenses were $1.6 million in the fourth quarter of 2019 (fourth quarter of 2018: $2.9 million).

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Three months ended
December 31,
$ in thousands 2019 2018
Provision for doubtful trade and other receivables $ 60 $ 1,588
Impairment of properties for resale - 866
Impairment of prepaid expenses - 134
CIC management fee 853 761
Other taxes on foreign payments 858 599
Foreign exchange loss/(gain) (228) 1,373
Loss/(gain) on disposal of properties for resale (1) 179
-
Gain on disposal of property, plant and equipment (2,167)
Provision/(reversal of provision) for commercial arbitration 79 (562)
-
Net reversal of impairment of items of property, plant and equipment (346)
Adjustment on gain on settlement of trade payables - 564
Others (32) (68)
Other operating expenses $ 1,589 $ 2,921
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Administration expenses were $1.4 million in the fourth quarter of 2019 as compared to $1.6 million in the fourth quarter of 2018. The decrease in salaries and benefits was mainly due to the overprovision of staff bonus for past periods.

$ in thousands Corporate administration Professional fees Salaries and benefits Share-based compensation expense Depreciation	Three months ended December 31,
	2019 2018 554 $ 308 $ 408 52 208 1,184 9 28 207 11
Administration expenses	1,386 $ 1,583 $

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

Evaluation and exploration expenses were $0.4 million for the fourth quarter of 2019 (fourth quarter of 2018: negligible). The Company continued to minimize evaluation and exploration expenditures in 2019 in order to preserve the Company’s financial resources. Evaluation and exploration activities and expenditures in the fourth quarter of 2019 were limited to ensuring that the Company met the Mongolian Minerals Law requirements in respect of its mining licenses.

Finance costs were $7.1 million in the fourth quarter of 2019 compared to $10.9 million in the fourth quarter of 2018, which primarily consisted of interest expense on the CIC Convertible Debenture.

4. NON-IFRS FINANCIAL MEASURES

The Company has included the non-IFRS financial measure “cash costs” in this MD&A to supplement its consolidated financial statements, which have been prepared in accordance with IFRS. The data presented is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.

The Company believes that this measure, together with measures determined in accordance with IFRS, provides investors with useful information to evaluate the underlying performance of the Company. NonIFRS financial measures do not have a standardized meaning prescribed under IFRS and therefore may not be comparable to similar measures employed by other companies. The non-IFRS financial measure is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.

Cash Costs

The Company uses cash costs to describe its cash production and associated cash costs incurred in bringing the inventories to their present locations and conditions. Cash costs incorporate all production costs, which include direct and indirect costs of production, with the exception of idled mine asset costs and non-cash expenses which are excluded. Non-cash expenses include share-based compensation expense, impairment of coal stockpile inventories, depreciation and depletion of property, plant and equipment and 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 following table provides a reconciliation of the cash costs of product sold disclosed for the three months and year ended December 31, 2019 and December 31, 2018. The cash costs of product sold presented below may differ from cash costs of product produced depending on the timing of coal stockpile inventory turnover and impairment of coal stockpile inventories from prior periods.

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SouthGobi Resources Ltd.

Management’s Discussion and Analysis

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Three months ended Year ended
December 31, December 31,
$ in thousands, except per tonne information 2019 2018 2019 2018
Cash costs
Cost of sales determined in accordance with IFRS $ 23,446 $ 28,027 $ 84,400 $ 79,835
Less royalties (4,737) (3,333) (11,639) (8,237)
Less non-cash expenses (2,651) (8,066) (9,214) (13,134)
Less non-cash idled mine asset costs (1,304) (1,518) (3,998) (12,860)
Total cash costs 14,754 15,110 59,549 45,604
Less idled mine asset cash costs - - - -
Total cash costs excluding idled mine asset cash costs 14,754 15,110 59,549 45,604
Coal sales (millions of tonnes) 0.99 0.91 3.74 2.78
Total cash costs of product sold (per tonne) $ 14.90 $ 16.60 $ 15.92 $ 16.40
Three months ended Year ended
December 31, December 31,
$ in thousands, except per tonne information 2019 2018 2019 2018
Cash costs
Direct cash costs of product sold (per tonne) $ 13.61 $ 14.41 $ 14.84 $ 14.90
Mine administration cash costs of product sold (per tonne) 1.29 2.19 1.08 1.50
Total cash costs of product sold (per tonne) $ 14.90 $ 16.60 $ 15.92 $ 16.40
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The cash cost of product sold per tonne was $13.6 for the fourth quarter of 2019, which has decreased from $14.4 per tonne for the fourth quarter 2018. The reason for the decrease is primarily related to the lower strip ratio achieved in the fourth quarter of 2019, which resulted in a higher production yield.

5. PROPERTIES

The Company currently holds three mining licenses in Mongolia. The mining licenses pertain to the Ovoot Tolgoi Mine (MV-012726) and the Zag Suuj deposit (MV-020676 and MV-020675).

On August 26, 2019, SGS received the Notice Letter from MRAM notifying that the Company’s three mining licenses (MV-016869, MV-020436 and MV-020451) for the Soumber Deposit have been terminated by the Head of Cadastre Division of MRAM effective as of August 21, 2019. See Section 7 of this MD&A under the heading entitled " Regulatory Issues and Contingencies – Termination of Soumber Deposit Mining Licenses” for more information.

The Company believes the cancellation of the Soumber Licenses is without merit. The Company is not aware of any failure on its part to fulfill its environmental reclamation duties as they relate to the Soumber Deposit. On October 4, 2019, SGS filed a claim against MRAM and the Ministry of Environment and Tourism of Mongolia in the Administration Court seeking an order to restore the Soumber Licenses. The Appeal Court issued the ruling in October 2020 and made an order to accept SGS’s claim and restore the Soumber Licenses. The case was transferred to the High Court for final ruling. The Company anticipates that the High Court will issue its ruling before the end of the first quarter of 2021. The Company will take all such actions, including additional legal actions, as it considers necessary to reinstate the Soumber Licenses. However, there can be no assurance that a favorable outcome will be reached. The termination of the Soumber Licenses does not have any impact on the Company’s current mining operations at the Ovoot Tolgoi mine site.

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

Operating Mines

Ovoot Tolgoi Mine

The Ovoot Tolgoi Mine is located in the southwest corner of the Umnugobi Aimag (South Gobi Province) of Mongolia. The deposit is within the administrative unit of Gurvantes Soum, 320km southwest of the provincial capital of Dalanzadgad and 950km southwest of the nation’s capital of Ulaanbaatar. Mining operations at the Ovoot Tolgoi Mine have been carried out in two distinct areas, the Sunset pit to the west and the Sunrise pit to the east.

Saleable products from the Ovoot Tolgoi Mine primarily include the Standard and Premium semi-soft coking coal products. Some higher ash content product is being washed and sold as semi-soft coking coal products while some of the unwashed product is sold as a thermal coal product as and when the market allows. The Company intends to continue to develop markets for both its Premium and Standard semi-soft coking coal brands and to pursue long-term supply offtake with end users in China to complement its existing customer base and to gain best value for the Company’s coal in the Chinese market. The Company is committed to further enhancing the quality of its coal products through wet washing and increasing its market penetration in China.

Resources

A resource estimate for the Ovoot Tolgoi deposit is set out in the Ovoot Tolgoi Technical Report, which was prepared by DMCL on behalf of the Company. A copy of the Ovoot Tolgoi Technical Report was filed under the Company’s profile on SEDAR at www.sedar.com on May 15, 2017.

Reserves

A reserve estimate for the Ovoot Tolgoi deposit is set out in the Ovoot Tolgoi Technical Report, which was prepared by DMCL on behalf of the Company. A copy of the Ovoot Tolgoi Technical Report was filed under the Company’s profile on SEDAR at www.sedar.com on May 15, 2017.

Mining Operations

Mining Method

The mining method employed at the Ovoot Tolgoi deposit could be described as open pit terrace mining utilizing large scale hydraulic excavators and shovels and trucks. Terrace mining is utilized where coal seams dip steeply and operating machinery on the coal seam roof and floor is not possible, due to the steep seam dips. Terraces, or benches, are excavated along fixed horizontal horizons and these benches intersect both coal and waste. Coal and waste are mined separately on each bench with dozers being used, as needed, to push coal or waste down to the excavator for loading onto trucks. This mining method allows large scale open pit mining to occur productively in steeply dipping coal seam environments. All waste is dumped ex-pit, as the steep dips preclude in-pit dumping.

The open pit limits extend across the Ovoot Tolgoi Mining License boundary into the adjacent lease held by Mongolyn Alt (MAK) LLC (“MAK”). As described previously, the Company and MAK have a cooperation agreement in place to allow mining across the boundary, which stipulates that SGS is responsible for removal of MAK waste but MAK is responsible for mining of MAK coal. Accordingly, the current reserve estimate does not include any coal within the MAK lease that must be extracted as part of the Company mining operation. Therefore, in the current mine plan, no revenue has been assumed for the MAK coal whereas costs have been assumed for stripping off the MAK waste.

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Management’s Discussion and Analysis

SouthGobi Resources Ltd.

Transportation Infrastructure

The paved highway has a carrying capacity in excess of 20 million tonnes of coal per year.

For the three months ended and the year ended December 31, 2019, RDCC LLC recognized toll fee revenue of $1.4 million (2018: $1.9 million) and $6.8 million (2018: $ 7.3 million), respectively.

Mining Equipment

The key elements of the currently commissioned mining fleet include: two Liebherr 996 (33m[3] & 36m[3] ) hydraulic excavators, three Liebherr R9250 (15m[3] ) hydraulic excavators and 19 MT4400AC (218 tonne capacity) haul trucks, together with various pieces of ancillary equipment.

Workforce

As at December 31, 2019, SGS employed 424 employees in Mongolia. Of the 424 employees, 39 are employed in the Ulaanbaatar office, 2 in an outlying office and 383 at the Ovoot Tolgoi Mine site. Of the 424 employees based in Mongolia, 419 (99%) are Mongolian nationals and of those, 224 (53%) are residents of the local Gurvantes, Dalanzadgad, Sevrei and Noyon Soums.

Development Projects and Exploration Program

Zag Suuj Deposit

The Zag Suuj deposit, located approximately 150km east of the Ovoot Tolgoi Mine and approximately 45km north of the Mongolia-China border, lies within the administrative units of Noyon and Bayandalai Soums in the Umnugobi Aimag (South Gobi Province) (the “Zag Suuj Deposit”).

Based on the exploration results to date, the coal occurrence at the Zag Suuj Deposit can be divided into four major seam groups. Each of the seam groups split into a number of coal plies of highly variable thickness, separated by stone partings. Interburden between the seams is mainly sandstone and conglomerate, whilst partings within the seams tend to be dominated by mudstone and carbonaceous mudstone. Correlation of the coal seams at the Zag Suuj Deposit with the Ovoot Tolgoi Mine and the Soumber Deposit has not been undertaken.

Several of the seams at the Zag Suuj Deposit have an average free swell index greater than five, indicating metallurgical properties; however, limited metallurgical testing has been undertaken to date.

On March 25, 2013, the Company reported an updated independent resource estimate for the Zag Suuj Deposit prepared by RPM in accordance with NI 43-101. RPM estimated that the Zag Suuj Deposit contains indicated coal resources of 21.5 million tonnes and inferred coal resources of 84.0 million tonnes as at January 10, 2013. The entire Zag Suuj Deposit resource is located above 300 metres (“m”) and is amenable to surface mining. Details of the assumptions and parameters used to calculate the resources and coal quality estimates and information on data verification are set out in the Zag Suuj Technical Report, a copy of which is available under the Company’s profile on SEDAR at www.sedar.com.

The coal rank at the Zag Suuj Deposit ranges between low to medium volatile bituminous coal based on the ASTM D388 standard. The average calorific value for individual coal seams ranges between 5,600 and 6,100 kcal/kg (ad).

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Management’s Discussion and Analysis

SouthGobi Resources Ltd.

The two exploration licenses pertaining to the Zag Suuj Deposit (13779X and 5267X) for which PMAs were issued on August 14, 2013 were converted to mining licenses (MV-020676 and MV-020675) by the MRAM in November 2016.

It is anticipated that coal from the Zag Suuj Deposit can be washed to produce a coking coal product or a coking coal blend product. Limited exploration activities were planned for the Zag Suuj Deposit in 2019. Exploration activities in 2020 will meet the requisite requirements under the Mongolian Minerals Law.

Ovoot Tolgoi Underground Deposit

The Ovoot Tolgoi Underground Deposit is contiguous to, and located directly below, the Ovoot Tolgoi Mine. As a result of the work performed by DMCL, resources have been re-installed in respect of the Ovoot Tolgoi Underground Deposit and are now considered to have reasonable prospect for eventual economic extraction due to recovering coal market conditions in China and Company’s long-term plan of fire-power plant near to the mine site which will require a substantial supply of thermal coal nearby.

Exploration Program

The Company continued to minimize evaluation and exploration expenditures during 2019 in order to preserve the Company’s financial resources. The 2020 exploration program will be limited to ensuring that the Company meets the Mongolian Minerals Law requirements in respect of its mining licenses including those related to the Soumber Deposit.

6. 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.

Bank Loan

On May 15, 2018, SGS obtained a bank loan (the “2018 Bank Loan”) in the principal amount of $2.8 million from a Mongolian bank (the “Bank”) with the key commercial terms as follows:

• Maturity date set at 24 months from drawdown (subsequently extended for 12 months on May 18, 2020);

• Interest rate of 15% per annum and interest is payable monthly; and

• Certain items of property, plant and equipment were pledged as security for the 2018 Bank Loan. As at December 31, 2019, the net carrying amount of the pledged items of property, plant and equipment was $0.4 million (December 31, 2018: $2.6 million).

As at December 31, 2019, the outstanding principal balance of the 2018 Bank Loan was $2.8 million (December 31, 2018: $2.8 million) and the accrued interest owed by the Company was negligible (December 31, 2018: negligible).

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

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

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.

As at December 31, 2019, the amount of reimbursable costs and fees claimed by Turquoise Hill (the “TRQ Reimbursable Amount”) amounted to $8.1 million (such amount is included in the aging profile of trade and other payables set out below). On October 12, 2016, the Company received a letter from Turquoise Hill, which proposed an arrangement for regular payments of the outstanding TRQ Reimbursable Amount. On November 12, 2020, the Company received communication from Turquoise Hill advising that Turquoise Hill wishes to re-engage in discussions with the Company regarding a repayment plan for the outstanding TRQ Reimbursable Amount. No agreement on repayment has been reached between the Company and Turquoise Hill as of the date of this MD&A.

Going concern considerations

The Company’s consolidated financial statements have been prepared on a going concern basis which assumes that the Company will continue operating until at least December 31, 2020 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 consolidated financial statements. The Company had a deficiency in assets of $49.2 million as at December 31, 2019 compared to a deficiency in assets of $48.1 million as at December 31, 2018 while the working capital deficiency (excess current liabilities over current assets) reached $114.7 million as at December 31, 2019 compared to a working capital deficiency of $203.1 million as at December 31, 2018.

Included in the working capital deficiency as at December 31, 2019 are significant obligations, which include the interest amounting to $67.1 million in relation to the 2019 Deferral Agreement, the 2020 February Deferral Agreement, the 2020 March Deferral Agreement, the 2020 April Deferral Agreement, the 2020 May Deferral Agreement, the 2020 June Deferral Agreement and the 2020 November Deferral Agreement.

In addition, the Common Shares have been suspended from trading since June 19, 2020 on the TSX and August 17, 2020 on the HKEX. As of the date hereof, certain conditions of the Resumption Guidance, including but not limited to the issuance of the audited financial statements for the year ended December 31, 2019, have been fulfilled. However, if the Common Shares become delisted from either the TSX or the HKEX, which would be an event of default under the CIC Convertible Debenture, which could result in the automatic termination of the deferral periods under the 2020 November Deferral Agreement and the acceleration of all principal, interest and other amounts owing under the CIC Convertible Debenture and the 2020 November Deferral Agreement becoming immediately due and payable, in each case without the necessity of any demand upon or notice to the Company by CIC.

The Company also has other current liabilities, including trade and other payables of $87.0 million, provision for commercial arbitration of $5.6 million and interest payable under the CIC Convertible Debenture of $67.1 million as at December 31, 2019. Out of trade and other payables, which require settlement in the shortterm, unpaid taxes of $31.8 million are repayable on demand by SGS to the Mongolian Tax Authority (“MTA”).

The Company may not be able to settle all trade and other payables on a timely basis, while continuing postponement in settling certain trade payables owed to suppliers and creditors may impact the mining operations of the Company and result in potential lawsuits and/or bankruptcy proceedings being filed

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

against the Company. Except as disclosed elsewhere in this MD&A, no such lawsuits or proceedings are pending as at November 26, 2020. However, there can be no assurance that no such lawsuits or proceedings will be filed by the Company’s creditors in the future and the Company’s suppliers and contractors will continue to supply and provide services to the Company uninterrupted.

Further, the Company was informed that effective as of February 11, 2020, the Mongolian State Emergency Commission closed Mongolia’s southern border with China in order to prevent the spread of COVID-19. Accordingly, the Company had suspended coal exports to China since February 11, 2020 as a result of the border closure and the closure remained in effect until March 27, 2020.

On March 28, 2020, the Mongolian-Chinese border was re-opened for coal export on a trial basis, with a limit imposed on the total volume of coal that was permitted to be exported during this trial period. The Company has experienced a continuous improvement in the volume of coal exported to China since March 28, 2020. During the period between April to October 2020, an aggregate of 1.9 million tonnes of coal was exported by the Company from Mongolia to China, as compared to an aggregate of 2.0 million tonnes of coal during the same period in the 2019 calendar year.

The border closure has had an adverse impact on the Company’s sales and cash flows in the first and second quarter of 2020. In order to mitigate the financial impact of the border closures and preserve its working capital, the Company temporarily ceased major mining operations (including coal mining), reduced production to only coal-blending activities and placed approximately half of its workforce on furlough from February 2020. Since August 2, 2020, the Company has resumed its mining operations, which includes mining, blending and washing of coal. As at October 31, 2020, SGS employed 208 employees at the Ovoot Tolgoi Mine site (December 31, 2019: 383 employees). The Company produced 1.1 million tonnes from August to October 2020, as compared to 1.3 million tonnes from August to October 2019. There were a few COVID-19 cases reported in Ulaanbaatar (being the capital city of Mongolia) on November 11, 2020. As a result, the Mongolian local authorities have taken certain precautionary steps to minimize further transmissions and announced a lockdown of Ulaanbaatar until December 2, 2020. Although the Company’s mining operations and the export of coal from Mongolia to China continues as of the date hereof, there can be no guarantee that the Company will be able to continue exporting coal to China, or the border crossings would not be the subject of additional closures as a result of COVID-19 in the future. The Company will continue to closely monitor the development of the COVID-19 pandemic and the impact it has on coal exports to China and will react promptly to preserve the working capital of the Company.

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 consolidated 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 noncurrent assets and non-current liabilities as current assets and current liabilities, respectively. The effects of these adjustments have not been reflected in the consolidated 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.

Management of the Company has prepared a cash flow projection covering a period of 12 months from December 31, 2019. The cash flow projection has taken into account 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: (i) entering into the 2020 November Deferral Agreement with CIC for a deferral of the 2020 November Deferral Amounts until August 31, 2023, subject to conditions precedent therein (as disclosed in Section 6 of this MD&A); (ii) agreeing to deferral

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

arrangements and improved payment terms with certain vendors; (iii) SGS planned to reduce the outstanding tax payable by monthly payments to MTA starting from June 2020; (iv) reducing the inventory of low quality coal by wet washing and coal blending; and (v) resuming coal mining activities beginning as of August 2020 to enhance coal supply. In addition, management of the Company assessed that the Company would be able to issue all outstanding financial results, being one of the conditions of the Resumption Guidance which must be satisfied in order to avoid a delisting of the Common Shares from the HKEX, which is in turn an event of default under the CIC Convertible Debenture. After considering the above measures, and given the re-opening of the Mongolian-Chinese border since March 28, 2020, the Directors 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 December 31, 2019 and therefore are satisfied that it is appropriate to prepare the consolidated 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, impact of the COVID-19 pandemic, 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 December 31, 2019 and December 31, 2018, the Company was not subject to any externally imposed capital requirements.

Impact of the COVID-19 Pandemic

The Company was informed that effective as of February 11, 2020, the Mongolian State Emergency Commission closed Mongolia’s southern border with China in order to prevent the spread of COVID-19. Accordingly, the Company suspended coal exports to China beginning as of February 11, 2020 as a result of the border closure.

On March 28, 2020, the Mongolian-Chinese border was re-opened for coal export on a trial basis, with a limit imposed on the total volume of coal that was permitted to be exported during this trial period. The Company has experienced a continuous improvement in the volume of coal exported to China since March 28, 2020. During the period between April to October 2020, an aggregate of 1.9 million tonnes of coal was exported by the Company from Mongolia to China, as compared to an aggregate of 2.0 million tonnes of coal during the same period in the 2019 calendar year.

The border closure has had an adverse impact on the Company’s sales and cash flows in the first and second quarter of 2020. In order to mitigate the financial impact of the border closures and preserve its working capital, the Company temporarily ceased major mining operations (including coal mining), reduced production to only coal-blending activities and placed approximately half of its workforce on furlough from February 2020. Since August 2, 2020, the Company has resumed its mining operations, which includes mining, blending and washing of coal. As at October 31, 2020, SGS employed 208 employees at the Ovoot Tolgoi Mine site (December 31, 2019: 383 employees). The Company produced 1.1 million tonnes from August to October 2020, as compared to 1.3 million tonnes from August to October 2019. There were a few COVID-19 cases reported in Ulaanbaatar on November 11, 2020, as a result, the Mongolian local authorities have taken precautionary steps to minimize transmission and announced a lockdown for the city until December 2, 2020. Although the mining operations and the export of coal from Mongolia to China continues, there can be no guarantee that the Company will be able to continue exporting coal to China, or the border crossings would not be the subject of additional closures as a result of COVID-19 in the future. The Company will continue to closely monitor the development of the COVID-19 pandemic and the impact it has on coal exports to China and will reach promptly to preserve the working capital of the Company.

Based on a preliminary review of the information and operational data of the Company currently available, the Company expects to record a net loss for the three months ended March 31, 2020 and for the six

December 31, 2019

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

months ended June 30, 2020. The anticipated net loss was principally attributable to decreased sales volumes in the first quarter of 2020 as a result of the closure of the Mongolian-Chinese border crossings which took effect in February 2020 and therefore, the Company was unable to export coal into China as a result. In the event that the Company’s ability to export coal into the Chinese market becomes restricted or limited again as a result of any future restrictions which may be implemented at the Mongolian-Chinese border crossing, this is expected to have a material adverse effect on the business and operations of the Company and may negatively affect the price and volatility of the Common Shares and any investment in such shares could suffer a significant decline or total loss in value.

CIC 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 shares) with a maximum term of 30 years. The CIC Convertible Debenture is secured by a first ranking charge over the Company’s assets and certain subsidiaries. The financing was used primarily to support the accelerated investment program in Mongolia and for working capital, repayment of debt, 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 CIC Convertible Debenture into approximately 21.5 million shares at a conversion price of $11.64 (CAD$11.88). As at December 31, 2019, CIC owned approximately 23.8% of the issued and outstanding Common Shares of the Company.

On June 12, 2017, the Company executed the June 2017 Deferral Agreement with CIC for a revised repayment schedule on the $22.3 million of cash interest and associated costs originally due under the CIC Convertible Debenture on May 19, 2017. The key repayment terms of the June 2017 Deferral Agreement are: (i) the Company was required to repay on average $2.2 million of the cash interest and associated costs monthly during the period from May 2017 to October 2017; and (ii) the Company was required to repay $9.7 million of cash interest and associated costs on November 19, 2017.

On April 23, 2019, the Company executed the 2019 Deferral Agreement with CIC in relation to a deferral and revised repayment schedule in respect of (i) $41.8 million of outstanding cash and PIK Interest and associated costs due and payable to CIC on November 19, 2018 under the CIC Convertible Debenture and the June 2017 Deferral Agreement; and (ii) $27.9 million of cash and PIK Interest payments payable to CIC under the CIC Convertible Debenture from April 23, 2019 to and including May 19, 2020. Pursuant to Section 501(c) of the TSX Company Manual, the 2019 Deferral Agreement was approved at the Company’s adjourned annual and special meeting of shareholders on June 13, 2019.

The key repayment terms of the 2019 Deferral Agreement are: (i) the Company agreed to pay a total of $14.3 million over eight instalments from November 2019 to June 2020; (ii) the Company agreed to pay the PIK Interest covered by the Deferral by way of cash payments, rather than the issuance of Common Shares; and (iii) the Company agreed to pay the remaining balance of $62.6 million on June 20, 2020. The Company agreed to pay a deferral fee at a rate of 6.4% per annum in consideration of the Deferral.

At any time before the payment under the terms of the 2019 Deferral Agreement is fully repaid, the Company is required to consult with and obtain written consent from CIC prior to effecting a replacement or termination of either or both of its Chief Executive Officer and its Chief Financial Officer, otherwise this will constitute an event of default under the CIC Convertible Debenture, but CIC shall not withhold its consent if the Board proposes to replace either or both such officers with nominees selected by the Board, provided that the Board acted honestly and in good faith with a view to the best interests of the Company in the selection of the applicable replacements.

December 31, 2019

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

As a condition to agreeing to the Deferral, CIC required that the Cooperation Agreement dated November 19, 2009 between SGS and CIC, be amended and restated to clarify the manner in which the service fee payable to CIC under the Cooperation Agreement is calculated, with effect as of January 1, 2017. Specifically, the Management Fee under the Amended and Restated Cooperation Agreement is determined based on the net revenues realized by the Company and all of its subsidiaries derived from sales into China (rather than the net revenues realized by the Company and its Mongolian subsidiaries as currently contemplated under the Cooperation Agreement). As consideration for deferring payment of the additional Management Fee payable to CIC as a result of the Amended and Restated Cooperation Agreement, the Company agreed to pay to CIC a deferral fee at the rate of 2.5% on the outstanding Management Fee. Pursuant to the Amended and Restated Cooperation Agreement, the Company agreed to pay CIC the total outstanding Management Fee and related accrued deferral fee of $4.2 million over six instalments from June 2019 to November 2019. The Company executed the Amended and Restated Cooperation Agreement with CIC on April 23, 2019.

Pursuant to their terms, both the 2019 Deferral Agreement and the Amended and Restated Cooperation Agreement became effective on June 13, 2019, being the date on which the 2019 Deferral Agreement was approved by shareholders at the Company’s adjourned annual and special meeting of shareholders.

In connection with the 2019 Deferral Agreement, the Company also announced that it intends to discuss a potential debt restructuring plan with respect to amounts owing to CIC which is mutually beneficial to the Company and CIC; and to form a special committee comprised of independent directors to ensure that the interests of its minority shareholders are fairly considered in the negotiation and review of any such restructuring; however, there can be no assurance that a favorable outcome will be reached. As of the date hereof, there has not been any significant progress in relations to the restructuring plan.

On February 19, 2020, the Company and CIC entered into the 2020 February Deferral Agreement pursuant to which CIC agreed to grant the Company a deferral of: (i) the 2020 February Deferral Amounts; and (ii) approximately $0.7 million of the Management Fee which was due and payable on February 14, 2020 to CIC under the Amended and Restated Cooperation Agreement. The 2020 February Deferral Agreement became effective on March 10, 2020, being the date on which the Company obtained the requisite acceptance of the 2020 February Deferral Agreement from the TSX as required under applicable TSX rules.

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

• Payment of the 2020 February Deferral Amounts will be deferred until June 20, 2020, while the Management Fee will be deferred until they are repaid by the Company.

• As consideration for the deferral of these amounts, the Company agreed to pay CIC: (i) a deferral fee equal to 6.4% per annum on the 2020 February Deferral Amounts, commencing on the date on which each such 2020 Deferral Amount would otherwise have been due and payable under the 2019 Deferral Agreement; and (ii) a deferral fee equal to 2.5% per annum on the Management Fee, commencing on the date on which the 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.

• As the Company anticipated prior to agreeing to the 2020 February Deferral Agreement that a deferral was likely required in respect of the monthly payments due and payable in the period between April 2020 and June 2020 under the 2019 Deferral Agreement and Amended and Restated Cooperation Agreement, the Company and CIC have agreed to discuss in good faith a deferral of these payments on a monthly basis as they become due. There can be no assurance, however, that a favorable outcome will be reached either at all or on favorable terms.

December 31, 2019

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

• The Company agreed to comply with all of its obligations under the 2019 Deferral Agreement and the Amended and Restated Cooperation Agreement, as amended by the 2020 February Deferral Agreement.

• The Company and CIC agreed that nothing in the 2020 February Deferral Agreement prejudices CIC’s rights to pursue any of its remedies at any time pursuant to the 2019 Deferral Agreement and Amended and Restated Cooperation Agreement, respectively.

On March 10, 2020, the Company agreed with CIC that the 2020 March Deferral Amount which were due and payable to CIC on March 19, 2020 under the 2019 Deferral Agreement will be deferred until June 20, 2020. The terms of the 2020 March Deferral Agreement are substantially the same as the terms of the 2020 February Deferral Agreement, including that the Company agreed to pay CIC a deferral fee equal to 6.4% per annum on the 2020 March Deferral Amount, commencing on March 19, 2020. The 2020 March Deferral Agreement became effective on March 25, 2020, being the date on which the Company obtained the requisite acceptance of the 2020 March Deferral Agreement from the TSX as required under applicable TSX rules.

On April 10, 2020, the Company agreed with CIC that the 2020 April Deferral Amount which was due and payable to CIC on April 19, 2020 under the 2019 Deferral Agreement will be deferred until June 20, 2020. The terms of the 2020 April Deferral Agreement are substantially the same as the terms of the 2020 February Deferral Agreement, including that the Company agreed to pay CIC a deferral fee equal to 6.4% per annum on the 2020 April Deferral Amount, commencing on April 19, 2020. The 2020 April Deferral Agreement became effective on April 29, 2020, being the date on which the Company obtained the requisite acceptance of the 2020 April Deferral Agreement from the TSX as required under applicable TSX rules.

On May 8, 2020, the Company agreed with CIC that the 2020 May Deferral Amount which was due and payable to CIC on May 19, 2020 and May 15, 2020 under the 2019 Deferral Agreement and the Amended and Restated Cooperation Agreement, respectively, will be deferred until June 20, 2020. The terms of the 2020 May Deferral Agreement are substantially the same as the terms of the 2020 February Deferral Agreement, including that the Company agreed to pay CIC a deferral fee equal to 6.4% per annum on the deferred cash interest and deferral fees commencing on May 19, 2020 and a deferral fee equal to 2.5% per annum on the deferred Management Fees commencing on May 15, 2020. The 2020 May Deferral Agreement became effective on June 8, 2020, being the date on which the Company obtained the requisite acceptance of the 2020 May Deferral Agreement from the TSX as required under applicable TSX rules.

On June 19, 2020, the Company agreed with CIC that the 2020 June Deferral Amount which was due and payable to CIC on June 19, 2020 under the 2019 Deferral Agreement and the prior deferral agreements entered into during the period between February to May 2020 will be deferred until September 14, 2020. The terms of the 2020 June Deferral Agreement are substantially the same as the terms of the 2020 February Deferral Agreement, including that the Company agreed to pay CIC a deferral fee equal to 6.4% per annum on the 2020 June Deferral Amount commencing on June 19, 2020. The 2020 June Deferral Agreement became effective on July 17, 2020, being the date on which the Company obtained the requisite acceptance of the 2020 June Deferral Agreement from the TSX as required under applicable TSX rules.

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 effectiveness of the 2020 November Deferral Agreement and the respective covenants, agreements and obligations of each party under the 2020 November Deferral Agreement are subject to the Company obtaining the requisite approval of the 2020 November Deferral Agreement from the Company’s shareholders in accordance with applicable TSX rules. On October 29, 2020, the Company obtained an order from the BCSC which partially revoked the CTO to, amongst other things, permit the Company to execute the 2020 November Deferral Agreement.

December 31, 2019

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

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 CIC 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 CIC Convertible Debenture and the 2020 June Deferral Agreement, commencing on the date on which each such 2020 November Deferral Amount would otherwise have been due and payable under the CIC Convertible Debenture or the June 2020 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 CIC Convertible Debenture, the June 2020 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 November 2020 PIK Interest is fully repaid, CIC reserves the right to require the Company to pay and satisfy the amount of the November 2020 PIK Interest, either in full or in part, by way of issuing and delivering PIK interest shares in accordance with the CIC 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.

December 31, 2019

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

Commercial Arbitration in Hong Kong

On June 24, 2015, First Concept served a notice of arbitration (the “Notice”) on SGS in respect of a coal supply agreement dated May 19, 2014 as amended on June 27, 2014 (the "Coal Supply Agreement") for a total consideration of $11.5 million.

On January 10, 2018, the Company received a confidential partial ruling (final except as to costs) with respect to the commercial arbitration (the “Arbitration Award”). Pursuant to the Arbitration Award, SGS was ordered to repay the sum of $11.5 million (which SGS had received as a prepayment for the purchase of coal) to First Concept, together with accrued interest at a simple interest rate of 6% per annum from the date which the prepayment was made until the date of the Arbitration Award, and then at a simple interest rate of 8% per annum until full payment. The Arbitration Award is final, except as to costs which were reserved for a future award.

On November 14, 2018, the Company executed the Settlement Deed with First Concept in respect of the Arbitration Award. The Settlement Deed provides for the full and final satisfaction of the Arbitration Award as well as the settlement of the issue of costs relating to the Arbitration and any other disputes arising out of the Coal Supply Agreement. Pursuant to the Settlement Deed, which provides for the full and final satisfaction of the Arbitration Award as well as the settlement of the issue of costs relating to the Arbitration and any other disputes arising out of the Coal Supply Agreement, SGS agreed to pay to First Concept the sum of $13.9 million, together with simple interest thereon at the rate of 6% per annum from November 1, 2018 until full payment, in 12 monthly instalments commencing in November 2018. Provided that SGS complies with the terms of the Settlement Deed, First Concept agreed to waive its costs in connection with the Arbitration and Arbitration Award and interest for the period from January 4, 2018 to October 31, 2018 (the “Waived Costs”).

On October 16, 2019, SGS received a notice from First Concept claiming that the Company is default under the Settlement Deed and demanding payment of the full amount of the Outstanding Settlement Deed Payments due under the Settlement Deed, otherwise First Concept intends to commence legal action against SGS pursuant to the Settlement Deed.

As at December 31, 2019, the outstanding amount payable to First Concept amounted to $5.6 million (December 31, 2018: $12.5 million).

On February 7, 2020, SGS was informed by its Mongolian banks that they received a request from the CDIA to freeze the respective bank accounts of SGS in Mongolia in relation to the enforcement of the Arbitration Award. Approximately $0.8 million in cash has been frozen by the banks as at February 7, 2020 and such amount was subsequently transferred to the CDIA on March 6, 2020.

On June 7, 2020, SGS entered into a settlement agreement with First Concept, pursuant to which SGS agreed to pay to First Concept the Full Settlement Sum of $8.0 million in full. The Full Settlement Sum was fully satisfied by the Company in June 2020 and the outstanding payable to First Concept as of the date hereof is $nil.

December 31, 2019

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

Cash Flow Highlights

$ in thousands Cash generated from operating activities Cash used in investing activities Cash used in financing activities Effect of foreignexchangerate changes oncash	December 31, Year ended
	2019 2018 32,568 $ 40,420 $ (18,508) (26,656) (13,850) (13,649) (5) 373
Increase in cash for the year Cashbalance, beginning ofyear	205 488 6,959 6,471
Cash balance,end ofyear	7,164 $ 6,959 $

Cash generated from Operating Activities

The Company generated $32.6 million of cash in operating activities in 2019 compared to $40.4 million in 2018. The decrease is primarily due to the net effect of (i) increase in revenue generated; and (ii) increase in settlement of trade and other payables.

Cash used in Investing Activities

The Company used $18.5 million of cash during 2019 in investing activities compared to $26.7 million during 2018. In 2019, expenditures on property, plant and equipment totaled $20.9 million (2018: $34.1 million) and $2.0 million of dividend income was collected from RDCC LLC (2018: $2.2 million).

Cash used in Financing Activities

Cash used in financing activities was $13.9 million in 2019 (2018: $13.6 million), which was principally attributable to the refund of customers’ deposits of $12.4 million (2018: $10.6 million).

Contractual Obligations and Guarantees

Day-to-day mining, expansionary and sustaining capital expenditures as well as administrative operations give rise to commitments for future minimum payments. As at December 31, 2019, the Company’s operating and capital commitments were:

As at December 31, 2019 Capital expenditure commitments Operating expenditure commitments	Within 1year	2-3 years	Over 3 years Total
	5,173 $ 6,807	- $ 49	- $ 5,173 $ 313 7,169
Commitments	11,980 $	49 $	313 $ 12,342 $

December 31, 2019

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Management’s Discussion and Analysis

SouthGobi Resources Ltd.

Ovoot Tolgoi Mine Impairment Analysis

The Company determined that an indicator of impairment existed for its Ovoot Tolgoi Mine cash generating unit as at December 31, 2019. The impairment indicators were the uncertainty of future coal prices in China and the lower than budgeted production.

Therefore, the Company conducted an impairment test whereby the carrying value of the Company’s Ovoot Tolgoi Mine cash generating unit was compared to its “fair value less costs of disposal” (“FVLCTD”) using a discounted future cash flow valuation model. The Company’s cash flow valuation model takes into consideration the latest available information to the Company, including but not limited to, sales prices, sales volumes, coal washing capacity, operating costs and life of mine coal production estimates as at December 31, 2019. The carrying value of the cash generating unit of the Company’s Ovoot Tolgoi Mine was $136.4 million.

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

• Coal resources and reserves as estimated by an independent third party engineering firm;

• Sales price estimates from an independent market consulting firm;

• Forecasted sales volumes in line with production levels as reference to the mine plan;

• Life-of-mine coal production, strip ratio, capital costs and operating costs; and

• A post-tax discount rate of 11% based on an analysis of the market, country and asset specific factors.

Key sensitivities in the valuation model are as follows:

• For each 1% increase/(decrease) in the long term price estimates, the calculated fair value of the cash generating unit increases/(decreases) by approximately $20.3/(20.2) million;

• For each 1% increase/(decrease) in the post-tax discount rate, the calculated fair value of the cash generating unit (decreases)/increases by approximately $(28.7)/31.4 million;

• For each 1% increase/(decrease) in the cash mining cost estimates, the calculated fair value of the cash generating unit (decreases)/increases by approximately $(13.3)/13.4 million; and

• For each 1% increase/(decrease) in Mongolian inflation rate, the calculated fair value of the cash generating unit (decreases)/increases by approximately $(4.5)/4.5 million.

The impairment analysis did not result in the identification of an impairment loss or an impairment reversal and no charge or reversal was required as at December 31, 2019. A decline of 19% in the long term price estimates, an increase of more than 35% in the post-tax discount rate, an increase of 29% in the cash mining cost estimates or an increase of 73% in Mongolian inflation rate may trigger an impairment charge on the cash generating unit. 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.

Financial Instruments

The fair value of financial assets and financial liabilities at amortized cost is determined in accordance with generally accepted pricing models based on discounted cash flow analysis or using prices from observable current market transactions. The fair value of all the financial instruments of the Company approximates their carrying value because of the demand nature or short-term maturity of these instruments, except for the fair values of trade and other payables, interest bearing borrowings, and provision for commercial arbitration and convertible debenture below their respective carrying amounts given the current financial

December 31, 2019

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

condition of the Company as described under Section 6 of this MD&A under the heading entitled “ Liquidity and Capital Management”.

The fair values of the embedded derivatives within the CIC Convertible Debenture are determined using a Monte Carlo simulation. The risks associated with the CIC Convertible Debenture relate to a potential breach of the Company’s obligations under the terms of the CIC Convertible Debenture. The Company mitigates these risks by ensuring its corporate activities comply with all of its contractual obligations under the CIC Convertible Debenture.

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----- Start of picture text -----

As at December 31,
$ in thousands 2019 2018
Financial assets
Notes receivables $ - $ 2,500
Cash 7,164 6,959
Restricted cash 862 872
Trade and other receivables 1,778 5,046
Total financial assets $ 9,804 $ 15,377
As at December 31,
$ in thousands 2019 2018
Financial liabilities
Fair value through profit or loss
Convertible debenture - embedded derivatives $ 196 $ 265
Other financial liabilities
Trade and other payables 87,013 99,576
Provision for commercial arbitration 5,593 12,508
Interest-bearing borrowings 3,403 4,251
Convertible debenture - debt host and interest payable 156,778 139,636
Total financial liabilities $ 252,983 $ 256,236
----- End of picture text -----

7. 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 (“Certification Motion”). 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 plaintiffs 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.

December 31, 2019

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

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.

Since December 2018, counsels for the parties have proceeded with the action as follows: (1) two case conferences before the motions judge; (2) production of certain documents by the Company to the plaintiffs; (3) review of those documents by plaintiffs’ counsel from May 2020 to November 2020; and (4) setting down examinations for discovery for February and March 2021. The Company is urging an early trial.

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 judged a provision for this matter as at December 31, 2019 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 commencement of the contract and provided for an annual wet washing capacity of approximately 3.5 million tonnes of input coal.

Under the original 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 a provision for this matter at December 31, 2019 is not required.

Special Needs Territory in Umnugobi

On February 13, 2015, the entire Soumber mining license and a portion of SGS’ exploration license 9443X (9443X was converted to mining license MV-020436 in January 2016) (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, 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 Licenses and until the License Areas are removed from the SNT.

December 31, 2019

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

On June 29, 2016, the Mongolian Parliament and CRKh election was held. As a result, the Company was aware that additional action may be taken in respect of the SNT; however, the Company has not yet received any indication on the timing of the next session of the CRKh.

Termination of Soumber Deposit Mining Licenses

On August 26, 2019, SGS received the Notice Letter from MRAM notifying that the Company’s three mining licenses (MV-016869, MV-020436 and MV-020451) for the Soumber Deposit have been terminated by the Head of Cadastre Division of MRAM effective as of August 21, 2019.

According to the Notice Letter, the Soumber Licenses have been terminated pursuant to Clause 56.1.5 of Article 56 of the Minerals Law, Clauses 4.2.1 and 4.2.5 of Article 4 and Clause 28.1.1 of Article 28 of the General Administrative Law and a decision order of a working group established under an order of the Minister of Environment and Tourism (Mongolia). According to this decision order, the working group determined that SGS had violated its environmental reclamation obligations with respect to the Soumber Deposit. The Soumber Deposit is an undeveloped coal deposit covering approximately 22,263 hectares located approximately 20 kilometers east of the Company’s Ovoot Tolgoi coal mine in Mongolia. The Company owned a 100% interest in the Soumber Deposit.

The Company believes the cancellation of the Soumber Licenses is without merit. The Company is not aware of any failure on its part to fulfill its environmental reclamation duties as they relate to the Soumber Deposit. On October 4, 2019, SGS filed a claim against MRAM and the Ministry of Environment and Tourism of Mongolia in the Administration Court seeking an order to restore the Soumber Licenses. The Appeal Court issued the ruling in October 2020 and made an order to accept SGS’s claim and restore the Soumber Licenses. The case was transferred to the High Court for final ruling. The Company anticipates that the High Court will issue its ruling before the end of the first quarter of 2021. The Company will take all such actions, including additional legal actions, as it considers necessary to reinstate the Soumber Licenses. However, there can be no assurance that a favorable outcome will be reached. The termination of the Soumber Licenses does not have any impact on the Company’s current mining operations at the Ovoot Tolgoi mine site.

Mongolian royalties

During 2017, the Company was ordered by the Mongolian tax authority to apply the “reference price” determined by the Government of Mongolia, as opposed to calculated sales price that is derived based on the actual contract price, in calculating the royalties payable to the Government of Mongolia. Although no official letter has been received by the Company in respect of this matter as of the date hereof, there can be no assurance that the Government of Mongolia will not disagree with the methodology employed by the Company in determining the calculated sales price and deem such price “non-market” under Mongolian tax law. Management believes that its interpretation of the relevant legislation is appropriate and the Company’s positions related to the royalty will be sustained.

On September 4, 2019, the Government of Mongolia issued a further resolution in connection with the royalty regime. From September 1, 2019 onwards, in the event that the contract sales price is less than the reference price as determined by the Government of Mongolia by more than 30%, then the royalty payable will be calculated based on the Mongolian government’s reference price instead of the contract sales price.

Restrictions on Importing F-Grade Coal into China

As a result of import restrictions established by Chinese authorities at the Ceke border, the Company has been barred from transporting its F-grade coal products into China for sale since December 15, 2018. The Company, together with other Mongolian coal companies, have been in discussions with Chinese

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Management’s Discussion and Analysis

SouthGobi Resources Ltd.

authorities regarding a potential amendment or withdrawal of these import restrictions to allow for the importation of F-grade coal into China; however, there can be no assurance that a favorable outcome will be reached.

8. ENVIRONMENT

The Company is subject to the Environmental Protection Law of Mongolia (“EPL”) and has the following duties with respect to environmental protection:

• To comply with the EPL and the decisions of the government, local self-governing organizations, local governors and Mongolian state inspectors;

• To comply with environmental standards, limits, legislation and procedures and to supervise their implementation within the organization;

• To keep records on toxic substances, adverse impacts, and waste discharged into the environment; and

• To report on measures taken to reduce or eliminate toxic chemicals, adverse impacts, and waste.

In addition to those duties imposed on them by the EPL, mining license holders are required to prepare an initial environmental impact assessment analysis before the mine comes into production. The mining license holders must also annually develop and implement an environmental management plan (including reclamation measures) in co-operation with the Ministry of Environment, Green Development and Tourism, which should take into account the results of the environmental impact assessment. The Company received approval of its detailed Environmental Impact Assessment and Environmental Management Plan from the Mongolian Ministry of Environment for the mining operation at the Ovoot Tolgoi Mine in 2007 and renewed in 2016.

The Company has implemented a number of internal policies to embrace responsibility for the impact of its business activities on the environment. By conducting studies, carefully designing mine plans, implementing pollution control recommendations from internal and external sources, monitoring the effects of mining on mining areas and carefully designing mine closure plans, the Company seeks to minimize the impact of its activities on the environment.

The Company established an environmental policy in 2008. The environmental policy affirms the Company’s commitment to environmental protection. The Company monitors its operations to ensure that it complies with all applicable environmental requirements, and takes actions to prevent and correct problems if needed. In accordance with new provisions specified in Mongolian laws and regulations, in 2014 the Company developed a protection strategy jointly with professional organization. This strategic plan can serve as a policy document directed to protection of biological diversity, ecosystem balance and its preservation; and support species dwelling nearby the Ovoot Tolgoi mine area.

The Board maintains a Health, Environment, Safety and Social Responsibility Committee, which is composed of independent, non-executive and executive directors and the Chief Operating Officer. The primary objective of the Health, Environment, Safety and Social Responsibility Committee is to assist the Board of Directors in fulfilling its oversight responsibilities by monitoring and reviewing performance, and recommending for approval policies and management systems, with respect to health, environmental, safety and social responsibility related matters affecting the Company. The Health, Environment, Safety and Social Responsibility Committee also reviews any incidents that may occur and provides guidance on how to prevent any recurrences.

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

9. EMOLUMENT POLICY

The emolument policy of the executives of the Company is administered by the Compensation and Benefits Committee on the basis of merit, qualifications and competence and approved by the Board. The emolument policy for the rest of the employees is determined on a department by department basis with the executive in charge of each department determining the emoluments for senior employees and managers in the department and the emoluments for non-senior employees being determined by an appropriately designated manager. The emolument policy for non-executives is administered in conjunction with the human resources department and is done on the basis of merit, qualifications and competence.

The emolument policy for the directors of the Company is administered by the Compensation and Benefits Committee and approved by the Board, having regard to comparable market statistics.

The Company has also adopted an equity incentive plan to incentivize directors and eligible employees. Details of the plan are set out in note 28 of the Company’s consolidated financial statements for the year ended December 31, 2019.

10. OUTSTANDING SHARE DATA

The Company is authorized to issue an unlimited number of Common Shares without par value and an unlimited number of preferred shares without par value. As at November 26, 2020, approximately 272.7 million Common Shares were issued and outstanding. There are also incentive share options outstanding to acquire approximately 6.8 million unissued Common Shares with exercise prices ranging from CAD$0.11 to CAD$0.92. There are no preferred shares outstanding.

As at November 26, 2020, to the best of the Company’s knowledge:

• CIC holds a total of approximately 64.8 million Common Shares representing approximately 23.8% of the issued and outstanding Common Shares;

• Novel Sunrise holds a total of approximately 46.4 million Common Shares representing approximately 17.0% of the issued and outstanding Common Shares; and

• Voyage Wisdom Limited (“Voyage Wisdom”) holds a total of approximately 25.8 million Common Shares representing approximately 9.5% of the issued and outstanding Common Shares.

11. DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING (“ICFR”)

Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by the Company in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in the securities legislation and include controls and procedures designed to ensure that information required to be disclosed by the Company in its annual filings, interim filings or other reports filed or submitted under securities legislation is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management is responsible for the design of the Company’s internal control over financial reporting in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.

The Company’s internal controls over financial reporting include policies and procedures that pertain to the maintenance of records that, in reasonable detail accurately and fairly reflect the transactions and

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

disposition of assets, and which are designed with the objective of providing reasonable assurance that: (i) transactions are recorded as necessary to permit preparation of the financial statements in accordance with IFRS and that receipts and expenditures are being made only in accordance with authorization of management and directors of the Company; and (ii) unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements is prevented or detected in a timely manner.

As discussed and summarized in Section 8 of the Company’s management’s discussion and analysis for the three-month period ended March 31, 2019 (the “Q1 2019 MD&A”) (a copy of which is available under the Company’s profile on SEDAR at www.sedar.com), management identified certain material weaknesses in relation to the design and effectiveness of the internal controls over financial reporting as at December 31, 2018. In response, the Board adopted and approved Remedial Actions and Preventative Measures to address and remediate these material weaknesses. A summary of the Remedial Actions and Preventative Measures is contained in Section 1 of the Q1 2019 MD&A. Based on the Remedial Actions and Preventative Measures that have been implemented, the Company now has in place internal controls and procedures which are adequate to address the aforementioned material weaknesses referred to above.

Following the implementation of the Remedial Actions and Preventative Measures, management, including the Chief Executive Officer and Chief Financial Officer of the Company, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Management assessed the effectiveness of internal controls over financial reporting using the Internal Control – Updated Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As of December 31, 2019, the Chief Executive Officer and Chief Financial Officer of the Company have each concluded that the Company’s disclosure controls and procedures, as defined in NI 52-109 – Certification of Disclosure in Issuer’s Annual and Interim Filings (“NI 52-109”), are effective to achieve the purpose for which they have been designed.

Because of their inherent limitations, internal controls over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements due to error or fraud. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by individual acts, by collusion of two or more individuals or by unauthorized override of controls. Furthermore, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

There has been no significant change in the Company’s internal controls over financial reporting that occurred during the most recently completed quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

12. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

The preparation of financial statements in conformity with IFRS requires the Company to establish accounting policies and to make estimates and judgments that affect both the amount and timing of the recording of assets, liabilities, revenues and expenses.

A detailed summary of all of the Company’s significant accounting policies is included in Note 3 to the Company’s consolidated financial statements for the year ended December 31, 2019.

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The following new IASB standards were adopted by the Company on January 1, 2019. Refer to Note 2.3 of the Company’s consolidated financial statement of the year ended December 31, 2019 for details.

IFRS 16 Leases IFRIC 23 Uncertainty over Income Tax Treatments Amendments to IFRS 9 Prepayment Features and Negative Compensation Amendments to IAS 19 Plan Amendment, Curtailment or Settlement Amendments to IAS 28 Long-term Interests in Associates and Joint Ventures Amendments to IFRS 3, IFRS 11, IAS 12 and IAS 23 Annual Improvements to IFRSs 2015 - 2017 Cycle

Refer to Note 3.22 of the Company’s consolidated financial statements of the year ended December 31, 2019 for information regarding the accounting judgments and estimates.

13. RECENT ACCOUNTING PRONOUNCEMENTS

The standards that are issued up to the date of issuance of the Company’s financial statements, but were not effective during the year ended December 31, 2019, are disclosed below. The Company intends to adopt these standards, if applicable, when they become effective.

Amendments to IFRS 3 Definition of Business[1] Amendments to IAS 1 and IAS 8 Definition of Material[1] Amendments to IFRS 9, IAS 39 and Interest Rate Benchmark Reform[1 ] IFRS 7 IFRS 17 Insurance Contracts[3 ] Amendments to IFRS 10 and IAS 28 Sale or Contribution of Assets between and Investor and its Associate or Joint Venture[6 ] Amendments to IFRS 16 Lease — Covid-19-Related Rent Concessions[2] Amendments to IFRS 3 Reference to the Conceptual Framework[4] Amendments to IAS 16 Property, Plant and Equipment: Proceeds before Intended Use[4] Amendments to IAS 37 Onerous Contracts — Cost of Fulfilling a Contract[4] Amendments to IAS 1 Classification of Liabilities as Current or Non-current[5] Amendments to IFRS 1, IFRS 9, IFRS Annual improvements to IFRS 2018-2020[4] 16 and IAS 41

1 Effective for annual periods beginning on or after January 1, 2020

2 Effective for annual periods beginning on or after June 1, 2020

3 Effective for annual periods beginning on or after January 1, 2021

4 Effective for annual periods beginning on or after January 1, 2022

5 Effective for annual periods beginning on or after January 1, 2023

6 The amendments were originally intended to be effective for periods beginning on or after January 1, 2018. The effective date has now been deferred/removed. Early application of the amendments continued to be permitted.

The Company is not yet in a position to state whether these new pronouncements will result in substantial changes to the Company’s accounting policies and financial statements.

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

14. RISK FACTORS

There are certain risks involved in the Company’s operations, some of which are beyond its control. These risks can be broadly categorized into: (i) risks relating to the Company’s ability to continue as a going concern; (ii) risks relating to the Common Shares; (iii) risks relating to the economic operation of the Company's Ovoot Tolgoi Mine; (iv) risks relating to the Company's other projects in Mongolia; and (v) risks relating to its business and industry. The risk factors identified below could have a material adverse impact on the Company’s business, operations, results of operations, financial condition and future prospects and could cause actual events to differ materially from those described in forward-looking statements relating to the Company. Additional risks and uncertainties not presently known, or not expressed or implied below, or that are presently deemed immaterial, could also harm the Company’s business, operations, results of operations, financial condition and future prospects. Some of the following statements are forward-looking and actual results may differ materially from the results anticipated in these forward-looking statements. See “Forward-Looking Statements”.

Risks Relating to the Company’s Ability to Continue as a Going Concern

Unless the Company acquires additional sources of financing and/or funding in the short term, the ability of the Company to continue as a going concern is threatened

The Company’s consolidated financial statements have been prepared on a going concern basis, which assumes that the Company will continue operating until at least December 31, 2020 and will be able to realize its assets and discharge its liabilities in the normal course of operations as they come due. However, certain adverse conditions and material uncertainties cast doubt upon the ability of the Company to continue as a going concern. These include:

• the Company has a working capital deficiency (excess current liabilities over current assets) of $114.7 million as at December 31, 2019;

• the Company has an obligation to pay CIC under the 2019 Deferral Agreement, the 2020 February Deferral Agreement, the 2020 March Deferral Agreement, the 2020 April Deferral Agreement, the 2020 May Deferral Agreement, the 2020 June Deferral Agreement and the 2020 November Deferral Agreement;

• the trade and other payables of the Company remain high due to liquidity constraints. See the Company’s aging profile of the trade and other payables as at December 31, 2019 in Section 6 of this MD&A under the heading entitled “ Liquidity and Capital Resources – Liquidity and Capital Management – Going Concern Considerations ”;

• the Company has other current liabilities which require settlement in the short-term, including the $31.8 million of unpaid taxes payable by SGS to the Mongolian government;

• the current operation plan requires the Company to raise significant operational funding in order to support the Company’s mining operations and contemplates equipment maintenance expenditures, in order to achieve the Company’s revenue and cash flow targets. Such expenditures and other working capital requirements may require the Company to seek additional financing. There is no guarantee that the Company will be able to secure other sources of financing; and

• the current import restrictions on F-grade coal by Chinese authorities will further affect the short term cash inflow and may in turn undermine the execution of the operation plan.

This could result in adjustments to the amounts and classifications of assets and liabilities in the Company’s consolidated financial statements and such adjustments could be material. If the Company is unable to continue as a going concern, it may be forced to seek relief under applicable bankruptcy and insolvency legislation, which may negatively affect the price and volatility of the Common Shares and any investment in such shares could suffer a significant decline or total loss in value.

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Management’s Discussion and Analysis

If the Company is unable to continue as a going concern it may be forced to seek relief under applicable bankruptcy and insolvency legislation.

If the Company seeks relief under applicable bankruptcy and insolvency legislation, its business and operations will be subject to certain risks, including but not limited to, the following:

• An insolvency filing by or against the Company will cause an event of default under the CIC Convertible Debenture;

• An insolvency filing by or against the Company may adversely affect its business prospects, including its ability to continue to obtain and maintain the contracts necessary to operate its business on competitive terms;

• There can be no assurance as to the Company’s ability to maintain or obtain sufficient financing sources for operations or to fund any reorganization plan and meet future obligations;

• There can be no assurance that the Company will be able to successfully develop, prosecute, confirm and consummate one or more plans of reorganization that are acceptable to the applicable courts and its creditors, equity holders and other parties in interest; and

• The value of the Common Shares could be reduced to zero as result of an insolvency filing.

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 any potential losses, if any.

The Company is subject to litigation risks. In the normal course of the Company’s business, it may come involved in, named as a party to, or be the subject of, various legal proceedings, including, without limitations, mining laws, environmental laws, labour laws, and anti-corruption and anti-bribery laws in the jurisdictions in which the Company operates. Defense and settlement costs associated with legal claims can be substantial, even with respect to claims that are frivolous or have no merit. Due to the inherent uncertainty of the litigation process, the resolution of any particular legal proceeding to which the Company is or may become subject could have a material adverse impact on its business, operations, results of operations, financial condition and future prospects.

The Company is currently a defendant in the Class Action (as more particularly described in Section 7 “ Regulatory Issues and Contingencies ” of this MD&A). 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.

In the event the Company incurs any liability in connection with the Class Action, it maintains insurance with respect thereto. While the Company believes that such insurance coverage is in an amount that would be sufficient to cover any amounts the Company may be required or determines to pay with respect thereto, there can be no assurance that such coverage will be adequate to do so, and, if so, any amounts not so covered would be required to be paid by the Company. The Company's ability to continue as a going concern will be impacted to the extent it is required to pay any amounts in connection with the Class Action, which would have a material adverse effect on the business and operations of the Company and may negatively affect the price and volatility of the Common Shares and any investment in such shares could suffer a significant decline or total loss in value.

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

Risks Relating to the Common Shares

There can be no assurance that the Cease Trade Order will be lifted in a timely manner or at all.

On June 19, 2020, the BCSC issued a general “failure to file” cease trade order to prohibit the trading by any person of any securities of the Company in Canada, which remains in effect as of the date of this MD&A. The CTO was issued as of result of the Company’s failure to file: (i) its annual consolidated financial statements for the year ended December 31, 2019 and the accompanying Management’s Discussion & Analysis; (ii) its Annual Information Form for the year ended December 31, 2019; and (iii) its interim consolidated financial statements for the three-month period ended March 31, 2020 and accompanying Management’s Discussion & Analysis, in each case prior to the filing deadline of June 15, 2020.

The CTO will remain in effect until such time as the Company fully remedies its filing defaults under applicable Canadian securities laws, including filing of its 2019 Annual Information Form and its interim financial statements for the three month periods ended March 31, 2020 and June 30, 2020 and the accompanying Management’s Discussion & Analysis, and makes a successful application to the BCSC to have the CTO revoked. While the Company is taking such actions as it considers necessary in order to remedy its filing defaults as soon as possible, there can be no assurance that the Company will have the CTO lifted in a timely manner or at all. For so long as the CTO remains in effect, it will have a significant adverse impact on the liquidity of the Common Shares and shareholders may suffer a significant decline or total loss in value of its investment in the Common Shares as a result.

There can be no assurance that trading in the Common Shares will resume on the TSX or HKEX.

In conjunction with the issuance of the CTO, trading in the Common Shares was halted on the TSX effective as of June 19, 2020. On September 11, 2020, the TSX notified the Company that it is reviewing the eligibility for continued listing of the Common Shares on the TSX pursuant to the TSX’s Remedial Review Process. The Company has been granted until January 11, 2021 to remedy the following delisting criteria, as well as any other delisting criteria that become applicable during the Remedial Review Process: (i) financial condition and/or operating results; (ii) adequate working capital and appropriate capital structure; and (iii) disclosure issues. The TSX Continued Listing Committee has scheduled a meeting to be held on January 7, 2021 to consider whether or not to suspend trading in and delist the shares of the Company on TSX. If the Company fails to demonstrate to the TSX that it has remedied the Delisting Criteria on or before January 11, 2021, the Common Shares will be delisted from the TSX 30 days from such date, unless an extension is granted by the TSX prior to the January 11, 2021 deadline.

At the request of the Company, trading in the shares of the Company on the HKEX was suspended with effect as of August 17, 2020 pending the publication of the audited annual results of the Company for the year ended December 31, 2019. The HKEX has provided the Company with the following resumption guidance which must be satisfied by the Company in order for trading to resume on the HKEX: (i) publish all outstanding financial results and address any audit modifications; (ii) inform the market of all material information for the Company’s shareholders and investors to appraise its position; and (iii) announce quarterly updates on the Company’s developments under Rules 13.24A of the HKEX’s Listing Rules, including, amongst other relevant matters, its business operations, its resumption plan and the progress of implementation.

Notwithstanding a successful application by the Company to revoke the CTO, (i) the Common Shares will be delisted from the TSX if the Company fails to demonstrate to the TSX that it has remedied the Delisting Criteria on or before January 11, 2021, unless an extension is granted by the TSX prior to the January 11, 2021 deadline.; and (ii) the HKEX’s Listing Division will recommend to the HKEX’s Listing Committee that it proceed with the cancellation of the Company’s HKEX listing if the Company fails to remedy the issues causing its trading suspension, fully comply with the Listing Rules to the HKEX’s satisfaction and resume trading in its shares on the HKEX by February 16, 2022. A delisting of the Common Shares from either the

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SouthGobi Resources Ltd.

Management’s Discussion and Analysis

TSX or HKEX will have a significant adverse impact on the liquidity of the Common Shares and shareholders of the Company may suffer a significant decline or total loss in value of its investment in the Common Shares as a result.

Future issuances or sales, or perceived possible issuances or sales, of substantial amounts of Common Shares in the public market could materially and adversely affect the prevailing market price of the Common Shares and the Company’s ability to raise capital in the future.

If the Company is able to successfully apply for the revocation of the CTO, the market price of the Common Shares could decline as a result of future sales of substantial amounts of the Common Shares or other securities relating to the Common Shares in the public market, including sales by its substantial Shareholders, or the issuance of new Common Shares, or the perception that such sales or issuances may occur. Future sales, or perceived possible sales, of substantial amounts of the Common Shares could also materially and adversely affect the Company’s ability to raise capital in the future at a time and at a price favorable to it, and Shareholders may experience dilution in their holdings upon issuance or sale of additional Common Shares or other securities in the future.

Future stock market conditions may change.

There are risks involved with any equity investment. The market price of the Common Shares may rise or fall depending upon a range of factors and stock market conditions, which are unrelated to the Company’s future financial performance. Movements on international stock markets, local interest rates and exchange rates, domestic and international economic and political conditions, as well as government, taxation and other policy changes may affect the stock market. As the Company is a listed company on the TSX and the HKEX, its Common Share price will also be subject to numerous influences including broad trends in the stock market and the share prices of individual companies or sectors.

Risks Relating to the Economic Operation of the Company's Ovoot Tolgoi Project

There can be no assurance that the mine plan developed for the Ovoot Tolgoi Mine will ultimately be viable or profitable due to the inherent operational risks.

As a result of work performed by DMCL, the Company increased its estimate of total resources at the Ovoot Tolgoi deposit from those described in the 2016 Technical Report, has declared reserves for the Ovoot Tolgoi deposit and prepared a new mine plan. There are no assurances, however, that the Company will execute its mine plan and realize on the estimates for the Ovoot Tolgoi deposit. It is not unusual in the mining industry for mining operations to experience unexpected problems during commercial production, resulting in delays and requiring more capital than anticipated. Actual costs and economic returns may differ materially from the Company’s estimates. Risks associated with the operation of mines include, but are not limited to, the following:

• Unusual or unexpected geological formations;

• Unstable ground conditions that could result in cave-ins or landslides;

• Floods;

• Power outages;

• Restrictions or interruptions in supply of key materials;

• Restrictions or interruptions to coal exports into China;

• Labour disruptions or shortages;

• Social unrest in adjacent areas;

• Equipment failure;

• Fires and explosions;

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

• Changes to applicable law; and

• Inability to obtain suitable or adequate machinery, equipment, or labour.

In addition, risks particular to the Company’s mine plan include:

• Transition to contract mining and if the Company is able to negotiate a contract with applicable contractors at rates that justify the transition;

• Ability to generate sufficient sales volumes at economical realized prices;

• Maintaining an adequate water supply to the mine site to permit the continued operations of the wash plant as planned;

• Achieving satisfactory yields from wet washing operations;

• Successful conversion of resources into reserves during the life of mine;

• Continued delays in the custom clearance process at the Ceke border;

• Continued ban on the import of F-grade coal products into China;

• Impact of the COVID-19 pandemic on the Company’s ability to export coal into China;

• Success in enhancing the operational efficiency and the output throughput of the of the wet wash plant; and

• Successful negotiations with the wash plant operator concerning an agreement regarding the operation of the wash plant.

Any of the risks noted above could have a material adverse impact on the Company’s financial performance, cash flow and results of operations, which may negatively affect the price and volatility of the Common Shares and any investment in such shares could suffer a significant decline or total loss in value.

Risks Relating to the Company’s Projects in Mongolia

The Company is subject to continuing governmental, regulatory and internal investigations, the outcome of which is unclear at this time but could have a material adverse effect on the Company.

The Company is subject to certain investigations referred to under Section 7 of this MD&A under the heading entitled “ Regulatory Issues and Contingencies ”, which could result in one or more of the Mongolian, Canadian, China, United States or other governmental or regulatory agencies taking civil or criminal action against the Company, its affiliates or its current or former employees. Defense and settlements costs associated with defending and responding to any civil or criminal action can be substantial. The likelihood or consequences of such investigative actions are unclear at this time but could include financial or other penalties and could have a material adverse effect on the Company and the value of the Common Shares.

Legislation in Mongolia may be subject to conflicting interpretations, which may have adverse consequences on the Company’s business.

The Mongolian legal system shares several of the qualitative characteristics typically found in a developing country and many of its laws, particularly with respect to matters of taxation, are still evolving. A transaction or business structure that would likely be regarded under a more established legal system as appropriate and relatively straightforward might be regarded in Mongolia as outside the scope of existing Mongolian law or regulation. As a result, certain business arrangements or structures and certain tax planning mechanisms may carry significant risks. In particular, when business objectives and practicalities dictate the use of arrangements and structures that, while not necessarily contrary to settled Mongolian law, are sufficiently novel within a Mongolian legal context, it is possible that such arrangements may be challenged resulting in their invalidation.

The legal system in Mongolia has inherent uncertainties that could limit the legal protections available to the Company, which include: (i) inconsistencies between laws; (ii) limited judicial and administrative

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guidance on interpreting Mongolian legislation; (iii) substantial gaps in the regulatory structure due to delay or absence of implementing regulations; (iv) the lack of established interpretations of new principles of Mongolian legislation, particularly those relating to business, corporate and securities laws; (v) a lack of judicial independence from political, social and commercial forces; and (vi) bankruptcy procedures that are not well developed and are subject to abuse. The Mongolian judicial system has relatively little experience in enforcing the laws and regulations that currently exist, leading to a degree of uncertainty as to the outcome of any litigation; it may be difficult to obtain swift and equitable enforcement, or to obtain enforcement of a judgment by a court of another jurisdiction.

In addition, while legislation has been enacted to protect private property against expropriation and nationalization, due to the lack of experience in enforcing these provisions and political factors, these protections may not be enforced in the event of an attempted expropriation or nationalization. Expropriation or nationalization of any of the Company’s assets, or portions thereof, potentially without adequate compensation, could materially and adversely affect its business and results of operations.

Application of and amendments to legislation could adversely affect the Company’s mining rights in its projects or make it more difficult or expensive to develop its projects and carry out mining.

The 2006 Minerals Law (as defined under the heading "DEFINITIONS AND OTHER INFORMATION – Defined Terms and Abbreviations" in the Company’s most recently filed Annual Information Form), which preserves to a limited extent some of the substance of the former 1997 minerals legislation, was drafted with the assistance of legal experts in the area of mining legislation and was widely regarded as progressive, internally consistent and effective legislation. However, the 2006 Minerals Law has been subsequently amended and the potential for political interference has increased and the rights and security of title holders of mineral tenures in Mongolia has been weakened. Certain provisions of the 2006 Minerals Law are ambiguous and it is unclear how they will be interpreted and applied in practice. Examples of such provisions include those relating to the designation of a mineral deposit as a Mineral Deposit of Strategic Importance (as defined under the heading "DEFINITIONS AND OTHER INFORMATION – Defined Terms and Abbreviations" in the Company’s most recently filed Annual Information Form). Refer to the risk factor entitled “ The Government of Mongolia could determine that any one or more of the Company’s projects in Mongolia is a Mineral Deposit of Strategic Importance ” below.

In addition, the introduction of new Mongolian laws and regulations and the interpretation of existing ones may be subject to policy changes reflecting domestic political or social changes. For example, on July 16, 2009, the Parliament of Mongolia enacted the Mining Prohibition in Specified Areas Law (the "Specified Areas Law") that prohibits minerals exploration and mining in areas such as headwaters of rivers and lakes, forest areas as defined in the Law of Forests of Mongolia of May 17, 2012, as amended, and areas adjacent to rivers and lakes as defined in the Law of Mongolia on Water enacted on May 17, 2012, as amended.

Pursuant to the Specified Areas Law, the Government of Mongolia has defined the boundaries of certain areas in which exploration and mining is purportedly prohibited. A list of licences has been prepared that overlap with the prohibited areas described in the law based on information submitted by water authority agencies, forest authority agencies and local authorities for submission to the Government of Mongolia.

Portions of the mining licence in respect of the Ovoot Tolgoi Mine and the exploration licence pertaining to the Zag Suuj Deposit are included on the list of specified areas described in the Specified Areas Law.

In regard to the Ovoot Tolgoi Mining Licence, the potential area which may be affected is a relatively small area which represents approximately 3% of the entire area of the mining licence and does not contain any reserves or resources or immovable assets. Accordingly, the loss of the potentially affected area would not materially and adversely affect the existing operations.

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Activities historically carried out on the other licences referred to above include drilling, trenching and geological reconnaissance. The Company has no immovable assets located in any of the potentially affected areas of these licences and the loss of any or all of these potentially affected properties would not materially and adversely affect the existing operations.

The Mining Prohibition in Specified Areas Law has not been adequately enforced to date mainly due to compensation issues due to the licence holders.

In order to address the issues facing its implementation, in February, 2015 the Parliament of Mongolia adopted an amendment to the Law on Implementation of the Mining Prohibition in Specified Areas Law (the “Amended Law on Implementation”). The Amended Law on Implementation provides an opportunity for license holders covered within the scope of application of the Mining Prohibition in Specified Areas Law to continue their mining operations subject to advance placement of funds to cover 100% of the future environmental rehabilitation costs. A model contract and a specific Government regulation on this requirement will be adopted by the Government. The license holders must also apply within 3 months after the amendment to the Law on Implementation comes into effect for permission to MRAM to resume activities. The Company submitted its application with respect to its mining licenses before the deadline set on June 16, 2015 and hasn’t yet received any communication from MRAM on the status of its application.

Pursuant to the Mongolian Law “To prohibit mineral exploration and mining operations at headwaters of rivers, water protection zones and forested areas”, the Government administrative agency has notified the Company that special license area 12726A is partly overlapping with a water reservoir. The Company has inspected the area together with the Cadastral Division of the Mineral Resource Authority as well as through the cadastral registration system of the Ministry of Environment, it is determined that 29 hectares of Sukhait Bulag is partly overlapping with a water reservoir, of which has been partly handed over. (Resolution No.6/7522 issued on September 29, 2015 by the Head of Cadastral Division of the Mineral Resource Authority).

In accordance with Article 22.3 of Law of Mongolia on Water, 5,602.96 hectares of land, including Sukhaityn Bulag, Uvur Zadgai, and Zuun Shand pertaining to exploration license 9443X, which was converted to mining license MV-0125436 in January 2016, is overlapping with a protected area boundary. The overlapping area has been officially handed over to the local administration. (Resolution No.688 issued on September 24, 2015 by the Head of Cadastral Division of the Mineral Resource Authority) In connection with the nullification of Annex 2 of the Government order No.194 “On determining boundary” issued on June 5, 2012, area around the water reservoir located at MV-016869 license area was annulled from the Specified Area Law.

Therefore, mining license 12726A was removed from the list of licenses that overlaps with the prohibited areas described in the law.

There has been limited development of the law during 2016 while two exploration licenses of the Company (13779X and 5267X) were converted to mining licenses (MV-020676 and MV-020675) in November 2016. The Company will continue to monitor the developments and ensure that it follows the necessary steps in the Amended Law on Implementation to secure its operations and licenses and is fully compliant with Mongolian law.

There can be no assurance that future political and economic conditions in Mongolia will not result in the Government of Mongolia adopting different policies in relation to foreign development and ownership of mineral resources. Any such changes in government or policy may result in changes in laws affecting ownership of assets, environmental protection, labour relations, repatriation of income, return of capital, investment agreements, income tax laws, royalty regulation, government incentive and other areas, each of which may materially and adversely affect the Company’s ability to undertake exploration and

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development activities in the manner currently contemplated. Any restrictions imposed or charges levied or raised (including royalty fees) under Mongolian law for the export of coal could harm the Company’s competitiveness.

On August 26, 2019, SGS received the Notice Letter from MRAM notifying that the Company’s three mining licenses (MV-016869, MV-020436 and MV-020451) for the Soumber Deposit have been terminated by the Head of Cadastre Division of MRAM effective as of August 21, 2019. See Section 7 of this MD&A under the heading entitled " Regulatory Issues and Contingencies – Termination of Soumber Deposit Mining Licenses” for more information.

The Company believes the cancellation of the Soumber Licenses is without merit. The Company is not aware of any failure on its part to fulfill its environmental reclamation duties as they relate to the Soumber Deposit. On October 4, 2019, SGS filed a claim against MRAM and the Ministry of Environment and Tourism of Mongolia in the Administration Court seeking an order to restore the Soumber Licenses. The Appeal Court issued the ruling in October 2020 and made an order to accept SGS’s claim and restore the Soumber Licenses. The case was transferred to the High Court for final ruling. The Company anticipates that the High Court will issue its ruling before the end of the first quarter of 2021. The termination of the Soumber Licenses does not have any impact on the Company’s current mining operations at the Ovoot Tolgoi mine site. The Company will take all such actions, including additional legal actions, as it considers necessary to reinstate the Soumber Licenses. However, there can be no assurance that a favorable outcome will be reached.

The impact of the COVID-19 pandemic in China could have a material adverse impact on the Company’s business, results of operations, or financial condition.

In December 2019, COVID-19 was reported to have surfaced in Wuhan, China and continues to expand within the People’s Republic of China (“PRC”) and globally. On March 12, 2020, the World Health Organization declared the COVID-19 outbreak as a global pandemic. In China, reactions to or efforts to contain the spread of COVID-19 have led to, among other things, significant restrictions on travel within China, extended shutdown of business operations, mandatory quarantine requirements on infected individuals and a general reduction in industrial and consumer activity.

In Mongolia, the Mongolian State Emergency Commission closed Mongolia’s southern border with China effective as of February 11, 2020 in order to prevent the spread of the COVID-19. Accordingly, the Company suspended coal exports to China beginning as of February 11, 2020. On March 28, 2020, the MongolianChinese border was re-opened for coal export on a trial basis, with a limit imposed on the total volume of coal that was permitted to be exported during this trial period. The Company has experienced a continuous improvement in the volume of coal exported to China since March 28, 2020. During the period between April to October 2020, an aggregate of 1.9 million tonnes of coal was exported by the Company from Mongolia to China, as compared to an aggregate of 2.0 million tonnes of coal during the same period in the 2019 calendar year.

The border closure has had an adverse impact on the Company’s sales and cash flows in the first and second quarter of 2020. In order to mitigate the financial impact of the border closures and preserve its working capital, the Company temporarily ceased major mining operations (including coal mining), reduced production to only coal-blending activities and placed approximately half of its workforce on furlough from February 2020. Since August 2, 2020, the Company has resumed its mining operations, which includes mining, blending and washing of coal. As at October 31, 2020, SGS employed 208 employees at the Ovoot Tolgoi Mine site (December 31, 2019: 383 employees). The Company produced 1.1 million tonnes from August to October 2020, as compared to 1.3 million tonnes from August to October 2019. The Company will continue to closely monitor the development of the COVID-19 pandemic and the impact it has on coal exports to China and will react promptly to preserve the working capital of the Company.

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The Company believes the COVID-19 pandemic in China has negatively affected its business. Furthermore, the economic slowdown and negative business sentiment in the PRC could potentially have a negative impact on the demand for coal generally and our business operations and financial condition may be adversely affected as a result. Given the difficulty involved in determining with any degree of certainty as to how long the COVID-19 pandemic will last, the Company cannot predict if the adverse impact on the Company’s business, financial condition and operations will be short-lived or long-lasting at this time. If the negative impact of the COVID-19 pandemic continues and becomes long-lasting, the Company’s business, financial condition and operations may be materially and adversely affected as a result of any slowdown in economic growth in China, reduce demand for coal or other factors that the Company cannot foresee.

The Company’s ability to carry on business in Mongolia is subject to political risk.

The Company’s ability to efficiently conduct its exploration and development activities is subject to changes in government policy or shifts in political attitudes within Mongolia that are beyond the Company’s control.

Government policy may change to discourage foreign investment, nationalization of mining industries may occur or other government limitations, restrictions or requirements not currently foreseen may be implemented. There is no assurance that the Company’s assets will not be subject to nationalization, requisition or confiscation, whether legitimate or not, by any authority or body. The provisions under Mongolian law for compensation and reimbursement of losses to investors under such circumstances may not be effective to restore the value of the Company’s original investment.

In addition, Mongolia may experience political instability. Such instability could have a material adverse effect on economic or social conditions in Mongolia and may result in outbreaks of civil unrest, which could materially and adversely affect the Company’s business and results of operations.

The Government of Mongolia could determine that any one or more of the Company’s projects in Mongolia is a Mineral Deposit of Strategic Importance if it meets legal requirements.

Under the 2006 Minerals Law, the State Great Khural of Mongolia (the "Parliament of Mongolia") has wide discretion to designate mineral deposits to be Mineral Deposits of Strategic Importance. The Government of Mongolia is empowered to participate on an equity basis with the licence holder in the exploitation and/or mining of each Mineral Deposit of Strategic Importance on terms to be negotiated between the Government of Mongolia and such licence holder. Details of any minerals reserves must be filed by the relevant licence holder with the Government of Mongolia, and those deposits on the Strategic Deposits List represent most of the largest and highest profile deposits in Mongolia. In addition to deposits currently on the Strategic Deposits List and the additional Tier 2 Deposits List, the Parliament of Mongolia may at any time designate other deposits not yet currently on such Lists to be Mineral Deposits of Strategic Importance, add such deposits to either the Strategic Deposits List or the Tier 2 Deposits List and, in the former case, commence negotiations with the relevant licence holder with respect to the terms under which the Government of Mongolia will take an interest in such deposit. While the Government of Mongolia is in the process of adding the exact location and coordinates for each Mineral Deposit of Strategic Importance, a number of deposits on the Strategic Deposits List are identified by name only with no indication of the latitude and longitude coordinates for the deposit, and it is therefore not always possible to precisely determine the intended geographic area covered by each designated Mineral Deposit of Strategic Importance or to accurately determine whether or not any given licence area is within, or overlaps, a Mineral Deposit of Strategic Importance. In July 2014, the Mongolian Parliament made an amendment to the Minerals Law and redefined the term of “Mineral Deposit of Strategic Importance”. According to the Minerals Law, the Mineral Deposit of Strategic Importance means “a deposit which can affect national security, national economic and social development or a deposit that can produce more than five percent of Mongolian GDP in a year”.

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Under the 2006 Minerals Law, the size of the Government of Mongolia’s participation is determined largely by the level of state funding which has been provided for the exploration and development of any deposit, with the Government of Mongolia entitled to participate up to 50% in the event that there has been state funding of such deposit and up to 34% if there has not. However, the 2006 Minerals Law is very vague as to the details and method by which the Government of Mongolia will take its interest and the final arrangements in respect of the Government of Mongolia’s interest in each Mineral Deposit of Strategic Importance, including the amount of compensation to be paid to the licence holder and the actual form of the Government of Mongolia’s interest are subject to negotiation between the Government of Mongolia and the licence holder. In 2015, the Parliament of Mongolia adopted an amendment to the 2006 Minerals Law providing for the possibility for the Government to collect a special royalty on Mineral Deposits of Strategic Importance in lieu of holding an equity stake in such deposit. It stipulates that the parties can agree to transfer to the licence holder the state's share in the Mineral Deposit of Strategic Importance upon the approval of an authorized Government body, with the licence holder agreeing to pay a special royalty at a percentage (not to exceed 5%) to be approved by the Government.

The 2006 Minerals Law also contains provisions requiring any company which holds a Mineral Deposit of Strategic Importance to list no less than 10% of its shares on the Mongolian Stock Exchange. This particular provision of the 2006 Minerals Law has not yet been enforced and it is not clear how it will work in practice.

In recent years there have been a number of proposed amendments to the 2006 Minerals Law suggested by various parties, many of which have centered on amending the 2006 Minerals Law to increase the Government of Mongolia’s participating interest in excess of 50%. While the 2006 Minerals Law provides that the interest of the Government of Mongolia should take the form of an equity interest, based on past practice, and depending on the results of individual negotiations, the interest may be in the form of production or profit sharing or some other arrangement negotiated between the licence holder and the Government of Mongolia. There can be no assurance that legislation will not be enacted which further strengthens the Government of Mongolia’s right to participate in privately held mineral resources in Mongolia.

None of the deposits covered by the Company’s existing mining licences or exploration licences are currently designated as Mineral Deposits of Strategic Importance. However, there can be no assurance that any one or more of these deposits will not be so designated in the future, in which case the Company’s business and results of operations may be materially and adversely affected.

The Application of the Foreign Investment Law of Mongolia approved by the Parliament of Mongolia is uncertain.

Prior to October 3, 2013, the Company was subject to the Foreign Investment Law of Mongolia (“FIL”), as described in the Company’s Management’s Discussion and Analysis of Financial Condition and Results of Operation for the period ended December 31, 2012. The Company considers that this risk has been substantially mitigated following the repeal of the FIL and introduction of the Investment Law on October 3, 2013, which appears to provide greater certainty for foreign investment in Mongolia. However, that certainty remains subject to the inherent uncertainties of the legal system in Mongolia as described in the risk factor entitled the “ Legislation in Mongolia may be subject to conflicting interpretations, which may have adverse consequences on the Company’s business ” above.

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Risks relating to the Company’s business and industry

Some of the Company’s projects may not be completed as planned; costs may exceed original budgets and may not achieve the intended economic results or commercial viability.

The Company’s business strategy depends largely on expanding its production capacity at the Ovoot Tolgoi Mine and further developing its other coal projects into commercially viable mines. Whether a mineral deposit will be commercially viable depends on a number of factors, including: (i) the particular attributes of the deposit, such as size, grade and proximity to infrastructure; (ii) commodity prices, which are highly cyclical; and (iii) government regulations, including regulations relating to prices, taxes, royalties, land tenure, land use, importing and exporting of mineral resources and environmental protection. The Company’s long term intention to develop mines at the Zag Suuj Deposit and the Ovoot Tolgoi Underground Deposit in the future is based on geological, engineering, environmental and mine planning evaluations. The feasibility of mining at these projects has not been and may never be established. If the Company is unable to develop all or any of its projects into a commercial working mine, its business, financial condition and results of operations will be materially and adversely affected.

The Company’s projects are subject to both (i) technical risk in that they may not perform as designed, or (ii) operational redesign or modification as a result of on-going evaluation of the projects. Increased development costs, lower output or higher operating costs may all combine to make a project less profitable than expected at the time of the development decision. This would have a negative impact on the Company’s business and results of operations. No assurance can be given that the Company would be adequately compensated by third party project design and construction companies (if not performed by the Company) in the event that a project did not meet its expected design specification.

With respect to Zag Suuj project, as with all exploration properties or projects taken on by mining companies, there is a risk that exploration projects will not be converted to commercially viable mines, in part because actual costs from capital projects may exceed the original budgets. As a result of project delays, cost overruns, changes in project scientific or technical information, changes in market circumstances or other reasons, the Company may not be able to achieve the intended economic benefits or demonstrate the commercial feasibility of these projects, which in turn may materially and adversely affect the Company’s business, results of operations and growth projects.

The Company’s coal reserves and resources are estimates based on a number of assumptions, and the Company may produce less coal than its current estimates.

The coal reserve and resource estimates are based on a number of assumptions that have been made by the QPs in accordance with NI 43-101. Reserve and resource estimates involve expressions of judgment based on various factors such as knowledge, experience and industry practice, and the accuracy of these estimates may be affected by many factors, including quality of the results of exploration drilling and analysis of coal samples, as well as the procedures adopted by and the experience of the person making the estimates.

The Company notes that, in general, mineral resource and reserve estimates are always subject to change based on new information. Specifically, should the Company encounter mineralization different from that predicted by past drilling, sampling and similar examination, mineral resource and/or reserve estimates may have to be adjusted downward. In addition, the rank of coal ultimately mined may differ from that indicated by drilling results. There can be no assurance that coal recovered in laboratory tests will be duplicated under on-site conditions or in production-scale operations. In the event that the actual level of impurities is higher than expected or the coal mined is of a lower quality than expected, the demand for, and realizable price of, the Company’s coal may decrease. Short term factors relating to reserves, such as

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the need for orderly development of coal seams or the processing of new or different quality coals, may also materially and adversely affect the Company’s business and results of operations.

The inclusion of reserve and resource estimates should not be regarded as a representation that all these amounts can be economically exploited and nothing contained herein (including, without limitation, the estimates of mine lives) should be interpreted as assurance of the economic lives of the Company’s coal reserves and resources or the profitability of its future operations.

Mineral resources that are not mineral reserves do not have demonstrated economic viability. Due to the uncertainty that may attach to inferred mineral resources, there is no assurance that mineral resources will be upgraded to proven and probable ore reserves. Inferred mineral resources are considered too speculative geologically to have economic considerations applied to them that would enable them to be categorized as mineral reserves.

The Company’s results of operations are subject, to a significant extent, to economic, political and legal developments in China.

The Company expects that a majority if not all of the coal sales from the Ovoot Tolgoi Mine will be made to customers based in China. Accordingly, the economic, political and social conditions, as well as government policies, of China may affect its business. The Chinese economy differs from the economies of most developed countries in many respects, including: (i) structure; (ii) level of government involvement; (iii) level of development; (iv) growth rate; (v) control of foreign exchange; and (vi) allocation of resources. The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. For the past two decades, the Chinese government has implemented economic reform measures emphasizing the utilization of market forces in the development of the Chinese economy. Changes in the Chinese’s political, economic and social conditions, laws, regulations and policies could materially and adversely affect the Company’s business and results of operations. More recently, the COVID-19 pandemic has resulted in reduced industrial activity in China, with temporary closures of factories and other facilities, as described in the risk factor entitled “ The impact of the COVID-19 pandemic in China could have a material adverse impact on the Company’s business, results of operations, or financial condition ”.

In addition, the Chinese government indirectly influences coal prices through its regulation of power tariffs and its control over allocation of the transportation capacity of the national rail system. Any significant downturn in the prices in China could materially and adversely affect the Company’s business and results of operations. Additionally, the Chinese government could adopt new policies that could shift demand away from coal to other energy sources. Any significant decline in demand for, or over-supply of, coal could materially and adversely affect the Company’s revenues from coal export sales.

As a result of import restrictions established by the PRC authorities at the Ceke border, the Company has been barred from transporting its F-grade coal products into China for sale since December 15, 2018. The Company, together with other Mongolian coal companies, have been in discussions with the PRC authorities regarding a potential amendment or withdrawal of these import restrictions to allow for the importation of F-grade coal into China; however, there can be no assurance that a favorable outcome will be reached. A protracted or indefinite ban on the import of the Company’s F-grade coal products into China may have a material adverse impact on the Company’s financial performance, cash flow and results of operations, which may negatively affect the price and volatility of the Common Shares and any investment in such shares could suffer a significant decline or total loss in value.

The interests of the Company’s principal stakeholders, CIC, Novel Sunrise and Voyage Wisdom, may differ from those of the other stakeholders.

As at November 26, 2020, to the best of the Company’s knowledge:

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• CIC holds a total of 64.8 million Common Shares representing approximately 23.8% of the issued and outstanding Common Shares;

• Novel Sunrise holds a total of approximately 46.4 million Common Shares representing approximately 17.0% of the issued and outstanding Common Shares; and

• Voyage Wisdom holds a total of approximately 25.8 million Common Shares representing approximately 9.5% of the issued and outstanding Common Shares.

Accordingly, the Company’s principal stakeholders may have the ability to substantially affect the outcome of matters submitted to Shareholders of the Company for approval, including, without limitation, the election and removal of directors, amendments to our articles of incorporation and bylaws and the approval of any business combination. This may delay or prevent an acquisition of the Company or cause the market price of the Common Shares to decline. The interests of each of these principal stakeholders may conflict with the interests of other Shareholders and there is no assurance that any of these principal stakeholders will vote its Common Shares in a way that benefits minority Shareholders. While no Shareholder has the ability to elect a majority of the Board unilaterally, both Novel Sunrise and CIC have been granted contractual director appointment rights. In addition, the Company’s principal stakeholders may have an interest in pursuing acquisitions, divestitures and other transactions that, in the judgment of management, could enhance its equity or debt investment, even though such transactions might involve risks to other Shareholders and may negatively affect prevailing market prices of the Common Shares.

Subject to compliance with applicable securities laws, the principal stakeholders may sell some or all of their Common Shares in the future. No prediction can be made as to the effect, if any, such future sales of Common Shares will have on market prices of the Common Shares prevailing from time to time. However, the future sale of a substantial number of Common Shares by our principal stakeholders, or the perception that such sales could occur, could adversely affect prevailing market prices of the Common Shares.

Tax and royalty legislation in Mongolia is subject to varying interpretations and changes which may have a significant impact on the Company's financial position.

Mongolian tax, currency, customs and royalty legislation is subject to varying interpretations and changes, which can occur frequently. The interpretation by the Company's management of such legislation as applied to the transactions and activity of the Company may be challenged by the relevant authorities.

The Mongolian tax authorities may be taking a more assertive position in their interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in the past may be challenged by tax authorities. As a result, significant additional taxes, penalties, interest or royalties may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for five calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods.

The Mongolian tax legislation does not provide definitive guidance in certain areas, specifically in areas such as value-added tax, withholding tax, corporate income tax, personal income tax, transfer pricing and other areas. From time to time, the Company adopts interpretations of such uncertain areas that reduce the overall tax rate of the Company. As noted above, such tax positions may come under heightened scrutiny as a result of recent developments in administrative and court practices. The impact of any challenge by the tax authorities cannot be reliably estimated; however, it may be significant to the financial position and/or the overall operations of the entity in question.

The royalty regime in Mongolia is evolving and has been subject to change since 2012. On February 1, 2016, the Government of Mongolia issued a resolution in connection with the royalty regime. From February 1, 2016 onwards, royalties are to be calculated based on the actual contract price including transportation

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costs to the Mongolia border. If such transportation costs have not been included in the contract, the relevant transportation costs, customs documentation fees, insurance and loading costs should be estimated for the calculation of royalties. In the event that the calculated sales price as described above differs from the contract sales price of other entities in Mongolia (same quality of coal and same border crossing) by more than 10%, the calculated sales price will be deemed to be “non-market” under Mongolian tax law and the royalty will then be calculated based on a reference price as determined by the Government of Mongolia.

On September 4, 2019, the Government of Mongolia issued a resolution in connection with the royalty regime. From September 1, 2019 onwards, in the event that the contract sales price is less than the reference price as determined by the Government of Mongolia by more than 30%, then the royalty payable will be calculated based on the Mongolian government’s reference price instead of the contract sales price.

There can be no assurance, however, that the Government of Mongolia will not disagree with the methodology employed by the Company in determining the calculated sales price and require that the royalty payable be calculated based on the Mongolian government’s reference, which could have a material adverse effect on the business and operations of the Company and may negatively affect the price and volatility of the Common Shares.

Management believes that its interpretation of the relevant legislation is appropriate and the Company’s positions related to tax, royalty and other legislation will be sustained. Management believes that tax, royalty and legal risks are remote at present. Management performs regular re-assessment of tax risk and its position may change in the future as a result of the change in conditions that cannot be anticipated with sufficient certainty at present.

The Company does not insure against all risks to which it may be subject in planned operations and insurance coverage could prove inadequate to satisfy potential claims.

For certain aspects of the Company’s business operations, insurance coverage, in particular business interruption insurance, is restricted or prohibitively expensive. The Company currently holds its primary insurance policies through Canadian insurance providers to insure its properties. The Company has taken out insurance for risks including commercial general liability, and aviation premises liability. The Company maintains mining property insurance for all of its mining assets wherever located, property insurance on its office premises and liability insurance for its directors and officers. However, no assurance can be given that the Company will elect or be able to obtain such insurance coverage at economically reasonable premiums (or at all), or that any coverage it obtains will be adequate to cover the extent of any claims brought against it.

Exploration, development and production operations on mineral properties involve numerous risks, including environmental risks, such as unexpected or unusual geological operating conditions, rock bursts or slides, fires, floods, earthquakes or other environmental occurrences, and political and social instability. The Company does not maintain insurance against any environmental or political risks. Should any liabilities arise for which it is not insured or insurance coverage is inadequate to cover the entire liability, they could reduce or eliminate the Company’s actual or prospective profitability, result in increasing costs and a decline in the value of the Common Shares and could materially and adversely affect the Company’s business and results of operations.

Licences and permits are subject to renewal and various uncertainties and the Company may only renew its exploration licences a limited number of times for a limited period of time.

The Company’s activities are subject to extensive licensing and permitting requirements. The Company strives to obtain all required licenses and permits on a timely basis and to comply with all such licenses and

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permits at all times. However, there can be no assurance that the Company will obtain and maintain all required licenses and permits or that it will not face delays in obtaining all required licenses and permits, renewals of existing licenses and permits, additional licenses and permits required for existing or future operations or activities, or additional licenses and permits required by new legislation. The Company notes the following with respect to its ability to obtain and maintain applicable licenses and permits:

• In April 2012, MRAM announced the suspension of exploration and mining activity on certain of the Company’s licences including the licence pertaining to the Ovoot Tolgoi Mine. Although the Company did not receive official notification of a suspension of licences and had no reason to believe its licences were not in good standing, this announcement caused a significant disruption in the Company’s business which ultimately lead to the curtailment of operations at the Ovoot Tolgoi Mine. Although the Company received a letter from MRAM on September 6, 2012 confirming that all MELs and mining licences were in good standing there is still a risk that its licences could be revoked.

• Certain provisions of the Law on Land of Mongolia enacted on June 7, 2002, as amended (the “Land Law of Mongolia”) and the 2006 Minerals Law provide for the revocation of previously granted land use rights, MELs or mining licences on the grounds that the affected area of land has been designated as SNT. The Land Law of Mongolia grants the discretion to declare an area of land for special needs purposes to local governing authorities and identifies various broad categories which qualify as special needs. The 2006 Minerals Law requires the local governing authority that designates an area of land as a special needs territory to compensate within one year the licence holder whose rights or licence status are affected. The failure to pay the compensation within the one year period would allow the licence holder to resume its operations. If any of the Company’s land use rights or mining licences in Mongolia are revoked because the underlying land is declared as special needs territory, there is no assurance that the Company will receive adequate compensation and its business and results of operation might be adversely and materially affected.

• On February 13, 2015, the License Areas were included into a special protected area (referred to as a Special Needs Territory or “SNT”) newly set up by the Umnugobi Aimag’s 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, 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 until the License Areas are removed from the SNT.

• On June 29, 2016, the Mongolian Parliament and CRKh election was held. As a result, the Company is aware that additional action may be taken in respect of the SNT; however, the Company has not yet received any indication on the timing of the next session of the CRKh. The Company is confident of a positive outcome in its challenge of this new CRKh resolution; however, there is no assurance that the Company will receive adequate compensation and its business and results of operation might be adversely and materially affected.

• On August 26, 2019, SGS received the Notice Letter from MRAM notifying that the Company’s three mining licenses (MV-016869, MV-020436 and MV-020451) for the Soumber Deposit have been terminated by the Head of Cadastre Division of MRAM effective as of August 21, 2019. See Section 6 of this MD&A under the heading entitled " Regulatory Issues and Contingencies – Termination of Soumber Deposit Mining Licenses” for more information.

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The inability to obtain or maintain licenses and permits with respect to its mining operations, of any delay with respect to the obtaining of licenses and permits, could have a material adverse impact on the Company’s financial performance, cash flow and results of operations.

Prolonged periods of severe weather conditions could materially and adversely affect the Company’s business and results of operations.

Severe weather conditions may require the Company to evacuate personnel or curtail operations and may cause damages to the project site, equipment or facilities, which could result in the temporary suspension of operations or generally reduce the Company’s productivity. Severe weather conditions have not caused any delay or damages to the Company’s operations to date. However, there can be no assurance that severe weather will not occur. Any damages to the Company’s projects or delays in its operations caused by prolonged periods of severe weather could materially and adversely affect its business and results of operations.

The Company’s business and results of operations are susceptible to the cyclical nature of coal markets and are vulnerable to fluctuations in prices for coal.

The Company expects to derive substantially all of its revenue and cash flow from the sale of coal. Therefore, the market price of the Common Shares, the Company’s ability to raise additional financing and maintain ongoing operations and its financial condition and results of operations will be directly related to the demand for, and price of, coal and coal-related products. Coal demand and price are determined by numerous factors beyond the Company’s control, including the international demand for steel and steel products, the availability of competitive coal supplies, international exchange rates, political and economic conditions in Mongolia, China and elsewhere in the world, milder or more severe than normal weather conditions, production costs in major coal producing regions and, most recently, the impact of the COVID-19 pandemic. The Chinese and international coal markets are cyclical and have in the past exhibited significant fluctuations in supply, demand and prices from year to year. There has been significant price volatility on the coal spot market. An oversupply of coal in China or a general downturn in the economies of any significant markets for the Company’s coal and coal-related products could materially and adversely affect its business and results of operations. In addition, the Company’s dependence on Asian markets may result in instability in its operations due to political and economic factors in those Asian jurisdictions which are beyond the Company’s control. The combined effects of any or all of these factors on coal prices or volumes are impossible for the Company to predict.

If realized coal prices are below the full cost of production of any of the Company’s future mining operations and remain at such a level for any sustained period, the Company could experience increased losses and may decide to discontinue operations, which could require the Company to incur closure costs and result in further reduced revenues.

The Company’s coal mining activities are subject to operational risks, including equipment breakdown.

The Company’s coal mining operations are subject to a number of operational risks, some of which are beyond its control, which could delay the production and delivery of coal. These risks include unexpected maintenance or technical problems, periodic interruptions to its mining operations due to inclement or hazardous weather conditions and natural disasters, industrial accidents, power or fuel supply interruptions and critical equipment failure, including malfunction and breakdown of its shovels, upon which its coal mining operations are heavily reliant and which would require considerable time to replace. These risks and hazards may result in personal injury, damage to, or destruction of, properties or production facilities, environmental damage, business interruption and damage to its business reputation. In addition, breakdowns of equipment, difficulties or delays in obtaining replacement shovels and other equipment,

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Management’s Discussion and Analysis

SouthGobi Resources Ltd.

natural disasters, industrial accidents or other causes could temporarily disrupt the Company’s operations, which in turn may also materially and adversely affect its business, prospects, financial condition and results of operations.

The Company’s future financial performance depends, in part, on the successful operation of the wash plant at the Ovoot Tolgoi Mine, which is subject to various risks

In the fourth quarter of 2016, the Company initiated a plan to change the existing product mix to higher value and higher margin outputs by washing certain grades of coal in order to produce more premium semisoft coking coal and to initiate more processing of the lower grades of coal in order to reduce the ash content and improve the selling price and margins on its thermal coal product. The construction of the wash plant at the Ovoot Tolgoi mine was completed, and operations at the wash plant commenced, in October 2018.

Because the Company’s current mine plan is predicated, in part, on incorporating a coal washing and process systems, the Company’s future financial performance will depend on the successful operation of the wash plant at the Ovoot Tolgoi mine. The operating performance of the wash plant, and the related cost of operation and maintenance, may be adversely affected by a variety of risk factors, including, but not limited to, the following:

• Maintaining an adequate water supply and power supply to the mine site to permit the continued operations of the wash plant as planned;

• Achieving satisfactory yields from wet washing operations;

• The Company successfully enhancing the operational efficiency and the output throughput of the wet wash plant;

• The Company successfully negotiating an agreement with the wash plant operator regarding the operation of the wash plant;

• Unexpected maintenance and replacement expenditures;

• Shutdowns due to the breakdown or failure of the wash plant’s equipment;

• Labour disputes; and

• Catastrophic events such as fires, explosions, severe storms or similar occurrence affecting the wash plant facility or third parties providing services to the wash plant.

Any of the risks noted above could have a material adverse impact on the operational performance or cost of operations of the wash plant, which in turn could have a material adverse effect on the Company’s financial performance, cash flow and results of operations.

The unavailability or shortage of reliable and sufficient coal transportation capacity that meets Mongolian authority regulations will reduce the Company’s coal revenue by causing it to reduce its production volume or impairing its ability to supply coal to its customers.

The Company anticipates that the majority of its coal production from the projects in Mongolia will be exported to China. Inadequate transportation infrastructure, or restrictions on or delays in coal exports to China, is likely to affect the pricing terms on which it can sell the coal to customers and the willingness and ability of such customers to purchase coal from it. Customers are likely to factor in any delays and the costs and availability of transportation in determining the price they are prepared to pay to purchase the Company’s coal. Therefore, its mining operations are anticipated to be highly dependent on road and rail services in Mongolia and China.

In Mongolia, a bottleneck in the transportation of coal from the Ovoot Tolgoi Mine to customers in China may arise if the road connecting the Ovoot Tolgoi Mine to the Shivee Khuren Border Crossing does not have sufficient capacity to support the increased amount of cargo traffic, is affected by external factors such as disruptions caused by bad weather or is closed for repair, such as was the case during 2012, when the

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

road connecting the Ovoot Tolgoi Mine to the Shivee Khuren Border Crossing was closed for over four weeks for repair.

On May 8, 2015, the commercial operation of the Paved Highway commenced and subsequently the unpaved highway which was previously used to transport coal through the Shivee Khuren Border Crossing was closed. The Paved Highway is expected to significantly increase the safety of coal transportation, reduce environmental impacts and improve efficiency and capacity of coal transportation. The Paved Highway is expected to have a carrying capacity in excess of 20 million tonnes of coal per year.

The opening hours of the Shivee Khuren Border Crossing also affect the Company’s ability to expedite the movement of its coal shipments. There can be no assurance that there would be any other cost effective means of transporting the coal to the Company’s primary market in China. As a result, the Company may experience difficulty expediting the movement of its coal shipments and/or significant cost escalation for the transportation services, which could affect its production and reduce its profitability.

In addition, the Company has been experiencing delays with respect to the custom clearance process at the Shivee Khuren Border Crossing since July 2017. These delays have caused typical turnaround times for coal exporting trucks to double. The Company continues to closely monitor the situation. There can be no assurances that delays with respect to the custom clearance process at the Shivee Khuren Border Crossing will improve. Continued delays may have a material adverse impact on the Company’s financial performance, cash flow and results of operations.

The Company was informed that effective as of February 11, 2020, the Mongolian State Emergency Commission closed Mongolia’s southern border with China in order to prevent the spread of COVID-19. Accordingly, the Company suspended coal exports to China beginning as of February 11, 2020 as a result of the border closure.

On March 28, 2020, the Mongolian-Chinese border was re-opened for coal export on a trial basis, with a limit imposed on the total volume of coal that was permitted to be exported during this trial period. The Company has experienced a continuous improvement in the volume of coal exported to China since March 28, 2020. During the period between April to October 2020, an aggregate of 1.9 million tonnes of coal was exported by the Company from Mongolia to China, as compared to an aggregate of 2.0 million tonnes of coal during the same period in the 2019 calendar year.

The border closure has had an adverse impact on the Company’s sales and cash flows in the first and second quarter of 2020. In order to mitigate the financial impact of the border closures and preserve its working capital, the Company temporarily ceased major mining operations (including coal mining), reduced production to only coal-blending activities and placed approximately half of its workforce on furlough from February 2020. Since August 2, 2020, the Company has resumed its mining operations, which includes mining, blending and washing of coal. As at October 31, 2020, SGS employed 208 employees at the Ovoot Tolgoi Mine site (December 31, 2019: 383 employees). The Company produced 1.1 million tonnes from August to October 2020, as compared to 1.3 million tonnes from August to October 2019. There were a few COVID-19 cases reported in Ulaanbaatar (being the capital city of Mongolia) on November 11, 2020. As a result, the Mongolian local authorities have taken certain precautionary steps to minimize further transmissions and announced a lockdown of Ulaanbaatar until December 2, 2020. Although the Company’s mining operations and the export of coal from Mongolia to China continues as of the date hereof, there can be no guarantee that the Company will be able to continue exporting coal to China, or the border crossings would not be the subject of additional closures as a result of COVID-19 in the future. The Company will continue to closely monitor the development of the COVID-19 pandemic and the impact it has on coal exports to China and will react promptly to preserve the working capital of the Company.

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

In China, rail and road infrastructure and capacity has in the past been affected by extreme weather conditions, earthquakes, delays caused by major rail accidents, the COVID-19 pandemic, the diversion of rolling stock needed to deliver emergency food relief and seasonal congestion during public holidays. There can be no assurance that these problems will not recur or that new problems will not occur. In any of these circumstances, the customers may not be able to take delivery of the Company’s coal, which may lead to delays in payment, or refusal to pay, for the Company’s coal and, as a result, the Company’s business and results of operations could be materially and adversely affected.

The Company’s prospects depend on its ability to attract, retain and train key personnel.

Recruiting, retaining and training qualified personnel is critical to the Company’s success. The number of persons skilled in the acquisition, exploration and development of mining properties is limited and competition within the mining industry for such persons is intense, in particular, Mongolian law requires that at least 90% of a mining company’s employees be of Mongolian nationality. This provision of the law, coupled with the large number of active mining projects in Mongolia, further limits the number of available personnel and increases competition for skilled personnel. The reputation and capability to operate continuously over the longer term are key factors in also attracting key personnel to its business. The Company is reinforcing its core values of ethical behavior in dealing with all its stakeholders from senior management down in order to ensure the Company attracts the right people to its business. As the Company’s business activity grows, it will require additional key financial, administrative, mining, marketing and public relations personnel as well as additional operations staff. If the Company is not successful in attracting such key personnel, or retaining existing key personnel, its business and results of operations could be materially and adversely affected.

In addition, the Company’s ability to train operating and maintenance personnel is a key factor for the success of its business activities. If the Company is not successful in recruiting, training and retaining such personnel, its business and results of operations could be materially and adversely affected.

Competition in the coal industry may hinder development plans and adversely affect the Company’s coal sales if it is not able to compete effectively.

Continued growth in mining and mineral exploration activities in Mongolia could create an increasing demand for mining equipment and related services. Shortages of, or higher costs for, equipment and services could restrict the Company’s ability to carry out the exploration, development and production activities, increase its costs of operations and adversely affect its future plans.

The Company intends to sell a majority of the coal it produces in China. Competition in the Chinese coal industry is based on many factors, including, among others, price, production capacity, coal quality and characteristics, transportation capability and costs, blending capability and brand name. The Company’s coal business will most likely compete in China with other large Chinese and international coal mining companies. Due to location, some of the Company’s Chinese competitors may have lower transportation costs than the Company does. The Chinese coal market is highly fragmented and the Company faces price competition from some small local coal producers that produce coal for significantly lower costs than the Company due to various factors, including their lower expenditure on safety and regulatory compliance. Some of the Company’s international competitors, including the Mongolian coal producers, may have greater coal production capacity as well as greater financial, marketing, distribution and other resources than the Company does, and may benefit from more established brand names in international markets. The Company’s future success will depend on its ability to respond in an effective and timely manner to competitive pressure.

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

There are a number of risks associated with the Company’s operation plan, dependence on a limited number of customers and inability to attract additional customers.

The current operation plan contemplates significant operational funding in the Company’s mining operations as well as equipment maintenance in order to achieve the Company’s revenue and cash flow targets. Such expenditures and other working capital requirements may require the Company to seek additional financing. There is no guarantee that the Company will be able to secure other sources of financing. If the Company is unable to continue as a going concern, it may be forced to seek relief under applicable bankruptcy and insolvency legislation.

The Company has been selling its coal products since 2008. The Company had 13 active customers with the largest customer representing approximately 42%, the second largest customer representing approximately 36%, the third largest customer representing approximately 9%, the fourth largest customer representing approximately 6% and the remaining customers accounting for 7% of the Company’s total sales for the year ended December 31, 2019. In order to mitigate this risk, the Company is attempting to modify its sales strategy in order to expand its existing customer base. With certain of its customers, the Company has accepted payment for coal deliveries in the form of bank instruments, in lieu of cash. There can be no assurance, however, that the Company will be able to satisfy or comply with the funding conditions of such instruments following completion of the coal delivery or the bank that issues the instrument will be capable of paying all or any portion of the proceeds to the Company, which could have a material adverse effect on the business and operations of the Company and may negatively affect the price and volatility of the Common Shares.

The Company still expects to sell the majority of the coal from its Mongolian mining operations to customers in China. Chinese law requires specific authorization to be obtained by entities responsible for the import of coal into China. In the event that the Company’s customers, or the agents of such customers who are responsible for importing coal into China on their behalf, fail to obtain and retain the necessary authorizations, their ability to import coal into China may be affected, which could materially and adversely affect the Company’s business and results of operations.

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 consolidated 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 noncurrent assets and non-current liabilities as current assets and current liabilities, respectively. The effects of these adjustments have not been reflected in the consolidated financial statements.

Failure to maintain an effective system of internal controls may result in material misstatements of the Company’s financial statements or cause the Company to fail to meet its reporting obligations or fail to prevent fraud.

Effective internal controls are necessary for the Company to provide reliable financial reports and prevent fraud. If the Company fails to maintain an effective system of internal controls, the Company may not be able to report its financial results accurately or prevent fraud; and in that case, Shareholders and investors could lose confidence in the Company’s financial reporting, which would harm the Company’s business and could negatively impact the price of the Common Shares.

Following the implementation of the Remedial Actions and Preventative Measures, the Chief Executive Officer and Chief Financial Officer of the Company have each concluded that, as of December 31, 2019,

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the Company’s disclosure controls and procedures, as defined in NI 52-109, are effective to achieve the purpose for which they have been designed.

If the Company suffers any future material weaknesses in its internal controls and procedures or fails to maintain the adequacy of its internal controls and procedures, the Company could be the subject of regulatory scrutiny, penalties or litigation, all of which would harm the Company’s business and could negatively impact the price of the Common Shares.

The Company cannot provide assurances that the Company will not experience potential material weaknesses in its internal controls. Even if the Company concludes that its internal controls over financial reporting provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRS, because of their inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by individual acts, by collusion of two or more individuals or by unauthorized override of controls. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm the Company’s results of operations or cause the Company to fail to meet its future reporting obligations.

The Company’s operations are exposed to risks in relation to environmental protection and rehabilitation.

The operations of coal mines involve substantial environmental risks and hazards and the Company’s operations are subject to laws and regulations relating to the environment, health and safety and other regulatory matters in Mongolia and China.

The risk of environmental liability is inherent in the operation of the Company’s business. Environmental hazards may occur in connection with the Company’s operations as a result of human negligence, force majeure, or otherwise. Claims may be asserted against the Company arising out of its operations in the normal course of business, including claims relating to land use, safety, health and environmental matters. The Company is not insured against environmental liabilities and there can be no assurance that environmental liabilities would not materially and adversely affect its business and results of operations.

In addition, the Company is subject to reclamation requirements. The Company’s mine will eventually close. The key tasks in relation to the closure of the mines involves (i) long-term management of permanent engineered structures (for example, spillways, roads, waste dumps); (ii) achievement of environmental closure standards; (iii) orderly retrenchment of employees and contractors; and (iv) relinquishment of the site with associated permanent structures and community development infrastructure and programs to new owners. The successful completion of these tasks is dependent on the Company’s ability to successfully implement negotiated agreements with the relevant government, community and employees. The consequences of a difficult closure range from increased closure costs and handover delays to ongoing environmental impacts and corporate reputation damage if desired outcomes cannot be achieved, which could materially and adversely affect the Company’s business and results of operations.

The Company currently does not own a coal storage facility at the Ceke border. As a result of potential stricter requirements for coal storage facilities which may be adopted by the local government in the future, the Company may not be able to secure enough storage space at the Ceke border, which could have a material adverse effect on the business and operations of the Company and may negatively affect the price and volatility of the Common Shares. As part of its focus on capital preservation, the Company has decided to suspend indefinitely all further development activities relating to the previously announced Ceke Logistics Park Project until further notice. The Company may be at risk of becoming subject to litigation proceedings

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initiated by its investment partner in the Ceke Logistics Park Project for failing to comply with the underlying agreements governing project development. Due to the inherent uncertainty of the litigation process, the resolution of any particular legal proceeding to which the Company may become subject could have a material adverse impact on its business, operations, results of operations, financial condition and future prospects.

Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees. The Company may experience increased costs of production arising from compliance with environmental laws and regulations. Should the Company fail to comply with current or future environmental laws and regulations, the Company may be required to pay penalties or take corrective actions, any of which may have a material adverse effect on its results of operations and financial condition.

Foreign currency fluctuations could affect expenses and any future earnings.

The Company is exposed to foreign exchange fluctuations with respect to the MNT, Chinese Renminbi, Hong Kong, and Canadian dollars. The Company’s financial results are reported in United States dollars. The salaries for local laborers in Mongolia are paid in local currency. Sales of coal into China have been and may continue to be settled in United States dollars and Renminbi. The Company has a subsidiary in Hong Kong where some expenses are incurred in Hong Kong dollars. Since the Company’s headquarters is in Canada, a minor portion of its expenses are in Canadian dollars and the Company holds a portion of its cash in Canadian dollars. As a result, its financial position and results are impacted by the exchange rate fluctuations between the aforementioned currencies and the United States dollar.

Information in this MD&A regarding future plans reflects current intentions and is subject to change.

Whether the Company ultimately implements the business strategies described in this MD&A will depend on a number of factors including, but not limited to: the political situation in Mongolia and China; the availability and cost of capital; current and projected coal prices; coal markets; costs and availability of drilling services, costs and availability of heavy equipment, supplies and personnel; success or failure of activities in similar areas to those in which the Company’s projects are situated; and changes in estimates of project completion costs. The Company will continue to gather information about its projects, and it is possible that additional information will cause it to alter its schedule or determine that a project should not be pursued at all. Accordingly, the Company’s plans and objectives may change from those described in this MD&A.

15. OUTLOOK

Looking forward, market conditions in China are expected to be challenging for coal companies, as there are a number prevailing uncertainties, including the risk that the COVID-19 pandemic and its negative impact on the Chinese economy, becomes protracted, the possibility that the border crossings between Mongolia and China become the subject of additional closures and the continued restrictions on importing F-grade coal into China. The Company will continue to closely monitor these developments and the resulting impacts they have on coal exports to China and will take all necessary actions to mitigate the potential operational and financial impacts on the Company.

In the long run, the Company remains cautiously optimistic regarding the Chinese coal market as coal is still considered to be the primary energy source which China will rely on in the foreseeable future. The expected benefit from the reducing supply of low quality coal is anticipated to be offset by the uncertain circumstances of the Chinese macroeconomic environment.

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SouthGobi Resources Ltd. Management’s Discussion and Analysis

The Company’s objectives for the medium term are as follows:

• Enhance product mix – The Company will focus on improving the product mix and increase production of higher quality coal by: (i) improving mining operations and employing enhanced mining techniques and equipment; (ii) washing lower quality coal in the Company’s coal wash plant; (iii) blending lower quality coal with higher quality coal; and (iv) adopting other processing options available to the Company.

• Expand customer base – The Company will endeavor to increase sales volume, expand its sales network and diversify its customer base so as to enhance the pricing competency of the Company .

• Optimize cost structure – The Company will aim to reduce its production costs and optimize its cost structure through innovation, ongoing training, productivity enhancement and engaging third party contract mining companies.

• Operate in a socially responsible manner – The Company will continue to maintain the highest standards in health, safety and environmental performance in a corporate socially responsible manner.

Going forward, the Company will continue to focus on creating shareholders value by leveraging its key competitive strengths, including:

• Strategic location – The Ovoot Tolgoi Mine is located approximately 40km from China, which represents the Company’s main coal market. The Company has an infrastructure advantage, being approximately 50km from a major Chinese coal distribution terminal with rail connections to key coal markets in China.

• A large resources and reserves base – The Ovoot Tolgoi Deposit has mineral reserves of 114.1 million tonnes, while the aggregate coal resources include measured and indicated mineral resources of 194.6 million tonnes and inferred resources of 32.1 million tonnes.

• Bridge between Mongolia and China – The Company is well positioned to capture the resulting business opportunities between China and Mongolia under the Belt and Road Initiative. The Company will seek potential strategic support from its two largest shareholders (i.e., CIC and Cinda), which are both state-owned-enterprises in China, and its strong operational record for the past twelve years in Mongolia, being one of the largest enterprises and taxpayers in Mongolia.

November 26, 2020

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