Location and Ownership

Prophecy’s 100% owned Ulaan Ovoo coal mine was commissioned to production in December 2010 and since that time the Company has spent over $52 million on the project, including road and bridge building, mining fleet, mining camp, pre-stripping, and other infrastructure and community improvement. Prophecy has sold and delivered some 188,915 tonnes of thermal coal, including 8,055 tonnes to Russia, 23,543 tonnes to private Mongolian companies, and 157,317 tonnes to Mongolian government owned power plants. In May 2012, the Company entered into a coal sales contract with a local Mongolian direct reduced iron (DRI) manufacturing plant (the “Buyer”), for the sale of 22,100 tonnes of thermal coal from the Company’s Ulaan Ovoo mine. The Buyer has indicated that this initial purchase is to meet shortfalls from current suppliers and that it would eventually like to increase the supply from Prophecy to 300,000 tonnes on an annual basis. The Buyer currently purchases in excess of 850,000 tonnes of coal annually from various local suppliers. Additional off-take agreements with new and existing domestic and regional buyers are being negotiated.

The Ulaan Ovoo property sits approximately 430 km by paved highway from the capital city of Mongolia, Ulaanbataar. It is also strategically located just 17 km from the Russian border and 120 km from both Mongolian and Russian rail links. The project contains 209 million tonnes of measured and indicated coal resources (NI 43-101; 174 Mt of measured and 34 Mt of Indicated). A prefeasibility study of the initial mining area found the coal to be a high-quality, high-volatility sub bituminous rank (ASTM) thermal coal that is economically mineable with a 1.8:1 strip ratio. The average coal assay for the mining area is gross calorific value 5,040 kcal/kg with low ash at 11.3% and very low sulfur of 0.40% (all on the as-received basis). Characteristics of the deposit, including a coal thickness of at least 53 meters, a low strip ratio and no coal washing required for the first 8 years of operations, make for a low cost mining operation.

Surrounding the Ulaan Ovoo deposit are other prospective coal-bearing basins similar in size to Ulaan Ovoo. Prophecy has obtained four transferable licenses covering these basins. Recently during June 2011, Prophecy acquired the rights to acquire 100% ownership of the 4,773-hectare Ilch Khujirt property (Ilch) located 17 km northeast of the Ulaan Ovoo coal mine. The Ilch property is contiguous to Prophecy’s existing 7,392 hectare Khujirt exploration license. Prophecy immediately started to evaluate the coal resource potential of the licenses. During 2011, Prophecy began exploratory drilling activities to better evaluate the coal resource potential of their licenses and the Ilch Khujirt property.

Production

Since September 2011, Prophecy has sold and delivered some 188,915 tonnes of thermal coal, including 8,055 tonnes to Russia, 23,543 tonnes to private Mongolian companies, and 157,317 tonnes to Mongolian government owned power plants.

There are currently approximately 130,000 tonnes of coal stockpiled at Ulaan Ovoo. Total sales target for 2012 is 300,000 tonnes of coal.

In 2012, the Company has received commitment and interest for a substantial quantity of Ulaan Ovoo coal from Russian buyers, however Prophecy is postponing sales to Russia pending the opening of the Zheltura border crossing and a revised export royalty scheme from the General Department of Taxation of Mongolia. Prophecy is currently paying export royalties based on a government-set benchmark coal price which is nearly 3 times higher than the Company’s actual sale price. Prophecy is optimistic that progress will be made on both royalty and border opening fronts to improve the margin on sales.

Exploration Work

To date, the exploration work on Ulaan Ovoo includes over 110 drill holes, more than 1,200 analyzed coal laboratory samples, hydrological and rock mechanics surveys, detailed mapping and several advanced mining, engineering and scoping studies. The project area is underlain by two major coal seams—with total net coal thickness up to 70 m—and five minor seams. Detailed exploration drilling work was performed on the deposit in the late 1970′s by the Mongolian Ministry of Geology and Energy and again from 1993-1997 by Erdenet, a Mongolian-Russian joint venture mining and processing company. The results indicated a large coal deposit of over 78 million tonnes in the northern part of the deposit area. Exploration at the southern part of the deposit area was incomplete, but it is speculated to be comparable in size to that of the north.

In 2006, Red Hill, the previous owner, commissioned Behre Dolbear Inc. (USA) to supervise an 11-hole, 2,400 m diamond core drilling program at Ulaan Ovoo. Of these, six holes were drilled in the northern portion of the reserve to confirm previous results and five holes were drilled in the southern part of the area to increase the reliability of the model in this area. Over 362 core samples were taken, containing over 470 m of coal. The final results from the 2006 drilling program increased the resource estimate by an additional 130.8 million tonnes (168%), to a total coal resource of 208.8 million tonnes in measured and indicated.

In 2011, drilling at Prophecy’s newly acquired Ilch Khujirt property intercepted a gross coal seam thickness of 19-meters. Further exploration is planned in order to accurately define the extent of the resource at Ilch and the resource potential of the other licenses.

Environmental Approval Granted by Mongolian Government

In 2008, Prophecy received approval of a Detailed Environmental Impact Statement (DEIA) on the Ulaan Ovoo project from the Mongolian Ministry of Nature and the Environment. Under Mongolia’s 2006 Minerals Law and 1995 Environmental Protection Law, such DEIA approval is required before the project can be developed.

Prepared by Ecos LLC, an independent Mongolian environmental consulting company, the DEIA considers social and labour issues, climate and environmental circumstances of the project area, potential environmental impacts of a full mining operation, as well as other important factors. The study concluded that there are no major impediments to mining Ulaan Ovoo and provided recommendations on best practices for conservation of the environment and community.

The DEIA also assessed the local public opinion of the project, finding that a large majority of the local residents and soum (township) government support the project because of its potential to bring new, high-paying employment opportunities and expansion to the local economy.

In 2010, Prophecy received an Annual Environmental Protection Plan by the Mongolian Ministry of Environmental Protection.