SouthGobi lays out ambitious expansion plans

Vancouver – The Mongolian government’s long-awaited ratification of the Oyu Tolgoi investment agreement has spurred SouthGobi Energy Resources (SGQ-V) to announce a major expansion in its Mongolian coal mining and exploration plans. Ivanhoe Mines (IVN-T), owner of the massive Oyu Tolgoi copper-gold deposit that will now become a mine, owns 79% of SouthGobi.

SouthGobi’s plans for the next three to five years include four major development projects that the company says will create roughly 300 new jobs for Mongolians. To pay for the significant undertaking SouthGobi has inked a deal with China Investment Corp (CIC) for a US$500-million loan in the form of secured, convertible debentures bearing an 8% interest rate.

SouthGobi achieved commercial production at its Ovoot Tolgoi coal mine in 2008 and the mine is targeting production of 1.5 million tonnes of coal in 2009. The first major project on SouthGobi’s list is an expansion at Ovoot Tolgoi that will bring production up to 8 million tonnes annually. In 2010 SouthGobi will aim to produce 4 million tonnes, in 2011 the target will be 6.5 million tonnes, and in 2012 and beyond the mine should be outputting 8 million tonnes of coal annually.

The mine, which is in Mongolia’s South Gobi region roughly 40 km north of the Chinese border, produces high-quality coking coal. In a recent resource updates SouthGobi upgraded much of the coal at Ovoot Tolgoi to the status of proven and probable reserves. Total reserves now stand at 114.1 million tonnes, of which 105 million tonnes are proven. Ovoot Tolgoi hosts three kinds of coal: hard coking coal, high-quality thermal coal, and regular thermal coal. Measured and indicated resource total 250 million tonnes; inferred resources add 33.5 million tonnes.

Using an 8% discount rate, Ovoot Tolgoi carries a net present value of US$1.16 billion.

SouthGobi also recently produced a maiden resource estimate for its Soumber coal deposit, which is 20 km east of Ovoot Tolgoi. Based on the new resource the company has decided to develop the deposit into a mine, which is the second item on its new development list. The project does not yet hold the necessary licences and permits but the company plans to initiate mine planning imminently and then file an application for a mining licence.

Soumber is now home to 21.4 million measured and indicated tonnes of coal, as well as 55.5 million inferred tonnes. The resource reaches to a depth of 250 metres below surface and comprises bituminous coal, ranging from high-volatile to medium-volatile. Testing data suggest there is good potential to produce a blended or washed coking coal product from low-strip-ratio sources.

The Soumber coal field is contained in three areas – West, Central, and East – but SouthGobi has only drilled a sufficient density of holes in the Central zone to determine a National Instrument 43-101-compliant resource. The West and East Soumber fields are now high-priority drill targets, so that in the next resource calculation they can be included.

In facilitate movement around Ovoot Tolgoi and Soumber, SouthGobi announced a renewed commitment to investing in improvements to the region’s road network. IT will also evaluate opportunities to participate in the development of a cross-border rail link between Ovoot Tolgoi and Ceke, a major coal shipment terminal on the Chinese side of the border.

The fourth item on SouthGobi’s list is construction of a coal washing facility near Ovoot Tolgoi, which would reduce the sulphur and ash content of its coal and create processed coal products.

All together, SouthGobi’s expansion plans should create 300 new jobs in the South Gobi region by 2014, which would constitute a doubling of the company’s workforce.

The US$500-million debt agreement with CIC has a maximum term of 30 years. Of the 8% annual interest payment, Southgobi has to provide 6.4% of the amount in cash and can substitute share for the remaining 1.6%. The debentures are secured with a first charge over SouthGobi’s assets, including shares of its material subsidiaries.

While the loan is outstanding or while CIC holds a minimum 15% stake in SouthGobi the bank has the right to nominate one director to the junior’s board. CIC now also holds a right of first offer for any direct or indirect sale of Ivanhoe’s ownership stake in SouthGobi.

On news of its expansion plans, SouthGobi’s share price gained 35¢ or 3% to close at $12.80. The company has a 52-week trading range of $4 to $14, and 134 million shares outstanding.