China Investment Corporation provides $500 million debenture to SouthGobi Energy Resources to support its investment program in Mongolia and for working capital, repayment, and general corporate purposes

On October 26, 2009, Fullbloom Investment Corporation — a wholly-owned investment subsidiary of China Investment Corporation (CIC) — signed a $500,000,000 secured convertible debenture (loan) agreement with SouthGobi Energy Resources Limited (a Toronto Stock Exchange-listed coal mining and exploration company with its main producing assets in Mongolia) to support its investment program in Mongolia and for working capital, repayment, and general corporate purposes. This secured convertible debenture carried an interest rate of 8.0% [6.4% payable in cash and 1.6% in payable in SouthGobi shares, where the number of shares to be issued is calculated based on the 50-day volume-weighted average price (VWAP)] and maximum term of 30 years. The proceeds of the debenture were to be used by the borrower to support its accelerated investment program in Mongolia, with up to $120 million for use for working capital, repayment of debt due on funding, general and administrative expenses, and other general corporate purposes. The convertible interest was common equity of SouthGobi. CIC held a security interest in SouthGobi’s assets, had a pre-emptive right on future SouthGobi share issuances, and was entitled to nominate a director for election or appointment to SouthGobi’s board of directors. The convertible debenture was secured by (i.e. collateralized against) a first charge over SouthGobi's assets. The debenture required standard loan restrictive covenants regarding incurring additional debt and granting additional security to third parties (with standard carve-outs and grace periods for issues of this type) to SouthGobi and its direct and indirect subsidiaries.. The initial conversion price was set as the lower of $11.88 CAD or the 50-day VWAP at the date of conversion, with a floor price of $8.88 per share CAD. After five years from the issuance date, if at any part of the conversion price was greater $10.66 CAD, SouthGobi would be entitled to require conversion of the outstanding convertible debenture in whole or in part into common shares at the conversion price. SouthGobi and CIC each had various rights to call conversion of the debenture into common shares. CIC had the right to convert the debenture, in whole or in part, into common shares 12 months after the date of issuance (November 2010). SouthGobi had the right to call for the conversion of up to $250.0 million USD of the debenture on the earlier of 24 months after the issuance date, if the conversion price was greater than $10.66 CAD, or upon SouthGobi achieving a public float of 25% of its common shares under certain agreed circumstances, if the conversion price is greater than $10.66 CAD. SouthGobi was entitled to require conversion of one-half of the principal at any time upon completion of a Hong Kong Stock Exchange listing and to require conversion of the entire amount as of and after November 2014. The HKSE listing occurred in January 2010. On November 19, 2009, SouthGobi issued the convertible debenture to Land Breeze II S.à r.l. (CIC Subco), another wholly-owned subsidiary of CIC. On November 30, 2009, the borrower repaid a $30 million credit facility from Ivanhoe Minerals using the proceeds from the debenture. Then, on March 29, 2010, CIC, at SouthGobi’s request, converted $250 million of its convertible debenture into common shares of SouthGobi at a conversion price of $11.88 CAD per share. SouthGobi issued 21,560,961 common shares to CIC Subco; as a result, CIC owned approximately 13% of the common shares of SouthGobi Energy. On June 12, 2017, SouthGobi executed a deferral agreement with CIC with CIC for a revised repayment schedule on the $22.3 million of cash interest and associated costs due on May 19, 2017. Per this agreement, SouthGobi was required to repay on average $2.2 million of the cash interest and associated costs monthly during the period from May 2017 to October 2017 and was required to repay $9.7 million of cash interest and associated costs on November 19, 2017, with a deferral fee at a rate of 6.4% per annum in consideration for the deferral. On May 21, 2018, SouthGobi announced an update on its interest payment obligations to CIC, stating that it did not pay the $30.3 million total interest payments and associated fees that were due and payable to CIC on May 19, 2018. The outstanding interest payable consisted of cash interest payments and associated fees in the aggregate amount of $26.3 million and $4.0 million worth of PIK Interest Shares, which SouthGobi was obliged to issue to CIC pursuant to the Convertible Debenture. On November 20, 2018, SouthGobi announced an update on its interest payment obligations to CIC, stating that it did not pay the $41.8 million total interest payments and associated fees that were due and payable to CIC on November 19, 2018. The outstanding interest payable consisted of cash interest payments and associated fees in the aggregate amount of $33.8 million and $8.0 million worth of PIK interest shares which SouthGobi was obliged to issue to CIC pursuant to the debenture. On April 23, 2019, SouthGobi executed a deferral agreement with CIC in relation to a deferral and revised repayment schedule in respect of ($41.8 million of outstanding cash and payment in kind interest and associated costs due and payable to CIC on November 19, 2018 under the Convertible Debenture and the June 2017 deferral agreement and $27.9 million of cash and PIK interest payments payable to CIC under the Convertible Debenture from April 23, 2019 to and including May 19, 2020. On February 19, 2020, SouthGobi and CIC entered into an agreement pursuant to which CIC agreed to grant the Company a deferral of: deferred cash interest and deferral fees of $1.3 million and $2.0 million which were due and payable to CIC on January 19, 2020 and February 19, 2020, respectively, under the 2019 Deferral Agreement and approximately $0.7 million of the Management Fee which was due and payable on February 14, 2020 to CIC under a cooperation agreement. This deferral agreement became effective on March 10, 2020. The principal terms of were as follows: payments of the deferral amounts would be deferred until June 20, 2020, while the Management Fee will be deferred until they are repaid by SouthGobi; as consideration for the deferral of these amounts, SouthGobi agreed to pay CIC a deferral fee equal to 6.4% per annum on the deferral amounts, commencing on the date on which each such deferral amount would otherwise have been due and payable under the 2019 deferral agreement and a deferral fee equal to 2.5% per annum on the Management Fee, commencing on the date on which the Managements Fee would otherwise have been due and payable under the cooperation agreement; SouthGobi agreed to provide CIC with monthly updates regarding its operational and financial affairs; SouthGobi and CIC agreed to discuss in good faith a deferral of future payments on a monthly basis as they become due; SouthGobi agreed to comply with all of its obligations under the 2019 Deferral Agreement and the cooperation agreement; and that SouthGobi and CIC agreed that nothing in the 2020 February 2020 deferral agreement prejudices CIC’s rights to pursue any of its remedies at any time pursuant to the 2019 deferral agreement and the cooperation agreement. On March 10, 2020, SouthGobi agreed with CIC that the $2.0 million which was due and payable to CIC on March 19, 2020 under the 2019 deferral agreement would be deferred until June 20, 2020. The terms of were substantially the same as the terms of the February 2020 deferral agreement, including that SouthGobi agreed to pay CIC a deferral fee equal to 6.4% per annum on the deferred amount, commencing on March 19, 2020. The agreement became effective on March 25, 2020. On April 10, 2020, SouthGobi agreed with CIC that the $2.0 million of deferred cash interest and deferral fees which were due and payable to CIC on April 19, 2020 under the 2019 deferral agreement would be deferred until June 20, 2020. The terms of the agreement were substantially the same as the terms of the February 2020 deferral agreement, including that SouthGobi agreed to pay CIC a deferral fee equal to 6.4% per annum on the deferred amount, commencing on April 19, 2020. The agreement became effective on April 29, 2020. On May 8, 2020, SouthGobi agreed with CIC that the deferred cash interest and deferral fees of $2.0 million which were due and payable to CIC on May 19, 2020 under deferral agreement; and approximately $0.2 million of Management Fees which were due and payable on May 15, 2020 to CIC under the cooperation agreement would be deferred until June 20, 2020. The terms of the agreement were substantially the same as the terms of the February 2020 deferral agreement, including that SouthGobi agreed to pay CIC a deferral fee equal to 6.4% per annum on the deferred cash interest and deferral fees commencing on May 19, 2020 and a deferral fee equal to 2.5% per annum on the deferred Management Fees commencing on May 15, 2020. The agreement became effective on June 8, 2020. On June 18, 2020, SouthGobi agreed with CIC that the deferred cash interest and deferral fees in the aggregate amount of approximately $74.0 million which were due and payable to CIC on June 19, 2020 under the prior deferral agreements entered into during the period between February to May 2020 and the 2019 deferral agreement would be deferred until September 14, 2020. The terms of the agreement were substantially the same as the terms of the February 2020 deferral agreement, including that SouthGobi agreed to pay CIC a deferral fee equal to 6.4% per annum on the deferred amount commencing on June 19, 2020. The agreement became effective on July 17, 2020. On November 19, 2020, SouthGobi and CIC entered into an agreement pursuant to which CIC agreed to grant the Company a deferral of a deferred cash interest and deferral fees of approximately $75.2 million which were due and payable to CIC on or before September 14, 2020, under the June 2020 deferral agreement; (semi-annual cash interest payments in the aggregate amount of $16.0 million USD payable to CIC on November 19, 2020 and May 19, 2021; $4.0 million USD worth of PIK Interest shares issuable to CIC on November 19, 2020 under the Convertible Debenture; and the Management Fees which payable to CIC on November 14, 2020, February 14, 2021, May 15, 2021, August 14, 2021 and November 14, 2021 under the amended cooperation agreement. The principal terms of the agreement were as follows: payment of the deferred amounts would be deferred until August 31, 2023; CIC agreed to waive its rights arising from any default or event default under the Convertible Debenture as a result of trading in the common shares being halted on the TSX beginning as of June 19, 2020 and suspended on the HKEX beginning as of August 17, 2020, in each case for a period of more than five trading days; as consideration for the deferred amounts, SouthGobi agreed to pay CIC a deferral fee equal to 6.4% per annum on the deferred amounts payable under the Convertible Debenture and June 2020 deferral agreement commencing on the date on which each such deferral amount would otherwise have been due and payable under the Convertible Debenture or the June 2020 deferral agreement, as applicable; and) a deferral fee equal to 2.5% per annum on the deferred amounts payable under the amended cooperation agreement, commencing on the date on which the Management Fee would otherwise have been due and payable under the agreement. The agreement did not contemplate a fixed repayment schedule for the deferred amounts and related deferral fees. Instead, SouthGobi and CIC would agree to assess in good faith SouthGobi's financial condition and working capital position on a monthly basis and determine the amount, if any, of the deferred amounts and related deferral fees that SouthGobi is able to repay under the Convertible Debenture, the June 2020 deferral agreement or the amended cooperation agreement, having regard to the working capital requirements of the SouthGobi's operations and business at such time and with the view of ensuring that SouthGobi's operations and business would not be materially prejudiced as a result of any repayment. Additionally, commencing as of November 19, 2020 and until such time as the November 2020 PIK nterest was fully repaid, CIC reserved the right to require SouthGobi to pay and satisfy the amount of the November 2020 PIK interest, either in full or in part, by way of issuing and delivering PIK interest shares in accordance with the Convertible Debenture provided that, on the date of issuance of such shares, the common chares are listed and trading on at least one stock exchange. As at March 29, 2021, CIC held a total of 64.8 million common shares of SouthGobi (~23.8%).

Additional details

1. China Investment Corporation (CIC) is a state-owned sovereign wealth fund. It is wholly owned by the Chinese Government and has its own corporate entity status. The purpose of the CIC is to maximize returns at acceptable risk tolerance and improve the corporate governance of key state-owned financial institutions. It was established in 2007 with about $200 billion of assets under management, a number that grew to $1.2 trillion in 2021. 2. A debenture is a debt instrument used by a lender, such as a bank, when providing capital to companies and individuals. It enables the lender to secure loan repayments against the borrower’s assets – even if they default on the payment. A debenture can grant a fixed charge or a floating charge. A fixed charge is normally taken out against a tangible asset such as property. It enables the lender to take ownership of the borrower’s assets and sell them off in the event of a payment default. With a fixed charge, the borrower would not be able to sell the asset without the lender’s consent. A floating charge – which is usually attached to assets such as shares, raw materials and intellectual property – implies that the assets may change over time, and the borrower can sell them without the lender’s intervention. However, floating charges may become fixed if the borrower defaults. 3. A convertible debenture is a type of long-term debt issued by a company that can be converted into shares of equity stock after a specified period.

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