CHINESE COAL MARKETS AND MONGOLIA’S

EXPORTS

TSX: SGQ HKEx: 1878

Disclaimer

Forward-looking statements

This presentation includes certain “forward-looking statements.” All statements, other than

statements of historical fact, are forward-looking statements that involve various risks and

uncertainties. There can be no assurances that such statements will prove accurate, and actual

results and future events could differ materially from those anticipated in such statements. Such

information contained herein represents management’s best judgment as of the date hereof based

on information currently available. The company does not assume the obligation to update any

forward-looking statement.

Qualified Persons

The technical information in this presentation is derived from SouthGobi’s news releases, each of

which has been reviewed by one or more qualified persons (QPs), as defined by NI 43-101. Copies

of the releases naming the QPs are available at Sedar or www.southgobi.com.

Background: China resources and production

Key provinces are Inner

Mongolia and Shanxi with

25% and 23% of resources

respectively

Production is c. 3.4bn

tonnes (2010)

Shanxi and Inner Mongolia

produced 741mt and 787mt

respectively (2010)

Industry ownership (by

production) is split

50% KSOEs

35% TVEs

15% LSOEs

Total resources are 1,160 billion tonnes, 76% thermal coal

Distribution of Coal

in China

Lignite

Low quality coals (brown)

Medium quality coals

High quality coals (incl. coking)

Background: China’s recent coal industry history

Coal has gone from 67% of power generation in

China in 2000 to 71%

Blast furnace (using coking coal) remains the

dominant steel making process

Coal increasing its share

of use

Rapid growth in the

market

Prices have been robust

but vary radically by

region

Poor safety

Growth in thermal coal demand has averaged 10%

on a compound annual basis in the last decade

Growth in coking coal at 12%

Qinhuangdao thermal coal averaged RMB274/t for

2003 but now trades in the range of RMB820/t

Prices today vary from +20% to -65% for the same

coal depending on location

Fatality rate of 2.0 per million tonnes of output is 51

times the rate of the USA and 87 times the rate in

Australia

Roughly equivalent to 1950s Britain

Growth at all costs

Current trends: China’s coal industry policy

Fully funded mine safety administration

Safety fees trebled since 2004 towards RMB30/t on

average today

Elimination of unsafe small mines (70-100mtpa)

Shanxi targets fatality rate of 0.3/1mtpa

Increased safety

Promote efficiency of

resource use

Consolidation

Infrastructure

development

Resource fees have been rising rapidly

New resource tax system is proposed before the State

Council

An 8-9% royalty is likely

Generally provincially led – Shanxi proposes seven

major groups representing 75% of its production (all

groups >50mtpa)

RMB2tn of investment in railway approved by State

Council

Coal transportation in northern China to increase 31%

by 2011 to 1bn tonnes, then another 50% to 1.5bn

tonnes in 2016

Other than logistics, the demeanor is restrictive

Current trends: China’s cost structure

Costs are radically higher

60

70

80

90

100

110

120

130

- 20 40 60 80 100 120

Co

st

(US

D/t

)

Capacity (mt)

Cash cost Total cost

Cost curve for Shanxi coking coal to be available at Rizhao Cash costs have doubled in

the last two years

Fees and taxes are now

US$25-60/t

Coking coal cost curve is

around US$110/t delivered to

Rizhao but marginal tonnes

are c. US$120-130/t

Incremental marginal tonnes

of thermal coal adjusted to

seaborne benchmark

equivalent quality are c.

US$70/t

Costs are almost entirely in

RMB so any rise in RMB

exchange rate would impact

Source: Macquarie Research

Current trends: China’ coking coal challenges

China is literally running out of coking coal

China’s coking coal resource is 278 billion tonnes... But!

Half of this resource is not salable as true coking coal due

to quality issues

Only around 25% is shallower than 400 meters (where 90%

of mining activity occurs today)

Production has peaked in Shandong and is peaking in Henan,

Anhui and the north east

Larger scale blast furnaces increasingly demand more premium

hard coking coal in the mix

Outlook: China demand

Growth continues but slower and with structural differences

Coal demand likely to grow 5-8% per year this decade

Much more robust growth of 9-10% anticipated for north western

region (Shanxi, Shaanxi, Inner Mongolia, Xinjiang, Ningxia, Gansu

and Qinghai combined)

Coking coal demand growth continues to be higher than thermal

Outlook: China imports and pricing

China is ‘here to stay’ as a coal importer

2015f coal imports in the range of 180 to 300 million tonnes – 15-

25% of coking coal requirements plus some region specific

thermal coal imports

Significant imports from locations with scalable infrastructure and

capacity to serve key

China as the biggest net importer is the most important influence

on pricing

Seaborne benchmark thermal coal >US$80/t

Premium hard coking coal >US$200/t

Implications for Mongolia: Benefit from China’s needs

Mongolian coal exports are already accelerating

Mongolian coal exports 2008 – 2011YTD

4.2mt

7.1mt

16.6mt

7.7mt

0

5

10

15

20

2008 2009 2010 Q2 2011

Co

al e

xp

ort

(M

t)

Implications for Mongolia: Benefit from China’s needs

Mongolia’s ability to supply China’s coking coal is the key

Coking coal imports and their source

47.3 mt

2010

50.0 mt

2011 F

Source: Shanxi Fenwei Energy Consulting (2010 figures)

Mongolia32%

Australia37%

Canada7%

Other24%

Mongolia50%

Australia30%

Other 20%

Implications for Mongolia: Benefit from China’s needs

Mongolia will benefit, but China is the key customer

Other markets are not likely to be meaningful in comparison

(Russia has own coal / transportation cost prohibitive to other

markets)

Mongolian coal exports to China could be 35-60 million tonnes in

2015 (ie, 60-70% of Mongolia’s total coal production at that time)

Income to Mongolian government (royalties and taxes) US$500-

800 million per annum at that time – excludes income from

government stake in Tavan Tolgoi

Keys to success

Promoting a safe, efficient industry

Adding focus on infrastructure development for this

income opportunity

Avoiding cartel activity in China