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Executives

Ross Tromans – President and Chief Executive Officer

Justin Kapla – President-SouthGobi Sands LLC

Analysts

Oscar Cabrera – Bank of America Merrill Lynch

Daniel Mcconvey – Rossport Investments, LLC

Mike Plaster – Salman Partners, Inc.

Meredith Bandy – BMO Capital Markets

Terence S. Ortslan – TSO & Associates

SouthGobi Resources Ltd (OTC:SGQRF) Q4 2012 Earnings Call March 25, 2013 7:00 PM ET

Operator

[Call Starts Abruptly]…re-establish our reputation – SouthGobi’s vision is to be a respected and profitable Mongolian coal company. This will require re-establishing good working relationships with all of our external stakeholders, and this includes you as shareholders. After having spent an intense period both myself and the company’s business in (inaudible), I now look forward to spending more time getting to know our investors and understanding your expectations of the company as part of this process. And finally, to continue to focus on production, safety, environmental protection, operational excellence and community relations.

Looking ahead SouthGobi remains well-positioned with a number of key competitive strengths. SouthGobi is strategically positioned as its focus maybe coking coals producer in the world to China. I’ve already told mine that 40km from China which compares privately to some other Mongolian producers and significantly closer than Australia and North American producers. We’ll also have an infrastructure advantage of being approximately 50km from existing railway infrastructure in China.

Also the SouthGobi premium quality coal resources have coking properties, including a mixture of semi-soft coking coal and hard coking coals. We have a marketing plan by far two product strategy of a standard and premium semi-soft product, initial production will be principally standard product which is a higher, but extending to the last level that does not require any washing.

The mining opportunity to produce the premium product from raw coal and nearly, but this is more opportunistic and very much depended on premium differentials. Once the important plant facility is up and operational on a consistent and tested basis, we be in a better position to produce the premium product on a steady and ongoing basis. This is expected to be more widen to the second half of the year as mentioned in our release. The plan from outside is to be better able to produce consistent quality product through the cycle, which our customers have been talking us in the (inaudible) safety. This will give us better traction with both end users and our existing customer base and they will be more committed to take product at a slightly better premiums to reflect the high cost structure washing it out.

To conclude, I am optimistic for the year ahead and believe that we will have the faithful end resources to move towards that region as respected and profitable Mongolian coal company. We look forward to enhancing relationships with our major customers and numerous external stakeholders and putting our vision for the company in 2013 in direction.

This time, I will be happy to take your questions. But please let me hand back to Justin for more instructions.

Justin Kapla

Thanks, Ross. We appreciate that there maybe many questions out there and to maximize participations, could you please keep to two questions. If you have follow-ups, we will put you back into queue. Operator, can you please start the Q&A?

Questions-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. (Operator Instructions) Our first question comes from Oscar Cabrera of Merrill Lynch. Please go ahead.

Oscar Cabrera – Bank of America Merrill Lynch

Thank you, operator. Good evening or morning everyone. Just wanted to focus first on how you see your relationship with the Mongolian government as it stands now after getting your permits back basically in September 2012.

Ross Tromans

We are working hard to maintain good relationships with all of our stakeholders including the Mongolian government. We obviously had a number of meetings with them in many times and talked through things. We’ve tried to be very consistent in how we present ourselves and in the issues and respond to them. I think that generally, we are working at improving those relationships and it’s an going process, whether there’s been huge change, it’s hard to tell but certainly the relationship is cordial and respectful.

Oscar Cabrera – Bank of America Merrill Lynch

Great, and in terms of your expectations for 2013, based on what you press release today, you have the permit for the private plant and you’ll be working on the wet plant, when do you expect to have this operating and so all things equal if net coal prices improve, when do you think you can improve your margins with their coal pricing?

Ross Tromans

All right, there is two sections to that, the dry plant we actually won’t be using much of it for the year. We will be mining principally from Sunrise pit which is a quality slightly lower, so we don’t necessarily make use of dry handling facility. If we were to use it, we need it for Sunset, which there is couple of things in there, and (inaudible) which are higher ash which you get the productivity from the dry handling facility through that. The mine process that we have such as we don’t need to do it net debt to site cost. The wet plant is obviously it’s being commissioned, but it hasn’t really been tested on a consistent basis. So we need once that we’ve got new product coming through, we then want to start testing that and checking on the yields and making sure that everything running well. We’ve not tested to-date, because having the older coal that’s been sitting on the stockpile won’t necessarily give you a good indication of what the quality is because call deteriorates slightly over time and we’d rather start off with our customers when we bring in a new product with the best stock available.

Oscar Cabrera – Bank of America Merrill Lynch

Okay. See what I’m trying to get out is before the two plans were to be included in the process, you basically were selling run-of-mine coal to your customers. And so should we expect the $3.5 million that you’re talking about to be that or should we expect some of that sales volume to be processed through those plants so that you can get a higher margin?

Ross Tromans

No, no. Some of it will be and that’s the worst product in the second half of the year. But some of the run-of-mine product we’re bringing out is still going to produce semi-soft, the standard and the premium, because of the wide way mining and the (inaudible) mining. So we’re not having the higher-ash product that maybe we’ve done in the past. What we can produce is a higher-ash semi-soft, which the market can take. Previously, you might have had 12% to 15% ash product going out, which is a little bit high for semi-soft. The product we’re looking at bringing out a standard, it will be in the kind of the 10% to 12% range, which my experience has shown, the market convey that. So we will have run-of-mine coal going into the market as semi-soft because the coking properties in the coal allow us to be able to sell it as semi-soft. In the second half of the year, once you start washing, it’s obviously a higher cost, but then we expect higher premiums and improve marketability from that.

Operator

Thank you. Our next question comes from Daniel Mcconvey of Rossport Investments. Please go ahead.

Daniel Mcconvey – Rossport Investments, LLC

Hi, good morning, couple of questions. Just the cash position is obviously much reduced from last year. You have enough cash and liquidity get through for the next number of months, so just doesn’t seem like there is lot of room for extras I guess and I just wanted to get maybe more comfort to that cash is enough to get you through, I mean I guess you are starting up operations of to the margins would be fairly good, but is there potential here that you might need more financing in the course of 2013?

Ross Tromans

All right, it’s a good question obviously going through the order prices, that’s part of the requirement and everybody is very comfortable that we have got the liquidity to get it in 12 months. So you want to look at what cash you’re going to generate. Going back into production obviously allows that and depending on how the margins, the numbers we’ve done suggest it will be obviously cash positive, so that’s a good thing. We will be looking at other contingencies to work at, whether we need to do anything and then that’s a normal course of business and normal prudent why we are doing it, but we did believe by going back into operations that we’ll be generating the cash flow, to meet all of that commitments going forward.

Daniel Mcconvey – Rossport Investments, LLC

Okay. I don’t know if it was in the press release, what is your CapEx forecast for this year?

Ross Tromans

In the CapEx one we’ve got the commitments of $30 million, it’s the commitment for the next 12 months. It might be a little of sustaining capital which is not committed, which might increase that by 5 to 10 depending on what we need to do.

Daniel Mcconvey – Rossport Investments, LLC

Okay. The coal market in that area inland, has it – I know it’s in tough shape but is it – any signs of being better now than it was say two or three months ago?

Ross Tromans

Yes, I mean, you are seeing a rise in the prices but you are seeing more movements through that. I noticed it’s such a (inaudible) way, one way to not assign for everything but there is about 2,200 trucks went through in the weight. So that rise we’re talking in million tons a month through that border crossing. Now we had 25% of that with one of our customers taking that product, that’s been sitting on the soft coal. So there are better signs going forward. You’ve got because of the China’s New Year and unfavorable entire west, the direction is coming on the pricing, people are being a little bit reluctant to be setting prices for going forward, but that’s about to start. A lot of the tons have been moved even from our competitors, we understand and Southwood which was passed previously.

So there’s still a little bit of a clean out of contracted ton from our competitors as well as our sales. I would expect that the next couple of weeks that you’ll start to see, maybe it’s more processing being established going forward. It’s on my market have bought back so as far as I’m always confident, but I think for what I’m saying in China and actual position and I think we are in that market will pick up at least on the volume basis.

Operator

Thank you. (Operator Instructions) Our next participant is Mike Plaster of Salman Partners. Please go ahead.

Mike Plaster – Salman Partners, Inc.

Thanks very much. Hi, Ross, just a couple of questions here, first off, there were some comments in the release about the restrictions on your assets from MRAM and how it could result in default on your convertible debenture? Could you just elaborate on what the condition would be that could be breached in that case?

Ross Tromans

Yeah. It’s a very strange one, because what we had with the Mongolian MRAM putting kind of a stick around on certain assets that we weren’t allowed for sales, but we’re allowed to use them in mine. So it really has not had any impact on the operations. and so it’s not from our perspective, it’s not seen as an event of default, but obviously we are very cautious in how we present ourselves that we presented it to the market that this has happened. Certainly I see we not had any issues with them, we have been informed all these and they have not raised any issues with us as a consequence of this.

Mike Plaster – Salman Partners, Inc.

Okay.

Ross Tromans

And with the bank deposit, we had some money and most of that money is offshore. There was a phrase first, which we had to then work a process around to make sure that we could tie our employees and suppliers in such and since that time, we have had one of the accounts released, which allows us to manage easier from Mongolia, so that’s a progression forward.

Mike Plaster – Salman Partners, Inc.

Okay, thanks. And then on the toll washing agreement, do you have an estimate on what your sales mix could look like once that gets underway and gets fully ramped up in terms of how much would be washed products versus mine gate sales?

Ross Tromans

No, we haven’t, but the way that we have approached it is to look at it. If we were to sell row product all the way through, then we made certain assumptions, and the one we could do that but also that would generate certain cash flows. The equate to wash it, then we are going to get a better product and then presumably, we got to have to recover that in the premium. We would hope and expect that we could recover more than the cost in the premium, but even if you didn’t, then you just widen your customer base.

So where we want to really test that, because one of the real factors with using the toll wash facility is, we got to make sure that we know what the yield factor is on a consistent basis. We’ve made estimates based on preliminary test as to what we would expect, but the purchase in the 18, you got actually put significant ton through to make sure that the yield practice is right. And that has an impact on how you process and what premiums hereafter and what the cost structure is.

So I’d love to be able to say, yes we know all the answers, we still need to work through that, because we’re going into this with that recently built last year in a position where we couldn’t use it, because we’d start production and now we’re having to reestablish that hand rework at. But the theory and the practicality all that suggested should be very positive.

Operator

Thank you. Our next question comes from Meredith Bandy of BMO Capital Markets. Please go ahead.

Meredith Bandy – BMO Capital Markets

Hey, good evening. So I’m just wondering maybe, can you tell us what sort of range of prices you’re seeing in the market now for the different products?

Ross Tromans

Yeah. that’s the hard one, because not that – it’s hard in a sense we have to go into since negotiation. so it got arranged, and you don’t want to give a number particularly, actually get that deal done. I think it’s fair to say that if you looked at the mine process for a low-ash semi-soft product, they have been running around by the 300 renminbi. We would say that the market is increasing a little bit and the customer saying it’s going down a little bit, so it’s around that range. Then the question becomes what’s the differential for the higher-ash products that you would get it through, if you look at over the last six to eight months we had some very high-ash product that we’ve that the prices on that were quite low, also that coal have been sitting on the ground for while so it’s like going into discount or stable won’t allow process to discounts rather than used up, so we had to take that into account with the processing.

If you look at a higher-ash number it could be around the 200 mark that’s quite a difference from the 300, but it comes to the value and used of how the ash made through in the process of making the coking coal, and the impact that has, it’s a mid point is to what that is because matches only one point in the value proposition of coal that depends on what the coking properties are, what the FSI or Free Swelling Index is for the Chinese’s; it’s the GPAC that it needs to be above a 50, if it goes to 70 they love it. So there is a lot of different quality parameters, which going some of the discussions on the pricing, and a lot of the coals Magnolia and also in China it can be different in that respect, but as part of the numbers I gave kind of give you an indication of where the market has been given the market hasn’t changed substantially, I wouldn’t expect great changes from that.

Meredith Bandy – BMO Capital Markets

Okay, thanks and maybe if you could just back up and just get a bigger picture, what do you think could be the ultimate production at SouthGobi and in terms of qualities and – we think the cost would look like and what drove CapEx? Would it take to get there, assuming that the market is that critical?

Ross Tromans

You are talking beyond Ovoot Tolgoi, are you talking about other resources as well?

Meredith Bandy – BMO Capital Markets

No, I think maybe for now, just a quick on Ovoot Tolgoi and then we can get to Soumber and some of the others data, but just to get that mind up to whatever you think the full production should be, what would that be and what would it look like…

Ross Tromans

Yeah.

Meredith Bandy – BMO Capital Markets

How much CapEx will they take to…

Ross Tromans

The good news or bad news, depends on what side you are sitting on is, we do have the planned capacity and play capacity already to expand because some of the stuff that where we are looking at 3.2 million for this year, which roughly comes down about $4 million tonne for (inaudible) I think slightly on it.

We have the capacity to run at a $7.2 million, $7.3 million tonne without spending anymore money on CapEx. We are working through – trying to work at some more efficiencies to say where there is a little bit more there, so we got a fair bit of upside without necessarily having to spend a lot of money, obviously if you go to that level, then you are going to need more people and the good news is that, when we went through the unfortunate redundancy process, we’ve tried to at least make commitments to people in the local community area that we would rate higher from those people who are previous employees.

So we would expect that those opportunities will allow us to bring back people who used to have business, and then you could bring them back quicker, but that’s needs to be milestone process. We need to make the commitment to people, we are fine with their lines, you can’t just turn them on or off, so we will go through this year, and work out how we get to a higher number. That number like I said could be 7.2, if things are going well, longer-term we would see whether we could move over Tolgoi to a higher number about to maybe $9 million.

How that all fits in with Zumba given we’re using the same infrastructure and how we managed the said decision, it is worth that we are doing as I mentioned in the upgrade phase and better understanding some of how we maximize value added Zumba, and that includes how we’re going to wash it, if we’re going to wash it in country using the water resources that are valuable in Magnolia that will add to the CapEx expenditure, maybe that is wise that we can use entire wash plant, I wouldn’t say more efficiently, but more effectively for the higher-ash product that will come out of Zumba to get a better return.

There are a couple of other wash plant facilities on the other side of the border and there might be capacity that we could hire or use there. There is a number of different options that we kind of been looking at, and this is an ongoing process, we don’t have all the answers, at the moment and we’re working through that. We’re looking over the next few months that our longer term business plan and working how we fiddle those things in. I hope that answers your question without actually giving you any numbers.

Operator

Thank you. (Operator Instructions) Our next question comes from Terence Ortslan of TSO & Associates. Please go ahead.

Terence S. Ortslan – TSO & Associates

Thank you very much. Couple of questions; one is, your licenses, are there any conditions on any of the licenses from here or from September onwards that are for operations, exploration or any ongoing activity except obviously transfer?

Ross Tromans

All our licenses are in good standing, I mean so mine licenses is no issue. We have it in place to be able to mine and continue. The exploration licenses, there is some question on getting approvals. We’ve gotten working through the government. One of the licenses was mentioned in the (inaudible) case, and there has been discussion that that might be canceled, but we have not received any notice on that. If that was to happen, it’s not material to us, because the license is not within the timeframe of the next couple of years and the quality of coal is one that has some issues as well. So it’s an ongoing process in Mongolia on the discussion with licenses, but from an operational perspective, we are clean.

Terence S. Ortslan – TSO & Associates

Okay. So there is no short-term or medium term issue with assets being ceased or you are starting operations to go license issues?

Ross Tromans

Not that we are aware of. I mean I think in our press release in the MD&A, that we talk about the risks. If there is something that I am sustained with whether Mongolian authorities changes rules and regulations, which could implement that but there is nothing that we’re doing which would cause us to be – that we would lose our license.

Terence S. Ortslan – TSO & Associates

Okay, could you talk about your expected strip ratio this year? And also given the fact that last year you had some Russian allegation on the cost, what do you expect your cost to be?

Ross Tromans

Sure, I mean obviously we’ve kind of adapted the mining process to the market conditions, without ripe indulging the mine, I mean mines – we got to be very careful that you don’t high grade and do anything to destroy the value of the mine long-term and we’d take that into consideration. However that being said that’s why we’re in Sunrise, Sunrise will be the lowest strip ratio, minor will be ramp at three level, 3 to 1 ratio which is much lower than they are lots of mine, right which is at 4 or 5, I’m getting signals that’s might be higher because all I’m seeing and check the Sunrise rather than the Sunrise Sunset, so from that perspective that will bring our cost down.

On a cost basis we’re looking at a direct cash cost number around $24, $25 a ton.

Terence S. Ortslan – TSO & Associates

If I really just wrap around this issue, I think Mary did ask the question big picture basis, is there a market for you to be able to do 7 million or 9 million tons in the – let’s say in the foreseeable future, we came to markets that you’re operating and without major structural changes in the market or your market product mix.

Ross Tromans

I think that’s why the wash plant facility kind of change this thing, because what it does is, it provides you a better product that travel further and then that means that you’re moving closer to your end user, which is further away from where our traditional market is at the moment. And if you can start to produce a consistent product that people starts to rely on, then you got coke makers, you got ferro makers who then start to see the value that you think create relative to their own alternatives.

There are other alternatives, or old fleet China and you are going to depend upon the cost structure is that but there is obviously advantage, because there is coal coming in from places like Australia and North America into China, which obviously travels a long way, their cost structure is quite different. So you have to think that if you have got good Mongolian products albeit you have got the question of raw way and moving this up but you can’t move further into China away from where we currently are and that will be part of that strategy.

And we’ve talked to couple of people obviously to test the theory and they are receptive to the idea. However what requires is actually producing some, letting them see what the quality and getting a feel for it and working out how it goes into the plan. So this is the process that we’re going through. It’s one of the reasons why really you got to be back-end producing. If you are not producing, one, it’s very hard to respond to the market because of the time it takes to get it up and running, but secondly if you got a product there that you continue to develop, then you create value longer term.

I hope that answers your question.

Operator

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Ross.

Ross Tromans

So thank you for everyone joining the call, and thank you.

Operator

Thank you. The conference has now ended please disconnect your lines. We thank you for your participation.

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