Southgobi Energy Resources: Company Update

We participated in recent analyst trip to the Ovoot Tolgoi mine and had an opportunity to meet the SGQ management. The management meetings confirm our estimates of production growth and pricing improvements. SGQ is in the process of signing 2Q 2010 contracts with a significant hike in coal prices at the mine gate. The volume-weighted average coal prices will likely be in the range of US$42-44 per tonne, effective 1st April 2010, which represents an increase of 48% to ASP in 2009 (US$29/tonne). This is consistent with our ASP estimates of US$43/tonne for 2010. We maintain our target price of CAD24 per share. Our 12-month target price is based on a blended DCF and resource-based valuation approach. This represents 45% upside to current SGQ’s share price of CAD16.5 (March 30, 2010).

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