Consistent with the coal sales and production guidance provided in January 2014, coal sales and production decreased in the first quarter of 2014 compared to the fourth quarter of 2013. The company produced 640,000 tonnes of raw coal, down from the 1.73 million tonnes in the previous quarter, while total sales dropped from 1.72 million tonnes to just 390,000 tonnes.

Of the sales, there was no premium semi-soft coking coal sold with 290,000 tonnes of standard semi-soft coking coal sold and 100,000 tonnes of thermal coal.

Sales volume is generally lower in the first quarter of each year due to the seasonal holidays of Mongolian Tsagaan Sar and Chinese New Year, which result in border closures at the Shivee Khuren-Ceke crossing at the Mongolia-China border and a general decrease in the level of economic activity at the border crossing.

SouthGobi resumed operations at the Ovoot Tolgoi coal mine on March 22, 2013 after having been fully curtailed since the end of the second quarter of 2012. This resulted in higher coal production in the first quarter of 2014 compared to the first quarter of 2013.

The company is subject to a base royalty in Mongolia of 5% on all export coal sales. In addition, effective January 1, 2011, the company is subject to an additional sliding scale royalty of up to 5%. For the last three quarters of 2013 and the first quarter of 2014, the royalty was calculated using a set reference price per tonne published by the Government of Mongolia.

The Government of Mongolia changed the royalty regime effective April 1, 2014. Under the new ‘flexible tariff’ royalty regime, the royalty per tonne for export coal sales will be calculated based on the actual contracted sales price per tonne, whereby the contracted sales price includes the costs of transporting the coal to the Mongolia-China border.

If transportation costs are not included in the contracted sales price between a buyer and seller, the following costs are required to be included in the contracted sales price for purposes of calculating the royalty per tonne: transportation costs and costs associated with transportation such as customs documentation fees, insurance, loading and unloading costs.

In the event the actual contracted sales price differs by more than 10% from the contracted sales price of coal products with the same classification and quality being exported by other legal entities in Mongolia through the same border crossing, the calculated contracted sales price shall be deemed non-market under Mongolian tax law and the royalty per tonne will be calculated from a reference price.

The company currently sells coal from the Ovoot Tolgoi coal mine at the mine-gate and the coal is exported through the Shivee Khuren Border Crossing. The company expects that its royalty per tonne calculated under the new royalty regime will decrease compared to the prior reference price royalty regime.

Coal production during the current quarter will be paced to meet contracted sales volumes.

SouthGobi anticipates that coal prices in China will remain under pressure in 2014, which will continue to impact the company's margins and liquidity.

Based on its forecasts for the year ended December 31, 2014, the company is unlikely to have sufficient capital resources and does not expect to generate sufficient cash flows from mining operations in order to satisfy its ongoing obligations and future contractual commitments, including cash interest payments due on the CIC convertible debenture. Therefore, the company is actively seeking additional sources of financing to continue operating and meet its objectives.

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