SouthGobi outlines Mongolia mining law ownership limits

Executive Summary

• SouthGobi Resources Ltd. has been advised by its Mongolian legal counsel that its mining licenses for the Ovoot Tolgoi mine and Soumber deposit are designated as "strategically important," triggering potential ownership restrictions under Mongolian law.
• The company faces uncertainty regarding how Article 5.7 of the Law on Mineral Resources applies to publicly listed companies, specifically concerning whether beneficial shareholders holding more than 34% of the listed company's shares could trigger a violation.
• The company is currently in negotiations with the Mongolian government's plenipotentiary representative regarding the state's ownership interest in its wholly-owned subsidiary, SouthGobi Sands LLC (SGS).

Key Details

• Strategic Designation: Four of the company's Mongolian mining licenses have been designated as mineral deposits of strategic importance by Mongolian government authorities. These licenses relate to the Ovoot Tolgoi mine and the Soumber deposit.
• Ownership Restriction (Article 5.7): Under Mongolian law, legal persons holding a special license for a strategically important deposit cannot hold more than 34% of the total issued and outstanding shares individually or jointly with entities having a common interest.
• Enforcement Mechanism (Article 9.1.16): Non-compliance with the ownership restriction allows the Mongolian government to appoint a plenipotentiary representative to take charge of managing the legal person to ensure compliance.
• Interpretation Uncertainty: Legal counsel advises that the restriction is likely determined with reference to beneficial shareholders. If any single shareholder (or parties acting in concert) holds more than 34% of the company's shares, the company could be considered in contravention of the law. There is no judicial precedent in Mongolia clarifying how this applies to public listed companies.
• Current Shareholding Status: As of the announcement date, the single largest shareholder holds approximately 28.87% of the company's total issued and outstanding shares. No shareholder currently holds more than 34%.
• Government Negotiations: SouthGobi Sands LLC (SGS), the wholly-owned Mongolian subsidiary holding the coal mining licenses, received a letter from a plenipotentiary representative inviting SGS to negotiate the Mongolian state's ownership interest in SGS.
• Ongoing Discussions: SGS is in continued discussions with the plenipotentiary representative. The company intends to cooperate fully with the government and provide necessary information as permitted by law.
• Future Outlook: The company will monitor developments regarding the scope of strategically important deposits and issue further announcements as material developments occur.

Notable Quotes

• "The company understands that, under Article 5.7 of the law on mineral resources of Mongolia, any legal person holding a special licence for a mineral deposit of strategic importance shall not, individually or jointly with other entities having a common interest, hold more than 34 per cent of the total issued and outstanding shares of such legal person."
• "As of the date hereof, SGS is in continued discussions with the plenipotentiary representative of the Mongolian government. The company anticipates that the discussions between SGS and the plenipotentiary representative of the Mongolian government will continue and both parties will endeavour to engage in good faith for the purpose of arriving at a mutual and constructive understanding and agreement."