UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2011
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from __________
to __________
COMMISSION FILE NUMBER:
001-33929
CHINA SHEN ZHOU MINING & RESOURCES,
INC.
(Exact name of registrant as specified in
its charter)
Nevada
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87-0430816
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification Number)
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No. 166 Fushi Road, Zeyang Tower
Shijingshan District, Beijing, China
100043
(Address of principal executive offices)
(Zip Code)
86-010-8890-6927
(Issuer’s telephone number, including
area code)
Securities registered under Section 12(b)
of the Exchange Act:
Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $.001
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NYSE Amex
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Securities registered under Section 12(g)
of the Exchange Act: None.
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
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No
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Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
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No
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Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
x
No
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Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes
x
No
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Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K.
¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large
accelerated filer
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Accelerated
filer
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Non-accelerated
filer
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Smaller
reporting company
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(Do not check if a smaller
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reporting company)
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Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act):
Yes
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No
x
The number of shares outstanding of our
common stock as of June 30, 2011, was 31,885,973 shares. The aggregate market value of the common stock held by non-affiliates
15,015,963 shares, based on the closing market price $3.47
per
share of the common stock as of June 30, 2011 was $52,105,391.61.
As of March 05, 2012 the number of shares
of the registrant’s classes of common stock outstanding was 33,425,101.
Except as otherwise indicated by the context,
references in this Form 10-K to:
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“China Shen Zhou Mining & Resources, Inc.,” the “Company,” “CSZM,” “SHZ,” “we,” “us” or “our” are references to the combined business of China Shen Zhou Mining & Resources, Inc. and its direct and indirect subsidiaries.
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“U.S. Dollar,” “$” and “US$” means the legal currency of the United States of America.
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“RMB” means Renminbi, the legal currency of China.
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“China” or the “PRC” are references to the People’s Republic of China.
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“U.S.” is a reference to the United States of America.
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“SEC” is a reference to the Securities & Exchange Commission of the United States of America.
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DOCUMENTS INCORPORATED BY REFERENCE
Document
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Parts Into Which Incorporated
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None
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Not applicable
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TABLE OF CONTENTS
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Page
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PART I
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ITEM 1. BUSINESS
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3
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ITEM 1A. RISK FACTORS
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11
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ITEM 1B. UNRESOLVED STAFF COMMENTS
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21
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ITEM 2. PROPERTIES
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22
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ITEM 3. LEGAL PROCEEDINGS
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33
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ITEM 4. MINE SAFETY DISCLOSURES
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33
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PART II
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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34
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ITEM 6. SELECTED FINANCIAL DATA
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34
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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35
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ITEM 8. FINANCIAL STATEMENTS
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42
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
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42
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ITEM 9A. CONTROLS AND PROCEDURES
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42
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ITEM 9B. OTHER INFORMATION
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43
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PART III
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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44
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ITEM 11. EXECUTIVE COMPENSATION
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47
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
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48
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
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49
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
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49
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PART IV
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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50
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PART I
Corporate History
Unless otherwise indicated, or unless the
context otherwise requires, all references in this Annual Report to the terms “Company,” “CSZM,” “we,”
“our,” or “us” mean China Shen Zhou Mining & Resources, Inc., a Nevada corporation.
We are the result of a share exchange/reverse
takeover among Earth Products & Technologies, Inc., a Nevada corporation (“EPTI”), American Federal Mining Group,
Inc., an Illinois company (hereinafter “AFMG”), and the shareholders of AFMG. The effective date of the transaction
was September 15, 2006. Pursuant to the transaction, EPTI issued a total of 20,000,000 shares of common voting stock to AFMG Shareholders,
in exchange for 100% of AFMG’s common stock. The common stock was issued in reliance on the exemption from registration set
forth in Section 4(2) of the Securities Act of 1933, as amended. This transaction was accounted for as a reverse takeover (recapitalization)
with AFMG deemed the acquirer for accounting purposes and EPTI deemed the legal acquirer.
As a result of the share exchange/reverse
takeover, AFMG became a wholly-owned subsidiary of EPTI, with EPTI, which previously had no material operations, becoming a holding
company for the business of AFMG and its subsidiaries. AFMG is a holding company, incorporated in Illinois, whose principal business
is the ownership of entities in the People’s Republic of China (“PRC” or “China”) that are engaged
in the acquisition, exploration, extraction and development of mining properties.
The share exchange/reverse takeover resulted
in a change in voting control of EPTI. The former shareholders of AFMG held a total of 20,000,000 shares of common stock, or approximately
94% of the outstanding common stock of EPTI, and the original EPTI shareholders held a total of 1,297,700 shares of common stock,
or approximately 6% of the outstanding common stock. At the closing, EPTI’s officers and directors resigned, and Xiao-Jing
Yu was appointed as President of EPTI. Effective October 20, 2006, EPTI changed its name to China Shen Zhou Mining & Resources,
Inc.
AFMG owns all of the registered
capital of Inner Mongolia Wulatehouqi Qianzhen Ore Processing Co., Ltd. (“Qianzhen Mining”), a limited liability
company organized in the PRC. Qianzhen Mining holds 100% of the registered capital of Inner Mongolia Xiangzhen Mining Group
Co., Ltd., a limited liability company organized in the PRC (“Xiangzhen Mining”). The percentage of ownership
interest in Xiangzhen Mining held by AFMG and Qianzhen Mining changed from 67% and 33% in 2006 to 68% and 32% in 2007, and 0%
and 100% in 2011, respectively. Xiangzhen Mining owns 90% of Xinjiang Buerjin County Xingzhen Mining Co., Ltd.
(“Xingzhen Mining”). The remaining 10% of Xingzhen Mining is owned by Xinjiang Tianxiang New Technology
Development Co., Ltd. and an individual shareholder with each holding five percent, respectively. Xingzhen Mining owns 55% of
Anhui Jingde County Xinyi Fluorite Company Ltd. (“Xinyi Fluorite”). The remaining 45% of Xinyi Fluorite is owned
by four individual shareholders.
Prior to September 2009, the Company owned
100% of the registered capital of Tun-Lin Limited Liability Company (“Tun-Lin”), which is a Kyrgyz Republic registered
company, which in turn owned 100% of Kichi Chaarat Closed Stock Company. On September 21, 2009, the Company, through Xiangzhen
entered into a Share Purchase Agreement with Fortune Pegasus International Limited (“Fortune”), a company organized
under the laws of British Virgin Islands, pursuant to which the Company transferred to Fortune all of the equity of Tun Lin.
Prior to April, 2011, the Company owned 60% of Wulatehouqi
Qingshan Nonferrous Metal Development Co., Ltd. (“Qingshan Metal”), a limited liability company organized in the PRC.
On April 12, 2011, the Company through its subsidiary Qianzhen Mining entered into an equity transfer agreement to sell its 60%
equity interest Qingshan Metal to a Chinese citizen Mr. Mao Huang, a related party of the Company.
The table below illustrates the corporate
structure of the Company as of December 31, 2011:
Our executive offices are located at, Suite
1211, Zeyang Tower, No. 166 Fushi Road, Shijingshan District, Beijing, China 100043. Our telephone number is 86-010-8890-6927.
Our Industry
Our primary business activity is mining,
processing and distributing fluorite ore and processed fluorite powder, copper, zinc, lead, and other mineral concentrates.
Fluorite is mainly used by the steel industry
as a melting agent and by the fluorite chemical industry to manufacture hydrofluoric acid, a widely used raw material in the chemical
industry. Not only is fluorite an extremely scarce and non-renewable resource, but also it is used in a wide range of applications.
Therefore, in January of 2010, China’s State Council issued the notification SCS [2010] No. 1 “On Adoption of Comprehensive
Measures on Exploration and Production Control of Refractory Clay and Fluorite”. The notification was issued not only to
restrict the excessive exploitation of fluorite mineral resources through the integration of small fluorite mines and shutting
down parts of small-scale processing plants and mines with poor resources, but also by encouraging the rational use of resources.
In addition, for a certain period of time, no application for the survey and mining of any new fluorite mines is permitted. This
policy will play a role in the control of fluorite supply and will stimulate domestic fluorspar prices.
According to the statistics of China
Non-metallic Minerals Industry Association, China produced approximately 3.5 million metric tons of fluorite powder and
approximately 1.65 million metric tons of fluorite lumps in 2011. In 2011, about 87.14% of the fluorite powder annual output
was consumed within China and 12.86% was exported. In recent years, large exports of fluorite and hydrofluoric acid have
depleted fluorite resources in China.
According to the publication of
China’s Inorganic Fluoride Industry Association, in 2011, approximately 2.8 million metric tons of fluorite powder were
consumed by the producers of hydrofluoric acid and aluminum fluoride and approximately 300,000 metric tons were used for
other construction materials and nonferrous metal metallurgy. Also, approximately 1.4 million metric tons of fluorite
lumps were consumed by the producers of steel in China.
Current Business Operations
Our Business
Through our direct, wholly owned
subsidiary, American Federal Mining Group, Inc. (hereinafter “AFMG”), and its subsidiaries – Wulatehouqi
Qianzhen Ore Processing Co. Ltd. (“Qianzhen Mining”), Inner Mongolia Xiangzhen Mining Group Co., Ltd.,
(“Xiangzhen Mining”), Wulatehouqi Qingshan Nonferrous metal Development Co., Ltd. (“Qingshan
Metal”), Xinjiang Buerjin County Xingzhen Mining Co., Ltd. (“Xingzhen Mining”) and Anhui Jingde County
Xinyi Fluorite Company, Ltd. (“Xinyi Fluorite”), we engage in the business of mining, processing and distributing
fluorite ore and processed fluorite powder, copper, zinc, lead, and other mineral concentrates.
We operate mines in the
Inner Mongolia Autonomous Region, the Xinjiang Uygur Autonomous Region, and the Anhui Province
of the PRC, which are known for their rich reserves of high-grade minerals such as fluorite, copper, lead and zinc.
Regional human resources of general labor and specialized professional mining teams are available to us at low cost. We
believe that we have good relationships with the local governments since we provide employment opportunities to the local
residents and tax revenues to the government. Also, after years of experience working and developing relationships in the
mineral markets, we have formed strategic cooperative alliances with several large-scale domestic steel and chemical
enterprises.
On January 16, 2012, the
Company through its subsidiary Xiangzhen Mining, entered into an equity transfer and capital increase agreement to acquire
60% of the equity interests of Wuchuan Dongsheng Mining Co., Ltd. (“Dongsheng Mining”), a company based in
Wuchuan Yilao and Miao Autonomous County, Zunyi City, in the province of Guizhou, People’s Republic of China. On
February 7, 2012, the Company through its subsidiary Xiangzhen Mining purchased a 60% equity interest in Guizhou Qianshi
Resources Development Co., Ltd.(“Qianshi Resources”) and Yanhe Tujiazu Autonomous County Meilan Mining Co.,
Ltd.(“Meilan Mining”), two companies based in Yanhe Tujiazu Autonomous County, Tongren City, Guizhou Province,
PRC. Dongsheng Mining, Qianshi Resources, and Meilan Mining are engaged in the extraction and
processing of fluorite ore and barite ore.
Our principal executive offices are located
at Suite 1211, Zeyang Tower, No. 166 Fushi Road, Shijingshan District, Beijing, China 100043, and our telephone number at that
location is 86-010-8890-6927.
The following table summarizes the business
activities of AFMG’s subsidiaries
Subsidiaries
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Current Business Activities
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Qianzhen Mining*
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Engaged mainly in the processing of zinc-lead ore
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Xiangzhen Mining
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Engaged in the extraction and processing of fluorite ore
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Xingzhen Mining
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Engaged mainly in exploration and development of zinc-copper mine
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Xinyi Fluorite
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Engaged in the processing of fluorite powder
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Dongsheng Mining**
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Engaged in the extraction and processing of fluorite ore and barite ore
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Qianshi Resources***
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Engaged in the extraction and processing of fluorite ore and barite ore
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Meilan Mining***
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Engaged in the extraction of fluorite ore and barite ore
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*Qianzhen Mining had no operations in 2011.
**Dongsheng Mining was acquired on January
16, 2012.
** Qianshi Resources and Meilan Mining
were acquired on February 7, 2012.
Description of Products
Fluorite
We extract and process fluorite ore or
fluorspar in northern Inner Mongolia and Anhui Province. Xiangzhen Mining, a member of the China Fluorite Association, has the
largest fluorite ore reserves in northern China. There are two final products from the extraction and processing of fluorite:
(i) high grade fluorite ore with a purity of above 75% CaF2 and (ii) fluorite powder with a purity of greater than 96% CaF2. The
high grade fluorite ore, selected directly from the mined ores, is sold to steel making companies to be used as a melting agent
in steel making. Fluorite powder, on the other hand, is a key upstream material for use by the fluorine chemical industry in the
manufacture of fluorine compounds. Xinyi Fluorite’s primary assets include the mining permit to the Qingzheng Fluorite Xinyi
Mine No. 1, the mining permit for the Guangrong Fluorite Mine, and a flotation plant in Sanxi Old Town.
In 2011, Xiangzhen Mining extracted approximately
190,000 metric tons of fluorite ore, produced 41,000 metric tons of fluorite lumps and sold 49,000 metric tons of fluorite lumps
with total sales of approximately US$ 6.38 million, accounting for approximately 25% of the revenues of our fluorite business.
Xiangzhen Mining also produced 56,000 metric tons of fluorite powder and sold 49,000 metric tons of fluorite powder for approximately
US$ 16.03 million, which accounted for approximately 63% of the revenues of our fluorite business.
In 2011, Xinyi Fluorite extracted approximately
14,000 metric tons of fluorite ore, produced 9,000 metric tons of fluorite powder and sold 9,000 metric tons of fluorite powder
for approximately US$3.16 million, which accounted for approximately 12% of the revenues of our fluorite business.
On January 16, 2012, the Company
through its subsidiary Xiangzhen Mining, entered into an equity transfer and capital increase agreement to acquire 60% of the
equity interests of Wuchuan Dongsheng Mining Co., Ltd.(“Dongsheng Mining”), a company based in Wuchuan Yilao and
Miao Autonomous County, Zunyi City, in the province of Guizhou, PRC. On February 7, 2012, the
Company through its subsidiary Xiangzhen Mining purchased a 60% equity interest in Guizhou Qianshi Resources Development Co.,
Ltd.(“Qianshi Resources”) and Yanhe Tujiazu Autonomous County Meilan Mining Co., Ltd.(“Meilan
Mining”), two companies based in Yanhe Tujiazu Autonomous County, Tongren City, Guizhou Province, PRC. Dongsheng Mining, Qianshi Resources, and Meilan Mining were engaged in the extraction and processing of
fluorite ore and barite ore.
Nonferrous
We extract and process zinc, copper and
lead ores in the central part of Inner Mongolia and the northeastern part of the Xinjiang Uygur Autonomous Region. Our final products
are zinc concentrate, copper concentrate and lead concentrate, which are sold to metallurgical companies that in turn refine them
into zinc, copper and lead ingots.
In 2011, Xingzhen produced zinc concentrates
and copper concentrates equivalent to 2,639 metric tons of zinc metal and 214 metric tons of copper metal as compared to 3,129
and 155 metric tons in 2010, respectively, and sold zinc concentrates and copper concentrates equivalent to 2,761 metric tons of
zinc metal and 254 metric tons of copper metal, as compared to 2,538 and 115 metal tons in 2010, respectively, accounting for approximately
63% and 37%, respectively, of the total revenues of our nonferrous business of approximately $4.98 million as compared to 79%,
21% and $3.60 million in 2010, respectively.
Due to a lack of ore supply and the low
market prices of copper, zinc and sulfur, no activity was planned at Qianzhen Mining in 2011, and we did not produce any products
at Qianzhen Mining in 2011.
Exploration Activities
Keyinbulake Copper-Zinc Mine
In year 2011, Xingzhen Mining continued
exploration as planned. The main focuses were: ground drilling, surveying, geophysical prospecting, geological surveying, documentation,
rock-mineral experimenting, etc. Some of these projects are summarized below:
Ground drilling: drilled 23 holes, and
a total of 8,335.29 meters.
Surveying: tunnel survey was 2,000 meters,
1:1000 survey was 1.485 square kilometers.
Geophysical prospecting: powerful induced
polarization sounding (VIP method) a hundred points, advanced magnetic survey (network 50X20 meters) was 3.92 square kilometers.
Documentation: tunnel 138.54 meters, trenching
1,629.91 square meters, drilling 8,335.29 meters.
Rock-mineral experimenting: 687 items,
rock-mineral determined 37 items.
In 2012, we plan to channel 1,000 cubic
meters, drill 2,500 meters underground, and ground drill 1,000 meters.
Qingzheng Fluorite Xinyi Mine No.
1
In 2011, we renovated our mines and increased
capacity to 60,000 metric tons per year. We expanded our work focusing on two areas: underground mining projects and geophysical
exploration.
Underground mining project: The underground
mining project was started in 2011, and we plan on finishing the project in June 2012. The main focuses are 216, 256 middle section
reclamation works and development, venting system rehabilitation and implement of the six security systems and production safety
standards required by the State Council. We have already successfully implemented the six security systems required by State Council
and passed inspection of safety standard V required by local government. Also, we have developed a drift tunnel of 1,500 meters;
completed ground drilling of 300 meters, and underground drilling of 250 meters.
In order to further explore our underground potential, in 2012,
we plan to drill 6 holes and a drift tunnel of 2,000 meters.
Xinglong Town Guangrong Fluorite
Mine
No exploration work occurred in 2011.
Due to the requirements of getting mining license, we need to
drill and control below +60 meters elevation minerals. In 2012, we plan to drill 3 holes, and develop a drift tunnel of 1000 meters.
Sales and Marketing
We do not employ any marketing staff. We
have maintained long-term and good relationships with our customers, who send their orders directly to us. Our in-house sales staff
fills these orders based on our actual production capacity and the products are delivered to our customers via railway or truck.
We expect these relationships with our customers to continue
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Major Suppliers
As a mining processor, we
have various suppliers. We extract and process zinc, copper and fluorite ores from our mines and purchase fuel as well
as small amounts of raw materials.
Our Major Customers
In 2011, our revenues from our fluorite
business and nonferrous metals business were $25.57 million and $4.98 million, respectively.
The following table shows our major customers
(10% or more) for our nonferrous business for the year ended 2011:
Number
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Customer
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Revenue*
(In thousands)
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Percentage
(%)
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1
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Ruipeng Mining Ltd
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$
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4,981
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100
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%
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TOTAL
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$
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4,981
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100
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%
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The total revenue from our nonferrous segment was $4.98
million
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The following table shows our major customers
(10% or more) for our fluorite business for the year ended 2011:
Number
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Customer
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Revenue*
(In thousands)
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Percentage
(%)
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1
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Ningxia Jinhe Chemical Co., Ltd
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$
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9,117
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36
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%
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2
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Henan Zhongse Ltd
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4,585
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18
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%
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3
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Shandong Bofenglizhong Chemical, Ltd.
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2,771
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11
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%
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TOTAL
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$
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16,473
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65
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%
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*
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Total revenue from our fluorite segment was $25.57 million.
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As disclosed above, our three largest
customers for the fiscal year ended December 31, 2011 were Ruipeng Mining Ltd. for nonferrous metals and Ningxia Jinhe
Chemical Co., Ltd and Henan Zhongse Ltd for fluorite. Currently, the contracts we have signed with our major customers are
short term sales contracts with none having a duration longer than one year. They are one off agreements that do not
necessarily establish a long-term relationship between the Company and the customer and generally can be terminated by our
customers without penalty. Our other sales contracts have essentially the same terms as these agreements. Our major customers
tend to vary from year to year based upon market conditions and customer needs.
Competition
Rapid industrialization and development
in China have been the main drivers for China’s increase in nonferrous metal and fluorite consumption. In the current markets
for nonferrous metals and fluorite, demand, in general, exceeds supply. In the near term, we do not foresee difficulty in selling
our products and therefore do not expect to devote significant financial resources to sales and promotion.
Our competitors are mainly similar companies
in China.
Our main competitors in the fluorite
business are:
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Zhejiang Wuyi Shenlong Mining Co., Ltd., which produced 65,000 metric tons of fluorite lumps and 40,000 metric tons of fluorite powder in 2011;
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Inner Mongolia Linxi County Jingyuan Mining Co., Ltd., which produced 30,000 metric tons of fluorite lumps and 20,000 metric tons of fluorite powder in 2011;
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Inner Mongolia XiLinHaoTe Sinosteel Co.,which produced 40,000 metric tons
of fluorite lumps in 2011; and
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Inner Mongolia RongChang Mining Co., Ltd., which produced 35,000 metric tons of fluorite lumps and 10,000 metric tons of fluorite powder in 2011.
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Our competitors in the zinc, lead and copper
concentrates industries are local mining companies such as Inner Mongolia Wulatehouqi Huogeqi Copper Mine (“Huogeqi Mining”),
Wancheng Trading Co., Ltd.(“Wancheng Trading”) and Dongshengmiao Mining Industry Co, Ltd. (“Dongshengmiao Mining”).
Our production volumes of zinc, lead and copper concentrates are relatively small compared to the production volumes of these local
mining companies. However, as the demand for nonferrous metal concentrate exceeds the supply, we believe that we should have no
difficulty in selling our products.
Competitor
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Capacity
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Huogeqi Mining
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1,700,000 metric tons of extracting and ore processing capacity
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Dongshengmiao Mining
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820,000 metric tons of extracting and ore processing capacity
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Wancheng Trading
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760,000 metric tons of extracting and ore processing capacity
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Our Competitive Strengths
We believe that our following competitive
strengths enable us to compete and to capitalize on the growth opportunities in our industry:
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All of our current businesses are conducted through our China-based subsidiaries. We operate mines in the Inner Mongolia Autonomous Region and the Xinjiang Uygur Autonomous Region, which are known for their rich mineral deposits of fluorite, copper, lead and zinc.
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We own one of the best fluorite mines in China, which produces high purity fluorite ore, and possesses good extracting conditions as well as the largest processing plant in northern China.
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We have an experienced management team. Most of our executive officers have more than 20 years of experience in the mining industry.
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We maintain good relationships with local government agencies. Also, regional labor and specialized professional mining teams are available to us at a low cost.
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Many of our subsidiaries are located in the western part of China and therefore benefit from many preferential tax and regulatory policies.
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Business Strategies
We plan to implement the following strategies:
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Resumption of Production to Meet Demand
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In 2011, Xiangzhen Mining extracted approximately
190,000 metric tons of fluorite ore, produced 41,000 metric tons of fluorite lumps and sold 49,000 metric tons of fluorite lumps
with total sales of approximately US$ 6.38 million, accounting for approximately 25% of the revenues of our fluorite business.
Xiangzhen Mining also produced 56,000 metric tons of fluorite powder and sold 49,000 metric tons of fluorite powder for approximately
US$ 16.03 million, which accounted for approximately 63% of the revenues of our fluorite business.
In 2011, Xinyi Fluorite extracted approximately
14,000 metric tons of fluorite ore, produced 9,000 metric tons of fluorite powder and sold 9,000 metric tons of fluorite powder
for approximately US$3.16 million, which accounted for approximately 12% of the revenues of our fluorite business.
On January 16, 2012, the Company
through its subsidiary Xiangzhen Mining, entered into an equity transfer and capital increase agreement to acquire 60% of the
equity interests of Wuchuan Dongsheng Mining Co., Ltd.(“Dongsheng Mining”), a company based in Wuchuan Yilao and
Miao Autonomous County, Zunyi City, in the province of Guizhou, People’s Republic of China. On February 7, 2012, the
Company through its subsidiary Xiangzhen Mining purchased a 60% equity interest in Guizhou Qianshi Resources Development Co.,
Ltd.(“Qianshi Resources”) and Yanhe Tujiazu Autonomous County Meilan Mining Co., Ltd.(“Meilan
Mining”), two companies based in Yanhe Tujiazu Autonomous County, Tongren City, Guizhou Province, PRC. Dongsheng Mining, Qianshi Resources, and Meilan Mining are engaged in the extraction and processing of
fluorite ore and barite ore.
In 2011, Xingzhen produced zinc concentrates
and copper concentrates equivalent to 2,639 metric tons of zinc metal and 214 metric tons of copper metal as compared to 3,129
and 155 metric tons in 2010, respectively, and sold zinc concentrates and copper concentrates equivalent to 2,761 metric tons of
zinc metal and 254 metric tons of copper metal, as compared to 2,538 and 115 metal tons in 2010, respectively, accounting for approximately
63% and 37%, respectively, of the total revenues of our nonferrous business of approximately $4.98 million as compared to 79%,
21% and $3.60 million in 2010, respectively.
Due to a lack of ore supply and the low market prices of copper, zinc and sulfur, no activity was planned at Qianzhen Mining
in 2011 and we did not produce any products at Qianzhen Mining in 2011.
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Acquire Synergistic Mining Entities
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To increase our reserve base and ensure supply to our processing facilities, we plan to acquire domestic and foreign large-scale mines when the right opportunities arise. We also expect to acquire additional nonferrous metal mines and fluorite mines domestically that have high-quality extracting and operating conditions and possess all necessary governmental licenses.
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On January 16, 2012, the Company through its subsidiary Xiangzhen Mining,
entered into an equity transfer and capital increase agreement to acquire 60% of the equity interests of Wuchuan Dongsheng
Mining Co., Ltd.(“Dongsheng Mining”), a company based in Wuchuan Yilao and Miao Autonomous County, Zunyi City, in
the province of Guizhou, People’s Republic of China. On February 7, 2012, the Company through its subsidiary Xiangzhen
Mining purchased a 60% equity interest in Guizhou Qianshi Resources Development Co., Ltd.(“Qianshi Resources”)
and Yanhe Tujiazu Autonomous County Meilan Mining Co., Ltd.(“Meilan Mining”), two companies based in Yanhe
Tujiazu Autonomous County, Tongren City, Guizhou Province, PRC. Dongsheng Mining, Qianshi
Resources, and Meilan Mining were engaged in the extraction and processing of fluorite ore and barite ore.
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Government Regulation
The following is a summary of the principal
governmental laws and regulations that are or may be applicable to our operations in the PRC. The scope and enforcement of many
of the laws and regulations described below are uncertain. We cannot predict the effect of further developments in the Chinese
legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement of laws.
The mining industry, including certain
exploration and mining activities, is highly regulated in the PRC. Regulations issued or implemented by the State Council, the
Ministry of Land and Resources, and other relevant government authorities cover many aspects of exploration and mining of natural
resources, including: entry into the mining industry, the scope of permissible business activities, interconnection and transmission
line arrangements, tariff policies and foreign investment.
The principal regulations governing the
mining business in the PRC include:
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China Mineral Resources Law, which requires a mining business to have exploration and mining licenses from provincial or local land and resources agencies.
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China Mine Safety Law, which requires a mining business to have a safe production license and provides for random safety inspections of mining facilities.
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China Environmental Law, which requires a mining project to obtain an environmental feasibility study of each project.
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Foreign Exchange Controls. The principal regulations governing foreign exchange in the PRC are the Foreign Exchange Control Regulations (1996) and the Administration of Settlement, Sale and Payment of Foreign Exchange Regulations (1996) (“the Foreign Exchange Regulations”). Under the Foreign Exchange Regulations, RMB is freely convertible into a foreign currency for current account items, including the distribution of dividends. Conversion of RMB for capital account items, such as direct investment, loans and security investments, however, is still subject to the approval of the State Administration of Foreign Exchange (“SAFE”). Under the Foreign Exchange Regulations, foreign-invested enterprises are required to open and maintain separate foreign exchange accounts for capital account items. In addition, foreign-invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business, and only after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from SAFE.
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The Guidance to Businesses by Foreign Investments
revised in 2007 by the Chinese government no longer allows foreign investments in the fields of exploration and development of
fluorite mines in China. The policy is intended to protect Chinese businesses.
Our operating subsidiaries in China have
received authorization from the land and resources departments of the applicable local governments. Also, pursuant to Chinese regulations
that require a mining enterprise procure an exploration or a mining license from the land and resource department of local governments
before it can carry out exploration or mining activities, we have secured the necessary exploration or mining licenses for our
operations from the applicable local governments. These licenses require that we follow proper procedures in our exploring or mining
activities and in selling our products to customers. Most of our mining companies possess exploration or mining licenses while
some are applying for mining licenses in addition to exploration licenses.
Chinese regulations also require that a
mining company must have a safety certification from the PRC Administration of Work Safety before it can engage in mining and extracting
activities. All of our operating subsidiaries have obtained safety certifications from the Administration of Work Safety of the
applicable local governments. In addition, all of our operating subsidiaries have passed government safety inspections.
We also have been granted an environmental
certification from the PRC Bureau of Environmental Protection.
On September 29, 2011, Ministry
of Industry and Information Technology of China announced “the provisional measures of fireclay (high-alumina
clay) fluorite industry admittance notice”, which explicitly states enterprises that did not meet the requirements of
the notice, would not be able to get production quota distribution priority. The Company is a leader in fluorite industry
and its subsidiaries all meet the requirements of this notice and have the correspondence advantages of distribution and
integration.
Employees
As of December 31, 2011, we employed 317
full-time employees, of whom approximately 8% are with our Beijing Representative Office, 2% are with Qianzhen Mining, 49%
are with Xiangzhen Mining, 9% are with Xinyi Fluorite, and 32% are with Xingzhen Mining. Approximately 19% of our employees
are management personnel and 4% are sales and procurement staff. In terms of education level, approximately 18% of our employees
have a college degree or higher.
Under Chinese law, our employees have formed
trade unions that protect employees’ rights, aim to assist in the fulfillment of our economic objectives, encourage employee
participation in management decisions and assist in mediating disputes between us and union members. We believe that we maintain
a satisfactory working relationship with our employees and we have not experienced any significant labor disputes or any difficulty
in recruiting staff for our operations.
As required by applicable Chinese law,
we have entered into employment contracts with all of our employees. We have also entered into a confidentiality agreement with
each of our employees under which such employees are prohibited from disclosing confidential information of the Company or using
it for other purposes than the benefit of the Company. Directors, officers, mid-level managers and some key employees in sales
and R&D are required to sign a non-competition agreement which prohibits them from competing with the Company while they are
employees of the Company and within two years after their employment with the Company is terminated.
Our employees in China participate in a
state pension fund organized by Chinese municipal and provincial governments. We are required to contribute to the fund at the
rate of 20% of an employee’s average monthly salary. In addition, we are required by Chinese law to cover employees
in China with other types of social insurance. Our total contribution may amount to 30% of an employee’s average monthly
salary. Expenses related to social insurance were approximately $90,000 for the 2011 fiscal year.
ITEM 1A. RISK FACTORS
CAUTIONARY STATEMENT REGARDING FORWARD
- LOOKING INFORMATION AND CERTAIN IMPORTANT FACTORS
In this Annual Report on Form 10-K we make,
and from time to time we otherwise make, written and oral statements regarding our business and prospects, such as projections
of future performance, statements of management’s plans and objectives, forecasts of market trends, and other matters that
are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Statements containing the words or phrases “will likely result,” “are expected to,”
“will continue,” “is anticipated,” “estimates,” “projects,” “believes,”
“expects,” “anticipates,” “intends,” “target,” “goal,” “plans,”
“objective,” “should” or similar expressions identify forward-looking statements, which may appear in documents,
reports and filings with the Securities and Exchange Commission, news releases, written or oral presentations made by officers
or other representatives made by us to analysts, stockholders, investors, news organizations and others, and discussions with management
and other of our representatives. For such statements, we invoke the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
Our future results, including results related
to forward-looking statements, involve a number of risks and uncertainties. No assurance can be given that the results reflected
in any forward-looking statements will be achieved. Any forward-looking statement speaks only as of the date on which such statement
is made. Our forward-looking statements are based upon assumptions that are sometimes based upon estimates, data, communications
and other information from suppliers, government agencies and other sources that may be subject to revision. Except as required
by law, we do not undertake any obligation to update or keep current either (i) any forward-looking statement to reflect events
or circumstances arising after the date of such statement, or (ii) the important factors that could cause our future results to
differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to
time in any forward-looking statement.
In addition to other matters identified
or described by us from time to time in filings with the SEC, there are several important factors that could cause our future results
to differ materially from historical results or trends, results anticipated or planned by us, or results that are reflected from
time to time in any forward-looking statement. Some of these important factors, but not necessarily all important factors, include
the following:
Risks Related to Our Business
Disruptions in the capital and credit markets, which
may continue indefinitely or intensify, could adversely affect our results of operations, cash flows and financial condition, or
those of our customers and suppliers.
The current disruptions in the capital and credit markets
may continue indefinitely or intensify, and adversely impact our results of operations, cash flows and financial condition, or
those of our customers and suppliers. Disruptions in the capital and credit markets as a result of uncertainty, changing or increased
regulation, reduced alternatives or failures of significant financial institutions could adversely affect our access to liquidity
needed to conduct or expand our businesses or conduct acquisitions or make other discretionary investments, as well as our ability
to effectively hedge our currency or interest rate. Such disruptions may also adversely impact the capital needs of our customers
and suppliers, which, in turn, could adversely affect our results of operations, cash flows and financial condition.
We may not be able to secure financing needed for
future operating needs on acceptable terms, or on any terms at all.
From time to time, we may seek additional financing to
provide the capital required to maintain or expand our exploration activities and mining facilities, and equipment and/or working
capital, as well as repay outstanding loans if cash flow from operations is insufficient to do so. We cannot predict with certainty
the timing or amount of any such capital requirements. If such financing is not available on satisfactory terms, we may be unable
to expand our business or to develop new business at the rate desired, and our operating results may suffer. If we are able to
incur debt, we may be subject to certain restrictions imposed by the terms of the debt and the repayment of such debt may limit
our cash flow and our ability to grow. If we are unable to incur debt, we may be forced to issue additional equity, which could
have a dilutive effect on the then current holders of equity.
We receive a significant portion of
our revenues from a small number of customers. Our business will be harmed if our customers reduce their orders from us.
All of our revenue from our nonferrous segment in
2011 was derived from one customer. In 2011, our fluorite segment had three customers from which 65% of all revenue was
derived. Dependence on a few customers could expose us to the risk of substantial losses if a single dominant customer stops
purchasing our products. If we lose any customers and are unable to replace them with other customers that purchase a similar
number of our products and services, our revenues and net income would decline considerably.
We may not have sufficient supply of nonferrous ore.
Qianzhen Mining, one of our subsidiaries, has a 200,000
metric tons/year processing capacity for zinc-lead ore. However, it does not process any ore due to lack of ore supplied from the
third parties. Its contracts with third party ore suppliers expired in June 2008. It currently does not have a third party
supplier and may require third party suppliers in the future. If we are not able to obtain a sufficient quantity or quality of
ore for Qianzhen Mining, our revenues may be reduced and our business could suffer.
Inclement weather may affect our fluorite business.
Our fluorite business is conducted through
Xiangzhen Mining and Xinyi Fluorite. Xiangzhen Mining is located in an outlying area on the border between
China’s Inner Mongolia Autonomous Region and Mongolia. The weather conditions there are very harsh, especially in
winter. If there are strong snow storms or other inclement weather conditions, the mining operations may have to be suspended
for an indefinite period of time and we may not be able to ship our fluorite products to our customers in a timely manner. As
a result, our revenues may be adversely affected. Xinyi Fluorite is located in the trunk of the of Yangzi River. If
there is seasonal flooding or other inclement weather conditions, we may not be able produce functionally.
Our acquisition and administrative costs could affect
our ability to be profitable.
Our exploration and mining operations are scattered across
several geographical locations in China and such diversity of location can add to our administrative costs, and we plan to make
acquisition of mines in the future and the costs associated with such acquisitions could negatively impact our profitability. Also,
our administrative costs may increase as a result of our expanded operations and our profitability may be adversely affected.
Our ability to operate our company effectively could
be impaired if we lose key personnel.
We depend on the services of key executives and a small
number of personnel focused on the development of our mining projects. Additionally, the number of persons skilled in the development
and operation of mining properties is limited and significant competition exists for these individuals. We cannot assure you that
we will be able to employ key personnel or that we will be able to attract and retain qualified personnel in the future. We do
not maintain “key person” life insurance to cover our executive officers. Due to the relatively small size of our company,
our failure to retain or attract key personnel may delay or otherwise adversely affect the development of our projects, which could
adversely affect our business.
We may not be able to attract and retain the additional
personnel we will need to develop any of our projects.
We are a small company with a limited operating history
and relatively few employees. The development of any of our proposed projects will place substantial demands upon us. We will be
required to recruit additional personnel and to train, motivate and manage these new employees. There can be no assurance that
we will be successful in attracting and retaining such personnel.
We may not be able to obtain or renew licenses, rights
and permits required to develop or operate our mines, which would adversely affect our business.
In the ordinary course of business, mining companies
are required to seek governmental permits for expansion of existing operations or for the commencement of new operations. In addition
to requiring permits for the development of our mines, we will need to obtain various mining permits during the life of each project. Obtaining
and renewing the necessary governmental permits is a complex and time-consuming process. Obtaining or renewing the necessary permits
may increase costs and cause delays depending on the nature of the activity to be permitted and the interpretation of applicable
requirements implemented by the permitting authority. There can be no assurance that all necessary permits will be obtained and,
if obtained, will be renewed, or that in each case the costs involved will not exceed our estimates. It is possible that the costs
and delays associated with compliance with such standards and regulations could become such that we would not proceed with the
development or operation of a mine or mines.
Any material inaccuracies in our production estimates
could adversely affect our results of operations.
In preparing estimates of future production, we cannot
assure you that we will ever achieve our production estimates or any production at all. Our production estimates depend on, among
other things:
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the accuracy of our mineralization and reserves estimates;
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the accuracy of assumptions regarding ore grades and recovery rates;
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ground conditions and physical characteristics of the mineralization, such as hardness and the presence or absence of particular metallurgical characteristics;
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the accuracy of estimated rates and costs of mining and processing; and
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our ability to obtain and keep effective all permits for our mines and facilities.
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Our actual production may vary from our estimates if
any of our assumptions prove to be incorrect, which may adversely affect our business.
We may seek to make acquisitions that prove unsuccessful
or strain or divert our resources.
We may seek to expand our business through the acquisition
of businesses and assets. We may not be able to complete any acquisition on favorable terms or at all. Acquisitions present risks
that could materially and adversely affect our business and financial performance, including:
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the diversion of our management’s attention from our everyday business activities;
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the contingent and latent risks associated with the past operations of, and other unanticipated problems arising in, the acquired business; and
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the need to expand management, administration, and operational systems.
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If we make such acquisitions we cannot predict whether:
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we will be able to successfully integrate the operations and personnel of any new businesses into our business;
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we will realize any anticipated benefits of completed acquisitions; or
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there will be substantial unanticipated costs associated with acquisitions, including potential costs associated with environmental liabilities undiscovered at the time of acquisition.
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In addition, future acquisitions by us may result in:
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potentially dilutive issuances of our equity securities;
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the incurrence of additional debt;
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restructuring charges; and
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the recognition of significant charges for depreciation and amortization related to intangible assets.
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Expansion of our business may put added pressure on
our management and operational infrastructure, impeding our ability to meet any increased demand for our products and adversely
affect our operating results.
Our business plan is to significantly grow our operations
to meet anticipated growth in demand for our products. Our planned growth includes the expansion of our exploration and mining
activities over the next few years. Although most of our management personnel have extensive experience in the mining industry,
their training is in mining operations rather than contemporary management principles. They may not be able to cope with the challenges
presented by being a U.S. public company and the competitive business environment created by globalization. In addition, growth
in our business may place a significant strain on our personnel, management, financial systems and other resources. The evolution
of our business also presents numerous risks and challenges, including:
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the continued demand for our products from the iron and steel and fluorite chemical industries;
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our ability to successfully and rapidly expand our operations in response to potentially increasing demand;
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the costs associated with such growth, which are difficult to quantify, but could be significant;
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rapid technological change; and
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the highly cyclical nature of the mining industry.
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If we are successful in obtaining rapid market growth
of our products, we will be required to deliver large volumes of quality products to customers on a timely basis and at a reasonable
cost to those customers. Meeting any such increased demand will require us to expand our manufacturing facilities, to increase
our ability to purchase raw materials, to increase the size of our work force, to expand our quality control capabilities and to
increase the scale upon which we provide our products. Such demands would require more capital (including working capital) than
we currently have and, as a result, we may be unable to meet the needs of our customers.
We will incur increased costs relating to corporate
governance matters.
As a public reporting company, we will need to comply
with the Sarbanes-Oxley Act of 2002 and the related rules and regulations adopted by the SEC, including expanded disclosures, accelerated
reporting requirements and more complex accounting rules. Compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and other
requirements will increase our costs and require additional management resources. Additionally, these laws and regulations could
make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance,
and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar
coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve
on our board of directors, our board committees or as executive officers. We are presently evaluating and monitoring developments
with respect to these laws and regulations and cannot predict or estimate the amount or timing of additional costs we may incur
to respond to their requirements.
Risks Related to Our Industry
Fluctuations in the market price of fluorite and nonferrous
metals could adversely affect our business and results of operations.
The profitability of our operations will be directly
related to the market price of the metals we mine and refine. The market prices of fluorite and nonferrous metals fluctuate widely
and are affected by numerous factors beyond our control. These factors also include fluctuations with respect to the rate of inflation,
the exchange rates of the Renminbi and other currencies, interest rates, global or regional political and economic conditions,
banking industry fluctuations, global and regional demand, production costs in major metal producing areas and other factors. Any
decrease in the prices of the metals important to our operations would adversely impact our revenues, profits and cash flows. In
particular, a sustained drop in prices could:
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cause suspension of our development and, ultimately, our mining operations, if such operations become economically infeasible at the then-prevailing prices, thus further reducing revenues;
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prevent us from fulfilling our obligations under our agreements or under our permits and licenses, which could cause us to lose our interests in, or be forced to sell, our properties; and
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reduce available financing to us.
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Furthermore, the need to reassess the feasibility of
any of our projects if metal prices decline could cause substantial delays or might interrupt operations until the reassessment
can be completed. Mineral reserve calculations and life-of-mine plans using significantly lower metal prices could result in reduced
estimates of mineral reserves and in material write-downs of our investment in mining properties and increased amortization, reclamation
and closure charges.
Mining is inherently dangerous and subject to conditions
or events beyond our control, and any operating hazards could have a material adverse effect on our business.
Mining involves various types of risks and hazards, including:
environmental hazards, industrial accidents, metallurgical and other processing problems, unusual or unexpected rock formations,
structure cave-in or slides, flooding, fires and interruption due to inclement or hazardous weather conditions. These risks could
result in damage to, or destruction of, mineral properties, production facilities or other properties, personal injury or death,
environmental damage, delays in mining, increased production costs, monetary losses and possible legal liability. We may not be
able to obtain insurance to cover these risks at economically feasible premiums and some types of insurance may be unavailable
or too expensive to maintain. We may suffer a material adverse effect on our business and the value of our securities may decline
if we incur losses related to any significant events that are not covered by our insurance policies.
There is no guarantee that legal title to the properties
in which we have an interest will not be challenged, which could result in the loss of our rights in those properties.
The ownership and validity, or title, of mining claims
are often uncertain and may be contested in China. A successful claim contesting our title or interest to a property could cause
us to lose our rights to mine that property. In addition, the success of such a claimant could result in our not being compensated
for our prior expenditures relating to the property.
The mining industry is intensely competitive, and
we may have difficulty effectively competing with other mining companies in the future.
Mines have limited lives and, as a result, we must continually
seek to replace and expand our reserves through the acquisition of new properties. Significant competition exists for the acquisition
of properties producing or capable of producing fluorite and nonferrous metals. We may be at a competitive disadvantage in acquiring
additional mining properties because we must compete with other individuals and companies, many of which may have greater financial
resources and larger technical staffs than us. As a result of this competition, we may be unable to acquire attractive mining properties
on acceptable terms.
Shortages of critical parts, equipment and skilled
labor may adversely affect our development projects.
The industry has been impacted by increased worldwide
demand for critical resources such as input commodities, drilling equipment, tires and skilled labor. These shortages have caused
and may continue to cause unanticipated cost increases and delays in delivery times, potentially impacting operating costs, capital
expenditures and production schedules, which would adversely affect our business.
Costs estimates and timing of new projects are uncertain.
The capital expenditures and time required to develop
new mines or other projects are considerable and changes in costs or construction schedules can affect project economics. There
are a number of factors that can affect costs and construction schedules, including, among others:
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availability of labor, power, transportation, commodities and infrastructure;
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increases in input commodity prices and labor costs;
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fluctuations in exchange rates;
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availability of financing;
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difficulty of estimating construction costs over a period of years; and
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delays in obtaining environmental or other government permits.
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Uncertainties or incorrect assumptions may cause unanticipated
cost increases and delays in development, potentially impacting operating costs, capital expenditures and production schedules,
which would adversely affect our business.
The impact of governmental environmental regulation
could adversely affect our business.
Recently, Chinese laws and policies regarding environmental
protection have moved towards stricter compliance standards and stronger enforcement. Because the requirements imposed by these
laws and regulations frequently change, we cannot assure you that laws and regulations enacted in the future, including changes
to existing laws and regulations, will not adversely affect our business. In addition, because we acquire interests in properties
that have been operated in the past by others, we may be liable for environmental damage caused by former operators.
Also, applicants for mining licenses must submit environmental
impact assessments for their projects, and if those projects fail to meet environmental protection standards they will not be granted
licenses. In addition, after exploration, a licensee must take further actions for environmental protection, such as performing
water and soil maintenance. After mining licenses expire or a licensee stops mining during the license period and the mineral resources
have not been fully developed, the licensee shall perform other obligations such as water and soil maintenance, land recovery and
environmental protection in compliance with the original development scheme, otherwise it must pay the costs of land recovery and
environmental protection. After a mine closure, the mining enterprise must perform water and soil maintenance, land recovery and
environmental protection duties in compliance with mine closure approval reports, otherwise it must pay certain costs, which include
the costs of land recovery and environmental protection. At any stage of this process we cannot guarantee that we will not be found
to have failed to comply with such standards or that such standards will not be changed by the applicable authorities resulting
in our non-compliance and we may face revocation of our licenses, fines and/or closure as a result.
An interruption of energy supply could adversely affect
our mining operations.
Our mining operations and development projects require
significant energy, principally electricity, diesel, coal and natural gas. A disruption in the transmission of energy, inadequate
energy transmission infrastructure, or the termination of any of our energy supply contracts could interrupt our energy supply
and adversely affect our operations.
Disruption of transportation services or increased
transportation costs could have a material adverse effect on our business, financial condition and results of operations.
Disruption of transportation services for any reason
could have a material adverse effect on our business, financial condition and results of operations. If transportation for our
products becomes unavailable or even delayed, our ability to market our products could suffer and could negatively impact our financial
results. Additionally, increases in our transportation costs relative to those of its competitors could make our operations less
competitive and could affect our profitability.
Our
fluorite business may get less production quota than regular capacit
y.
Production
restriction is in effect since year 2010, the purpose is to protect fluorite resource, prevent the over extraction, illegal extraction,
abandoned low grade mines and extract only rich mines, etc. Due to total production decreasing, down stream demand is increasing,
price of fluorite is increased significantly. In the future, company or its subsidiaries might not be able get enough production
quotas to be producing in full capacity.
We may not be able to pass security systems and production
safety standards
The Company or its subsidiaries may not all passed the
security systems and production safety standards required by the State Council, included special monitoring and controls, an underground
personnel positioning system, an emergency refuge system, an emergency compressed air supply system, an emergency water supply
system, and underground communications. Therefore, we may be unable to produce functionally.
Risks Related to Doing Business in China
Our business may be adversely affected by incidents
of political unrest such as those in the Xinjiang Uygur Autonomous Region.
On July 5, 2009 in Urumqi, the capital of the Xinjiang
Uygur Autonomous region, political unrest and violence erupted due to ethnic conflicts between the minority Uygur and the Han Chinese.
One of our mines, Xingzhen Mining, is located
in the Aletai Zone, Xinjiang Uygur Autonomous Region. During this unrest,
transportation in Xinjiang was affected. Our purchased raw materials could not be timely moved into our mining site and our products
could not be moved out of the site for sale. Our operations and business may be adversely affected should such similar unrest occur
in the regions in which we operate.
Our business will be affected by PRC government regulation
and the PRC’s overall economic environment.
Although we export products to other countries, most
of our sales are in the PRC. It is anticipated that our products in China will continue to represent a significant portion of our
sales in the near future. As a result of our reliance on the Chinese markets, our operating results and financial performance could
be affected by any adverse changes in economic, political and social conditions in China.
There can be no assurance that future regulatory, judicial
and legislative changes will not have a material adverse effect on us, that regulators or third parties will not raise material
issues with regard to compliance or non-compliance with applicable laws or regulations, or that any changes in applicable laws
or regulations will not have a material adverse effect on our business.
The economy of the PRC is transitioning from a planned
economy to a market oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the
utilization of market forces for economic reforms, the reduction of state ownership of productive assets and the establishment
of sound corporate governance in business enterprises, a substantial portion of productive assets in the PRC are still owned by
the Chinese government. For example, all land is state owned and are leased to business entities or individuals through governmental
granting of state-owned land use rights or mining and exploration rights. The granting process is typically based on government
policies at the time of granting and can be lengthy and complex. This process may adversely affect our future business expansion.
The Chinese government also exercises significant control over the PRC’s economic growth through the allocation of resources,
controlling payment of foreign currency and providing preferential treatment to particular industries or companies. Uncertainties
may arise with the changing of governmental policies and measures. At present, our mining and exploration activities are subject
to approvals from the relevant government authorities in China. Such governmental approval processes are typically lengthy and
complex, and involve uncertainties.
Our ability to operate in China may be harmed by changes
in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use
rights, property, work safety, labor protection, and other matters. We believe that our operations in China are in material compliance
with all applicable legal and regulatory requirements. However, the central or local governments may impose new, stricter regulations
or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance
with such regulations or interpretations. Accordingly, government actions in the future, including any decision not to continue
to support recent economic reforms and to return to a more centrally planned economy, or regional or local variations in the implementation
of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could
require us to divest ourselves of any interest we hold in Chinese properties.
Certain political and economic considerations relating
to the PRC could adversely affect us.
While the PRC government has pursued economic reforms
since its adoption of the open-door policy in 1978, a large portion of the PRC economy is still operating under five-year plans
and annual state plans. Through these plans and other economic measures, such as control on foreign exchange, taxation and restrictions
on foreign participation in the domestic market of various industries, the PRC government exerts considerable direct and indirect
influence on the economy. Many of the economic reforms carried out by the PRC government are unprecedented or experimental, and
are expected to be refined and improved. Other political, economic and social factors can also lead to further readjustment of
such reforms. This refining and readjustment process may not necessarily have a positive effect on our operations or future business
development. Our operating results may be adversely affected by changes in the PRC’s economic and social conditions as well
as by changes in the policies of the PRC government, such as changes in laws and regulations (or the official interpretation thereof),
measures which may be introduced to control inflation, changes in the interest rate or method of taxation, and the imposition of
additional restrictions on currency conversion.
Economic reforms adopted by the Chinese government have
had a positive effect on the economic development of the country, but the government could change these economic reforms or any
of the legal systems at any time. This could either benefit or damage our operations and profitability. Some changes that could
have this effect are:
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level of government involvement in the economy;
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control of foreign exchange;
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methods of allocating resources;
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balance of payments position;
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international trade restrictions; and
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international conflict.
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The Chinese economy differs from the economies of most
countries belonging to the Organization for Economic Cooperation and Development, or OECD, in many ways. The economic reforms in
China have been conducted under a tight control of the Chinese government. As a result of these differences, we may not develop
in the same way or at the same rate as might be expected if the Chinese economy were similar to those of the OECD member countries.
The recent nature and uncertain application of many
PRC laws applicable to us create an uncertain environment for business operations and they could have a negative effect on us.
The PRC legal system is a civil law system. Unlike the
common law system, the civil law system is based on written statutes in which decided legal cases have little value as precedents.
In 1979, the PRC began to promulgate a comprehensive system of laws and has since introduced many laws and regulations to provide
general guidance on economic and business practices in the PRC and to regulate foreign investment. Progress has been made in the
promulgation of laws and regulations dealing with economic matters such as corporate organization and governance, foreign investment,
commerce, taxation and trade. The promulgation of new laws, changes of existing laws and the abrogation of local regulations by
national laws could have a negative impact on our business and business prospects. In addition, as these laws, regulations and
legal requirements are relatively recent, their interpretation and enforcement involve significant uncertainty.
A slowdown or other adverse developments in the economy
of the PRC may materially and adversely affect our customers, demand for our products and our business.
Although the economy of the PRC has grown significantly
in recent years, we cannot assure you that such growth will continue. A slowdown in overall economic growth, an economic downturn
or recession or other adverse economic developments in the PRC could materially reduce the demand for our products and materially
and adversely affect our business.
Future inflation in China may inhibit our ability to
conduct business in China.
In recent years, the Chinese economy has experienced
periods of rapid expansion and high rates of inflation. However, in 2009, the inflation rate in China experienced a decline. Expansion
and inflation have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to
restrict the availability of credit or regulate growth and contain inflation. Higher inflation may in the future cause the Chinese
government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China,
and thereby harm the end market for our products. In addition, due to the tightening of credit, we may have difficulties in securing
funding from financial institutions in China, which could adversely affect our operations.
Restrictions on currency exchange may limit our ability
to receive and use our revenues effectively.
Our revenues will be settled in Renminbi, and any future
restrictions on currency exchanges may limit our ability to use revenue generated in Renminbi to fund any future business activities
outside China or to make dividend or other payments in U.S. Dollars. Although the Chinese government introduced regulations in
1996 to allow greater convertibility of the Renminbi for current account transactions, significant restrictions still remain, including
primarily the restriction that foreign-invested enterprises may only buy, sell or remit foreign currencies after providing valid
commercial documents at those banks in China authorized to conduct foreign exchange business. In addition, conversion of Renminbi
for capital account items, including direct investment and loans, is subject to governmental approval in China, and companies are
required to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that we will
be able to obtain such necessary governmental approval in China or that the Chinese regulatory authorities will not impose more
stringent restrictions on the convertibility of the Renminbi.
We may not be able to distribute our assets upon liquidation.
Our assets are predominately located in China. Under
the laws governing foreign investment enterprises in China, dividend distribution and liquidation are allowed but subject to certain
procedures under the relevant laws and rules. Any dividend payment will be subject to the decision of the board of directors and
subject to foreign exchange rules governing such repatriation. Any liquidation is subject to both the relevant government agency’s
approval and supervision as well the foreign exchange control. This may generate additional risk for our investors in case of liquidation.
PRC regulations relating to the establishment of offshore
special purpose companies by PRC domestic residents and registration requirements for employee stock ownership plans or share option
plans may subject our PRC resident beneficial owners or the plan participants to personal liability, limit our ability to inject
capital into our PRC subsidiaries, limit our subsidiaries’ ability to increase their registered capital or distribute profits
to us, or may otherwise adversely affect us.
SAFE issued a circular in October 2005 requiring PRC
domestic residents to register with the local SAFE branch before establishing or controlling any company outside of China for the
purpose of capital financing with assets or equities of PRC companies, referred to in the circular as an “offshore special
purpose company.” PRC domestic residents who are stockholders of offshore special purpose companies and have completed round
trip investments but did not make foreign exchange registrations for overseas investments before November 1, 2005 were retroactively
required to register with the local SAFE branch before March 31, 2006. PRC resident stockholders are also required to amend their
registrations with the local SAFE branch in certain circumstances. We cannot provide any assurances that all of our stockholders
who are PRC residents have made all required amendments and will make or obtain any applicable registrations or approvals required
by these SAFE regulations. The failure or inability of our PRC resident stockholders to comply with the registration procedures
set forth therein may subject us to fines and legal sanctions, restrict our cross-border investment activities, or limit our PRC
subsidiaries’ ability to distribute dividends or limit our PRC subsidiaries’ ability to obtain foreign-exchange-dominated
loans.
As it is uncertain how the SAFE regulations will
be interpreted or implemented, we cannot predict how these regulations will affect our business operations or future strategy.
For example, we may be subject to more stringent review and approval process with respect to our foreign exchange activities, such
as remittance of dividends and foreign currency-denominated borrowings, which may adversely affect our results of operations and
financial condition. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners
of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations
required by the SAFE regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect
our business and prospects.
In December 2006, the People’s Bank of China promulgated
the Implementation Rules of the Administrative Measures for Individual Foreign Exchange, or the Individual Foreign Exchange Rules,
setting forth the respective requirements for foreign exchange transactions by PRC individuals under either the current account
or the capital account. In January 2007, SAFE issued implementing rules for the Individual Foreign Exchange Rules, which, among
other things, specified approval requirements for certain capital account transactions such as a PRC individuals participation
in the employee stock ownership plans or stock option plans of an overseas publicly-listed company. On March 28, 2007, SAFE promulgated
the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan
or Stock Option Plan of Overseas-Listed Company, or the Stock Option Rule. Under the Stock Option Rule, PRC individuals who are
granted stock options by an overseas publicly-listed company are required, through a qualified PRC agent or a PRC subsidiary of
such overseas publicly-listed company, to register with SAFE and complete certain other procedures. We and our PRC employees who
might be granted stock options are subject to the Stock Option Rule. If we or our PRC optionees fail to comply with these regulations,
we or our PRC optionees may be subject to fines and legal sanctions.
We must comply with the Foreign Corrupt Practices
Act and Chinese anti-corruption laws.
We are required to comply with the United States Foreign
Corrupt Practices Act, or FCPA, which prohibits U.S. companies from engaging in bribery or making other prohibited payments to
foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some of our competitors, are
not subject to these prohibitions. The PRC also strictly prohibits bribery of government officials. Corruption, extortion, bribery,
pay-offs, theft and other fraudulent practices occur from time to time in China. If our competitors engage in these practices,
they may receive preferential treatment from companies and gain an advantage in securing business, or from government officials
who might give them priority in obtaining new licenses, thus putting us at a disadvantage. Our employees, agents, representatives
and consultants may not always be subject to our control. If any of them violates the FCPA or other anti-corruption laws, we might
be held responsible, and we could be subject to severe penalties as a result. In addition, the U.S. government may seek to hold
us liable for successor liability for FCPA violations committed by companies in which we invest or which we acquire.
Our PRC subsidiaries are obligated to withhold and
pay PRC individual income tax in respect of the salaries and certain other income received by their employees who are subject to
PRC individual income tax. If our PRC subsidiaries fail to withhold or pay such individual income tax in accordance with applicable
PRC regulations, they may be subject to certain sanctions and other penalties, which could have a material adverse impact on their
respective businesses.
Under PRC individual income tax law, our PRC subsidiaries
are obligated to withhold and pay individual income tax in respect of the salaries and certain other income received by their employees
who are subject to PRC individual income tax. Our PRC subsidiaries may be subject to certain sanctions and other liabilities under
the PRC tax rules and regulations in the case of failure to withhold and pay individual income taxes for their employees in accordance
with the applicable law and regulations. Although we have not received any notice or penalty from PRC tax authorities, we cannot
assure you that such notice or penalty will not occur in the future.
Any future outbreak of severe acute respiratory syndrome
or avian influenza in China, or similar adverse public health developments, may severely disrupt our business and operations.
A renewed outbreak of severe acute respiratory syndrome,
the Avian Flu or another widespread public health problem in China, where all of our manufacturing facilities are located and where
all of our revenues are derived from, could have a negative effect on our operations. In addition, there have been confirmed human
cases of avian influenza in the PRC, Vietnam, Iraq, Thailand, Indonesia, Turkey, Cambodia and other countries which have proven
fatal in some instances. If such an outbreak or any other similar epidemic were to spread in China, where our operations are located,
it may adversely affect our business and operating results.
Such an outbreak could have an impact on our operations
as a result of:
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quarantines or closures of our facilities, which would severely disrupt our operations;
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the sickness or death of our key officers and employees; and
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a general slowdown in the Chinese economy.
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The Chinese merger and acquisition rules may impact
our ability to make acquisitions of Chinese businesses and may subject us to penalties.
On August 8, 2006, six PRC regulatory agencies namely,
the PRC Ministry of Commerce, the State Assets Supervision and Administration Commission, the State Administration for Taxation,
the State Administration for Industry and Commerce, the China Securities Regulatory Commission (“CSRC”), and the SAFE,
jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “New M&A
Rule”), which became effective on September 8, 2006. The New M&A Rule purports, among other things, to require offshore
Special Purpose Ventures, or SPVs, formed after the effective date, for overseas listing purposes, through acquisitions of PRC
domestic companies and controlled by PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing
their securities on an overseas stock exchange.
The Company intends to make acquisitions of Chinese businesses
in the future. There are uncertainties regarding the interpretation and application of current or future PRC laws and regulations,
including the New M&A Rule and those uncertainties could make it difficult or impossible to make acquisitions of Chinese businesses
in the future.
Also, if the CSRC or another PRC regulatory agency subsequently
determines that its approval was required for our previous M&A transactions or our overseas listing and/or any future offerings,
we may face sanctions by the CSRC or another PRC regulatory agency. If this occurs, these regulatory agencies may impose fines
and other penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the injection of
proceeds from an offering into our PRC subsidiaries, restrict or prohibit payment or remittance of dividends by our PRC subsidiaries
to us or take other actions that could have a material adverse effect on our business, financial condition, results of operations,
reputation and prospects, as well as the trading price of our common stock.
The Enterprise Income Tax Law and its implementing
rules may adversely affect our business
On March 16, 2007, China’s parliament, the National
People’s Congress, adopted the Enterprise Income Tax Law, which took effect on January 1, 2008. The new income tax law sets
a unified income tax rate for domestic and foreign companies at 25% and abolishes the favorable tax policies for foreign invested
enterprises. After this law took effect, newly established foreign invested enterprises will no longer enjoy certain favorable
tax treatments. Our subsidiaries were benefiting from the preferred tax rates for foreign invested companies and are subject to
the new tax rate of 25%, thus, our net income margin and results of operations could be negatively affected. Further changes to
the tax regime could also negatively impact our financial results.
You may have difficulty enforcing judgments obtained
against us.
Substantially all of our assets are located outside of
the United States. Substantially all of our current operations are conducted in the PRC. In addition, most of our directors and
officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons
is located outside the United States. As a result, it may be difficult for you to effect service of process within the United States
upon those persons. It may also be difficult for you to enforce in U.S. courts judgments obtained in U.S. courts based on the civil
liability provisions of the U.S. federal securities laws against us or our officers and directors, most of whom are not residents
in the United States and the substantial majority of whose assets are located outside of the United States. In addition, there
is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts against us or such persons
predicated upon the civil liability provisions of the securities laws of the United States or any state. In addition, it is uncertain
whether such PRC courts would be competent to hear original actions brought in the PRC against us or such persons predicated upon
the securities laws of the United States or any state.
China lacks a regulatory body to provide oversight and perform
appropriate due diligence to help to ensure the accuracy of our SEC disclosures.
At this time there is no regulatory body in China that
reviews our SEC disclosures. Furthermore, there are no penalties in China for false, misleading or otherwise inaccurate disclosures
made by Chinese companies that are SEC reporting companies. Thus, the lack of a separate system of Chinese regulation concerning
the SEC filings of Chinese companies that are SEC reporting companies does not serve to strengthen compliance with SEC and other
relevant rules, regulations and laws.
Risks Related to Investing in Our Securities
The market for our common stock is limited.
The shares of our common stock have been traded on the
NYSE Amex LLC under the trading symbol “SHZ” since January 31, 2008. Before the listing on the NYSE Amex LLC, the shares
of our common stock were traded on the OTC Bulletin Board.
We currently have approximately 644 shareholders of
record. The trading volume of our stock has been low. A viable public trading market may not develop for our shares or may
take a period of time to develop. Such a market, if it does develop, could be subject to extreme price and volume
fluctuations. In the absence of an active trading market:
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shareholders may have difficulty buying and selling or obtaining market quotations;
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market visibility for our common stock may be limited; and
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a lack of visibility for our common stock may have a depressive effect on the market price for our common stock.
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Our stock price may be volatile, which may result
in losses to our stockholders.
The stock markets have experienced significant price
and trading volume fluctuations, and the market prices of companies listed on the NYSE Amex LLC, the stock market on which shares
of our common stock is listed, have been volatile in the past and have experienced sharp share price and trading volume changes.
The trading price of our common stock is likely to be volatile and could fluctuate widely in response to many factors, including
the following, some of which are beyond our control:
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variations in our operating results;
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changes in expectations of our future financial performance, including financial estimates by securities analysts and investors;
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changes in operating and stock price performance of other companies in our industry;
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additions or departures of key personnel; and
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future sales of our common stock.
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The trading prices of many companies that have business
operations only in China, particularly companies that became public through the completion of a reverse merger, have been volatile
which may result in large fluctuations in the price of our common stock and losses for shareholders.
The stock market has experienced significant price and
volume fluctuations that have particularly affected the trading prices of equity securities of many companies that have business
operations only in China, especially companies, such as ours, that became public through the completion of a reverse merger. These
fluctuations have, at times, been as a result of negative publicity, and have often been unrelated or disproportionate to the operating
performance of many of these companies. Any negative change in the public’s perception of these companies could depress our
stock price regardless of our operating results. The market price of our common stock has been and may continue to be volatile.
We expect our stock price to be subject to fluctuations as a result of a variety of factors, including factors beyond our control.
These factors include:
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actual or anticipated variations in our quarterly operating results;
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announcements of technological innovations or new products or services by us or our competitors;
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announcements relating to strategic relationships or acquisitions;
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negative publicity relating to companies doing business in China or related to companies that became public through the completion of a reverse merger;
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announcements relating to strategic relationships or acquisitions;
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additions or terminations of coverage of our common stock by securities analysts;
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statements by securities analysts regarding us or our industry;
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conditions or trends in the our industry; and
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changes in the economic performance and/or market valuations of other mining companies.
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The prices at which our common stock trades will affect
our ability to raise capital, which may have an adverse affect on our ability to fund our operations.
Our common stock may be considered to be a “penny
stock” and, as such, the market for our Common Stock may be further limited by certain SEC rules applicable to penny stocks.
To the extent the price of our common stock is below
$5.00 per share, we have net tangible assets of $2,000,000 or less, or if we fall below certain other thresholds, our common shares
will be subject to certain “penny stock” rules promulgated by the SEC. Those rules impose certain sales practice requirements
on brokers who sell penny stock to persons other than established customers and accredited investors (generally institutions with
assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000). For transactions covered by the penny stock
rules, the broker must make a special suitability determination for the purchaser and receive the purchaser’s written consent
to the transaction prior to the sale. Furthermore, the penny stock rules generally require, among other things, that brokers engaged
in secondary trading of penny stocks provide customers with written disclosure documents, monthly statements of the market value
of penny stocks, disclosure of the bid and asked prices and disclosure of the compensation to the brokerage firm and disclosure
of the sales person working for the brokerage firm. These rules and regulations adversely affect the ability of brokers to sell
our common shares and limit the liquidity of our securities.
Future issuances of shares or equity-related securities
may depress the trading price of our shares.
Any issuance of equity securities could dilute the interests
of our existing stockholders and could substantially decrease the trading price of our shares. We may issue equity securities in
the future for a number of reasons, including to finance our operations and business strategy (including in connection with acquisitions,
strategic collaborations or other transactions), to adjust our ratio of debt to equity and to satisfy our obligations upon the
exercise of outstanding warrants or options or for other reasons.
Sales of a substantial number of shares or other equity-related
securities in the public market could depress the market price of our shares, and impair our ability to raise capital through the
sale of additional equity securities. We cannot predict the effect that future sales of our shares or other equity-related securities
would have on the market price of our shares.
We do not intend to pay any dividends on our common
stock in the foreseeable future.
We currently intend to retain all future earnings, if
any, to finance our current and proposed business activities and do not anticipate paying any cash dividends on our common stock
in the foreseeable future. We may also incur indebtedness in the future that may prohibit or effectively restrict the payment of
cash dividends on our common stock.
Certain stockholders can exert control over the Company
and may not make decisions that further the best interests of all stockholders.
Our officers, directors and principal stockholders (greater
than 5% stockholders) together currently own an aggregate of approximately 50.6% of our outstanding common stock on a fully diluted
basis. Consequently, these stockholders, if they act individually or together, may exert a significant degree of influence over
our management and affairs and over matters requiring stockholder approval, including the election of directors and approval of
significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change of control of us
and might affect the market price of our common stock, even when a change of control may be in the best interest of all stockholders.
Furthermore, the interests of this concentration of ownership may not always coincide with our interests or the interests of other
stockholders, and accordingly, they could cause us to enter into transactions or agreements which we would not otherwise consider.
Fluctuation in the value of the RMB may have a material
adverse effect on your investment.
The change in value of the RMB against the U.S. Dollar,
the Euro and other currencies is affected by changes in China’s political and economic conditions, among other things. On
July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. Dollar. Under the new
policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This
change in policy has resulted in over 21% appreciation of RMB against the U.S. Dollar. While the international reaction to the
RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an
even more flexible currency policy, which could result in a further and more significant appreciation of the RMB against the U.S.
Dollar. As a portion of our costs and expenses are denominated in RMB, the revaluation in July 2005 and potential future revaluation
has and could further increase our costs. In addition, as we rely entirely on dividends paid to us by our operating subsidiaries,
any significant revaluation of the RMB may have a material adverse effect on our revenues and financial condition. For example,
to the extent that we need to convert U.S. Dollars into RMB for our operations, appreciation of the RMB against the U.S. Dollar
would have an adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert our RMB into
U.S. Dollars for the purpose of making payments for dividends on our ordinary shares or for other business purposes, appreciation
of the U.S. Dollar against the RMB would have a negative effect on the U.S. Dollar amount available to us.
If the Company were to be delisted from NYSE Amex
LLC, it could negatively impact our liquidity and our stockholders’ ability to sell their shares.
Our common stock is currently listed on the NYSE Amex
LLC. We must comply with numerous rules in order to maintain the listing of our common stock on the exchange. There can be no assurance
that we can continue to meet the requirements to maintain the NYSE Amex LLC listing of our common stock. If we are unable to maintain
our listing on the NYSE Amex LLC, the market liquidity of our common stock may be severely limited.
Volatility in our common stock price may subject us
to securities litigation.
The market for our common stock is characterized by significant
price volatility as compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned
issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company
following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation.
Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.
Shares eligible for future sale may adversely affect
the market price of our common stock, as the future sale of a substantial amount of our restricted stock in the public marketplace
could reduce the price of our common stock.
From time to time, certain of our stockholders may be
eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant
to Rule 144 (“Rule 144”), promulgated under the Securities Act of 1933 (the “Securities Act”), subject
to certain limitations. Under Rule 144, a person who has beneficially owned restricted shares of our common stock or warrants
for at least six months would be entitled to sell their securities provided that (i) such person is not deemed to have been
one of our affiliates at the time of, or at any time during the three months preceding, a sale and (ii) we are subject to
the Exchange Act periodic reporting requirements for at least three months before the sale.
Persons who have beneficially owned restricted shares
of our common stock for at least six months but who are our affiliates at the time of, or at any time during the three months preceding,
a sale, would be subject to additional restrictions, by which such person would be entitled to sell within any three-month period
only a number of securities that does not exceed the greater of either of the following:
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1% of the total number of securities of the same class then outstanding; or
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the average weekly trading volume of such securities during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale.
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provided, in each case, that we are subject to the Exchange
Act periodic reporting requirements for at least three months before the sale.
Provisions in our charter documents could prevent
or delay a change in control, which could delay or prevent a takeover.
Our articles of incorporation authorize the issuance
of “blank check” preferred stock with such designations, rights, and preferences, as may be determined by our Board
of Directors. Accordingly, the Board of Directors may, without shareholder approval, issue shares of preferred stock with dividend,
liquidation, conversion, voting, or other rights that could adversely affect the voting power or other rights of the holders of
our common stock. Preferred stock could also be issued to discourage, delay, or prevent a change in our control.
Our
investors may lose their entire investment in our securities.
An investment in our
securities is highly speculative and may result in the loss of the entire investment. Only potential investors who are experienced
investors in high risk investments and who can afford to lose their entire investment should consider an investment in our securities.
ITEM 1B. UNRESOLVED STAFF COMMENT
None.
ITEM 2. PROPERTIES
General
As of December 31, 201
1,
the Company owns three properties in production; one in the Inner Mongolia Autonomous Region, in the People’s Republic
of China (“PRC”), one in the Xinjiang Uygur Autonomous Region and one in Anhui Province, in the PRC. The Company
also owns one property in the process of applying for a new mining license in Anhui Province in
the PRC.
The three properties in production are:
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Sumochaganaobao Fluorite Mine in Siziwangqi of Inner Mongolia Autonomous Region in the PRC (Xiangzhen Mining)
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Keyinbulake Cu-Zn Multi-metal Mine located in Buerjin County, Aletai, Xinjiang Uygur Autonomous Region in the PRC (Xingzhen Mining)
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Mining license for Qingzheng Fluorite Xinyi Mine No.1 in Jingde County,
Anhui Province, PRC (Xinyi Fluorite)
|
The one property in the process of
applying for a new mining license is:
|
·
|
Mining license for Xinglong Town Guangrong Fluorite Mine in
Jingde County, Anhui Province, PRC (Xinyi Fluorite)
|
No
|
|
Name of property
|
|
Type
|
|
Ownership
|
|
Status
|
|
Location/Country
|
|
With Known Reserves
under Industry Guide 7
|
1
|
|
Sumochaganaobao Fluorite Mine
|
|
Non-metal Fluorite
|
|
100%
|
|
Production
|
|
Inner Mongolia, PRC
|
|
Yes
|
2
|
|
Keyinbulake Multi-metal Mine
|
|
Copper and zinc
|
|
90%
|
|
Production
|
|
Xinjiang Uygur Autonomous Region , PRC
|
|
No
|
3
|
|
Qingzheng Fluorite Xinyi Mine No.1
|
|
Non-metal Fluorite
|
|
55%
|
|
Production
|
|
Jingde County, Anhui Province,, PRC
|
|
No
|
4
|
|
Xinglong Town Guangrong Fluorite Mine
|
|
Non-metal Fluorite
|
|
55%
|
|
Renewing
|
|
Jingde County, Anhui Province,, PRC
|
|
No
|
Figure 2-1: China Shen Zhou’s Properties
in China
The Company holds 4 mining licenses as of December 31, 2011. The licenses are:
|
·
|
Mining license for Sumochaganaobao Fluorite Mine, Siziwangqi, Inner Mongolia, PRC
|
|
·
|
Mining license for Keyinbulake Cu-Zn Mine in Buerjin County, Xinjiang Uygur Autonomous Region, PRC
|
|
|
|
|
·
|
Mining license for Qingzheng Fluorite Xinyi Mine No.1 in Jingde County, Anhui Province, PRC
|
|
|
|
|
·
|
Mining license for Xinglong Town Guangrong Fluorite Mine in Jingde County, Anhui Province, PRC
|
Table 2-1 below presents detailed information
about these licenses.
Table 2-1: 4 Mining Licenses Held by
the Company
Property
|
|
Sumochaganaobao fluorite
deposit (between prospecting
line 21-04)
|
|
Keyinbulake Cu-Zn
Multi-metal Mine
|
|
Qingzheng Fluorite Xinyi
Mine No. 1
|
|
Xinglong Town*
Guangrong Fluorite Mine
|
|
|
|
|
|
|
|
|
|
License Number
|
|
C1500002011056120112309
|
|
6500000712980
|
|
C3418252009036120010379
|
|
C3418002009046120011698
|
Owner
|
|
Inner Mongolia Xiangzhen Mining Group Ltd.
|
|
Buerjin County Xingzhen Mining.
|
|
Jingde County Xinyi Fluortie Company Ltd
|
|
Jingde County Xinyi Fluortie Company Ltd
|
Validated period
|
|
January 2012 to January 2015
|
|
August 2007 to August 2013
|
|
April 2011 to April 2014
|
|
April 2009 to April 2011
|
Area
|
|
0.909 km
2
|
|
1.955 km
2
|
|
0.151 km
2
|
|
0.0695 km
2
|
Mining mode
|
|
Underground mining
|
|
Underground mining
|
|
Underground mining
|
|
Underground mining
|
Mining scale
|
|
150,000 metric tons/annum
|
|
21,000 metric tons/ annum
|
|
30,000 metric tons/ annum
|
|
20,000 metric tons/ annum
|
Mineral types
|
|
Fluorite
|
|
Copper and zinc
|
|
Fluorite
|
|
Fluorite
|
Mining Level
|
|
1075m-497m
|
|
1420m-1516m
|
|
100m-502m
|
|
305m-0m
|
* The Company has applied to renew its
mining license of Xinglong Town Guangrong Fluorite Mine in Jingde County in Anhui Province in the PRC.
There are two types of mineral rights in
China: exploration rights and mining rights. Exploration rights are the rights to explore for minerals in the areas authorized
by the exploration license. Mining rights are the rights to exploit minerals within the defined area and produce mineral products.
According to Chinese law, an exploration license is valid for three years and shall not be extended beyond two additional periods
and each extension for no more than two years. 10, 20 and 30 years are the length limits of mining licenses for small, medium and
large deposits or mines, respectively. A mining license can be extended in scope or period of time if a company intends to continue
to operate. An application for extension needs to be submitted at least 30 days before the expiration date of the license.
Sumochaganaobao Fluorite Mine in
Production Stage (Xiangzhen Mining)
The Company has a 100% ownership interest
in the Sumochaganaobao fluorite mine (“Sumo”), which was acquired by Xiangzhen Mining from Inner Mongolia Siziwangqi
Northern Fluorite Ltd, Co. in July 2002.
Location, Access and Traffic
Sumochaganaobao fluorite mine is located
in Siziwangqi, Wulanchabu City, Inner Mongolia, PRC. The coordinates are: E111°15′35″~111°16′30″;
N43°07′10″~43°07′49″. This area is easily accessible, with a road of approximately 90km from the
mine to Erlianhot and then a freeway or national highway of approximately 250km to Hohhot, the capital city of Inner Mongolia,
China. Sumo has a typical continental climate characterized mainly by low precipitation and high evaporation, a large temperature
range between day and night, and windy conditions. The topography is gentle grassland with an elevation difference of only 20-40m.
Figure 2-2 is the index map of Sumochaganaobao Fluorite Mine.
Figure 2-2: Sumochaganaobao Fluorite Mine
Mining Licenses
Inner Mongolia Xiangzhen Mining Group Co
Ltd. (Xiangzhen Mining) holds the mining licenses to the area between prospecting line 21 and 04 of the Sumochaganaobao Fluorite
Deposit. The mining license Number is C1500002011056120112309, issued by the Bureau of Land and Resources on January 16, 2012, Wulanchabu
City, Inner Mongolia and expires in January 16, 2015.
Previous exploration and development
In 1975, Geological Survey Brigade No.
1 of Inner Mongolia conducted a 1/200,000 geological survey in this area and found the Sumochaganaobao Fluorite deposit. At that
time, its mineral reserves were estimated at 1.716 million metric tons of fluorite.
From 1981 to 1987, Geological Survey Brigade
No. 102 of Inner Mongolia conducted prospecting with continued general and detailed exploration and completed the “Geological
Report of Sumochaganaobao Fluorite Deposit of Siziwangqi, Inner Mongolia” in 1987.
In 1987, the property was mined by a state-owned
company, which was later reorganized to become the Siziwangqi Northern Fluorite Ltd., Co. in 1997. In 2003, the mining right was
transferred to Xiangzhen Mining Group Co., Ltd. from the Siziwangqi Northern Fluorite Ltd., Co.
Previous Mining Operation and Expansion
From 1987 to 2002, open-pit mining at Sumo
was conducted by state-owned company Siziwang Banner. The mining capacity was 8,000-20,000 metric tons per year and the mining
depth reached 58m from an elevation of 1,065m to 1,007m. In 1997, the mining right was transferred to Inner Mongolia Siziwangqi
Northern Fluorite Ltd., Co.
Since 2002, the underground mining has
been conducted by Xiangzhen Mining. Initially, the mining capacity was 80,000 metric tons per year with a concentrator (about 45km
southeast of the mine) with an annual processing capacity of 60,000 metric tons. In April 2006, the Company started an expansion.
The new designed mining capacity is 300,000 metric tons per year and the designed treatment capacity is 200,000 metric tons per
year carried out by a concentrator located near the fluorite mine. At the end of 2007, the expansion was completed and commissioning
started. As of 2011, the Company has invested approximately $5.91 million in the underground expansion and approximately $9.52
million in the new concentrator.
Water and Power Supply
Before October 2007, the mining area did
not possess a connection to the state power network, and power was supplied by diesel generators. Since October 2007, power has
been supplied to the mine by the state power network.
Water for production is supplied by two
wells that are located approximately five kilometer away from the mine. Water for living is supplied by water source that are located
approximately one kilometer away from the mine. In 2010, the Company added a water treatment system to the facility in order to
improve the water quality and reuse the waste water.
Current Mining Operation
Inclined shaft development has been assumed.
As a result, currently there is one main inclined shaft, one auxiliary inclined shaft and inclined shaft No. 2.
Hoisting and transportation: Underground
transportation is carried out by electric locomotives. After loading by rock loaders, ore is transported by the electric locomotive
to a shaft station and then lifted to ground level by the hoister and unloaded onto a storage platform where high grade lumps (CaF2>75%)
are directly sold to consumers (i.e., steel plant) after manual classification and the remainder is sent to concentrator for
further processing.
Ventilation: Fresh air is blown in from
the main inclined shaft, passes through the work area and is then out through the auxiliary inclined shaft and inclined shaft No.
2.
Drainage system: Water in each level flows
into sumps of drifts and is pumped to a pond on a higher level above ground for secondary use in production.
Mining Method: Short-hole shrinkage stopping
method with the mining loss at 25% and dilution at 10% and comprehensive recovery rate of ore at 75%.
Major equipment in the mine is as follows:
Name
|
|
Type
|
|
Qty (set)
|
|
Life of Service (year)
|
|
Notes
|
Hoisters
|
|
Ф2M
|
|
3
|
|
20
|
|
|
Rock loaders
|
|
Z-20W
|
|
6
|
|
20
|
|
|
Compressors
|
|
20M 3
|
|
4
|
|
20
|
|
Power driven
|
Electric Locomotives
|
|
|
|
6
|
|
20
|
|
|
Ventilators
|
|
|
|
4
|
|
20
|
|
|
Transformers
|
|
|
|
5
|
|
|
|
|
Pumps
|
|
|
|
6
|
|
|
|
|
Ore Processing
:
The concentrator that went online in 2007
has an annual designed treatment capacity of 200,000 metric tons. The process consists of two-stage closed crushing with primary
and secondary grindings, rough flotation, scavenging, eight steps of cleaning, dehydrating (thickening, filtrating and drying),
and final packaging for delivery. The major facilities include a ball mill workshop, a flotation ore processing plant, a press
and filtration workshop, concentrate pools, tailings houses, a lab, electronic scales, water supply wells, power supply lines and
offices, etc. The major equipment is as follows:
No.
|
|
Equipment
|
|
Unit
|
|
Qty
|
|
Life of Service
|
|
Notes
|
1
|
|
Linear vibrating feeder, XSW380x95
|
|
set
|
|
1
|
|
20 years
|
|
New
|
2
|
|
Jaw-type crusher, PE-500 × 500
|
|
set
|
|
1
|
|
20 years
|
|
New
|
3
|
|
Standard cone crusher, 36AF
|
|
set
|
|
1
|
|
20 years
|
|
New
|
4
|
|
Vibrating screen, 2YAH1800 × 4800
|
|
set
|
|
1
|
|
20 years
|
|
New
|
5
|
|
Overflow ball mill, MQY2700x4500
|
|
set
|
|
1
|
|
20 years
|
|
New
|
6
|
|
Twin spiral classifiers, FLGT24
|
|
set
|
|
1
|
|
20 years
|
|
New
|
7
|
|
Overflow ball mill, MQY1830x5700
|
|
set
|
|
1
|
|
20 years
|
|
New
|
8
|
|
Flotation machines, SF-8
|
|
set
|
|
34
|
|
20 years
|
|
New
|
9
|
|
Thickeners, NZSG-12
|
|
set
|
|
1
|
|
20 years
|
|
New
|
10
|
|
High efficiency thickeners, Ф 18
|
|
set
|
|
1
|
|
20 years
|
|
New
|
11
|
|
Ceramic filter, TC-45
|
|
set
|
|
1
|
|
20 years
|
|
New
|
12
|
|
Rotary dryer, SD2422
|
|
set
|
|
1
|
|
20 years
|
|
New
|
13
|
|
Air heater, EFL500
|
|
set
|
|
1
|
|
20 years
|
|
New
|
14
|
|
Packing machine, BG-4WY
|
|
set
|
|
1
|
|
20 years
|
|
New
|
The processing recovery is 75%. Fluorite
concentrate grade is over 96%. The main component of fluorite is CaF2, an important chemical that is used in steel making as a
flux and in glass making as an additive. The concentrates are in high demand and demand is expected to increase in the future.
Geology of the Property
Sumo is located in the Suniteyou Banner
Fold Zone in the late-Varican, Inner Mongolia Fold Belt. The main strata in the property are: late Paleozoic lower Permian System
Xilimiao Formation (P1xl) with three sections: P1xl2-4, P1xl3, and P1xl4-1; Proterozoic Ailegemiao Formation and Jurassic Chagannoer
group. The fluorite mineralized body and mineralization marble occurs in the lower of P1xl3 and on the top of P1xl2-4.
Reserves
In 2010, we commissioned SRK Consulting
China Ltd. to carry out overall reserves update and to complete an underground mine design and reserve estimate pertaining to the
authorized Siziwangqi Sumochaganaobao fluorite deposit (“Aobao fluorite deposit” or the “Mine”) in Wulanchabu,
Inner Mongolian Autonomous Region, as per the requirements of AMEX regarding reserve estimation. The estimation report was successfully
finished and issued in March 2011. The SRK team reviewed previous explorations completed by Chinese Minerals and Geology Exploration
Brigades, and conducted data verification, and was able to confirm the prior results. On the basis of their findings, SRK built
a database for estimating the reserves. With respect to the production of minerals, SRK estimated the reserves in compliance with
the standards of the Joint Ore Reserve Committee Code (“JORC Code”).
SRK has examined (via duplicate sample
collecting and re-analysis) the prior work, which was conducted by Chinese Geological Exploration Brigades, and SRK is satisfied
with the quality of previous work. On the basis of their results, SRK established a database for reserves estimate, and according
to the operation status of the mine, SRK estimated the reserve of the mine in compliance with JORC Code. The following technical
parameters are used to create the zones of mineralization on cross sections:
|
·
|
Cut-off grade: low grade ore: (CaF
2
)
³
20%,
high grade ore: (CaF
2
)
³
65%;
|
|
·
|
Minimum mineable thickness: low grade ore 1.0m and high grade ore 0.7m; and
|
|
·
|
Maximum dilution thickness: low grade ore 2m, high grade ore 0.7m.
|
The Company's sales records provided to SRK indicated that the fluorite powder selling prices in 2008 to
2010 were RMB 1,164, RMB 770 and RMB 1,300 per tonne, respectively. The current spot market fluorite powder price is over RMB 2,000
per tonne.
Base on the above data, SRK is according
to real production situation, designed mines production, revalued reserves of mines. As of December 31
st
2010, according
to JORC code, total reserves of mines are 1,523 thousand tons (kt), the average grade is 53.6%, Proved reserve is 818 kt, average
grade is 60.43%; Probable reserve is 705 kt, the average grade is 45.78%.
See Below:
|
|
Block
|
|
|
Proven
|
|
|
Probable
|
|
|
Total Proven and Probable
|
|
Level
|
|
Amount
|
|
|
Tonnage (kt)
|
|
|
CaF
2
(%)
|
|
|
Tonnage (kt)
|
|
|
CaF
2
(%)
|
|
|
Tonnage (kt)
|
|
|
CaF
2
(%)
|
|
850 m
|
|
|
4
|
|
|
|
153
|
|
|
|
60.26
|
|
|
|
2
|
|
|
|
30.94
|
|
|
|
155
|
|
|
|
59.9
|
|
820 m
|
|
|
7
|
|
|
|
355
|
|
|
|
61.56
|
|
|
|
1
|
|
|
|
69.07
|
|
|
|
356
|
|
|
|
61.6
|
|
790 m
|
|
|
8
|
|
|
|
310
|
|
|
|
59.23
|
|
|
|
|
|
|
|
|
|
|
|
310
|
|
|
|
59.2
|
|
760 m
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
283
|
|
|
|
47.22
|
|
|
|
283
|
|
|
|
47.2
|
|
730 m
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
273
|
|
|
|
46.39
|
|
|
|
273
|
|
|
|
46.4
|
|
700 m
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
146
|
|
|
|
41.91
|
|
|
|
146
|
|
|
|
41.9
|
|
Total
|
|
|
46
|
|
|
|
818
|
|
|
|
60.43
|
|
|
|
705
|
|
|
|
45.78
|
|
|
|
1,523
|
|
|
|
53.6
|
|
SRK understands that the reserves above
level 880m had been mined out and half of the reserves at level 850m had been extracted. The mined out area is delineated based
on measured plans and plans of design at and above level 850m, and depleted reserves are accordingly estimated.
In 2011, we extracted a total amount
of 190,000 metric tons of fluorite ore (130,000 metric tons from underground and 60,000 from open mining), which consumed
156,000 metric tons of the reserves below level 850m. As of December 31, 2011, the retained reserves of mine are 1,376 kt,
including 738 kt of the proved reserve with the average grade 60.45% and 629 kt of the probable reserve with the average
grade is 30.94%.
SRK Consulting
SRK Consulting is an independent, international
consulting company providing focused advice and problem solving. SRK is one of the world’s first one-stop consultancies offering
specialist services to mining and exploration companies for the entire life cycle of a mining project, from exploration through
to mine closure. Among SRK’s clients are most of the world’s major and medium-sized metal and industrial mineral
mining houses, exploration companies, banks, petroleum exploration companies, agribusiness companies, construction firms and government
departments.
Formed in Johannesburg (South Africa) in 1974, SRK now employs
more than 1000 professionals internationally in over 40 offices on 6 continents. A broad range of internationally recognised
associate consultants complements the core staff.
The SRK Group’s independence is ensured by the fact that
it holds no equity in any project and that its ownership rests solely with its staff. This permits the SRK Group to provide
its clients with conflict-free and objective recommendations on crucial judgment issues.
SRK employs leading specialists in each
field of science and engineering. Its seamless integration of services and global base has made the company an international
leader in due diligence, feasibility studies and confidential internal review.
Sampling, Analytical Procedures and
Quality Control
The core recovery is over 85% for the drill
holes. The samples were taken by splitting the core into halves, one half being the sample and the other half being stored in the
core box. Sample length was usually 0.5 meters to 1.5 meters and core recovery is over 85%.
Trenching samples were collected along
channels with widths of 10 centimeters and depths of 5 centimeters and in parallel along the walls of the pits. Each sample was
1 to 2 meters in length.
Samples are crushed by three jaw crushers
to 0.9mm in size and then are split. About 500 grams of each sample is sent for pulverization and the rest are kept as coarse rejects.
100 grams of each pulp sample are sent to the lab for assaying and the rest are stored. Items of CaF2, CaCO3, SiO2, Fe2O3 and S
are assayed in the lab.
Assaying of samples was completed in the
laboratory of Geological Brigade No. 102 of Inner Mongolia and checked by the Central Laboratory of Bureau of Geology of Inner
Mongolia. Internal and external check samples were assayed: 95% of samples sent for internal checkup and 6.4% for external checkup.
The qualification rate of the check samples was above 95%. The criteria of Barite, Fluorite and Boron Exploration were also adopted
in sample assaying.
Products and Output:
The mine produces fluorite ore which is
classified into two commodities, one being high grade fluorite lumps and the second being fluorite powders processed in concentrator.
The following table lists the products and output and the average prices in past three years:
Table 2-3: The Output and Price of Products
of 2009-2011, Xiangzhen Mining
Year
|
|
|
Product
|
|
Output (t)
|
|
|
Average Price
per Year(USD$/t)
|
|
|
2009
|
|
|
Fluorite lumps
|
|
|
27,663.10
|
|
|
|
91.65
|
|
|
|
|
|
Fluorite concentrate
|
|
|
15,261.40
|
|
|
|
112.86
|
|
|
2010
|
|
|
Fluorite lumps
|
|
|
36,133.95
|
|
|
|
99.00
|
|
|
|
|
|
Fluorite concentrate
|
|
|
24,327.57
|
|
|
|
163.78
|
|
|
2011
|
|
|
Fluorite lumps
|
|
|
40,945.06
|
|
|
|
129.63
|
|
|
|
|
|
Fluorite concentrate
|
|
|
56,488.43
|
|
|
|
329.41
|
|
Potential for Further Exploration
In June 2007, the Company hired the Third
Geological Prospecting Institute of China Metallurgy Geological General Bureau to conduct supplementary prospecting. As result
of the prospecting, the category of this fluorite mine was upgraded.
There is a low probability of finding ore
bodies or extensions to existing ore bodies since the deposit is well defined and well understood geologically.
Qingzheng Fluorite Xinyi Mine No.1 (Xinyi Fluorite)
Xinyi Fluorite owns 100% of the Qingzheng
Fluorite Xinyi Mine No.1. On January 13 2011, the Company, through its subsidiary Xingzhen Mining, acquired 55% of equity interest
of Xinyi Fluorite.
Location
Xinyi Mine No.1 is located in Banshu
Town, Jingde County, Xuancheng District, Anhui Province of the PRC. The coordinates are E 118º30′41″, N 30º17′28”.The
mine is 2.5 kilometers to Banshu Town, Jingde County. It is conveniently accessible by highways and telecommunications. Straight
distance to S217 highway is 2.5 kilometers, travel distance is 4.5 kilometers. See Figure 2-3
Figure 2-3: Qingzheng Fluorite Xinyi Mine
No.1
History of Operation
Xinyi Mine No.1 has been in operation since year
1989, it was belong to Banshu town local government back then. Later it was transferred to a villager to manage operation.
Mining capacity is 5,000 metric tons of ores per year. In year 2004, local government has remade the Mine through financing,
the mining capacity is increased to 15,000 metric tons per year and built a processing plant. This plant processing capacity
is processing 60,000 metric tons ore per year. In the year 2011, company has applied to government for expanding mining
capacity for 15,000 metric tons per year to 30,000 metric tons per year. In the mean time, company is remake and expanding
underground production system, it is still in process.
Mining and Extraction technical condition:
The extraction technical condition is rather good. The
mineralized body is inside of granite, inclined over 70 degrees, top and bottom of mineralized body are stabilized, safety extraction
condition. Less water is under the shaft, less influence to production. Xinyi Mine No.1 is considered to have simply extraction
condition.
The Current Situation of the Mine
Footrill extraction method: internal shaft developing
method, short-hold shrinkage extraction method.
Transportation: Underground transportation is carried
out by electric locomotives. After they are loaded by rock loaders, ores transported by the electric locomotive underground, and
then lifted to ground level by a hoister and unloaded into a storage yard.
Ventilation: draw-out method, mechanical flank diagonal
type venting
Drainage system: Relay drainage
Air supply: two air compressors for air supply
Power supply: There is a 10 KV power supply line for
mining production.
Water supply: Industrial water is supplied by underground
water; domestic water is supplied by special water source.
The mining progress is at +216 meters, the work above
+294 level has finished. Ores is carried out by electric locomotives, then transported by electric locomotive underground, and
then lifted to ground level by a hoister and unloaded into a storage yard. We are using short-hold shrinkage extraction method;
designed recovery rate is 90%.
See below for production equipment:
Equipment list of Xinyi Mine No.1
No.
|
|
Equipment
|
|
Type
|
|
Qty
|
|
Notes
|
1
|
|
Submersible sewage
|
|
WQN20-130-15
|
|
6
|
|
3 in use
|
2
|
|
U type mining cart
|
|
0.55 cubic meter
|
|
6
|
|
All in use
|
3
|
|
U type mining cart
|
|
0.65 cubic meter
|
|
25
|
|
20 in use
|
4
|
|
Power transformer
|
|
SH-M-400/10
|
|
1
|
|
All in use
|
5
|
|
Power transformer
|
|
S9-M-160/10
|
|
1
|
|
Not in use
|
6
|
|
Power transformer
|
|
S9-50/10
|
|
1
|
|
All in use
|
7
|
|
Screw electric air compressor
|
|
LG110-8
|
|
1
|
|
All in use
|
8
|
|
AC Power frequency diesel generator set
|
|
HC250GF
|
|
1
|
|
Back-ups
|
9
|
|
Electric rock loader
|
|
Z-20W
|
|
3
|
|
All in use
|
10
|
|
Hoisting winch
|
|
2JTP-1.2*0.8
|
|
1
|
|
All in use
|
11
|
|
Hoisting winch
|
|
KJ500
|
|
2
|
|
All in use
|
12
|
|
Movable air compressor
|
|
W-3.5/7
|
|
5
|
|
All in use
|
13
|
|
Transfer conveyor
|
|
Z30
|
|
1
|
|
All in use
|
14
|
|
Low voltage transformer
|
|
JMB-10kVA
|
|
10
|
|
All in use
|
15
|
|
Battery electric vehicle
|
|
2.5T
|
|
1
|
|
All in use
|
16
|
|
Air drive rock driller
|
|
YT-28
|
|
15
|
|
All in use
|
17
|
|
Electric vehicle
|
|
ZK2-6-100V
|
|
1
|
|
All in use
|
18
|
|
Main ventilating fan
|
|
K40-6№13/6-18.5
|
|
2
|
|
All in use
|
19
|
|
Spot ventilating fan
|
|
|
|
2
|
|
All in use
|
20
|
|
Spot ventilating fan
|
|
JK58-2
|
|
1
|
|
All in use
|
21
|
|
Spot ventilating fan
|
|
|
|
5
|
|
All in use
|
22
|
|
Spot ventilating fan
|
|
|
|
1
|
|
Back-ups
|
23
|
|
Spot ventilating fan
|
|
|
|
1
|
|
Back-ups
|
24
|
|
Communication system
|
|
|
|
2
|
|
All in use
|
25
|
|
Inspection system
|
|
|
|
1
|
|
All in use
|
26
|
|
Monitoring system
|
|
|
|
1
|
|
All in use
|
Mineral Processing
Ores is transported by trucks to mineral processing plant
to process. Transporting distance is 30 kilometers. Procedure of production of processing plant is: crushing (two stages) –
grinding (once) – floatation (rough once, scavenging twice, concentration six times) – dehydration (thicken and filtrating)
– packaging.
Ores grade is around 55%, recovery rate is over 95%.
The quality of our concentrate is considered national primes standard. Concentration ratio is 1.98/1 tons per ton.
Processing plant power supply is through 10 KV power
supply line, water supply is getting from river 50 meters away from plant.
Equipment list of processing plant
|
|
|
|
|
|
Type of motor
|
|
|
|
|
No
|
|
Equipment
|
|
Type
|
|
Type
|
|
Power (KW)
|
|
Set
|
|
Notes
|
1
|
|
Loader
|
|
Z50
|
|
|
|
|
|
1
|
|
Crush for feeding
|
2
|
|
loader
|
|
Z30
|
|
|
|
|
|
1
|
|
Crush for feeding
|
3
|
|
transformer
|
|
S9-315
|
|
|
|
400KFA
|
|
1
|
|
|
4
|
|
Jaw-type crusher
|
|
250*400
|
|
40KW
|
|
25
|
|
1
|
|
crushing
|
5
|
|
Belt conveyor
|
|
800mm
|
|
5.5KW
|
|
5.5
|
|
1
|
|
Ball mill feeding
|
6
|
|
Stirring tank
|
|
XB-1000
|
|
Y90L-6
|
|
2
|
|
2
|
|
|
7
|
|
Circular feeder
|
|
1000
|
|
Y112M-6
|
|
2
|
|
1
|
|
|
8
|
|
Storage bin
|
|
|
|
|
|
|
|
|
|
|
9
|
|
classifier
|
|
FLG-1200
|
|
Y132M2-6
|
|
5.5
|
|
1
|
|
Original ores
|
10
|
|
Ball mill
|
|
1500*3000
|
|
Y180M-6
|
|
75
|
|
|
|
|
11
|
|
Pulp stirring slot
|
|
XB-1500
|
|
|
|
1
|
|
2
|
|
|
12
|
|
Concentrate pump
|
|
100LWB-10
|
|
Y100L1-4
|
|
2
|
|
2
|
|
|
13
|
|
Floatation machine
|
|
XJK-1.1
|
|
Y132M2-6
|
|
5.5
|
|
27
|
|
|
14
|
|
Mono beam overhead crane
|
|
3T L=7M
|
|
|
|
2
|
|
1
|
|
For repairing
|
15
|
|
thickener
|
|
TNZ-6
|
|
Y100L2-4
|
|
5.5
|
|
|
|
|
16
|
|
Water jet pump
|
|
SPB-450
|
|
Y160L-2
|
|
4
|
|
|
|
|
17
|
|
Filtration machine
|
|
GW10-1.80
|
|
|
|
7.5
|
|
1
|
|
|
18
|
|
Platform weigher
|
|
SDT-2A 2T
|
|
|
|
|
|
1
|
|
Concentrate weighing
|
19
|
|
Platform weigher
|
|
100吨
|
|
|
|
|
|
1
|
|
Original ores weighting
|
20
|
|
Packaging driving
|
|
3T
|
|
|
|
2
|
|
1
|
|
|
Potential for Further Exploration
The lowest elevation of our mining license is +100 meters,
and it can extent in depth. Now we only extract at +294 meters, we have nearly 200 meters to extract in depth. Our surrounding
mining sites are at -200 meters elevation level, we think we can go as much further as them. We authorized geological team for
exploration site in depth. We are drilling holes at ground level, the results is satisfied. We predict the production is good for
15 years. Exploration work is planed on finishing on May 2012. At that time, we will provide a complete report.
Xinglong Town Guangrong Fluorite
Mine (Xinyi Fluorite)
Xinyi Fluorite also owns 100% of the Xinglong
Town Guangrong Fluorite Mine. On January 13, 2011, the Company, through its subsidiary Xingzhen Mining, acquired 55% of equity interest
of Xinyi Fluorite.
Location:
Guangrong Mine is located in 18 kilometers
northwest of Jingde County in the area of Guangrong village, Xinglong town, Jingde County. Mining site has country road connected
to Jingde (Sanxi) – Taiping County Road, straight distance is less than 2 kilometers. The straight distance to Jixi Town
railway station is 39 kilometers, transportation like trucks can reach railway station directly, travelling distance is 65 kilometers,
and traffic condition is fine. Mining site is less than 3 kilometers to the closest high-voltage power line, the power supply is
sufficient. The water can be supplied by rivers. During dry season, water can be supplied by upstream of Hui River and other sources
of secondary water systems. Mines is only half kilometers away form this segment of river.
The coordinates are E 118
°
21
′
16
″
,
N 30
°
19
′
42
″
.
Figure 2-
4: Xinglong Town Guangrong Fluorite Mine
History of operation
Guangrong Mine had been in extraction since 1994, being extracted for 14 years. There are two similar
named fluorite mines in this area, Xinyi Fluorite owns Xinglong Town Guangrong Mine southwest. The other mine is Jingde County
Xinglong Town Guangrong Mine Northeast. In 2010, local government decided to ask Xinyi Fluorite to integrate the other fluorite
mine. Now it is getting the mining rights after integration.
Mining and Extraction technical condition:
The ore body is gentler
slopes. The rock structure joint of ground mining area is normal. Surface depletion area is rather stable. The current mining tunnel
is mainly below the zone of weathering, the sizes of newly extracted rocks are proper with good conditions of overall stability
and strong compressive strength, and mechanics performance is good, classified as hard rock group. But during these years extraction,
southwest section + 185 meters fluorite ore bodies are nearly depleted and formed a mined-out area in elevation difference about
40 meters and development construction for the shaft is still being conducted at level + 169 meters in this section, it is easy
to get rain infiltration, therefore worsen the engineering geology condition. Geophysical condition is easy-medium type.
Minerals
The geophysical exploration has been started
since December 2011. The exploration method is surface drilling. The purpose is to explore minerals deep down and get mining license.
It is expected to finish in June 2012.
Keyinbulake Cu-Zn Property in Development
Stage (Xingzhen Mining)
Xingzhen Mining owns 100% of the Keyinbulake
Multi-Metal Property. Before 2004 it was operated by Xinjiang Tianxiang New Tech Co. Ltd. (“Tianxiang”) and Mr. Li
Leyi. On April 28, 2006 Xiangzhen Mining acquired 80% of the ownership, and on June 25, 2007 Xiangzhen acquired another 10% from
Tianxiang. By December 31, 2007, Xiangzhen Mining owned 90% of Xingzhen Mining. The other 10% is owned by Xinjiang Tianxiang New
Technology Development Co., Ltd. (5%) and an individual shareholder (5%).
Location and Traffic
Keyinbulake Multi-Metal Property is located
in Buerjin County, Aletai, Xinjiang Uygur Autonomous Region. The coordinates are E 87º17′30″-87º19’30”,
N 47º58′30” - 47º59′45”, and the area is in 3.59 km
2
. It is 65 kilometers northwest
of Aletai city, and 60 kilometers northeast of Buerjin County, and 26 km northeast of Dulaiti town. With the highway from Aletai
city to Dulaiti Town passing through the property, it is conveniently accessible. Figure 2-4 is the index map of the Keyinbulake
Multi-Metal Property.
Figure 2-5: Keyinbulake Multi-Metal Property
Previous Geological work:
In June 2006, the Company conducted geological
explorations in the mining area by means of ground geophysical prospecting and drilling as well as underground pitting exploration
and drilling. By the end of 2007, we had completed 5,909 meters of ground drilling and 4,322 meters of underground exploration
and 7,389 meters of underground drilling.
In 2009, IP sounding work in geological
prospecting was carried out. The information delivered regarding the mineral formation conditions and the origins of mineral bodies
provided by the IP sounding shows that Keyinbulake Copper-Zinc Mine belongs to the submarine volcanogenic sediment. The analysis
of the data from exploration shows that within the mineralized belt the mineral bodies continue along with the strike and distributes
in a parallel and en echelon arrangement. The method of sounding indicates that the inclined deepening of the mineral-bodies in
this area is longer than the length of their strike prolongation. There are five high-polarization abnormal zones that were found
through IP sounding methods and they coincide in space and position with the known copper-zinc mineralized bodies controlled under
current underground extraction, which confirms that Keyinbulake Copper-Zinc Mine possesses high potential for mineral prospecting
and the work greatly assisted the Company in delimiting the accurate target area for further verification.
In the first half of 2010, Xingzhen focused
on conducting geophysical research and an electric logging project, making drilling plans, carrying out construction in strict
accordance with results given by our prospecting team, and conducting necessary geophysical investigations in the mining area.
In 2010, Xingzhen mining drilled 12 holes, 3,356 meters, and trenched 3,060
cubic meters, and completed 771 IP sounding
points. Among the middle, northern and southern areas, we found two new mineralized bodies through drilling verification.
In 2011, based on the previous exploration
work, Xingzhen drilled 23 holes with the total 8,335.9 meters in the surface exploration work, conducted geophysical engineering
investigations of high power VIP method 3.92 square kilometers.
According to the plan of the Company, the
exploration being executed in the mining area will be thoroughly completed in 2012.
Ore Processing
:
In April 2007, the Company began to build
a concentrator in the mining area with a designed daily processing capacity of 600 metric tons (200,000 metric tons/annually).
The concentrator started trial operation in May 2008.
The concentrator process consists of two-stage
closed crushing with one stage of grinding, flotation of copper primary and zinc secondary, scavenging, and two steps of dehydrating
(thickening and filtrating). The final products are copper concentrates and zinc concentrates. The following table lists the products
and output and the average prices in past three years:
Table 2-4: Annual treatment & concentrate
average price in last three years of Xingzhen Mining
Year
|
|
Product
|
|
|
Treatment
(metric tons)
|
|
|
Concentrate
(metal tons)
|
|
|
Average Metal Price
Per Year (USD$/metal ton)
|
|
2009
|
|
|
Zinc concentrate
|
|
|
|
14,300
|
|
|
|
178.30
|
|
|
|
853.39
|
|
|
|
|
Cu concentrate
|
|
|
|
|
|
|
|
9.76
|
|
|
|
4,577.10
|
|
2010
|
|
|
Zinc concentrate
|
|
|
|
77,241
|
|
|
|
3,129.45
|
|
|
|
1,114.42
|
|
|
|
|
Cu concentrate
|
|
|
|
|
|
|
|
154.81
|
|
|
|
6,728.80
|
2011
|
|
|
Zinc concentrate
|
|
|
|
77,978
|
|
|
|
2,638.60
|
|
|
|
1,138.18
|
|
|
|
|
Cu concentrate
|
|
|
|
|
|
|
|
214.25
|
|
|
|
7,230.08
|
|
The major equipment is as follows:
No.
|
|
Equipment
|
|
Type
|
|
Unit
|
|
Qty
|
1
|
|
Vibrating feeder
|
|
ZSW380X95I
|
|
set
|
|
1
|
2
|
|
Jaw-type crusher,
|
|
PE-500X750
|
|
set
|
|
1
|
3
|
|
Belt conveyor No. 1
|
|
8063 a=15 º v=1.60m/s Lh=53.393m
|
|
set
|
|
1
|
4
|
|
Cone crusher
|
|
H-36AFJ1-3
|
|
set
|
|
1
|
5
|
|
Belt conveyor No. 2
|
|
8063 a=15.96 º v=1.60m/s Lh=47.393m
|
|
set
|
|
1
|
6
|
|
Electric drive rolling drum
|
|
JWD2220-160-8063
|
|
set
|
|
1
|
7
|
|
Heavy magnetic vibration- actuated feeder
|
|
DZ-C-80160
|
|
set
|
|
1
|
8
|
|
Circular vibrating screen
|
|
2YA1542(Over screen 40mm, Below screen 15mm)
|
|
set
|
|
34
|
9
|
|
Belt conveyor No. 3
|
|
B=650 Lh=36.85m a=16º
|
|
set
|
|
1
|
10
|
|
Belt conveyor No. 4
|
|
B=650 Lh=20.713m a=15º
|
|
set
|
|
1
|
11
|
|
Wet grate discharge ball mill
|
|
MQG2700 × 3600
|
|
set
|
|
1
|
12
|
|
Sinking win-spiral classifiers
|
|
2FC-20
|
|
set
|
|
1
|
13
|
|
Flotation machines
|
|
SF-4 scraper YIOOL-6 P=1.5KW
|
|
set
|
|
16
|
14
|
|
Flotation machines
|
|
SF-2.8 scraper YIOOL-6 P=1.5KW
|
|
set
|
|
7
|
15
|
|
Flotation machines
|
|
SF-1.2 scraper Y90S-4 P=1.1KW
|
|
set
|
|
7
|
16
|
|
Horizontal slurry pump
|
|
ZBG(P)-458B(P) P=75kw n=1480r/min H=74m
|
|
set
|
|
2
|
17
|
|
Upright slurry pump
|
|
65Q-LPR
|
|
set
|
|
2
|
18
|
|
Center drive thickeners
|
|
NZ-9
|
|
set
|
|
1
|
19
|
|
Center drive thickeners
|
|
NZ-12
|
|
set
|
|
1
|
20
|
|
Ceramic filter
|
|
TT-6 P=13 KW
|
|
set
|
|
1
|
21
|
|
Ceramic filter
|
|
TT-8 P=13 KW
|
|
set
|
|
1
|
All equipment was new when installed. Each
piece of equipment has a service life of 20 years.
Power and Water Supply
There is a 35KV high voltage power line
from the Buerjin Power Station to the mining area. The Company built the power line at its own expense.
Three wells 4km away from the mining area
provide production and drinking water.
Mineralized Materials
The Earth-Physics Exploration Brigade of
the Xinjiang Non-ferrous Geological Exploration Bureau completed the Geological Evaluation of the area between May 2002 and July
2006. Their results were reported on August 31, 2006. The Technology Commission examined and approved this survey report on September
5, 2006.
In June 2007, the No. 3 Geological Prospecting
Institute of the China Metallurgical Geological Bureau conducted a supplementary survey on the Keyinbulake property. In December
2007, it presented the final supplementary prospecting report which confirmed relevant mineralized materials within the mining
property. In this report, the total indicated mineralized materials included 0.6035 million metric tons of mineralized materials
with an average grade of copper at 0.68% and zinc at 4.19%.
According to the plan of the Company, the
exploration being executed in the mining area will be thoroughly completed in 2012.
Inner Mongolia Wulatehouqi Qianzhen
Ore Processing Co., Ltd (Qianzhen Mining)
Qianzhen Mining owns a concentrator with
an annual treatment capacity of 200,000 metric tons. The concentrator process includes two-stage closed crushing with primary and
secondary grindings, roughing flotation, scavenging, three steps of cleaning, thickening, filtrating and drying. The major facilities
of the concentrator include a ball mill workshop, a flotation ore processing plant, a filtration workshop, concentrate pools, dams,
a laboratory, electronic scales, water supply wells, power supply lines and offices, etc. The major equipment consists of ball
mills (3 sets, 2.1m x 3m and 1.5m x 3m), 4m³ flotation machines (24 sets), 2m³ flotation machines (12 sets), Ф
12m thickeners (1 set), classifiers (2 sets, 1.5m x 10m), 20m² filters, pumps, power transformers and power distribution panels
and so on. In 2005, Qianzhen Mining invested approximately $750,000 to modernize the processing production line to increase its
yearly capacity to approximately 200,000 metric tons. The current equipment was new when installed.
Qianzhen Mining conducts its
operations has been by purchasing zinc, copper and/or lead ore from Qingshan Nonferrous Metal or other suppliers. The final
products are in bulk and are transported by truck. There is no production within the last three years.
Mining Site No. 2 of Qingxing Copper
Mine (Qingshan Metal)
Qingshan Metal owns 100% of the Qingxing
Copper Mine. Before April 2006, Qingshan Metal was owned by several individuals. On April 12, 2006, 60% of the shares of Qingshan
were transferred to Qianzhen Mining by the shareholders.
On April 12, 2011, the Company through its
subsidiary Qianzhen Mining entered into an equity transfer agreement to sell its 60% equity interest in Qingshan Metal to a
Chinese citizen Mr. Mao Huang (the “Investor”). Pursuant to the Agreement, Qianzhen Mining sold all of its equity
in Qingshan Metal to the Investor.
|
ITEM 3.
|
LEGAL PROCEEDINGS
|
None.
|
ITEM 4.
|
MINE SAFETY DISCLOSURES
|
The disclosures required by Item 4 are not applicable to our operations.
PART II
|
ITEM 5.
|
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.
|
The shares of our common stock have been
traded on the NYSE AMEX (formerly American Stock Exchange) under the trading symbol “SHZ” since January 31, 2008. Before
the listing on the NYSE AMEX, the shares of our common stock were quoted on the OTC Bulletin Board. The following table sets forth
the quarterly average high and low bid prices per share for the common stock for the past two years:
Year ending December 31, 2011
|
|
High
|
|
|
Low
|
|
First Quarter
|
|
$
|
10.84
|
|
|
$
|
3.12
|
|
Second Quarter
|
|
$
|
6.62
|
|
|
$
|
2.28
|
|
Third Quarter
|
|
$
|
3.54
|
|
|
$
|
1.40
|
|
Fourth Quarter
|
|
$
|
2.73
|
|
|
$
|
0.97
|
|
Year ending December 31, 2010
|
|
High
|
|
|
Low
|
|
First Quarter
|
|
$
|
1.47
|
|
|
$
|
0.90
|
|
Second Quarter
|
|
$
|
1.25
|
|
|
$
|
0.83
|
|
Third Quarter
|
|
$
|
1.10
|
|
|
$
|
0.72
|
|
Fourth Quarter
|
|
$
|
9.29
|
|
|
$
|
1.01
|
|
Holders.
As of March 5,
2012, we had approximately 644 holders of record of our common stock. Our common stock had a closing bid price of $1.54
per share on March 5, 2012.
Dividends.
We
have never declared or paid any cash dividends or distributions on our common stock. We currently intend to retain our future
earnings to support operations and to finance future growth and expansion and, therefore, do not anticipate paying any cash dividends
on our common stock in the foreseeable future.
Transfer Agent and Registrar
.
Our transfer agent is Standard Registrar & Transfer, Inc. located at 12528 South 1840, East Draper, Utah, 84020. Their telephone
number is (801) 571-8844.
Securities Authorized for Issuance
Under Equity Compensation Plans
On October 29, 2009, the shareholders and
the board of directors have approved the 2009 Omnibus Long-term Incentive Plan. On February 4, 2010, 760,000 shares of our common
stock were issued to 42 officers, directors, employees, or consultant under this 2009 Omnibus Long-term Incentive Plan. The number
of shares of stock awarded to each officer, director, employee or consultant was determined by dividing the amount of back pay
due such officer, director, employee or consultant by $0.38, average daily trading price per share for the Company’s common
stock in December 2008.
On June 20, 2011, 400,000 shares of common
stock were approved by the board of directors to its employees as share based on the 2009 Omnibus Long-term Incentive Plan. The
number of shares of stock awarded to each employee was determined by the fair value by $2.43 which was the close price per share
for the Company’s common stock on June 20, 2011.
Recent Sales of Unregistered Securities
On September 22, 2009, the Company entered
into a Notes Repurchase Agreement with Mountview Path Limited (“Mountview”), a corporation incorporated under the
laws of the British Virgin Islands, pursuant to which the Company repurchased the entire 6.75% Senior Convertible Notes due 2012
of US$ 28,000,000 principal amount from Mountview. The consideration payable in the transaction consisted of US$ 8,000,000 in
cash and 5 million shares of the Company’s common stock. The shares of the Company’s common stock were issued in a
private transaction pursuant to the “safe harbor” for the private offering exemption under Section 4(2) of the Securities
Act of 1933 (the “Securities Act”) and Rule 506 of Regulation D promulgated thereunder to accredited investors as
defined under Rule 501(a) of the Securities Act.
On January 13, 2011, the Company,
through its subsidiary Xingzhen Mining, entered into an equity transfer agreement (the “Agreement”) to
acquire 55% of the equity interests of Xinyi Fluorite. Pursuant to the Agreement, the Company acquired the Equity from the
three original shareholders of Xinyi Fluorite for total consideration in the amount of RMB 65 million (approximately US$
9.85 million) (the “Purchase Price”). Pursuant to the terms of the agreement, the consideration was agreed to be
RMB 50 million (approximately US$ 7.58 million) of the Company’s common stock at $7.05 per share and RMB 15
million (approximately US$ 2.27 million) in cash.
After negotiations with the original shareholders
of Xinyi Fluorite and as required by the Agreement in circumstances where the Company’s stock price has changed, the Company
on February 13, 2012 issued an additional 1,139,128 shares of common stock to the original shareholders.
Direct Registration of Common Stock
On January 19, 2011, the Company agreed
to sell to certain institutional investors 2,836,883 shares of the Company’s common stock and warrants to purchase up to
851,066 shares of the Company’s common stock in a registered direct public offering (the “Offering”). The Offering
was effected as a takedown from the Company’s shelf registration statement on Form S-3 (File No. 333-171243), which became
effective on January 7, 2011, pursuant to a prospectus supplement to be filed with the U.S. Securities and Exchange Commission.
|
ITEM 6.
|
SELECTED FINANCIAL DATA.
|
Not required.
|
ITEM 7.
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS.
|
The following management’s discussion
and analysis should be read in conjunction with our consolidated financial statements and the notes thereto and the other financial
information appearing elsewhere in this item. In addition to historical information, the following discussion contains certain
forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.
These statements relate to our future plans, objectives, expectations and intentions. These statements may be identified by the
use of words such as “may”, “will”, “could”, “expect”, “anticipate”,
“intend”, “believe”, “estimate”, “plan”, “predict”, and similar terms
or terminology, or the negative of such terms or other comparable terminology. Although we believe the expectations expressed in
these forward-looking statements are based on reasonable assumptions within the bound of our knowledge of our business, our actual
results could differ materially from those discussed in these statements. Factors that could contribute to such differences include,
but are not limited to, those discussed in the “Risk Factors” section of this Annual Report on Form 10-K. We undertake
no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other
events occur in the future.
Our financial statements are prepared in
U.S. Dollars and in accordance with accounting principles generally accepted in the United States. See “Exchange Rates”
below for information concerning the exchanges rates at which Renminbi (“RMB”) were translated into U.S. Dollars (“USD”
or “US$” or “$”) at various pertinent dates and for pertinent periods.
Overview
The Company,
through
its subsidiaries, is engaged in the exploration, development, mining, and processing of fluorite, barite and
nonferrous metals such as zinc, lead and copper in China. The Company has the following principal areas of interest in China:
(a) fluorite extraction and processing in the Sumochaganaobao region of Inner Mongolia; (b) fluorite extraction and
processing in Jingde County, Anhui Province; (c) zinc/copper exploration, mining and processing in Xinjiang; (d)
zinc/copper/lead processing in Wulatehouqi of Inner Mongolia.
In 2012, t
he Company has acquired Dongsheng Mining, Qianshi Resources and Meilan Mining, which are
engaged in the extraction and processing of fluorite ore and barite ore.
Business
Fluorite
Xiangzhen Mining and Xinyi Fluorite were engaged in fluorite
extraction and processing in 2011.
Xiangzhen Mining
In November 2007, Xiangzhen Mining finished construction of a mining project with a capacity of 300,000 metric tons and a
processing plant with a capacity of 200,000 metric tons. Xiangzhen Mining owns 100% of the fluorite mining rights of Inner
Mongolia Sumochaganaobao.
In 201
1, Xiangzhen Mining extracted approximately
190,000 metric tons of fluorite ore, produced 41,000 metric tons of fluorite lumps and sold 49,000 metric tons of fluorite lumps
with total sales of approximately US$ 6.38 million, accounting for approximately 25% of the revenues of our fluorite business.
Xiangzhen Mining also produced 56,000 metric tons of fluorite powder and sold 49,000 metric tons of fluorite powder for approximately
US$ 16.03 million, which accounted for approximately 63% of the revenues of our fluorite business.
Xinyi Fluorite
On January 13, 2011, the
Company through its subsidiary Xingzhen Mining acquired 55% equity interests of Xinyi Fluorite. Xinyi Fluorite owns 100% of
one processing plant with a processing capacity of 60,000 metric tons of fluorite ore per year and the mining rights of
Guangrong Mine and Qingzhen Fluorite Xinyi Mine No. 1.
After acquisition, the Company performed
certain renovations and Xinyi Mine No. 1 resumed production on February 10, 2011. The processing plant resumed its
production on March 26, 2011.
In 2011, Xinyi Fluorite extracted approximately 14,000 metric
tons of fluorite ore, produced 9,000 metric tons of fluorite powder and sold 9,000 metric tons of fluorite powder for approximately
US$3.16 million, which accounted for approximately 12% of the revenues of our fluorite business.
On November 18, 2011, Xinyi Fluorite engaged geological evaluation
institution SRK Consulting China Ltd. (SRK) to evaluate the current situation and potential extraction volume at Xinyi Mine No.
1. In order to satisfy disclosure requirements, a technical report that satisfies JORC standards will soon to be delivered to us,
and it will include an estimation of the volume of the mine’s reserves.
Plans for extraction and processing fluorite in 2012
In 2012, Xiangzhen Mining plans to be in normal
production. We plan to extract 150,000 metric tons of fluorite ore, produce 40,000 metric tons of fluorite powder, and produce
60,000 metric tons of fluorite lumps. We plan to sell 40,000 metric tons of fluorite powder and 60,000 metric tons of fluorite
lumps.
In 2012, Xinyi Fluorite plans to be in normal production.
We plan to extract 60,000 metric tons of fluorite ore produce 25,000 metric tons of fluorite powder, and produce 10,000 metric
tons of fluorite lumps. We plan to sell 25,000 metric tons of fluorite powder and 60,000 metric tons of fluorite lumps.
We
also plan to do the following work in 2012
:
Ensure and stabilized our current production condition,
extract and process to capacity and carry-out our current plans.
According to changes in the prices of fluorite powder
and fluorite lumps, adjust our product structure of fluorite powder and fluorite lumps to ensure the highest profit.
We will still strive to leverage our position as
one of the leaders in the industry to acquire additional appropriate fluorite reserves.
Acquire advanced fluorine chemical technology and
develop and construct highly profitable down stream products using fluorite as a raw material.
Non-ferrous Metals
Xingzhen Mining
In July 2006, Xingzhen Mining started to build a 200,000 metric
tons/year zinc-copper ore mining and processing project at Keyinbulake Multi-Metal Mine in Buerjin County, Aletai Region, Xinjiang
Uygur Autonomous Region.
On April 28, 2008, Xingzhen Mining completed a successful test
of its facilities and subsequently started production. In parallel with processing, Xingzhen Mining continued exploration in the
area.
In 2011, Xingzhen produced zinc concentrates
and copper concentrates equivalent to 2,639 metric tons of zinc metal and 214 metric tons of copper metal as compared to 3,129
and 155 metric tons in 2010, respectively, and sold zinc concentrates and copper concentrates equivalent to 2,761 metric tons of
zinc metal and 254 metric tons of copper metal, as compared to 2,538 and 115 metal tons in 2010, respectively, accounting for approximately
63% and 37%, respectively, of the total revenues of our nonferrous business of approximately $4.98 million as compared to 79%,
21% and $3.60 million in 2010, respectively.
In 2012, weather conditions permitting, we plan to start production
at the end of April or the beginning of May. We did not stop excavating in 2011. We plan to extract ores of 130,000 metric tons,
process ores of 130,000 metric tons, and produce approximately 5,000 metal tons of zinc concentrate and approximately 470
metal tons of copper concentrate.
Qianzhen Mining
Before the end of 2007, Qianzhen Mining processed ores supplied
by local mining companies. Since then, the supplier contracts expired.
No production occurred at Qianzhen Mining in 2011 due to a lack
of ore supply.
Due to a potential asset reorganization activity, we do not
plan to produce at Qianzhen Mining in 2012.
Qingshan Metal
On April 12, 2011, the Company through its subsidiary Qianzhen Mining entered into an equity transfer
agreement to sell its 60% equity interest
in Qingshan Metal to a Chinese
citizen Mr. Mao Huang, a minority shareholder of Xingzhen Mining.
Exploration Activities
Keyinbulake Copper-Zinc Mine
In 2011, Xingzhen Mining continued exploration
as planned, with a focus on: ground drilling, surveying, geophysical prospecting, geological surveying, documenting, rock-mineral
experimenting, etc. It is described as following:
Ground drilling: drilled 23 holes, total
project amount was 8,335.29 meters.
Surveying: tunnel survey was 2,000 meters,
1:1000 survey was 1.485 square kilometers.
Geophysical prospecting: powerful induced
polarization sounding (VIP method) a hundred points, advanced magnetic survey (network 50X20 meters) was 3.92 square kilometers.
Documenting: tunneling 138.54 meters, trenching
1,629.91 square meters, drilling 8,335.29 meters.
Rock-mineral experimenting: sampling 687
items, rock-mineral determined 37 items.
In 2012, we plan to channel 1,000 cubic
meters, drill underground 2,500 meters, ground drilling 1,000 meters.
Qingzheng Fluorite Xinyi Mine No.
1
In 2011, we renovated our mines and increased
capacity to 60,000 metric tons per year. We expanded our work based in two areas: underground mining projects and geophysical exploration.
Underground mining project: the plan was
started during 2011 and we plan on finishing the project in June 2012. The project’s main focus is 216, 256 middle section
reclamation works and development, venting system rehabilitation and implementation of the six security systems and production
safety standards required by the State Council. We successfully implemented the six security systems required by State Council
and passed inspection of safety standard V required by the local government. We also developed 1,500 meters of drift tunnels; performed
ground drilling of 300 meters, and underground drilling of 250 meters.
In 2012, in order to continue underground exploration, we plan
to drill 6 holes and develop 2,000 meters of drift tunnels.
Xinglong Town Guangrong Fluorite Mine
No exploration work was done in 2011.
Due
to the requirements of getting mining license, we need to drill and control below +60 meters elevation
minerals.
In 2012, we plan to drill 3 holes, and develop 1,000 meters of drift tunnels.
Acquire More Mining Entities
To increase our reserve base and ensure supply to our processing
facilities, we plan to acquire domestic and foreign large-scale mines when the right opportunities arise. We also expect to acquire
additional nonferrous metal mines and fluorite mines domestically that have high-quality extracting and operating conditions and
possess all necessary governmental licenses.
Business Strategy
Prospecting in 2012
With respect to China’s overall economic situation, we
believe that China’s economic growth will be slow in 2012. We expect there will be difficulties and challenges in the fluorite
and non-ferrous metal industries as a result.
Stabilize
production volume
.
Due to favorable policies issued by PRC government in 2010, the price of fluorite ore and the downstream
products increased rapidly, but
such increases started to slow during the
second half of 2011. At the same time, the price of nonferrous metal kept rising. Under these conditions, the Company plans to
stabilize production volume and start production at our newly acquired project.
Acquiring More Mineral Reserves
To increase our reserve base and insure supply to our processing
facilities, we plan to acquire domestic and foreign large-scale mines when the right opportunities arise. We also expect to acquire
additional nonferrous metal mines and fluorite mines that have good extracting and operating conditions and possess all necessary
governmental licenses.
Continuing to focus efforts on mining exploration and forming
a periodic/staged and detailed report
Based on our early stage prospecting results, the Company plans
to keep putting more effort into prospecting for chalcopyrite ore at Xingzhen Mining. We intend to retain a third party authoritative
geological prospecting and engineering team in Xinjiang Province, PRC, to drill, punch, and conduct the geophysical and geochemical
exploration, and to try to complete the examination of the mining areas of the Company. In 2012, they will complete a reserve technical
report for Xingzhen Mining and Xinyi Fluorite in accordance with JORC standards.
The Company plans to make early stage preparations for producing
downstream fluorine chemical products
Based on the support and guidance of government policies, the Company
decided
to make downstream fluorine chemical products a future development priority, and the Company plans to focus more efforts on research
and development in the fluorine chemical industry. To be specific, we may partner with some national and international fluorine
chemical enterprises, through a “resource + technology” form of cooperation, and enter the fluorine chemical industry
at a suitable time.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER
31, 2011 AS COMPARED TO YEAR ENDED DECEMBER 31, 2010
Selected information from the Consolidated
Statements of Operations
|
|
For the years ended
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
Net revenue
|
|
$
|
30,551
|
|
|
$
|
11,612
|
|
Gross profit
|
|
|
13,500
|
|
|
|
3,008
|
|
- Gross profit margin
|
|
|
44
|
%
|
|
|
26
|
%
|
General and administrative expenses
|
|
|
11,197
|
|
|
|
4,085
|
|
Interest expenses
|
|
|
682
|
|
|
|
589
|
|
Net income (loss) attributable to the Company
|
|
$
|
346
|
|
|
$
|
(3,288
|
)
|
REVENUES. Net revenues for the year ended
December 31, 2011 were $30.55 million, representing a $18.94 million or 163% increase as compared to $11.61 million of 2010. The
improved performance was mainly due to the increased revenues from the fluorite segments as described below.
GROSS PROFIT AND GROSS PROFIT MARGIN. For
the year ended December 31, 2011, gross profit was $13.50 million, representing a increase of approximately 349% as compared to
$3.01 million of 2010. The gross profit from our fluorite segment was approximately $12.90 million and $1.95 million for the year
ended December 31, 2011 and 2010, respectively. The gross profit from our non-ferrous metal segment was approximately $0.60 million
and $1.06 million the year ended December 31, 2011 and 2010, respectively. Gross profit margin was approximately 44% for the year
ended December 31, 2011, which increased significantly as compared to gross profit margin of 26% for the year ended December 31,
2010.
GENERAL AND ADMINISTRATIVE EXPENSES. General and
administrative expenses increased by approximately $7.11 million to $11.20 million in 2011 from $4.09 million in 2010. The
increase was mainly due to (i) 400,000 shares of common stock with the fair value of amount to $972,000 being granted by
the board of directors on June 20, 2011 to the employees under the 2009 Omnibus Long-term Incentive Plan ; (ii) increased
administrative expense and depreciation and amortization expense amounting to $1,684,000 for the newly acquired
Xinyi Fluorite and (iii) increased professional fees amounting to approximately $2,168,000 for the U.S. Securities
financings, the Xinyi Fluorite acquisition audit, Investor relations, Xingzhen Mining’s exploration, and so on.
INTEREST EXPENSE. Interest expense increased
by approximately $0.09 million as compared to the same period of 2010.
NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY.
Net income attributable to the Company for the year ended December 31, 2011 was approximately $0.34 million, a difference of $3.63
million compared to net loss of $3.29 million for 2010. Basic earnings per share were $0.01 or ($0.12) fully diluted for the year
ended December 31, 2011 and 2010, respectively.
SEGMENT PERFORMANCE ANALYSIS
|
|
Segment revenue
For year Ended December 31,
|
|
|
Segment profit (loss)
For year Ended December 31,
|
|
(amounts in thousand)
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Fluorite
|
|
$
|
25,571
|
|
|
$
|
8,012
|
|
|
$
|
6,992
|
|
|
$
|
(436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonferrous metals
|
|
$
|
4,980
|
|
|
$
|
3,600
|
|
|
$
|
(3,247
|
)
|
|
$
|
(2,444
|
)
|
Fluorite
Fluorite segment revenue increased by
219% from
$8.01 million for 2010 to $25.57 million for 2011. The increase was primarily due to the increases in sales volume for fluorite
products and the sale price for fluorite products. Approximately 58,000 and 29,000 metric tons of fluorite powder were sold for
the years ended December 31, 2011 and 2010, respectively; and the average price for a metric ton of fluorite powder was $329 and
$164 for the years ended December 31, 2011 and 2010, respectively. Approximately 49,000 and 33,000 metric tons of fluorite lumps were sold for
the years ended December 31, 2011 and 2010, respectively; and the average price for a metric ton of fluorite lumps was $130 and
$99 for the years ended December 31, 2011 and 2010, respectively.
Revenue contributed by our fluorite segment
accounted for 83.7% of the Company’s total revenue for the year ended December 31, 2011 as compared to 69.0% in 2010.
Our fluorite segment reported a segment
profit of approximately $6.99 million for the year ended December 31, 2011 compared to a segment loss of $0.44 million in 2010.
The net segment profit (loss) for Xiangzhen
Mining was approximately $7.05 million and ($0.44) million for the years ended December 31, 2011 and 2010, respectively.
The net segment loss for Xinyi Fluorite
was approximately $0.06 million for the year ended December 31, 2011.
Nonferrous metals
Nonferrous metals segment revenue for
2011 amounted to $4.98 million, representing an increase of approximately $1.38 million or 38% compared to 2010. Xingzhen
Mining processed 77,978 metric tons of ores to produce 2638 metal tons of zinc concentrate powder and 214 metal tons of
copper concentrate, and sold 2,761 metal tons of zinc concentrate powder and 254 metal tons of copper concentrate powder for
the year ended December 31, 2011. While for the same period of 2010, Xingzhen Mining processed 77,241 metric tons of ores to
produce 3,129 metal tons of zinc concentrate powder and 155 metal tons of copper concentrate, and sold 2,538 metal tons of
zinc concentrate powder and 115 metal tons of copper concentrate powder.
Revenue contributed from our nonferrous
metal segment accounted for 16.3% of the Company’s total revenue for the year ended December 31, 2011 as compared to 31.0%
in 2010.
Our nonferrous metal segment reported a
segment loss of approximately $3.25 million for the year ended December 31, 2011 compared to a segment loss of $2.44 million
in 2010.
The net segment loss for Xingzhen was approximately
3.13 million and 0.81 million for the years ended December 31, 2011 and 2010, respectively.
The net segment loss for Qianzhen was approximately
0.22 million and 1.63 million for the years ended December 31, 2011 and 2010, respectively.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL
RESOURCES
Cash and cash equivalents were $5.6 million
as of December 31, 2011, an increase of $4.1 million as compared to the balance at December 31, 2010 of $1.5 million.
Net cash used in operating activities for
the year ended December 31, 2011 was $4.0 million, as compared to $3.7 million used for the year ended December 31, 2010.
Net cash used in investing activities of
$11.0 million for the year ended December 31, 2011, as compared to $2.0 million for the year end December 31, 2010. For year ended
December 31, 2011, the cash amount to $6.0 million was used in the acquisition of Xinyi Fluorite and Dongsheng Mining, and the
cash amount to $5.2 million was used in the purchasing of property, machinery and mining assets.
Net cash provided by financing activities
for the year ended December 31, 2011 was $18.6 million, as compared to $7.2 million provided for the same period of 2010.
The increase was primarily the result of the issuance and sale of approximately $20 million of common shares less certain expenses
associated therewith.
ENVIRONMENTAL
The Company’s mining and exploration
activities are subject to various PRC laws and regulations governing the protection of the environment. These laws and regulations
are continually changing and are generally becoming more restrictive. The Company conducts its operations so as to protect the
public health and environment and believes its operations are in compliance with applicable laws and regulations in all material
respects. The Company’s mining operations are subject to “Natural Resource Compensation Charges”, but the charging
rate varies in different cities in the PRC. As of December 31, 2011 and 2010 Natural Resource Compensation Charges of $0.61 million
and $0.27 million, respectively, were charged to operations.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL
COMMITMENTS
OFF-BALANCE SHEET ARRANGEMENTS
We have never entered into any off-balance
sheet financing arrangements and have not formed any special purpose entities. We have not guaranteed any debt or commitments of
other entities or entered into any options on non-financial assets.
INFLATION
The Company does not foresee any material
adverse effects on its earnings as a result of inflation.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial
condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements
requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and
expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on
various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates.
An accounting policy is considered to be
critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time
the estimates are made, and if different estimates that reasonably could have been used, or changes in the accounting estimates
that are reasonably likely to occur, could materially impact the consolidated financial statements.
We believe that the following critical
accounting policies reflect the significant estimates and assumptions which are used in the preparation of the consolidated financial
statements and affect our financial condition and results of operations.
Use of Estimates
The Company’s consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The
preparation of the Company’s consolidated financial statements requires the Company to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date
of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. The more
significant areas requiring the use of management estimates and assumptions relate to mineral reserves and value beyond proven
and probable reserves that are the basis for future cash flow estimates utilized in impairment calculations, the estimated lives
of the mineralized bodies based on estimated recoverable volume through the end of the period over which the company has extraction
rights that are the basis for units-of-production depreciation, depletion and amortization calculations; estimates of fair value
for certain reporting units and asset impairments (including impairments of goodwill, long-lived assets and investments); write-downs
of inventory to net realizable value; reserves for contingencies and litigation; and the fair value and accounting treatment of
financial instruments. The Company bases its estimates on historical experience and on various other assumptions that are believed
to be reasonable under the circumstances. Accordingly, actual results may differ significantly from these estimates under different
assumptions or conditions.
Property, machinery and mining assets
Expenditures for new facilities or equipment and expenditures
that extend the useful lives of existing facilities or equipment are capitalized and depreciated using the straight-line method
at rates sufficient to depreciate such costs over the estimated productive lives, which do not exceed the related estimated mine
lives, of such facilities based on mineralized material.
Mineral exploration costs are expensed as incurred. After
a mine is considered to be in development or production stage or considered to have proven or probable reserves further exploration
costs are also expensed as incurred.
Extraction rights are stated at the lower of cost and
recoverable amount. When extraction rights are obtained from the government according to mining industry practice in the PRC, extraction
rights are capitalized as incurred and are amortized using the units-of-production (“UOP”) method over the estimated
life of the mineralized body based on estimated recoverable volume through to the end of the period over which the Company has
extraction rights.
Once a mine is considered to be in the development or
production stage, major development costs are amortized using the UOP method based on the estimated recoverable volume of the mineralized
material. The Company determines whether a mine is in development or production stage based upon standard mining industry practices
in the PRC. Given that commencing development and production at mining properties prior to establishing proven and probable reserves
(to the extent necessary to meet the definition under Industry Guide 7), and often after only establishing inferred resources,
is standard business practice in the mining industry in the PRC, the Company believes it is appropriate to account for the Xiangzhen
Mining property as production-stage operations and to account for the Xingzhen Mining and Xinyi Fluorite properties as a development-stage
project.
At the Company’s surface mines, development costs
include costs to further delineate the mineralized body and remove overburden to initially expose the mineralized body. At the
Company’s underground mines, development costs include the costs of building access ways, shaft sinking and access, lateral
development, drift development, ramps and infrastructure development.
To the extent that these costs benefit the entire mineralized
body, they are amortized over the estimated life of the mineralized body. Costs incurred to access specific mineralized blocks
or areas that only provide benefit over the life of that area are amortized over the estimated life of that specific mineralized
block or area. Interest cost allocable to the cost of developing mining properties and to constructing new facilities, if any,
is capitalized until assets are ready for their intended use.
Land use rights are stated at cost, less accumulated
amortization. Amortization is computed using the straight-line method over the estimated useful lives of 25 years.
Estimated useful lives of the Company’s assets
are as follows:
|
|
Useful Life
|
|
|
(In years)
|
Land use rights
|
|
25
|
Buildings
|
|
3-25
|
Machinery
|
|
12
|
Mining assets
|
|
License term
|
Motor vehicle
|
|
6
|
Equipment
|
|
5
|
Extraction rights
|
|
License term
|
Exploration rights
|
|
License term
|
CONCENTRATION OF CUSTOMERS
The Company had three main customers who
contributed approximately $18,682,000 or 61% of the Company’s consolidated net revenue for the year ended December 31, 2011.
For the same period of 2010 the Company had two main customers who contributed approximately $7,527,000 or 65% of the Company’s
consolidated net revenue
The following table shows revenue from
the Company’s major customers (10% or more of consolidated net revenue) for the year ended December 31, 2011:
|
|
Revenue
|
|
|
Percentage
|
|
Customer
|
|
(In thousands)
|
|
|
(%)
|
|
Ningxia Jinhe chemistry Ltd
|
|
$
|
9,117
|
|
|
|
30
|
%
|
Ruipeng Mining Ltd
|
|
|
4,981
|
|
|
|
16
|
%
|
Henan Zhongse Ltd
|
|
|
4,585
|
|
|
|
15
|
%
|
|
|
$
|
18,683
|
|
|
|
61
|
%
|
The following table shows the Company’s
major customers (10% or more of consolidated net revenue) for the year ended December 31, 2010:
|
|
Revenue
|
|
|
Percentage
|
|
Customer
|
|
(In thousands)
|
|
|
(%)
|
|
Ruipeng Mining Ltd
|
|
$
|
3,601
|
|
|
|
31
|
%
|
Ningxia Jinhe Ltd
|
|
|
3,926
|
|
|
|
34
|
%
|
|
|
$
|
7,527
|
|
|
|
65
|
%
|
|
ITEM 7A.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
|
Not required.
|
ITEM 8.
|
FINANCIAL STATEMENTS.
|
Please see the “Consolidated Financial
Statements of the Company” beginning on page F-1 of this Annual Report.
|
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
|
There are no reportable events as required
by Item 304(b) of Regulation S-K.
|
ITEM 9A.
|
CONTROLS AND PROCEDURES
.
|
Effectiveness of Control Procedures
As required by Rule 13a-15(b) under
the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this
report. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be
disclosed by us in reports that we file under the Exchange Act with the SEC is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our
management, as appropriate, to allow such persons to make timely decisions regarding required disclosures. Based upon the results
of our evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls
and procedures were effective as of December 31, 2011.
Management’s Report on Internal
Control Over Financial Reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) or 15d-15(f), under
the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our principal
executive and principal financial officers and affected by our Board of Directors, management and other personnel, and to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our assets; (ii)provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on its financial statements.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness
of our internal control over financial reporting as of December 31, 2011. In making this assessment, management used the criteria
set forth in the framework established by the Committee of Sponsoring Organizations of the Treadway Commission Internal Control—Integrated
Framework, (“COSO”) Based on its assessment, management believes that, as of December 31, 2011, our internal
control over financial reporting is effective based on those criteria.
This Annual Report does not include an
attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual
Report.
Changes in Internal Control over Financial
Reporting
There have been no changes in our internal
control over financial reporting that occurred during the fourth quarter within the fiscal year ended December 31, 2011 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
|
ITEM 9B.
|
OTHER INFORMATION.
|
None
PART III
|
ITEM 10.
|
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
|
Set forth below is certain information concerning each of the
directors and executive officers of the Company as of March
05, 2012. None
of our directors or executive officers holds directorships in other public companies as of March 05, 2012.
Listed below are the directors, executive
officers, and certain key employees of the Company. The directors listed below will serve until the Company’s next annual
meeting of the stockholders:
Name
|
|
Age
|
|
Position
|
Xiaojing Yu
|
|
55
|
|
Director, CEO and Chairwoman of the Board
|
Helin Cui
|
|
56
|
|
Director, President and Chief Operating Officer
|
Xueming Xu
|
|
51
|
|
Director
|
Jiayin Zhu
|
|
30
|
|
Chief Financial Officer
|
Liancheng Li
|
|
45
|
|
Director, Chairman of Compensation Committee
|
Jian Zhang
|
|
70
|
|
Director, Chairman of Corporate Governance and Nominating Committee
|
Shing Mun Wong
|
|
37
|
|
Director, Chairman of the Audit Committee
|
Ligang Wang
|
|
51
|
|
Vice President and President of Qianzhen Mining
|
Ms. Xiaojing
Yu
has served
as Director, Chief Executive Officer and Chairwoman of the Board of Directors of the Company since September 15, 2006. Given Ms.
Yu’s extensive experience in the mining industry of greater than twenty years, and her vast management and leadership experience,
the Board of Directors believes Ms. Yu is essential to our future growth and based her appointment on such qualities. She currently
also serves as director and chairwoman of Inner Mongolia Wulatehou Banner Qianzhen Mining and Processing Co., Ltd and Inner Mongolia
Xiangzhen Mining Co., Ltd. She has served in that capacity since May 2002. Prior to that, from 1992 to 2001 she was the general
manager of Dalian Zhikun Metal Materials Co. Ltd and from 1974 to 1991 she was the finance manager of Gansu Baiyin Nonferrous Industrial
Corporation. Also, since July 2004, Ms. Yu has served as the Executive Vice President of China Non-metallic Minerals Industry Association.
She attended an advanced Management Program run by Tsing Hua University from May 2004 to December 2005.
Mr. Helin Cui
serves as Director,
President and Chief Operating Officer. Mr. Cui was appointed director on September 15, 2006, and President and Chief Operating
Officer on December 03, 2009. Given Mr. Cui has more than twenty years experience in the mining industry, which includes both technical
and management roles, the Board of Directors believes Mr. Cui is a qualified and valuable appointment to the Board. He is currently
a director and deputy chairman of Inner Mongolia Wulatehou Banner Qianzhen Mining and Processing Co., Ltd and of Inner Mongolia
Xiangzhen Mining Co., Ltd. He has served in that capacity since May 2002. Prior to that, from June 1974 to March 1977, Mr. Cui
worked with Gansu Province’s No. 3 Geological Team as a technician, engineer and team leader and from October 1979 to April
2002 as deputy general manager at Baiyin Foreign Trading Company in Gansu Province. From April 1977 to September 1979, he attended
and graduated from the Xi’an Geology College.
Mr. Xueming Xu
serves as Director.
He was appointed director in April of 2007. The Board considered Mr. Xu’s extensive background in the mining industry, more
than twenty years, and his technical and management backgrounds, in determining that Mr. Xu is a qualified and valuable appointment
to the Board. He is currently director and President of Inner Mongolia Wulatehou Banner Qianzhen Mining and Processing Co., Ltd
and of Inner Mongolia Xiangzhen Mining Co., Ltd. He has served in that capacity since May 2002. Prior to that, from August 1983
to May 1998, Mr. Xu served as technician, vice-superintendent and superintendent at Inner Mongolia’s Tianyaokou Iron Ore
Plant and, from June 1998 to July 2002, as deputy general manager of Inner Mongolia Dongshengmiao Mining Co., Ltd. Mr. Xu graduated
from Lianyungang College of Chemical Mining and attended an advanced Management Program run by Tsing Hua University.
Mr. Liancheng Li
serves as Director
and the Chairman of the Compensation Committee. He was appointed director in November of 2010. The Board considered Mr. Li’s
extensive experience in senior management and technical research and development, more than twenty years, in determining that Mr.
Li is a qualified and valuable appointment to the Board. From 2005 to present, as senior engineer, Mr. Li served as the vice-director
of Information Center of Tianjin Chemical Research & Design Institute of China National Offshore Oil Corp. Mr. Li acted as
the vice director of China National Inorganic Salts Information Center from 1997 to present. From 1989 to 1994, Mr. Li served as
a chemical economic analyst of Tianjin Research Institute of Chemical Industry. Mr. Li holds a bachelors degree in chemical engineering
from Zhengzhou Institute of Technology.
Mr. Jian Zhang
serves as Director
and Chairman of the Nominating & Corporate Governance Committee. Mr. Zhang was appointed to these positions in April of 2007.
The Board considered Mr. Zhang’s extensive background in the mining industry, including nonferrous mining, project constructions
and management, spanning more than thirty years, as well as his technical and management backgrounds, in determining that Mr. Zhang
is a qualified and valuable appointment to the Board. Since August 2005, he has been an external director of China Construction
Materials Company Ltd. Prior to that, Mr. Zhang was President of China Nonferrous Mining Construction Group from September 2003
to August 2005. He served as President of China Nonferrous Mining Construction Group from April 2002 to September 2003. Mr. Zhang
graduated from the environmental engineering department of Xi’an Mining Architecture College in 1968.
Mr. Shing Mun Wong
serves as Director
and the Chairman of the Audit Committee of the Company. Mr. Wong is currently Chief Financial Officer and Assistant Company Secretary
of Foreland Fabrictech Holdings Limited (a Singapore Mainboard listed company) (“Foreland”), positions he has held
since October 2006. Foreland is a fabric manufacturer involved in weaving, dyeing, coating and finishing of fabric products. Mr.
Wong is a fellow member of The Association of Chartered Certified Accountants. He is also a practicing member of Hong Kong Institute
of Certified Public Accountants. From September 1998 to January 2003, Mr. Wong served as Senior Associate, Assurance and Business
Advisory Services of PricewaterhouseCoopers. From January 2003 to August 2003, he was Company Secretary and Qualified Accountant
of CCID Consulting Company Limited (a Hong Kong Growth Enterprise Market listed company). From August 2003 to October 2005, he
acted as Chief Financial Officer and Company Secretary of Pacific-Pack Holdings Limited. From October 2005 to October 2006, he
served as Financial Controller and Company Secretary of Fujian Zhenyun Plastics Industry Co., Ltd. (a Singapore Catalist listed
company). Mr. Wong graduated in 1998 from the Hong Kong University of Science & Technology with a bachelor’s degree in
Business Administration, with a specialization in Financial Accounting.
The Board evaluated several
factors when selecting Mr. Wong as the Chairman of the Audit Committee as well as its financial expert. First, his working
knowledge of US-GAAP was an important factor in the decision. This factor was bolstered by a number of other factors that led
to the determination that he possesses the expertise required to serve as the Chairman of the Audit Committee and the audit
committee financial expert. These factors include, but are not limited to the following: (i) obtaining his bachelors degree,
with a specialization in accounting and finance from Hong Kong University of Science & Technology, (ii) becoming a
fellow member of The Association of Chartered Certified Accountants, (iii) passing the CPA exam on the first sitting, (iv)
becoming a licensed CPA in Hong Kong, (v) participation in US-GAAP related reporting projects when he was working with
PricewaterhouseCoopers, (vi) interfacing with auditors and CPAs on behalf of clients (vii) his holding various positions such
as CFO and Secretary of several publicly listed companies. His knowledge of both western accounting practices and the Chinese
business environment coupled with all of the reasons above made him an ideal candidate to head our Audit Committee and act as
its financial expert. After consideration, the Company believes Mr. Wong fulfills the requirements of Regulation S-K Item
407(d) with respect to the role of audit committee financial expert. The company feels that the Company’s business and
structure does not preclude this finding, and the support for such determination is further strengthened when the Company
considers the combination of Mr. Wong’s business and financial expertise with the mining expertise of other members of
the committee and the board.
Mr. Jiayin Zhu
serves as the Chief
Financial Officer of the Company. He was appointed as CFO on March 16, 2011. Most recently, Mr. Zhu held the position of Financial
Manager with the Company from June of 2010 until his appointment to the CFO position. Previously, Mr. Zhu held the positions of
Deputy Financial Manager and Accountant with the company, from February of 2009 until June of 2010 and from April of 2008 until
February of 2009, respectively. Mr. Zhu received his master’s degree in management from Liaoning Technical University in
2008. Mr. Zhu received his bachelor’s degree in economics from Central China Normal University in 2005.
Mr. Ligang Wang
has served as Vice
President. Since July 2002, he has served as President of Qianzhen Mining. He has more than 20 years’ experience in mine
management. From January 1986 to June 2002, he worked as plant manager in the Wulatehou Banner Baynnur Mining.
Each of the directors named above will
serve until our next Annual Meeting of Stockholders or until their successors are duly elected and qualified. Directors will be
elected for one-year terms at the Annual Meeting of Stockholders. Officers will hold their positions at the pleasure of the Board
of Directors, absent any employment agreement, of which none currently exists or is contemplated. There is no arrangement or understanding
between any of our directors or officers and any other person pursuant to which any director or officer was or is to be selected
as a director or officer, and there is no arrangement, plan or understanding as to whether non-management stockholders will exercise
their voting rights to continue to elect the current directors to our Board of Directors. There are also no arrangements, agreements
or understandings between non-management stockholders that may directly or indirectly allow participation in or influence the management
of our affairs.
There are no agreements or understandings
for any officer or director to resign at the request of another person, and none of our officers or directors is acting on behalf
of, or will act at the direction of, any other person.
As directors of the Company, we elected them based on their experiences in financial or industrial work.
Most of our directors have over 20 years’ experience in the relevant industries, such as Messrs. Helin Cui, Xueming Xu, and
Jian Zhang, and Liancheng Li who all have over 20 years’ experience in the management of nonferrous mining. Thus are qualified
for being directors of the Company which is mainly engaged in the business of mining operations. As an Amex listed company, we
also appoint some financial experts as the director of the Company, for example,
Mr.
Shing Mun Wong.
Ms. Xiaojing Yu has over 20 years’
experience in the mining and finance industries. As the founder of the Company, she is a major shareholder (currently 44.9%) of the
Company. To stabilize the experienced management team and for the long term development of the Company, she has served as both
the Chairwoman of Board and the CEO of the Company.
We do not have a Lead Independent Director.
We consider the diversity in identifying nominees for director in two aspects: sufficient experiences in management of mining operations
and finance.
Involvement in Certain Legal Proceedings
During the past ten years, no present or
former director, executive officer or person nominated to become a director or an executive officer of our Company:
|
(1)
|
Was a general partner or executive officer of any business against which any bankruptcy petition was filed, either at the time
of the bankruptcy or two years prior to that time;
|
|
(2)
|
Was convicted in a criminal proceeding or named subject to a pending criminal proceeding (excluding traffic violations and
other minor offenses);
|
|
(3)
|
Was subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities
or banking activities; or
|
|
(4)
|
Was found by a court of competent jurisdiction (in a civil action),
the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the
judgment has not been reversed, suspended or vacated.
|
Compliance with Section 16(a) of the
Securities Exchange Act of 1934
Section 16(a) of the Securities and Exchange
Act of 1934 requires our executive officers and directors and persons who own more than 10% of a registered class of our equity
securities, to file with the SEC initial statements of beneficial ownership on Form 3, reports of changes in ownership on Form
4 and annual reports concerning their ownership on Form 5. Executive officers, directors and greater than 10% stockholders are
required by the SEC regulations to furnish us with copies of all Section 16(a) reports they file.
We believe that, during 2011, our directors,
executive officers, and 10% stockholders complied with all Section 16(a) filing requirements, with the exceptions noted below.
|
•
|
|
A late Form 4 report was filed for Yu Xiaojing, our Chairman and CEO, on June 13, 2011 to report an four sales transactions.
|
|
•
|
|
A late Form 4 report was filed for Xu Xueming, our director, on June 13, 2011 to report two sales transactions and six purchase transactions.
|
|
•
|
|
A late Form 4 report was filed for Wang Ligang, our Vice President, on June 14, 2011 to report 13 sales transactions.
|
|
|
|
A late Form 4 report was filed for Li Liancheng, our director, on June 14, 2011 to report one purchase transactions.
|
|
|
|
A late Form 4 report was filed for Zhang Jian, our director, on July 21, 2011 to report one purchase transactions.
|
|
|
|
A late Form 4 report was filed for Wang Konman, our director, on July 21, 2011 to report one purchase transactions.
|
|
|
|
A late Form 3 and a late Form 4 report were filed for Zhu Jiayin, our Chief Financial Officer, on July 18, 2011 and July 21, 2011, respectively, to report one purchase transaction each.
|
In making these statements, we have relied
upon examination of the copies of Forms 3, 4, and 5, and amendments to these forms, provided to us and the written representations
of our directors, executive officers, and 10% stockholders.
Code of Ethics
We have adopted a Code of Business Conduct
and Ethics (the “Code”) that is applicable to all employees, consultants and members of the Board of Directors, including
the Chief Executive Officer, Chief Financial Officer and Secretary. This Code embodies our commitment to conduct business in accordance
with the highest ethical standards and applicable laws, rules and regulations. We will provide any person a copy of the Code, without
charge, upon written request to the Company. Requests should be addressed in writing to: Fulun Song, office of the Board of Directors,
China Shen Zhou Mining & Resources, Inc., Suite 1211, Zeyang Tower, No. 166 Fushi Road, Shijingshan District, Beijing, China
100043.
Director Nominees Recommended by Stockholders
We have not implemented any changes to
the procedures by which stockholders may recommend nominees to our board of directors since we last disclosed those procedures
in our most recent proxy statement.
Board Composition; Audit Committee and
Financial Expert
Our Board has six members, of which
three are independent directors. The independent directors are Jian Zhang, Shing Mun Wong and Liancheng Li. We have an Audit
Committee, a Compensation Committee and a Corporate Governance and Nominating Committee. The Audit Committee has been
established as a separately-designated standing committee in accordance with section 3(a)(58)(A) of the Exchange Act. The
Audit Committee has at least one member, Mr. Shing Mun Wong, who meets the definition of an “audit committee financial
expert” under SEC rules and whom the Board has determined to be “independent”.
Audit Committee
. The Audit Committee
is currently comprised of Shing Mun Wong, Liancheng Li and Jian Zhang, with Shing Mun Wong as the chairman, each of whom are “independent”
as that term is defined by SEC rules and under the American Stock Exchange listing standards. The Audit Committee is directly responsible
for the appointment, retention and oversight of the work of any independent accountants employed by the Company for the purpose
of preparing or issuing an audit report or related work or performing other audit, review or other services. Any such registered
public accounting firm must report directly to the Audit Committee. The Audit Committee has the ultimate authority and responsibility
to evaluate and, where appropriate, replace the registered public accounting firm.
Audit Committee held 4 meetings in 2011
and the attendance rates for all committee members were 100%.
Compensation Committee.
The Compensation
Committee is responsible for the administration of all salary, bonus and incentive compensation plans for our officers and key
employees. The members of the Compensation Committee are Shing Mun Wong, Jian Zhang and Liancheng Li, with Liancheng Li as the
chairman, all of whom are “independent” directors.
Compensation Committee
held 1 meeting
in 2011 and the attendance rates for all committee members were 100%.
Nominating and Corporate Governance
Committee
The Nominating and Corporate Governance Committee is responsible for overseeing, reviewing, and making periodic recommendations
concerning the company’s corporate governance policies and recommending candidates for election to the Company’s Board
of Directors. The committee also oversees our adherence to our corporate governance standards. The members of the committee are
Jian Zhang, Shing Mun Wong, and Liancheng Li with Jian Zhang as the chairman.
Nominating and Corporate Governance
Committee
held 2 meetings in 2011 and the attendance rates for all committee members were 100%.
In 2011, the board of directors held 8
meetings and attendance rates for all board members were 96%.
|
ITEM 11.
|
EXECUTIVE COMPENSATION
|
During 2011, no executive officer’s total annual salary
and bonus exceeded $100,000, except Ms. Xiaojing Yu.
Summary Compensation Table
Name and
Principal
Underlying
Positions (a)
|
|
Year
(b)
|
|
|
Salary
Paid in
Cash
(c)
|
|
|
Bonus
(d)
|
|
|
Option
Awards
(e)
|
|
|
Stock
Awards
(f)***
|
|
|
Non-equity
Incentive Plan
Compensation
(g)
|
|
|
Nonqualified
Deferred
Compensation
Earnings
(h)
|
|
|
All Other
Compensation
(i)
|
|
|
Total
(j)
|
|
Xiaojing Yu, CEO
|
|
|
2011
|
|
|
$
|
294,285
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
294285
|
|
|
|
|
2010
|
|
|
$
|
70,808
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
70,808
|
|
Helin Cui, President and COO
|
|
|
2011
|
|
|
$
|
78,285
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
78,285
|
|
|
|
|
2010
|
|
|
$
|
46,026
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
46,026
|
|
Jiayin Zhu, CFO*
|
|
|
2011
|
|
|
$
|
12,381
|
|
|
$
|
15,187
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
27,568
|
|
Steven Wang, CFO**
|
|
|
2011
|
|
|
$
|
8,614
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
8,614
|
|
|
|
|
2010
|
|
|
$
|
6,294
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
6,294
|
|
Ligang Wang, Vice President
|
|
|
2011
|
|
|
$
|
77,756
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
77,756
|
|
|
|
|
2010
|
|
|
$
|
23,013
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
23,013
|
|
* Common shares awarded under 2009 Omnibus
Long-term Incentive Plan approved on October 29, 2009.
** Steven Wang resigned effective March
16, 2011 and was succeeded by Jiayin Zhu.
Outstanding Equity Awards at Fiscal
Year-End
2009 Omnibus Long-term Incentive Plan was
approved both by Board of Directors of the Company on October 29, 2009 and by shareholders of a majority of our voting stock and
upon the effectiveness of the Information Statement on Form 14C. The shares of Stock issuable under the 2009 Plan are available
either from authorized but unissued shares or from shares reacquired by us on the open market. The maximum number of shares of
Stock available for issuance under the 2009 Plan shall be 2,000,000, and the maximum number of common stock that will be awarded
to any one Grantee (as defined) during any calendar year shall not exceed 300,000.
On February 4, 2010, 760,000 common shares
were issued to 42 persons of employees, consultants, officers and directors under 2009 Omnibus Long-term Incentive Plan. The number
of shares of stock awarded to each officer, director, employee or consultant was determined by dividing the amount of back pay
due such officer, director, employee or consultant by $0.38 which was the average daily trading price per share for the Company’s
common stock in December 2008.
On June 20, 2011, 400,000 shares of common
stock were approved by the board of directors to its employees as share based on the 2009 Omnibus Long-term Incentive Plan. The
number of shares of stock awarded to each employee was determined by the fair value by $2.43 which was the close price per share
for the Company’s common stock on June 20, 2011.
Director Compensation
Compensation for all directors in 2011
as follows:
Name (a)
|
|
Year
|
|
|
Fees
Paid in
Cash (b)
|
|
|
Stock
Awards
(c) **
|
|
|
Option
Awards
(d)
|
|
|
Non-Equity
Incentive Plan
Compensation (e)
|
|
|
Nonqualified
Deferred
Compensation
Earnings (f)
|
|
|
All Other
Compensation
(g)
|
|
|
Total (h)
|
|
Liancheng Li*
|
|
2011
|
|
|
$
|
14,857
|
|
|
$
|
24,300
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
39,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jian Zhang*
|
|
2011
|
|
|
$
|
14,857
|
|
|
$
|
24,300
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
39,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Konman Wong**
|
|
2011
|
|
|
$
|
15,321
|
|
|
$
|
24,300
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
39,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gene Michael Bennett**
|
|
2011
|
|
|
$
|
21,700
|
|
|
$
|
24,300
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
46,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xueming Xu
|
|
2011
|
|
|
$
|
67,529
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
67,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Independent director
** On January 1, 2012, Mr. Shing
Mun Wong was appointed to the Board. He will also serve as a chairman of the audit committee and as a member of the
Compensation Committee and the Nominating and Corporate Governance Committee.
On October 17, 2011, Mr. Gene Michael Bennett resigned
as a director of the Board of Directors of the Company. In effect, Mr. Bennett also resigned as chairman of the audit committee
of the Board. The Company’s independent director Mr. Konman Wong replaced Mr. Bennett as the chairman of the audit committee
of the Board.
On December 31, 2011, Mr. Konman Wang resigned as a director of the Board of Directors of the Company. In effect, Mr. Wang
also resigned as chairman of the audit committee of the Board and as a member of the compensation committee and the nominating
and corporate governance committee.
Retirement, Post-Termination and Change
in Control
We have no retirement, pension, or profit-sharing
programs for the benefit of directors, officers or other employees, nor do we have post-termination or change in control arrangements
with directors, officer or other employees, but our Board of Directors may recommend adoption of one or more such programs in the
future.
|
ITEM 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
|
The following table sets forth certain
information as of March 5, 2012 relating to the beneficial ownership (as defined by the rules of the SEC) of shares of common stock
by (i) each person who owns beneficially more than 5% of the outstanding shares of our common stock, (ii) each of our directors,
(iii) each of our executive officers as of March 5, 2012, and (iv) all of our executive officers and directors as a group.
|
|
Amount and Nature of
Beneficial Ownership (1)
|
|
Name and Address
|
|
Number of
Shares(2)
|
|
|
Percentage
Owned (3)
|
|
Xiaojing Yu, Chairman of theBoard & CEO
|
|
|
14,997,090
|
|
|
|
44.9
|
%
|
Xueming Xu, Director
|
|
|
1,844,120
|
|
|
|
5.8
|
%
|
Helin Cui, Director & COO
|
|
|
8,800
|
|
|
|
*
|
|
Jiayin Zhu, CFO
|
|
|
6350
|
|
|
|
*
|
|
Jian Zhang, Independent Director
|
|
|
20,000
|
|
|
|
*
|
|
Liancheng Li, Independent Director
|
|
|
10,000
|
|
|
|
*
|
|
Shing Mun Wong, Independent Director
|
|
|
-
|
|
|
|
*
|
|
Ligang Wang, Vice President
|
|
|
-
|
|
|
|
*
|
|
Directors and executive officers as a group (8 persons)
|
|
|
16,
886,360
|
|
|
|
50.5
|
%
|
|
**
|
Including the common shares awarded under 2009 Omnibus Long-term Incentive Plan approved on October 29, 2009.
|
|
(1)
|
As of March 5, 2012, there were 33,425,101 shares of common stock outstanding. Each person named above has sole
investment and voting power with respect to all shares of the common stock shown as beneficially owned by the person, except
as otherwise indicated below.
|
|
(2)
|
Under applicable rules promulgated by the SEC pursuant to the Exchange Act, a person is deemed the “beneficial owner”
of a security with regard to which the person, directly or indirectly, has or shares (a) the voting power, which includes the power
to vote or direct the voting of the security, or (b) the investment power, which includes the power to dispose or direct the disposition
of the security, in each case irrespective of the person’s economic interest in the security. Under these SEC rules, a person
is deemed to beneficially own securities which the person has the right to acquire within 60 days through (x) the exercise of any
option or warrant or (y) the conversion of another security.
|
|
(3)
|
In determining the percent of common stock owned by a person (a) the numerator is the number of shares of common stock beneficially
owned by the person, including shares the beneficial ownership of which may be acquired within 60 days upon the exercise of options
or warrants or conversion of convertible securities, and (b) the denominator is the total of (i) the shares of common stock outstanding
as of March 5, 2012, and (ii) any shares of common stock which the person has the right to acquire within 60 days upon the exercise
of options or warrants or conversion of convertible securities. Neither the numerator nor the denominator includes shares which
may be issued upon the exercise of any other options or warrants or the conversion of any other convertible securities.
|
|
ITEM 13.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
|
On April 12, 2011, the Company through its subsidiary
Qianzhen Mining entered into an equity transfer agreement to sell its 60% equity interest Qingshan Metal to a Chinese citizen Mr.
Mao Huang, a minority shareholder of Xingzhen Mining.
In December 2011, the Company transferred from Ms. Yanling Ding to Mr. Mao Huang a 5.15%-interest note for an amount approximately
equal to the consideration owed to Mr. Huang.
There were no other related party transactions for the years ended December 31,
2011 and 2010, except for loans and repayments to related parties. As of December 31, 2011 and 2010, amounts due to related
parties consisted of the following:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Due to directors of the Company:
|
|
|
|
|
|
|
Ms. Xiaojing Yu, CEO of the Company (a)
|
|
$
|
106
|
|
|
$
|
102
|
|
Mr. Xueming Xu, Director of the Company (b)
|
|
|
13
|
|
|
|
12
|
|
Due to Mr. Xiaoming Yu, General Manager of Xiangzhen Mining (c)
|
|
|
127
|
|
|
|
431
|
|
Due to Mr. Mao Huang, a minority shareholder of Xingzhen Mining(d)
|
|
|
4
|
|
|
|
1,894
|
|
|
|
$
|
250
|
|
|
$
|
2,439
|
|
(a)
|
Ms. Yu is the CEO of the Company.
|
(b)
|
Mr. Xu is a director of the Company.
|
(c
|
Mr. Yu is the General Manager of Xiangzhen Mining.
|
(d)
|
Mr. Huang is a minority shareholder of Xingzhen Mining.
|
|
ITEM 14.
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
Sherb & Co. LLP (“Sherb”)
audited our financial statements for the 2011 and 2010 fiscal years. All of the services described below were approved by our
board prior to performance. Our board has determined that the payments made to the independent accountant for these services are
compatible with maintaining such auditor’s independence.
Audit Fees.
The aggregate fees billed
by Sherb for professional services rendered for the audit of the Company’s financial statements and review services for interim
quarterly financial statements for the fiscal years ended December 31, 2011 and 2010 were $278,000 and $172,000, respectively.
Audit-Related Fees.
There were no
fees for assurance and related services by Sherb for the fiscal years ended December 31, 2011 and 2010.
Tax Fees.
There were no fees for
tax compliance, tax advice or tax planning services from Sherb for the fiscal year ended December 31, 2011 and 2010.
All Other Fees
. The aggregate
fees billed by Sherb for all other professional services rendered for the fiscal year ended December 31, 2011
was $20,000. There were no other fees for either audit-related or non-audit services billed by Sherb for the fiscal year
ended December 31, 2010.
Statements filed as part of this Report
Exhibits
The following documents are filed as exhibits
herewith or incorporated by reference to exhibits previously filed with the SEC:
Exhibit
Number
|
|
Description of Exhibit
|
2
|
|
Stock Exchange Agreement by and among Earth Products & Technologies, Inc., American Federal Mining Group, Inc. and shareholders of American Federal Mining Group, Inc., dated July 14, 2006 (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on July 20, 2006)
|
3.1
|
|
Amended and Restated Articles of Incorporation of the Company, effective December 13, 2006 (incorporated by reference to the Company’s Form 10-KSB/A filed on April 24, 2007)
|
3.2
|
|
Bylaws of the Company adopted on November 27, 2006 (incorporated by reference to the Company’s Form 10-KSB/A filed on April 24, 2007)
|
3.3
|
|
Bylaws of China Shen Zhou Mining & Resources, Inc., dated November 2, 2007 (incorporated by reference to the Company’s Form 8-K filed with SEC on November 05, 2007.)
|
3.4
|
|
Form of Amended and Restated Certificate of Designations (incorporated by reference to the Company's Current Report on Form
8-K filed on March 26, 2012)
|
10.1
|
|
Indenture dated December 27, 2006 (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on December 29, 2006)
|
10.2
|
|
Note Purchase Agreement by and between the Company and Citadel Equity Fund, Ltd., dated December 21, 2006 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on December 29, 2006).
|
10.3
|
|
Voting Agreement by and between the Company, Xiaojing Yu, Xueming Xu and Citadel Equity Fund, Ltd. (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on December 29, 2006).
|
10.4
|
|
Service Agreement for Going Public between Inner Mongolia Xiangzhen Mining Group Co. Ltd and American Eastern Group, Inc., dated November 1, 2006, and as amended on December 10, 2006 (incorporated by reference to the Company’s Form 10-KSB/A filed on April 24, 2007)
|
10.5
|
|
Stock Option Agreement by and between the Company and American Eastern Group, Inc., dated December 3, 2005 (incorporated by reference to the Company’s Form 10-KSB/A filed on April 24, 2007)
|
10.6
|
|
Stock Option Agreement by and between the Company and Shenzhen DRB Investment Consultant, Limited, dated December 3, 2005 (incorporated by reference to the Company’s Form 10-KSB/A filed on April 24, 2007)
|
10.7
|
|
Letter Agreement by and between the Company and American Eastern Securities, Inc., dated November 1, 2006, as amended on December 27, 2006 (incorporated by reference to the Company’s Form 10-KSB/A filed on April 24, 2007)
|
10.8
|
|
Stock Purchase Agreement by and between American Federal Mining Group, Inc. and Xinjiang Buerjin County Xingzhen Mining Co., Ltd., dated April 28, 2006, as amended on July 6, 2006 and July 20, 2006 (incorporated by reference to the Company’s Form 10-KSB/A filed on April 24, 2007)
|
10.9
|
|
Stock Purchase Agreement by and between American Federal Mining Group, Inc. and Inner Mongolia Qingshan Nonferrous Metal Development Co., Ltd., dated April 12, 2006, as amended on July 8, 2006 and July 20, 2006 (incorporated by reference to the Company’s Form 10-KSB/A filed on April 24, 2007)
|
10.10
|
|
Share Equity Acquisition Agreement by and between Inner Mongolia Xiangzhen Mining Group, Ltd. and Jiaxing Li and Guan Huang, dated as of November 6, 2006 (incorporated by reference to the Company’s Form 10-KSB/A filed on April 24, 2007)
|
10.11
|
|
Industrial Product Sales Contract by and between Inner Mongolia Wulatehouqi Qianzhen Ore Processing Co., Ltd. and Baiyin Nonferrous Metal Group. Co., Ltd., dated July 28, 2006 (incorporated by reference to the Company’s Form 10-KSB/A filed on April 24, 2007)
|
10.12
|
|
Refined Zinc Ore Supply Agreement by and between Wulatehouqi Qianzhen Ore Processing Co., Ltd. and Zijin Nonferrous Metal Co., Ltd., dated as of March 26, 2006 (incorporated by reference to the Company’s Form 10-KSB/A filed on April 24, 2007)
|
10.13
|
|
Contract by and between Wulatehouqi Qianzhen Ore Processing Co., Ltd. and Wulatehouqi Zijin Mining Co., Ltd., dated as of December 10, 2006 (incorporated by reference to the Company’s Form 10-KSB/A filed on April 24, 2007)
|
10.14
|
|
Fluorite Purchase Agreement by and between Inner Mongolia Xiangzhen Fluorite Industrial Co., Ltd. and Langfang Xinda Iron Alloy Co., Ltd., dated as of April 23, 2006 (incorporated by reference to the Company’s Form 10-KSB/A filed on April 24, 2007)
|
10.15
|
|
Contract by and between American Federal Mining Group, Inc., Xiaojing Yu and Inner Mongolia Wulatehouqi Qianzhen Ore Processing Co., Ltd., dated as of February 16, 2006 (incorporated by reference to the Company’s Form 10-KSB/A filed on April 24, 2007)
|
10.16
|
|
Industrial Product Sales Contract by and between Inner Mongolia Xiangzhen Mining Co., Ltd. and Beijing Capital Steel Company Limited by Shares, dated as of March 31, 2005 (incorporated by reference to the Company’s Form 10-KSB/A filed on April 24, 2007)
|
10.17
|
|
Fluorite Powder Supply Agreement by and between Ningxia Jinhe Chemical Co., Ltd. and Inner Mongolia Xiangzhen Mining Group Co., Ltd. dated as of April 3, 2006 (incorporated by reference to the Company’s Form 10-KSB/A filed on April 24, 2007)
|
10.18
|
|
Working Capital Loan Agreement by and between Inner Mongolia Xiangzhen Mining Group Co., Ltd. and China Industrial and Commerce Bank, dated as of November 30, 2006 (incorporated by reference to the Company’s Form 10-KSB/A filed on April 24, 2007)
|
10.19
|
|
Equity Transfer Agreement, dated as of December 10, 2007, by and among Inner Mongolia Xiangzhen Mining Group Co Ltd., Xiaojing Yu, and Dechang Wang (incorporated by reference to the Company’s Form 8-K filed with SEC on December 12, 2007)
|
10.20
|
|
Stock Purchase Agreement by and between Inner-Mongolian Xiangzhen Mining Group Ltd. Co and Xinjiang Tianxiang Development Co. of New Technology, dated June 25, 2007 (incorporated by reference to the Company’s 10-KSB filed on April 14, 2008)
|
10.21
|
|
Share Purchase Agreement by and between Inner Mongolia Xiangzhen Mining Group Co., Ltd. and Fortune Pegasus International Limited, dated September 21, 2009 (incorporated by reference to exhibit 10.1 of the Company’s Form 8-K filed on September 25, 2009)
|
10.22
|
|
Notes Repurchase Agreement by and between China Shen Zhou Mining & Resources, Inc. and Mountview Path Limited, dated September 22, 2009 (incorporated by reference to exhibit 10.2 of the Company’s Form 8-K filed on September 25, 2009)
|
10.24
|
|
Form of Securities Purchase Agreement (incorporated by reference to exhibit 10.1 to the Company’s Form 8-K filed on January 19, 2011)
|
10.25
|
|
Form of Warrant to Purchase Common Stock (incorporated by reference to exhibit 4.1 to the Company’s Form 8-K filed on January 19, 2011)
|
10.26
|
|
Equity Transfer Agreement, dated April 12, 2011 (translation
from original Chinese) (incorporated by reference to exhibit 10.1 to the Company’s Form 8-K filed on April 18, 2011)
|
10.27
|
|
Equity Transfer and Capital Increase Agreement, dated January
16, 2012 (translation from original Chinese) (incorporated by reference to exhibit 10.1 to the Company’s Form 8-K filed on
January 17, 2012)
|
10.28
|
|
Transfer Agreement, dated February 7, 2012 (translation from original Chinese) (incorporated by reference to exhibit 10.2 to the Company’s Form 8-K/A filed on February 10, 2012)
|
10.29
|
|
Transfer Agreement, dated February 7, 2012 (translation from original Chinese) (incorporated by reference to exhibit 10.3 to the Company’s Form 8-K/A filed on February 10, 2012)
|
10.30
|
|
Form of Warrant to Purchase Common Stock (incorporated by reference to the Company’s Current Report on Form 8-K filed
on March 21, 2012)
|
10.31
|
|
Form of Securities Purchase Agreement, as amended (incorporated by reference to the Company’s Current Reports on Form
8-K filed on March 21, 2012 and March 26, 2012)
|
10.32
|
|
Form of Waiver (incorporated by reference to the Company’s Current Report on Form 8-K filed on March 21, 2012)
|
14.1
|
|
Code of Ethics, dated as of April 16, 2007 (incorporated by reference to the Company’s Form 10-KSB filed on April 17, 2007)
|
21.1*
|
|
Subsidiaries of the Company
|
23.1*
|
|
Consent of Independent Auditor
|
23.2*
|
|
Consent of Consultant
|
31.1*
|
|
Statement of Chief Executive Officer furnished pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
|
31.2*
|
|
Statement of Chief Financial Officer furnished pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002, 18 U.S.C. Section 1350
|
32*
|
|
Statement of Chief Executive Officer and Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
|
101.INS
|
|
XBRL Instance Document
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
* Filed herewith.
SIGNATURES
In accordance with Section 13 or 15(d)
of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
CHINA SHEN ZHOU MINING & RESOURCES, INC.
|
|
|
|
Dated: March 26, 2012
|
|
/s/ Xiaojing Yu
|
|
|
Xiaojing Yu
|
|
|
Director, Chief Executive Officer, and Chairman of the Board
|
|
|
(Principal Executive Officer)
|
|
|
|
Dated: March 26, 2012
|
|
/s/ Jiayin Zhu
|
|
|
Jiayin Zhu
|
|
|
Chief Financial Officer
(Principal Accounting and Financial Officer)
|
In accordance with the Exchange Act, this
report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Xiaojing Yu
|
|
Chairman of the Board and Chief Executive Officer
|
|
March 26, 2012
|
Xiaojing Yu
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/ Jiayin Zhu
|
|
Chief Financial Officer
|
|
March 26, 2012
|
Jiayin Zhu
|
|
(Principal Accounting and Financial Officer)
|
|
|
|
|
|
|
|
/s/ Helin Cui
|
|
Director, Chief Operating Officer
|
|
March 26, 2012
|
Helin Cui
|
|
|
|
|
|
|
|
|
|
/s/ Xueming Xu
|
|
Director
|
|
March 26, 2012
|
Xueming Xu
|
|
|
|
|
|
|
|
|
|
/s/ Jian Zhang
|
|
Director
|
|
March 26, 2012
|
Jian Zhang
|
|
|
|
|
|
|
|
|
|
/s/ Shing Mun Wong
|
|
Director
|
|
March 26, 2012
|
Shing Mun Wong
|
|
|
|
|
|
|
|
|
|
/s/ Liancheng Li
|
|
Director
|
|
March 26, 2012
|
Liancheng Li
|
|
|
|
|
China Shen Zhou Mining & Resources,
Inc. and Subsidiaries
Index to Consolidated Financial
Statements
|
|
Page
|
Report of Independent Registered Public Accounting Firm
|
|
F-1
|
|
|
|
Consolidated Balance Sheets
|
|
F-2
|
|
|
|
Consolidated Statements of Operations
|
|
F-3
|
|
|
|
Consolidated Statements of Changes in Stockholders’ Equity
|
|
F-4
|
|
|
|
Consolidated Statements of Cash Flows
|
|
F-5
|
|
|
|
Notes to Consolidated Financial Statements
|
|
F-6
|
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of
Directors
China Shen Zhou Mining & Resources,
Inc. and Subsidiaries
We have audited the accompanying
consolidated balance sheets of China Shen Zhou Mining & Resources, Inc. and Subsidiaries (the “Company”) as of
December 31, 2011 and 2010 and the related consolidated statements of operations and comprehensive income, stockholders' equity
and cash flows for the years ended December 31, 2011 and 2010. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform
an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly,
we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December
31, 2011 and 2010 and the results of their operations and their cash flows for the years ended December 31, 2011 and 2010, in conformity
with accounting principles generally accepted in the United States of America.
/s/Sherb & Co., LLP
Certified Public Accountants
New York, New York
March 26, 2012
CHINA SHEN ZHOU MINING & RESOURCES,
INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share
data)
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,569
|
|
|
$
|
1,545
|
|
Notes receivable, net
|
|
|
1,019
|
|
|
|
-
|
|
Accounts receivable, net
|
|
|
3,332
|
|
|
|
162
|
|
Prepayment for office rent
|
|
|
-
|
|
|
|
82
|
|
Advances to suppliers
|
|
|
1,833
|
|
|
|
333
|
|
Acquisition deposit
|
|
|
2,359
|
|
|
|
-
|
|
Other deposits, net
|
|
|
258
|
|
|
|
517
|
|
Inventories
|
|
|
7,479
|
|
|
|
7,243
|
|
Restricted assets
|
|
|
2,536
|
|
|
|
-
|
|
Assets - Discontinued operations
|
|
|
-
|
|
|
|
1,188
|
|
Total current assets
|
|
|
24,385
|
|
|
|
11,070
|
|
|
|
|
|
|
|
|
|
|
Restricted assets
|
|
|
175
|
|
|
|
70
|
|
Prepayment for vehicle rent
|
|
|
443
|
|
|
|
-
|
|
Property, machinery and mining assets, net
|
|
|
60,313
|
|
|
|
33,052
|
|
Total assets
|
|
$
|
85,316
|
|
|
$
|
44,192
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
3,324
|
|
|
$
|
2,434
|
|
Short term bank loans
|
|
|
11,996
|
|
|
|
8,061
|
|
Receipts in advance
|
|
|
1,528
|
|
|
|
2,058
|
|
Other payables and accruals
|
|
|
2,772
|
|
|
|
4,053
|
|
Due to related parties
|
|
|
250
|
|
|
|
-
|
|
Taxes payable
|
|
|
1,877
|
|
|
|
644
|
|
Liabilities - Discontinued operations
|
|
|
-
|
|
|
|
100
|
|
Total current liabilities
|
|
|
21,747
|
|
|
|
17,350
|
|
|
|
|
|
|
|
|
|
|
Long term loans
|
|
|
-
|
|
|
|
2,630
|
|
Due to related parties
|
|
|
-
|
|
|
|
2,439
|
|
Total liabilities
|
|
|
21,747
|
|
|
|
22,419
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
Common Stock ($0.001 par value; 50,000,000 shares authorized; 32,285,973 shares and 27,974,514 shares issued and outstanding as of December 31, 2011 and 2010, respectively
|
|
|
32
|
|
|
|
28
|
|
Additional paid-in capital
|
|
|
58,425
|
|
|
|
29,508
|
|
PRC statutory reserves
|
|
|
1,732
|
|
|
|
1,672
|
|
Accumulated other comprehensive income
|
|
|
6,109
|
|
|
|
4,357
|
|
Accumulated deficit
|
|
|
(13,344
|
)
|
|
|
(13,630
|
)
|
Stockholders' equity - China Shen Zhou Mining & Resources, Inc. and Subsidiaries
|
|
|
52,954
|
|
|
|
21,935
|
|
Noncontrolling interest
|
|
|
10,615
|
|
|
|
-
|
|
Noncontrolling interest - Discontinued operations
|
|
|
-
|
|
|
|
(162
|
)
|
Total stockholders’ equity
|
|
|
63,569
|
|
|
|
21,773
|
|
Total liabilities and stockholders’ equity
|
|
$
|
85,316
|
|
|
$
|
44,192
|
|
The accompanying notes are
an integral part of these consolidated financial statements.
CHINA SHEN ZHOU MINING &
RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per
share data)
|
|
For the Years Ended
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Net revenue
|
|
$
|
30,551
|
|
|
$
|
11,612
|
|
Cost of sales
|
|
|
17,051
|
|
|
|
8,604
|
|
Gross profit
|
|
|
13,500
|
|
|
|
3,008
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling and distribution expenses
|
|
|
202
|
|
|
|
104
|
|
General and administrative expenses
|
|
|
11,197
|
|
|
|
4,085
|
|
Provision for doubtful accounts
|
|
|
(148
|
)
|
|
|
355
|
|
Impairment provision for inventories
|
|
|
-
|
|
|
|
287
|
|
Impairment provision for mining assets
|
|
|
-
|
|
|
|
1,007
|
|
Total operating expenses
|
|
|
11,251
|
|
|
|
5,838
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from operations
|
|
|
2,249
|
|
|
|
(2,830
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(682
|
)
|
|
|
(589
|
)
|
Provision for available for sale investment
|
|
|
-
|
|
|
|
(148
|
)
|
Other, net
|
|
|
(40
|
)
|
|
|
472
|
|
Total other expense
|
|
|
(722
|
)
|
|
|
(265
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
1,527
|
|
|
|
(3,095
|
)
|
|
|
|
|
|
|
|
|
|
Income tax benefits (expenses)
|
|
|
(1,235
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
292
|
|
|
|
(3,095
|
)
|
|
|
|
|
|
|
|
|
|
Discontinued operations (Note 4):
|
|
|
|
|
|
|
|
|
Loss from operations of discontinued component
|
|
|
(7
|
)
|
|
|
(193
|
)
|
Loss on disposal of discontinued subsidiary
|
|
|
(82
|
)
|
|
|
-
|
|
Loss from discontinued operations
|
|
|
(89
|
)
|
|
|
(193
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
203
|
|
|
|
(3,288
|
)
|
Add: Noncontrolling interests attributable to the noncontrolling interests
|
|
|
143
|
|
|
|
-
|
|
Net income (loss) - attributable to China Shen Zhou Mining & Resources, Inc. and Subsidiaries
|
|
|
346
|
|
|
|
(3,288
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
1,752
|
|
|
|
518
|
|
Comprehensive income (loss)
|
|
$
|
2,098
|
|
|
$
|
(2,770
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share – basic and diluted
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.01
|
|
|
$
|
(0.11
|
)
|
From discontinued operations
|
|
|
(0.00
|
)
|
|
|
(0.01
|
)
|
|
|
$
|
0.01
|
|
|
$
|
(0.12
|
)
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
– Basic and Diluted
|
|
|
31,369
|
|
|
|
27,902
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
CHINA SHEN ZHOU MINING & RESOURCES,
INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY AND COMPREHENSIVE INCOME
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
PRC
|
|
|
|
|
|
Other
|
|
|
|
|
|
Interest
|
|
|
Total
|
|
|
|
Number of
|
|
|
Paid-in
|
|
|
Statutory
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Noncontrolling
|
|
|
—Discontinued
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Reserves
|
|
|
Deficit
|
|
|
Income
|
|
|
Interest
|
|
|
operations
|
|
|
Equity
|
|
Balance at January 1, 2010
|
|
|
27,215
|
|
|
$
|
27
|
|
|
$
|
28,518
|
|
|
$
|
1,672
|
|
|
$
|
(10,342
|
)
|
|
$
|
3,839
|
|
|
$
|
-
|
|
|
$
|
(29
|
)
|
|
$
|
23,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares for employees compensation
|
|
|
760
|
|
|
|
1
|
|
|
|
752
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
753
|
|
Debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
238
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
238
|
|
Net loss for the year ended December 31, 2010
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,288
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(133
|
)
|
|
|
(3,421
|
)
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
518
|
|
|
|
-
|
|
|
|
-
|
|
|
|
518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
27,975
|
|
|
|
28
|
|
|
|
29,508
|
|
|
|
1,672
|
|
|
|
(13,630
|
)
|
|
|
4,357
|
|
|
|
-
|
|
|
|
(162
|
)
|
|
|
21,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares for cash
|
|
|
2,837
|
|
|
|
3
|
|
|
|
18,481
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,484
|
|
Issuance of shares for acquisition
|
|
|
1,075
|
|
|
|
1
|
|
|
|
9,466
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,467
|
|
Plan to issue additional issuance of shares for acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
Acquisition of subsidiaries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,758
|
|
|
|
-
|
|
|
|
10,758
|
|
Issuance of share based compensation
|
|
|
400
|
|
|
|
-
|
|
|
|
971
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
971
|
|
Sale the discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
162
|
|
|
|
162
|
|
Net income for the year ended December 31, 2011
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
346
|
|
|
|
-
|
|
|
|
(143
|
)
|
|
|
-
|
|
|
|
203
|
|
Appropriations to statutory reserves
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60
|
|
|
|
(60
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,752
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
32,287
|
|
|
$
|
32
|
|
|
$
|
58,425
|
|
|
$
|
1,732
|
|
|
$
|
(13,344
|
)
|
|
$
|
6,109
|
|
|
$
|
10,615
|
|
|
$
|
-
|
|
|
$
|
63,569
|
|
The accompanying notes are an
integral part of these consolidated financial statements.
CHINA SHEN ZHOU MINING & RESOURCES,
INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Amounts in thousands, except share
data)
|
|
For the Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
346
|
|
|
$
|
(3,288
|
)
|
Adjustments to reconcile net income (loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Loss from operations of discontinued component, net of income tax benefits
|
|
|
7
|
|
|
|
194
|
|
Loss on sale of discontinued operations, net of income taxes
|
|
|
82
|
|
|
|
-
|
|
Provision for doubtful accounts
|
|
|
(131
|
)
|
|
|
355
|
|
Impairment provision for inventories
|
|
|
-
|
|
|
|
287
|
|
Provision for available for sale investment
|
|
|
-
|
|
|
|
148
|
|
Impairment provision for mining assets
|
|
|
-
|
|
|
|
1,007
|
|
Depreciation and amortization
|
|
|
4,171
|
|
|
|
2,434
|
|
Noncontrolling interests
|
|
|
(143
|
)
|
|
|
-
|
|
Forgiveness of payroll payables
|
|
|
50
|
|
|
|
(300
|
)
|
Stock-based compensation
|
|
|
972
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in -
|
|
|
|
|
|
|
|
|
Notes receivable
|
|
|
(1,019
|
)
|
|
|
-
|
|
Accounts receivable
|
|
|
(3,075
|
)
|
|
|
48
|
|
Advances to suppliers
|
|
|
(1,398
|
)
|
|
|
371
|
|
Other deposits
|
|
|
230
|
|
|
|
(636
|
)
|
Prepayment for vehicle rent
|
|
|
(443
|
)
|
|
|
-
|
|
Prepayment for office rent
|
|
|
82
|
|
|
|
198
|
|
Inventories
|
|
|
53
|
|
|
|
(3,687
|
)
|
Restricted assets
|
|
|
(2,639
|
)
|
|
|
693
|
|
Increase (decrease) in -
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
449
|
|
|
|
(2,386
|
)
|
Receipts in advance
|
|
|
(612
|
)
|
|
|
53
|
|
Other payables and accruals
|
|
|
(2,167
|
)
|
|
|
420
|
|
Taxes payable
|
|
|
1,207
|
|
|
|
300
|
|
Net cash used in operating activities from continuing operations
|
|
|
(3,978
|
)
|
|
|
(3,789
|
)
|
Net cash (used in) provided by operating activities
from discontinued operations
|
|
|
(37
|
)
|
|
|
59
|
|
Net cash used in operating activities
|
|
|
(4,015
|
)
|
|
|
(3,730
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property, machinery and mining assets
|
|
|
(5,193
|
)
|
|
|
(2,099
|
)
|
Acquisition of subsidiaries, net of cash and cash equivalents acquired
|
|
|
(6,022
|
)
|
|
|
-
|
|
Sales of property, machinery and mining assets
|
|
|
189
|
|
|
|
75
|
|
Net cash used in investing activities from continuing operations
|
|
|
(11,026
|
)
|
|
|
(2,024
|
)
|
Net cash used in investing activities from discontinued operations
|
|
|
-
|
|
|
|
(4
|
)
|
Net cash used in investing activities
|
|
|
(11,026
|
)
|
|
|
(2,028
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Due to related parties
|
|
|
(656
|
)
|
|
|
67
|
|
Proceeds from issuance of common shares
|
|
|
20,000
|
|
|
|
-
|
|
Issuance costs of common shares
|
|
|
(1,516
|
)
|
|
|
-
|
|
Repayment at short-term bank loans
|
|
|
(8,964
|
)
|
|
|
(5,036
|
)
|
Proceeds from short-term bank loans
|
|
|
9,704
|
|
|
|
12,142
|
|
Net cash provided by financing activities
|
|
|
18,568
|
|
|
|
7,173
|
|
Foreign currency translation adjustment
|
|
|
497
|
|
|
|
(203
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
4,024
|
|
|
|
1,212
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the beginning of the year
|
|
|
1,545
|
|
|
|
333
|
|
Cash and cash equivalents at the end of the year
|
|
$
|
5,569
|
|
|
$
|
1,545
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities
|
|
|
|
|
|
|
|
|
Shares issued to employees as share based compensation
|
|
$
|
-
|
|
|
$
|
752
|
|
Shares issued to Acquire Xinyi Fluorite
|
|
$
|
9,467
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest expenses
|
|
$
|
582
|
|
|
$
|
415
|
|
Cash paid for income tax
|
|
$
|
57
|
|
|
$
|
-
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
CHINA SHEN ZHOU MINING & RESOURCES,
INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
AND ORGANIZATION
China Shen Zhou Mining & Resources,
Inc. and its subsidiaries (collectively known as the “Company” or “we”) are principally engaged in the
exploration, development, mining, and processing of fluorite, zinc, lead, copper, and other nonferrous metals in the People’s
Republic of China (“PRC” or “China”).
At December 31, 2011, the subsidiaries
of China Shen Zhou Mining & Resources, Inc. are as follows:
Name
|
|
Domicile and Date
of Incorporation
|
|
Paid-in Capital
|
|
Percentage of
Effective
Ownership
|
|
Principal Activities
|
|
|
|
|
|
|
|
|
|
|
American Federal Mining Group, Inc. (“AFMG”)
|
|
Illinois November 15, 2005
|
|
USD
|
10
|
|
100 %
|
|
Investment holdings
|
|
|
|
|
|
|
|
|
|
|
Inner Mongolia Wulatehouqi Qianzhen Ore Processing Co., Ltd. (“Qianzhen Mining”)
|
|
PRC September 22, 2002
|
|
RMB
|
37,221,250
|
|
100 %
|
|
Sales and processing of nonferrous metals and chemical products
|
|
|
|
|
|
|
|
|
|
|
Inner Mongolia Xiangzhen Mining Industry Group Co. Ltd. (“Xiangzhen Mining”)
|
|
PRC July 3,2002
|
|
RMB
|
88,860,699
|
|
100 %
|
|
Acquisition, exploration and extraction, and development of natural resource properties
|
|
|
|
|
|
|
|
|
|
|
Xinjiang Buerjin County Xingzhen Mining Company (“Xingzhen Mining”)
|
|
PRC April 10, 2006 (Acquired on April 28, 2006)
|
|
RMB
|
50,000,000
|
|
90 %
|
|
Exploration of solid metals, processing and sales of mining products.
|
|
|
|
|
|
|
|
|
|
|
Anhui Jingde County Xinyi Fluorite Company (“Xinyi Fluorite”)
|
|
PRC September 18, 2003 (Acquired on January 13, 2011)
|
|
RMB
|
3,200,000
|
|
55 %
|
|
Extraction, processing and sales of fluorite products
|
NOTE 2 - RECAPITALIZATION,
REORGANIZATION
On July 14, 2006,
American Federal Mining Group, Inc. (“AFMG”, the then holding company of China Shen Zhou’s PRC subsidiaries)
entered into a stock exchange agreement with Earth Products & Technologies, Inc. (“EPTI”). Pursuant to the stock
exchange agreement, and as instructed by the Company, EPTI issued 20,000,000 shares of its common stock, of which 17,687,000 shares
were issued to shareholders of AFMG, 1,013,000 shares were issued to management of AFMG and 1,300,000 shares were issued to the
financial advisors of AFMG, in exchange for a 100% equity interest in AFMG, making AFMG a wholly-owned subsidiary of EPTI.
The above stock exchange transaction
resulted in the aforementioned shareholders of AFMG obtaining a majority voting interest in EPTI. Generally accepted accounting
principles in the United States of America require that the Company whose shareholders retain the majority interest in a combined
business be treated as the acquirer for accounting purposes. Consequently, the stock exchange transaction has been accounted for
as a recapitalization of AFMG as AFMG acquired a controlling equity interest in EPTI as of September 15, 2006. The reverse acquisition
process utilizes the capital structure of EPTI and the assets and liabilities of AFMG recorded at historical cost. Although AFMG
is deemed to be the acquiring corporation for financial accounting and reporting purposes, the legal status of EPTI as the surviving
corporation did not change.
Subsequent to completion of the
reverse takeover transaction, on October 5, 2006, EPTI changed its name to China Shen Zhou Mining and Resources, Inc.
NOTE 3 – ACQUISITION
On January 13, 2011, the Company,
through its subsidiary Xingzhen Mining, entered into an equity transfer agreement to acquire 55% of the equity interests of Xinyi
Fluorite (the “Agreement”).
Pursuant to the Agreement, the Company
acquired the equity from the three original shareholders (Jia Xiangfu, a Chinese citizen, Yu Wuqiang, a Chinese citizen, and Chen
Qiaolin, a Chinese citizen) of Xinyi Fluorite for total consideration in the amount of RMB 86.71 million (approximately US$ 13.15
million) (the “Purchase Price”). Pursuant to the terms of the agreement, the consideration was agreed to be RMB 62.44
million (approximately US$ 9.47 million) of the Company’s common stock and RMB 24.27 million (approximately US$ 3.68 million)
in cash. Pursuant to the Agreement, Xingzhen Mining and other investors in the transaction also agreed to pay an additional
RMB 20 million (US$ 3.03 million) for the renovation of Xinyi Fluorite’s mining facilities.
During the January 13, 2011
to December 31, 2011 timeframe, the Company paid cash amounting to RMB 23.29 million (approximately US$ 3.53 million)
and issued 1,074,576 shares of the Company’s common stock to the original shareholders of Xinyi Fluorite. Approximately
RMB 0.98 million (approximately US$ 0.15 million) remains to be paid to the original shareholders of Xinyi Fluorite. The fair
value of the Company’s common stock at the date of the transaction was $8.81. As a result, we recorded a total
of $13,148,165 as the purchase price in connection with the acquisition of Xinyi Fluorite.
After negotiations with the
original shareholders and as required by the Agreement in circumstances where the Company’s stock price has changed,
the Company on February 13, 2012 issued an additional 1,139,128 shares of common stock to the original shareholders. The
Company will not be required to issue any additional shares to the original shareholders in connection with the acquisition.
The following is a reconciliation
of the purchase:
|
|
Shares
|
|
|
Price per share
|
|
|
|
|
Fair value of the Company’s stock issued - first issuance
|
|
|
1,074,576
|
|
|
$
|
8.81
|
|
|
$
|
9,467,000
|
|
Fair value of the Company’s stock issued - second issuance
|
|
|
1,139,128
|
|
|
$
|
-
|
|
|
|
-
|
|
Cash
|
|
|
|
|
|
|
|
|
|
|
3,681,000
|
|
Total purchase price
|
|
|
|
|
|
|
|
|
|
$
|
13,148,000
|
|
Acquired assets and liabilities
|
|
|
|
|
Fixed assets
|
|
$
|
971,000
|
|
Fair value of extraction rights
|
|
|
23,576,000
|
|
Liabilities
|
|
|
(
641,000
|
)
|
|
|
|
23,906,000
|
|
Acquisition of 55% share
|
|
|
55
|
%
|
|
|
|
13,148,000
|
|
Purchase price
|
|
|
13,148,000
|
|
Goodwill
|
|
$
|
-
|
|
|
|
Noncontrolling
interests
|
|
|
|
$
|
23,906,000
|
|
|
|
|
45
|
%
|
|
|
$
|
10,758,000
|
|
The following unaudited pro forma
consolidated results of operations have been prepared as if the acquisition of Xinyi Fluorite had occurred as of January 1, 2010
through December 31, 2010:
Net revenue
|
|
$
|
12,353
|
|
|
|
|
|
|
Cost of sales
|
|
|
9,100
|
|
Gross profit
|
|
|
3,253
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
Selling and distribution expenses
|
|
|
124
|
|
General and administrative expenses
|
|
|
5,035
|
|
Provision for doubtful accounts
|
|
|
355
|
|
Impairment provision for inventories
|
|
|
287
|
|
Impairment provision for mining assets
|
|
|
1,007
|
|
Total operating expenses
|
|
|
6,808
|
|
|
|
|
|
|
Net loss from operations
|
|
|
(3,555
|
)
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
Interest expense
|
|
|
(597
|
)
|
Provision for available investment
|
|
|
(148
|
)
|
Other, net
|
|
|
442
|
|
Total other loss
|
|
|
(303
|
)
|
|
|
|
|
|
Loss from continuing operations
before income taxes
|
|
|
(3,858
|
)
|
|
|
|
|
|
Income tax expenses
|
|
|
(19
|
)
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(3,877
|
)
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
Loss from operations of discontinued component, net of taxes
|
|
|
(193
|
)
|
Loss from discontinued operations
|
|
|
(193
|
)
|
|
|
|
|
|
Net loss
|
|
|
(4,070
|
)
|
Add: Noncontrolling interests attributable to the noncontrolling interests
|
|
|
352
|
(a)
|
Net loss - attributable to China Shen Zhou Mining
& Resources, Inc. and Subsidiaries
|
|
|
(3,718
|
)
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
528
|
|
Comprehensive loss
|
|
$
|
(3,190
|
)
|
|
|
|
|
|
Net loss per common share – basic and
diluted
|
|
|
|
|
From continuing operations
|
|
$
|
(0.12
|
)
|
From discontinued operations
|
|
|
(0.00
|
)
|
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
Weighted average common shares outstanding - Basic and Diluted
|
|
|
30,116
|
(b)
|
(a)
|
Noncontrolling interest of 45% ownership in Xinyi Fluorite for purposes of the pro
forma.
|
(b)
|
Assumes 2,213,704 common shares issued for the purchase of Xinyi Fluorite were outstanding for the entire year pro forma period.
|
The unaudited pro forma information
does not purport to be indicative of the results that would have been obtained had these events actually occurred at the beginning
of the period presented and is not intended to be indicative of future results.
NOTE 4 - DISCONTINUED OPERATIONS
On April 12, 2011, the Company through
its subsidiary Qianzhen Mining entered into an equity transfer agreement (the “Agreement”) to sell its 60% equity interest
in Qingshan Metal to a Chinese citizen Mr. Mao Huang (the “Investor”), a related party of the Company.
Pursuant to the Agreement,
Qianzhen Mining sold all of its Equity in Qingshan Metal to the Investor for total consideration in the amount of RMB 8.5
million (approximately $1.3 million). The payment of the transfer price offset the debt owed by the Company to the Investor.
After the transfer, Qianzhen Mining no longer holds any equity interest in Qingshan Metal.
The Company has recorded a loss
from the operations of a discontinued component, net of income taxes, of approximately $7,000, and a loss from the disposal of
a discontinued subsidiary, net of income taxes, of approximately $82,000 for the year ended December 31, 2011. In accordance with
Accounting Standard Codification (“ASC”) 360 (Formerly FAS 144) of Financial Accounting Standards Board (“FASB”),
Accounting for Impairment or Disposal of Long-Lived Assets, the Company has reflected Qingshan Metal’s results of operations
in the consolidated statements of operations through the date of the sale as discontinued operations for all periods presented.
The assets, liabilities and equity of Qingshan Metal in the Company’s consolidated balance sheet as of December 31, 2010
have been reclassified. The cash flows from discontinued operations have also been reclassified.
The following table presents the
revenue, net loss from discontinued operations and incurred because of the disposal of Qingshan Metal for the periods presented:
|
|
For the Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
|
$
|
(7
|
)
|
|
$
|
(193
|
)
|
|
|
|
|
|
|
|
|
|
Net loss on disposal of subsidiary
|
|
$
|
(82
|
)
|
|
$
|
Not Applicable
|
|
NOTE 5 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Use of Estimates
The Company’s consolidated
financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of
America (“US GAAP”). The preparation of the Company’s consolidated financial statements requires the Company
to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent
assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting periods.
The calculations more dependent on management’s use of estimates and assumptions are those related to mineral reserves and
valuations of proven and probable reserves that are the basis for future cash flow estimates utilized in impairment calculations;
the estimated lives of the mineralized bodies based on estimated recoverable volume through the end of the period over which the
company has extraction rights that are the basis for units-of-production depreciation; depletion and amortization calculations;
estimates of fair value for certain reporting units and asset impairments (including impairments of goodwill, long-lived assets
and investments); write-downs of inventory to net realizable value; reserves for contingencies and litigation; and the fair value
and accounting treatment of financial instruments. The Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ significantly from
these estimates.
Certain of the Company’s accounting
policies require higher degrees of judgment than others in their application. Management evaluates all of its estimates and judgments
on an on-going basis.
Principles of Consolidation
The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries (AFMG, Xiangzhen Mining, and Qianzhen Mining) and its majority
owned subsidiaries (Xingzhen Mining and Xinyi Fluorite). All inter-company balances and transactions have been eliminated.
The minority interest in the net
assets and earnings or losses of Xingzhen Mining have been absorbed by the Company as the minority interest holders in the subsidiary
have no basis in their investment in the subsidiary.
Basis of Preparation
The accompanying consolidated financial
statements have been prepared in conformity with US GAAP. The basis of accounting differs from that used in the statutory accounts
of the Company, which are prepared in accordance with the accounting principles of the PRC (“PRC GAAP”). The Company’s
functional currency is the Chinese Renminbi (“RMB”); however the accompanying consolidated financial statements have
been translated and presented in United States Dollars (“USD”). All significant inter-company transactions and balances
have been eliminated
Cash and Cash Equivalents
The Company considers all highly
liquid debt instruments purchased with a maturity period of three months or less to be cash or cash equivalents. The carrying amounts
reported in the accompanying consolidated balance sheets for cash and cash equivalents approximate their fair value. Substantially
all of the Company’s cash is held in bank accounts in the PRC and is not protected by FDIC insurance or any other similar
insurance. Restricted cash is excluded from cash and cash equivalents and is included in restricted assets.
Accounts Receivable
Accounts receivable is stated at
cost, net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses resulting
from the failure of customers to make required payments. The Company reviews the accounts receivable on a periodic basis and makes
allowances where there is doubt as to the collectibility of individual balances. In evaluating the collectibility of individual
receivable balances, the Company considers many factors, including the age of the balance, the customer’s payment history
and current credit-worthiness, and current economic trends.
Inventories
Inventories are stated at the lower
of cost, determined on a weighted average basis, and net realizable value. Costs of finished goods are composed of direct materials,
direct labor and an attributable portion of manufacturing overhead. Net realizable value is the estimated selling price, in the
ordinary course of business, less estimated costs to complete and dispose. Our management regularly evaluates the composition of
our inventory to identify slow-moving and obsolete inventory to determine if a valuation allowance is required.
Property, Machinery and Mining
Assets
Expenditures for new facilities or equipment and expenditures
that extend the useful lives of existing facilities or equipment are capitalized and depreciated using the straight-line method
at rates sufficient to depreciate such costs over the estimated productive lives, which do not exceed the related estimated mine
lives, of such facilities based on mineralized material.
Mineral exploration costs are expensed as incurred. After
a mine is considered to be in the development or production stage or considered to have proven or probable reserves further exploration
costs are also expensed as incurred.
Extraction rights are stated at the lower of cost and
recoverable amount. When extraction rights are obtained from the government according to mining industry practice in the PRC, extraction
rights are capitalized as incurred and are amortized using the units-of-production (“UOP”) method over the estimated
life of the mineralized body based on estimated recoverable volume through to the end of the period over which the Company has
extraction rights.
Once a mine is considered to be in the development or
production stage, major development costs are amortized using the UOP method based on the estimated recoverable volume of the mineralized
material. The Company determines whether a mine is in development or production stage based upon standard mining industry practices
in the PRC. Given that commencing development and production at mining properties prior to establishing proven and probable reserves
(to the extent necessary to meet the definition under Industry Guide 7), and often after only establishing inferred resources,
is standard business practice in the mining industry in the PRC, the Company believes it is appropriate to account for the Xiangzhen
Mining property as a production-stage operation and to account for the Xingzhen Mining and Xinyi Fluorite properties as development-stage
projects.
At the Company’s surface mines, development costs
include costs to further delineate the mineralized body and remove overburden to initially expose the mineralized body. At the
Company’s underground mines, development costs include the costs of building access ways, shaft sinking and access, lateral
development, drift development, and ramps and infrastructure development.
To the extent that these costs benefit the entire mineralized
body, they are amortized over the estimated life of the mineralized body. Costs incurred to access specific mineralized blocks
or areas that only provide benefit over the life of that area are amortized over the estimated life of that specific mineralized
block or area. Interest cost allocable to the cost of developing mining properties and to constructing new facilities, if any,
is capitalized until such assets are ready for their intended use.
Land use rights are stated at cost, less accumulated
amortization. Land use right amortization is computed using the straight-line method over the estimated useful lives of 25 years.
Estimated useful lives of the Company’s assets
are as follows:
|
|
|
Useful Life
|
|
|
|
|
(In years)
|
|
Land use rights
|
|
|
25
|
|
Buildings
|
|
|
3-25
|
|
Machinery
|
|
|
12
|
|
Mining assets
|
|
|
License term
|
|
Motor vehicle
|
|
|
6
|
|
Equipment
|
|
|
5
|
|
Extraction rights
|
|
|
License term
|
|
Exploration rights
|
|
|
License term
|
|
Foreign Currency
The Company’s principal country of operations is
the PRC. The financial position and results of operations of the Company’s subsidiaries located in the PRC are recorded using
Renminbi (“RMB”) as the functional currency. The results of operations denominated in foreign currencies are translated
at the average rate of exchange during the reporting period.
Assets and liabilities denominated in foreign currencies
at the balance sheet date are translated at the market rate of exchange at that date. The registered equity capital denominated
in the functional currency is translated at the historical rate of exchange at the time of capital contribution. All translation
adjustments resulting from the translation of the financial statements into the reporting currency (“US dollar”) are
recorded in accumulated other comprehensive income, a separate component within shareholders’ equity.
The exchange rates used to translate
amounts in RMB into US Dollars for the purposes of preparing the consolidated financial statements are as follows:
|
|
|
December 31, 2011
|
|
|
December 31, 2010
|
Balance sheet items, except for the registered and paid-up capital and retained earnings, as of year end
|
|
|
US$1=RMB6.3585
|
|
|
US$1=RMB6.6118
|
|
|
|
For the
Year Ended
December 31, 2011
|
|
|
For the
Year Ended
December 31, 2010
|
Amounts included in the statements of operations, statements of changes in stockholders’ equity and statements of cash flow for the years then ended
|
|
|
US$1=RMB6.4616
|
|
|
US$1=RMB6.7788
|
For the years ended December 31, 2011 and 2010, foreign
currency translation adjustments of approximately $1,752,000 and $518,000, respectively, have been reported as comprehensive income
in the consolidated statements of stockholders’ equity and comprehensive income.
Although government regulations now allow conversion
of RMB for current account transactions, significant restrictions still remain. Hence, such translations should not be construed
as representations that RMB could be converted into U.S. Dollars at that rate or any other rate.
The value of the RMB against the U.S. Dollar and other
currencies may fluctuate and is affected by, among other things, changes in Chinese political and economic conditions. Any significant
revaluation of the RMB may materially affect the Company’s financial condition in terms of U.S. Dollar reporting.
Noncontrolling Interest
Noncontrolling interests in the Company’s subsidiaries
are recorded in accordance with the provisions of FASB ASC 810 and are reported as a component of equity, separate from the parent’s
equity. Purchase or sale of equity interests that do not result in a change of control are accounted for as equity transactions.
Results of operations attributable to the noncontrolling interest are included in our consolidated results of operations and, upon
loss of control, the interest sold, as well as interest retained, if any, will be reported at fair value with any gain or loss
recognized in earnings.
Revenue Recognition
Revenue is recognized on the sale of products when title
has transferred to the customer in accordance with the specified terms of each product sales agreement and all of the following
four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed
or determinable, and collectibility is reasonably assured. Generally, the Company’s product sales agreements provide that
title and risk of loss pass to the customer when the quantity and quality of the products delivered are certified and accepted
by the customer.
Sales revenue is recognized, net of PRC business taxes,
sales discounts and returns at the time when the merchandise is sold to the customer. Based on historical experience, management
estimates that returns of sold products are immaterial and has not made allowance for estimating such amounts.
Stripping Costs
Stripping costs are costs of removing overburden and
other mine waste materials. Stripping costs incurred during the production phase of a mine are variable production costs that are
included as a component of inventory to be recognized in cost of sales in the same period as the revenue from the sale of the related
inventory.
Asset Impairment
(a) Long-lived Assets
The Company reviews and evaluates its long-lived assets including property, machinery and mining assets
for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. An impairment
is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the
assets, including goodwill, if any. An impairment loss is measured and recorded based on discounted estimated future cash flows.
Future cash flows are estimated based on quantities of recoverable metals, corresponding expected commodity prices (considering
current and historical prices, price trends and related factors), production levels and operating costs of production and capital,
all based on life-of-mine plans. Existing proven and probable reserves and value beyond proven and probable reserves are included
when determining the fair value of mine site reporting units acquired and, subsequently, in determining whether the assets are
impaired. The term “recoverable metals” refers to the estimated amount of metals that will be obtained after taking
into account losses during ore processing and treatment. Estimates of recoverable metals from such exploration stage metal interests
are risk adjusted based on management’s relative confidence in such materials. In estimating future cash flows, assets are
grouped at the lowest level for which there are identifiable cash flows that are largely independent of future cash flows from
other asset groups. The Company’s estimates of future cash flows are based on numerous assumptions and it is possible that
actual future cash flows will differ significantly from the estimates, as actual future quantities of recoverable metals, prices,
production levels and operating costs of production and capital are each subject to significant risks and uncertainties. Accumulated
impairment provisions of $1,073,000 and $1,028,000, respectively for the years ended December 31, 2011 and 2010 were recorded for
the property and machinery of Qianzhen Mining.
Financial Instruments
Effective January 1, 2008, the Company adopted FASB ASC
820-Fair Value Measurements and Disclosure or ASC 820 for assets and liabilities measured at fair value on a recurring basis. ASC
820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require
the use of fair value measurements establishes a framework for measuring fair value and expands disclosure about such fair value
measurements. The adoption of ASC 820 did not have an impact on the Company’s financial position or operating results, but
did expand certain disclosures.
ASC 820 defines fair value as the price that would be
received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the
use of unobservable inputs. These inputs are prioritized below:
Level 1: Observable inputs such as quoted market prices
in active markets for identical assets or liabilities
Level 2: Observable market-based inputs or unobservable
inputs that are corroborated by market data
Level 3: Unobservable inputs for which there is little
or no market data and require the use of the reporting entity’s own assumptions.
The Company values its financial instruments by estimating
their fair value. The estimated fair value amounts have been determined by the Company using available market information or other
appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates
of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid
in a current market exchange.
The Company’s financial instruments primarily consist
of cash and cash equivalents, accounts receivable, restricted assets, accounts payable, other payables and accruals, short-term
bank loans, and other current liabilities.
Cash and cash equivalents include money market securities
and commercial paper that are considered to be highly liquid and easily tradable. These securities are valued using inputs observable
in active markets for identical securities and are therefore classified as Level 1 within the fair value hierarchy.
As of the balance sheet dates, the estimated fair values
of the financial instruments were not materially different from their carrying values as presented due to the relatively short
maturities of these instruments and to the fact that the interest rates on the borrowings approximate those that would have been
available for loans of similar remaining maturity and risk profile at the respective year ends.
Taxation
(a) Enterprise Income Tax
Taxation on profits earned in the PRC are calculated
on the estimated assessable profits for the year at the rates of taxation prevailing in the PRC after taking into account the benefits
from any special tax credits or “tax holidays” allowed in the PRC.
The Company provides for deferred income taxes using
the asset and liability method. Under this method, the Company recognizes deferred income taxes for tax credits and net operating
losses available for carry-forwards and significant temporary differences. The Company classifies deferred tax assets and liabilities
as current or non-current based upon the classification of the related asset or liability in the financial statements or the expected
timing of their reversal if they do not relate to a specific asset or liability. The Company provides a valuation allowance to
reduce the amount of deferred tax assets if it is considered more likely than not that some portion of or all of the deferred tax
assets will not be realized.
Income taxes are accounted for under the Statement of
FASB ASC 740, Income Taxes. Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and tax loss carry forwards. Any deferred tax assets and liabilities would
be measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled.
(b) Value Added Tax
The Provisional Regulations of the PRC Concerning Value
Added Tax promulgated by the State Council came into effect on January 1, 1994. Under these regulations and the Implementing Rules
of the Provisional Regulations of the PRC Concerning Value Added Tax, a value added tax is imposed on goods sold in or imported
into the PRC and on processing, repair and replacement services provided within the PRC.
Value added tax payable in the PRC is charged on an aggregated
basis at a rate of 13% or 17% (depending on the type of goods involved) on the full price collected for the goods sold or, in the
case of taxable services provided, at a rate of 17% on the charges for the taxable services provided, but excluding, in both cases,
any amount paid in respect of value added tax included in the price or charges, and less any deductible value added tax already
paid by the taxpayer on purchases of goods and services in the same financial year.
(b) Resource Tax
All units and individuals engaged in the exploitation
of mineral products as prescribed in the Regulations within the territory of the PRC shall pay a Resource Tax. The tax payable
for Resource Tax shall be computed in accordance with the assessable volume of the taxable products and the prescribed unit tax
amount.
Transportation charges
Transportation charges represent costs to deliver the
Company’s inventory to points of sale. Transportation costs are expensed and charged to cost of sales as incurred.
Stock Based Compensation
In December 2004, the Financial Accounting Standards
Board, or FASB, issued FASB ASC 718-10-55 - Compensation-Stock Compensation, or ASC 718-10-55. Under ASC 718-10-55, companies are
required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize
the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation
arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share
purchase plans. In addition, FASB ASC 825-10-50-10 – Financial Instruments – Overall – Disclosures, or ASC 825-10-50-10,
expresses views of the Securities and Exchange Commission, or the SEC, staff regarding the interaction between ASC 718-10-55 and
certain SEC rules and regulations and provides the staff's views regarding the valuation of share-based payment arrangements for
public companies. The Company’s compensation cost is measured on the date of grant at its fair value. Such compensation amounts,
if any, are amortized over the respective vesting periods or period of service of the option grant
Net Income Per Common Share
Basic and diluted earnings per share are presented for
net income and for income from continuing operations. Basic earnings per share is computed by dividing net income by the weighted-average
number of outstanding common shares for the period. Diluted earnings per share reflects the potential dilution that could occur
if securities or other contracts that may require the issuance of common shares in the future were converted. Diluted earnings
per share is computed by increasing the weighted-average number of outstanding common shares to include the additional common shares
that would be outstanding after conversion and adjusting net income for changes that would result from the conversion. Only those
securities or other contracts that result in a reduction in earnings per share are included in the calculation.
Comprehensive Income (Loss)
Accumulated other comprehensive income includes foreign
currency translation adjustments. Total comprehensive (loss) income for the years ended December 31, 2011 and 2010 was approximately
$2,098,000 and ($2,770,000), respectively.
Reclassifications
Certain reclassifications have been made to the prior
periods’ financial statements to conform to the current year presentation. These reclassifications had no effect on previously
reported results of operations or the sum of retained earnings and statutory reserves.
Recently Issued Accounting Pronouncements
In September 2011, the FASB issued
ASU 2011-08, "Testing Goodwill for Impairment." ASU 2011-08 will allow companies to assess qualitative factors to
determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill
impairment test required under current accounting standards. ASU 2011-08 will be effective for annual and interim goodwill impairment
tests performed for annual reporting period beginning after December 15, 2011, with early adoption permitted. The Company
is currently evaluating this guidance, but does not expect the adoption will have a material impact on its consolidated financial
statements.
In June 2011, the FASB issued ASU 2011-05,
"Comprehensive Income: Presentation of Comprehensive Income." ASU 2011-05 will require companies to present the components
of net income and other comprehensive income either as one continuous statement or as two consecutive statements. ASU 2011-05 eliminates
the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. ASU
2011-05 does not change the items which must be reported in other comprehensive income, how such items are measured or when they
must be reclassified to net income. ASU 2011-05 will be effective for the first interim and annual periods beginning after December 15,
2011. Further, in December 2011, the FASB issued ASU 2011-12, "Deferral of the Effective Date for Amendments to the Presentation
of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05."
The Company believes the adoption of this guidance concerns disclosure only and will not have a material impact on its consolidated
financial statements.
In May 2011, the Financial Accounting Standards Board ("FASB")
issued Accounting Standards Update ("ASU") 2011-04, "Fair Value Measurement: Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in U.S. GAAP and IFRSs." ASU 2011-04 changes the wording used to describe the
requirements in generally accepted accounting principles in the United States ("U.S. GAAP") for measuring fair value
and for disclosing information about fair value measurements in order to improve consistency in the application and description
of fair value between U.S. GAAP and International Financial Reporting Standards ("IFRS"). ASU 2011-04 clarifies
how the concepts of highest and best use and valuation premise in a fair value measurement are relevant only when measuring the
fair value of nonfinancial assets and are not relevant when measuring the fair value of financial assets or of liabilities. In
addition, ASU 2011-04 expanded the disclosures for the unobservable inputs for Level 3 fair value measurements, requiring
quantitative information to be disclosed related to (1) the valuation processes used, (2) the sensitivity of the fair
value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, and (3) use
of a nonfinancial asset in a way that differs from the asset's highest and best use. ASU 2011-04 will be effective for the first
interim and annual reporting period beginning after December 15, 2011 and early adoption is prohibited. The Company is currently
evaluating the future impact of this new accounting update on its consolidated financial statements.
A variety of proposed or otherwise potential accounting
standards are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative and
preliminary nature of those proposed standards, management has not determined whether implementation of such proposed standards
would result in material changes to our consolidated financial statements.
NOTE 6 – NOTES RECEIVABLE
Notes receivable amounted to approximately
$1,019,000 as of December 31, 2011 consisted of bank’s acceptance bills from four customers for the purchase of the Company’s
products. Bank’s acceptance bills are accepted by the remitters’ banks and entitle the holders to receive the full
face amount from the banks at maturity, which bears no interest and generally ranges from three to six months from the date of
issuance. The Company can also endorse the bank’s acceptance bills as payment to its suppliers before the bank’s acceptance
bills’ maturity date.
NOTE 7 -ACCOUNTS RECEIVABLE
Accounts receivable consisted of
the following:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Accounts receivable
|
|
$
|
3,413
|
|
|
$
|
328
|
|
Less: Allowance for doubtful accounts
|
|
|
(81
|
)
|
|
|
(166
|
)
|
|
|
$
|
3,332
|
|
|
$
|
162
|
|
The activities in the Company’s
allowance for doubtful accounts are summarized as follows:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Balance at the beginning of the year
|
|
$
|
166
|
|
|
$
|
66
|
|
Add: provision during the year
|
|
|
-
|
|
|
|
100
|
|
Less: write off provision during the period
|
|
|
(85
|
)
|
|
|
-
|
|
Balance at the end of the year
|
|
$
|
81
|
|
|
$
|
166
|
|
NOTE 8 - ADVANCES TO SUPPLIERS
Advances to suppliers consist of
the following:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Advances to suppliers
|
|
$
|
1,943
|
|
|
$
|
525
|
|
Less: Allowance for doubtful accounts
|
|
|
(110
|
)
|
|
|
(192
|
)
|
|
|
$
|
1,833
|
|
|
$
|
333
|
|
The activities in the Company’s allowance for doubtful
accounts are summarized as follows:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Balance at the beginning of the year
|
|
$
|
192
|
|
|
$
|
-
|
|
Add: provision during the period
|
|
|
-
|
|
|
|
192
|
|
Less: write off the provision during the period
|
|
|
(82
|
)
|
|
|
-
|
|
Balance at the end of the period
|
|
$
|
110
|
|
|
$
|
192
|
|
NOTE 9 - ACQUISITION DEPOSITS
The acquisition deposits as of December 31,
2011 amounting to approximately $2.36 million were mainly for the potential acquisition in Guizhou Province in China. The total
amount was used as part of the cash consideration for the acquisition in January 2012
NOTE 10 - OTHER DEPOSITS
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Other deposits
|
|
|
357
|
|
|
|
580
|
|
Less: Allowance for doubtful accounts
|
|
|
(99
|
)
|
|
|
(63
|
)
|
|
|
$
|
258
|
|
|
$
|
517
|
|
The activities in the Company’s
allowance for doubtful accounts are summarized as follows:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Balance at the beginning of the year
|
|
$
|
63
|
|
|
$
|
-
|
|
Add: provision during the period
|
|
|
36
|
|
|
|
63
|
|
Balance at the end of the period
|
|
$
|
99
|
|
|
$
|
63
|
|
NOTE 11- INVENTORIES
Inventories consisted of the following:
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Raw materials
|
|
|
|
|
|
$
|
1,623
|
|
|
$
|
708
|
|
Unprocessed ore
|
|
|
(a)
|
|
|
|
3,204
|
|
|
|
4,818
|
|
Consumables
|
|
|
|
|
|
|
181
|
|
|
|
227
|
|
Finished goods and semi-manufactured goods
|
|
|
|
|
|
|
2,471
|
|
|
|
1,490
|
|
|
|
|
|
|
|
$
|
7,479
|
|
|
$
|
7,243
|
|
(a) Unprocessed ore is the inventory
that consists of materials extracted from the mines that have not been processed. These inventories are primarily maintained in
large mounds of materials stored in the mine field in the form of a “stockpile.” These stockpiles are measured at the
reporting date by qualified experts using industry standards. Such standards taking into account the volume, density, and mineral
content in such stockpiles. The cost for such stockpiles includes extraction cost from mines, labor, amortization and depreciation,
and other overhead costs. Any proven or probable reserves are not included in the Company’s inventory.
Under normal circumstances, ores
will be extracted, processed and sold within the same month. When the price of fluorite powder rose significantly in 2011, the
Company increased extraction of fluorite ore in order to produce fluorite powder. However, due to certain issues in processing
ores the capacity of the processing plant was limited and a large quantity of ores were not processed and sold in the usual timeframe.
(b) The impairment provisions for
inventory were approximately $287,000 for the year ended December 31, 2011 and December 31, 2010 due to Qianzhen’s three
years of non-operation.
NOTE 12 - RESTRICTED ASSETS
Restricted assets are the deposits
consisting of the following:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Bank drafts pledged for the short term bank (see Note 15)
|
|
$
|
2,536
|
|
|
$
|
-
|
|
Bank deposits guaranteed for the asset retirement obligations (see Note 23)
|
|
|
175
|
|
|
|
70
|
|
|
|
$
|
2,711
|
|
|
$
|
70
|
|
NOTE 13 - PROPERTY, MACHINERY
AND MINING ASSETS, NET
Property, machinery and mining assets
consisted of the following:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Land use rights
|
|
$
|
1,764
|
|
|
$
|
1,697
|
|
Buildings
|
|
|
15,452
|
|
|
|
13,068
|
|
Machinery
|
|
|
13,316
|
|
|
|
11,820
|
|
Mining assets
|
|
|
13,476
|
|
|
|
10,809
|
|
Motor vehicles
|
|
|
2,465
|
|
|
|
1,343
|
|
Equipment
|
|
|
437
|
|
|
|
451
|
|
Extraction rights
|
|
|
31,703
|
(a)
|
|
|
7,155
|
|
Construction in progress
|
|
|
325
|
|
|
|
234
|
|
|
|
|
78,938
|
|
|
|
46,577
|
|
Less:
|
|
|
|
|
|
|
|
|
Accumulated depreciation and amortization
|
|
|
(17,552
|
)
|
|
|
(12,497
|
)
|
Impairment provision
|
|
|
(1,073
|
)
|
|
|
(1,028
|
)
|
|
|
$
|
60,313
|
|
|
$
|
33,052
|
|
|
(a)
|
The extraction right’s significant increase of approximately
$24.54 million was mainly due to the acquisition cost of extraction rights of Xinyi fluorite acquired on January 13, 2011.
|
Depreciation and amortization
Depreciation and amortization expense
in the aggregate for the years ended December 31, 2011 and 2010 was approximately $4,171,000 and $2,434,000, respectively.
Impairment provision
An accumulated impairment provision
of $1,073,000 and $1,028,000, respectively for the years ended December 31, 2011 and 2010 was recorded for the property and machinery
of Qianzhen Mining.
Exploration and extraction
rights
As in most jurisdictions, mineral
rights in China are divided into two types: extraction rights and exploration rights. Extraction rights refer to the rights obtained
in accordance with the law for the exploitation of mineral resources and market control of mineral products. In nearly every jurisdiction
in the world, mineral rights are absolutely exclusive. In China, however, there are no clear stipulations regarding the exclusivity
of mineral rights. The Amendment of China Mining Regulation stressed the security of mineral rights and its Article 6 stated that
“upon discovery of mineral resources, the exploration licensees have the privileged priority to obtain mining rights to the
mineral resources within the exploration area.” According to the Ministry of Land and Resources, this privileged priority
will be guaranteed under further amendments to be made in the near future.
Exploration rights refer to the
right obtained in accordance with the law for exploring for mineral resources within the areas authorized by the exploration license.
The Company has been granted mineral exploration permits. These exploration rights enable the Company to explore selected prospective
mines for possible economic value to mine and develop. Under Chinese mining laws and regulations, generally an exploration license
is valid for no more than 3 years and extension of the exploration license shall not exceed two years and two extensions.
NOTE 14 - ACCOUNTS PAYABLE AND
ACCRUED LIABILITIES
At December 31, 2011 and 2010, accounts
payable and accrued liabilities were approximately $3,324,000 and $2,434,000, respectively. Accounts payable and accrued liabilities
are primarily payments due to suppliers and vendors for mining and transportation services.
NOTE 15 - SHORT-TERM LOANS
Short-term loans consisted of the
following:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
10.01% note payable to Baiyin Credit Union matures on February 4, 2011 with interest due on the 20th day of each quarter and principal due at date of maturity, guaranteed by Qianzhen Mining
|
|
$
|
-
|
|
|
$
|
189
|
|
10.01% note payable to Baiyin Credit Union matures on February 4, 2011 with interest due on the 20th day of each quarter and principal due at date of maturity, guaranteed by Qianzhen Mining
|
|
|
-
|
|
|
|
68
|
|
7.01% note payable to China Citic Bank matures on February 15, 2011, collateralized with Xiangzhen’s extraction right, land use right and some machineries
|
|
|
-
|
|
|
|
756
|
|
7.01% note payable to China Citic Bank matures on February 12, 2011, collateralized with Xiangzhen’s extraction right, land use right and some machineries
|
|
|
-
|
|
|
|
2,269
|
|
7.01% note payable to China Citic Bank matures on February 14, 2011, collateralized with Xiangzhen’s extraction right, land use right and some machineries
|
|
|
-
|
|
|
|
3,025
|
|
9.45% note payable to Baiyin Credit Union matures on March 21, 2011 with interest due on the 20th day of each quarter and principal due at date of maturity, which is in the name of a related party and guaranteed by Xiangzhen Mining
|
|
|
-
|
|
|
|
242
|
|
13.28% note payable to Wulatehouqi Credit Union matures on April 11, 2011, which is in the name of a related party and guaranteed by Qianzhen Mining
|
|
|
-
|
|
|
|
423
|
|
6.37% note payable to Baiyin Credit Union matures on August 18, 2011 with interest due on the 20th day of each quarter and principal due at date of maturity, guaranteed by Qianzhen Mining and secured by the certificate of deposit of Ms. Xiaojing Yu, a director of the Company
|
|
|
-
|
|
|
|
121
|
|
6.97% note payable to Baiyin Credit Union matures on December 28, 2011 with interest due on the 20th day of each quarter and principal due at date of maturity, guaranteed by Qianzhen Mining and secured by the certificate of deposit of Ms. Helin Cui, a director of the Company
|
|
|
-
|
|
|
|
91
|
|
9.45% note payable to Baiyin Credit Union matures on December 21, 2011 with interest due on the 20th day of each quarter and principal due at date of maturity, guaranteed by Xingzhen Mining
|
|
|
-
|
|
|
|
877
|
|
7.01% note payable to China Citic Bank matures on March 31, 2012, collateralized with Xiangzhen’s extraction right, land use right and some machineries
|
(a)
|
|
3,145
|
|
|
|
-
|
|
7.01% note payable to China Citic Bank matures on March 31, 2012, collateralized with Xiangzhen’s extraction right, land use right and some machineries
|
|
|
3,145
|
|
|
|
-
|
|
5.15% note payable to Mr. Mao Huang, a related party of the Company, matures on January 26, 2012, collateralized with Xingzhen’s extraction right and the ore processing plant
|
(b)
|
|
2,560
|
|
|
|
-
|
|
9.76% note payable to Baiyin Credit Union matures on January 17, 2012, guaranteed by the bank draft of the Company
|
(c)
|
|
944
|
|
|
|
-
|
|
9.76% note payable to Baiyin Credit Union matures on April 21, 2012, guaranteed by the bank draft of the Company
|
(d)
|
|
786
|
|
|
|
-
|
|
9.76% note payable to Baiyin Credit Union matures on May 9, 2012, guaranteed by the bank draft of the Company
|
|
|
786
|
|
|
|
-
|
|
11.15% note payable to Baiyin Credit Union matures on December 17, 2012 with interest due on the 20th day of each quarter and principal due at date of maturity, guaranteed by Xingzhen Mining
|
|
|
315
|
|
|
|
-
|
|
11.15% note payable to Baiyin Credit Union matures on December 21, 2012 with interest due on the 20th day of each quarter and principal due at date of maturity, guaranteed by Xingzhen Mining
|
|
|
315
|
|
|
|
-
|
|
|
|
$
|
11,996
|
|
|
$
|
8,061
|
|
(a)
|
The loan amount to approximately $3,145,000 was repaid on March 2, 2012.
|
(b)
|
The deadline of the loan was extended to July 26, 2012 in January 2012, and the interest rate changed to be 12% per year.
|
(c)
|
The loan amount of approximately $944,000 was repaid in February, 2012.
|
(d)
|
The loan amount of approximately $173,000 was repaid in February, 2012.
|
(e)
|
9.76% note payable approximately $2,536,000 to Baiyin Credit Union matures on May 9, 2012, guaranteed by the bank drafts
of the Company, was proceed on February 28, 2011.
|
NOTE 16 - LONG-TERM LOANS
Long-term loans consisted of the
following:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
5.15%-interest note payable to Ms. Yanling Ding matures on January 26, 2012, collateralized with Xingzhen’s extraction right and the ore processing plant
|
|
$
|
-
|
|
|
$
|
2,630
|
|
|
|
|
|
|
|
|
|
|
The loan to Ms. Yanling Ding was
transferred to Mr. Mao Huang, a minority shareholder of Xingzhen Mining in December 2011.
NOTE 17 – RECEIPTS IN ADVANCE
Receipts in advance consist of the
following:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Receipts in advance from fluorite customers
|
|
$
|
1,528
|
|
|
$
|
453
|
|
Receipts in advance from nonferrous metals customers
|
|
|
-
|
|
|
|
1,605
|
|
|
|
$
|
1,528
|
|
|
$
|
2,058
|
|
As of December 31, 2011, receipts
in advance totaled approximately $1,528,000, which consists of advances from 15 customers.
The following table shows the receipts
in advance of the Company’s major customers (10% or more of consolidated receipts in advance) as of December 31, 2011:
|
|
Receipts in advance
|
|
|
Percentage
|
|
Customer
|
|
(In thousands)
|
|
|
(%)
|
|
Inner Mongolia Huadesanli Trading Ltd
|
|
$
|
472
|
|
|
|
31
|
%
|
Weichang Jintai Mining Ltd
|
|
|
295
|
|
|
|
20
|
%
|
Houma Huatai Furnace Charge Ltd
|
|
|
215
|
|
|
|
14
|
%
|
Anhui Jinyang fluorine Chemical Ltd
|
|
|
157
|
|
|
|
10
|
%
|
|
|
$
|
1,139
|
|
|
|
75
|
%
|
As of December 31, 2010, receipts
in advance totaled approximately $2,058,000, which consists of advances from 10 customers.
The following table shows the receipts
in advance of the Company’s major customers (10% or more of consolidated receipts in advance) as of December 31, 2010:
|
Receipts in advance
|
|
Percentage
|
|
Customer
|
(In thousands)
|
|
(%)
|
|
RuiPeng Mining Ltd
|
$
|
1,514
|
|
|
74
|
%
|
NOTE 18 - OTHER PAYABLES AND
ACCRUALS
Other payables and accruals consisted
of the following:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Accruals for payroll, bonus and other operating expenses
|
|
$
|
841
|
|
|
$
|
689
|
|
Payables for construction service vender
|
|
|
135
|
|
|
|
1,635
|
|
Others payables
|
|
|
1,796
|
|
|
|
1,729
|
|
|
|
$
|
2,772
|
|
|
$
|
4,053
|
|
NOTE 19 - DUE TO RELATED
PARTIES
Due to related parties consisted
of the following:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Due to directors of the Company:
|
|
|
|
|
|
|
|
|
Ms. Xiaojing Yu, CEO of the Company (a)
|
|
$
|
106
|
|
|
$
|
102
|
|
Mr. Xueming Xu, Director of the Company (b)
|
|
|
13
|
|
|
|
12
|
|
Due to Mr. Xiaoming Yu, General Manager of Xiangzhen Mining (c)
|
|
|
127
|
|
|
|
431
|
|
Due to Mr. Mao Huang, a minority shareholder of Xingzhen Mining(d)
|
|
|
4
|
|
|
|
1,894
|
|
|
|
$
|
250
|
|
|
$
|
2,439
|
|
(a)
|
Ms. Yu is the CEO of the Company.
|
(b)
|
Mr. Xu is a director of the Company.
|
(c
|
Mr. Yu is the General Manager of Xiangzhen Mining.
|
(d)
|
Mr. Huang is a minority shareholder of Xingzhen Mining.
|
NOTE 20 - Equity
Common Stock
We have 50,000,000 shares of common
stock, par value $0.001, authorized. At December 31, 2011 and December 31, 2010 there were 32,285,973 shares and 27,974,514 shares
of common stock issued and outstanding, respectively.
On January 19, 2011, the Company
agreed to sell to certain institutional investors 2,836,883 shares of the Company’s common stock and warrants to purchase
up to 851,066 shares of the Company’s common stock in a registered direct public offering (the “Offering”). The
Offering was effected as a takedown from the Company’s shelf registration statement on Form S-3 (File No. 333-171243), which
became effective on January 7, 2011, pursuant to a prospectus supplement to be filed with the U.S. Securities and Exchange Commission.
On January 13, 2011, the Company,
through its subsidiary Xingzhen Mining, entered into an equity transfer agreement to acquire 55% of the equity interests of Xinyi
Fluorite. Pursuant to the Agreement, the Company acquired the Equity from the three original shareholders of Xinyi Fluorite for
total consideration in the amount of RMB 65 million (approximately US$ 9.85 million) (the “Purchase Price”). Pursuant
to the terms of the agreement, the consideration was agreed to be RMB 50 million (approximately US$ 7.58 million) of the Company’s
common stock at $7.05 per share and RMB 15 million (approximately US$ 2.27 million) in cash.
During the year ended December 31,
2011, we issued a total of 4,311,459 shares of our common stock comprised of: 2,836,883 shares to certain institutional investors
in connection with the January 19, 2011 agreement discussed above, 1,074,576 shares as part of the Purchase Price for our acquisition
of an 55% interest in Xinyi Fluorite, and 400,000 shares to its employees as share based on the 2009 Omnibus Long-term Incentive
Plan.
After negotiations with the original
shareholders of Xinyi Fluorite and as required by the Agreement in circumstances where the Company’s stock price has changed,
the Company on February 13, 2012 issued an additional 1,139,128 shares of common stock to the original shareholders.
Common stock authorized and outstanding
table
|
|
Par value
authorized
|
|
|
Granted
date
|
|
Shares
outstanding
|
Common stock at 01/01/2011
|
|
|
50,000,000
|
|
|
|
|
27,974,514
|
New shares issued to investors
|
|
|
|
|
|
01/19/2011
|
|
2,836,883
|
New shares issued as acquisition consideration
|
|
|
|
|
|
01/13/2011
|
|
1,074,576
|
New shares issued to employees based on the 2009 Omnibus Long-term Incentive Plan
|
|
|
|
|
|
06/20/2011
|
|
400,000
|
Common stock at 12/31/2011
|
|
|
|
|
|
|
|
32,285,973
|
Warrants
On January 19, 2011, the Company
agreed to sell to certain institutional investors 2,836,883 shares of the Company’s common stock and warrants to purchase
up to 851,066 shares of the Company’s common stock in a registered direct public offering (the “Offering”). The
Offering was effected as a takedown from the Company’s shelf registration statement on Form S-3 (File No. 333-171243),
which became effective on January 7, 2011, pursuant to a prospectus supplement to be filed with the U.S. Securities and Exchange
Commission.
The common stock and warrants were
sold in fixed combinations, with each combination consisting of one share of common stock and a warrant to purchase 0.30 shares
of common stock. The purchase price is $7.05 per fixed combination. The warrants are exercisable immediately
following the closing date of the Offering and will remain exercisable for three years thereafter at an exercise price of $8.46
per share. The exercise price of the warrants is subject to adjustment in the case of stock splits, stock dividends,
combinations of shares and similar recapitalization transactions and in the event the Company issues or is deemed to issue shares
of common stock for less than the exercise price then in effect. The exercise price of the warrants has not been adjusted
as of December 31, 2011 or the date of this filing.
If the adjustment feature with respect
to the warrants should be triggered, such as if the Company were to issue common shares at a price lower than the granted warrants,
the Company might have to account for these warrants in accordance with the Derivative and Hedging Topic of ASC 815. If the warrants
are determined not to have a scope exception under ASC Section 815-10-15, and the warrants are determined to not be indexed to
the Company’s common stock, these warrants may be reclassified from equity to a derivative liability for their future fair
market value at the time the Company should issue common shares, or their equivalents, below the original exercise price of $8.46
for such warrants. The valuation of warrants, if they are deemed to be a derivative liability, would be valued at market. Under
ASC 815, the warrants would be carried at fair value and adjusted during each reporting period subsequent to reclassification
to a derivative liability from that of an equity instrument.
The exercisability of the warrants
may be limited if, upon exercise, the holder or any of its affiliates would beneficially own more than 4.99% of the Company’s
common stock.
The Company has also agreed to grant
to the placement agent at the closing of the Offering warrants (the “Placement Agent’s Warrants”) to purchase
that number of shares of our common stock equal to 8% of the aggregate number of shares underlying the warrants placed in the Offering. The
Placement Agent’s Warrants shall have the same terms as the warrants offered in the Offering, except that the exercise price
will be 120% of the exercise price in the warrants offered in the Offering. The Placement Agent’s Warrants, and
shares underlying the Placement Agent’s Warrants, are each included in the prospectus supplement to be filed with the U.S.
Securities and Exchange Commission.
During the year ended December
31, 2011, no warrants were exercised.
|
|
Warrants to purchase
The Company’s
common stock
|
|
|
Average
exercise price
|
|
|
|
(Shares)
|
|
|
(In US dollars)
|
|
Outstanding warrants at January 19, 2011
|
|
|
851,066
|
|
|
$
|
8.46
|
|
Warrants granted to the placement agent
|
|
|
68,085
|
|
|
|
10.15
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding warrants at December 31, 2011
|
|
|
919,151
|
|
|
$
|
8.59
|
|
Common Stock Future issuance plan
On January 16, 2012, the Company through
its subsidiary Xiangzhen Mining, entered into an equity transfer and capital increase agreement to acquire 60% of the equity interests
of Wuchuan Dongsheng Mining Co., Ltd.(“Dongsheng Mining”), for total consideration of RMB 93 million in the form of
2,418,448 of the Company’s common stock and RMB 50 million (approximately US$ 7.88 million) in cash.
On February 7, 2012, the Company through
its subsidiary Xiangzhen Mining purchased a 60% equity interest in Guizhou Qianshi Resources Development Co., Ltd.(“Qianshi
Resources”), for RMB 6,000,000 in the form of 337,457 shares of the Company’s common stock.
On February 7, 2012, the Company through
its subsidiary Xiangzhen Mining purchased a 60% equity interest in Yanhe Tujiazu Autonomous County Meilan Mining Co., Ltd.(“Meilan
Mining”), for RMB 9,000,000 in the form of 506,186 shares of the Company’s common stock.
On March 21, 2012, the Company entered into a Securities Purchase
Agreement (the “SPA”) with a certain institutional investors, pursuant to which the Company will offer up to an aggregate
of $10 million of Series A Convertible Preferred Stock, and warrants to purchase approximately 1,960,785 shares of common stock
of the Company (such offer being the “Offering”). Under the SPA, the investors may purchase up to an aggregate of 10,000
shares of preferred stock in the Offering. The initial conversion price of the preferred stock is $2.04, subject to anti-dilution
adjustments. The Company has also agreed to grant to the placement agent at the initial closing of the Offering warrants to purchase
392,157 shares of common stock. The placement agent’s warrants shall have the same general terms as the warrants offered
in the Offering, except that the exercise price will be 120% of the exercise price in the warrants offered in the Offering.
Available common stock in the future table
|
|
Par value authorized
|
|
|
Shares outstanding
|
|
|
Available Shares
|
|
Available common stock at 12/31/2011
|
|
|
50,000,000
|
|
|
|
32,285,973
|
|
|
|
17,714,027
|
|
Will issue additional shares of common stock to the original shareholders
of Xinyi Fluorite
|
|
|
|
|
|
|
|
|
|
|
(1,139,128
|
)
|
Warrants granted in January 2011 to purchase the Company’s common stock
|
|
|
|
|
|
|
|
|
|
|
(919,151
|
)
|
Will issue shares of common stock to the original shareholders of Dongsheng
Mining
|
|
|
|
|
|
|
|
|
|
|
(2,418,448
|
)
|
Will issue shares of common stock to the original shareholders of Qianshi
Resources
|
|
|
|
|
|
|
|
|
|
|
(337,457
|
)
|
Will issue shares of common stock to the original shareholders of Meilan
Mining
|
|
|
|
|
|
|
|
|
|
|
(506,186
|
)
|
Will issue shares to employees based on the 2009 Omnibus Long-term Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
(800,000
|
)
|
Series A Convertible Preferred Stock to purchase the Company’s common stock
|
|
|
|
|
|
|
|
|
|
|
(4,901,960
|
)
|
Warrants granted in March 2012 to purchase the Company’s common stock
|
|
|
|
|
|
|
|
|
|
|
(2,352,942
|
)
|
Available Common stock at 03/24/2012
|
|
|
|
|
|
|
|
|
|
|
4,298,755
|
|
NOTE 21 - DEFINED CONTRIBUTION
RETIREMENT PLANS
As stipulated by the regulations
of the PRC government, companies operating in the PRC must have defined contribution retirement plans for their employees. The
PRC government is responsible for the pension liability of these retired employees. Commencing on January 1, 2002, the Company
was required to make specified contributions to the state-sponsored retirement plan at 20% of the basic salary cost of their staff.
Each of the employees of the PRC subsidiaries is required to contribute 6% of his/her basic salary to the retirement plan.
NOTE 22 - PRC STATUTORY RESERVES
In accordance with the
PRC Companies Law, the Company’s PRC subsidiaries were required to transfer 10% of their profit after tax, as
determined in accordance with accounting standards and regulations of the PRC, to the statutory surplus reserve and a
percentage of not less than 5%, as determined by management, of the profit after tax to the public welfare fund. With
the amendment to the PRC Companies Law which became effective on January 1, 2006, enterprises in the PRC are no longer
required to transfer any profit to the public welfare fund. Any balance of public welfare fund brought forward from December
31, 2005 should be transferred to the statutory surplus reserve. The statutory surplus reserve is non-distributable.
Approximately $60,000 was transferred as statutory reserve for the years ended December 31, 2011. There was no statutory
reserve for the years ended December 31, 2010.
NOTE 23 - ASSET RETIREMENT OBLIGATIONS
According to the “Rules on
Mineral Resources Administration” and “Rules on Land Rehabilitation” of the PRC, mining companies causing damages
to cultivated land, grassland or forest are required to restore the land to a state approved by the local governments.
The Company has identified and recognized
the asset retirement obligations related to the Company’s mining sites. The Company has deposited approximately $175,000 and
$70,000, respectively , in the Company’s bank accounts for the years ended December 31, 2011 and 2010 as guaranteed funds
for the company’s future asset retirement obligations.
NOTE 24 - ENVIRONMENTAL CHARGES
The Company’s mining and exploration
activities are subject to various PRC laws and regulations governing the protection of the environment. These laws and regulations
are continually changing and are generally becoming more restrictive. The Company conducts its operations so as to protect the
public health and environment and believes its operations are in compliance with applicable laws and regulations in all material
respects.
The Company’s mining operations are
subject to “Natural Resource Compensation Charges”, but the rate at which the Company is charged varies in different
cities in the PRC. Xiangzhen Mining, Xingzhen Mining and Xinyi Fluorite were charged at net revenue * 2%* a special index
solely determined by the local government.
For the years ended December 31, 2011 and
2010, Natural Resource Compensation Charges were approximately $606,000 and $268,000, respectively.
NOTE 25 - OPERATING RISK
Country risk
Currently, the Company’s revenues
are mainly derived from sales in the PRC. The Company hopes to expand its operations in the PRC, however, there are no assurances
that the Company will be able to achieve such an expansion successfully. Therefore, a downturn or stagnation in the economic environment
of the PRC could have a material adverse effect on the Company’s financial condition.
Products risk
The Company competes with larger
companies, who have greater funds available for expansion, marketing, research and development and for attracting more qualified
personnel. There can be no assurance that the Company will remain competitive with larger competitors.
Exchange risk
The Company cannot guarantee that
the current exchange rate will remain steady, therefore there is a possibility that the Company could post the same amount of profit
for two comparable periods and because of a fluctuating exchange rate actually post higher or lower profit depending on exchange
rate of PRC Renminbi (RMB) to U.S. Dollars on that date. The exchange rate could fluctuate depending on changes in the political
and economic environments without notice.
Political risk
Currently, the PRC is in a period
of growth and is openly promoting business development in order to bring more business into the PRC. Additionally, the PRC allows
a PRC corporation to be owned by a United States corporation. If the laws or regulations are changed by the PRC government, the
Company’s ability to operate in the PRC could be affected.
Key personnel risk
The Company’s future success
depends on the continued services of its executive management in China. The loss of any of their services would be detrimental
to the Company and could have an adverse effect on its business development. The Company does not currently maintain key-man insurance
for its key employees. Future success is also dependent on the ability to identify, hire, train and retain other qualified managerial
and other employees. Competition for these individuals is intense and increasing.
Non-compliance with financing
requirements
The Company might need to obtain
future financings that require timely filing of registration statements, and have declared effective those registration statements,
to register the shares being offered by the selling stockholders in future financings. The Company might be subject to liquidated
damages and other penalties if it obtains future financings requiring registration statements without having those registration
statements filed and declared effective in a prompt manner.
NOTE 26 - COMMITMENTS AND CONTINGENCIES
General
The Company accounts for contingencies,
using FASB issued guidance. Accordingly, estimated losses from loss contingencies are accrued by a charge to income when information
available prior to issuance of the financial statements indicates that it is probable that a liability could have been incurred
and the amount of the loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred.
If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is made in the financial statements
when it is at least reasonably possible that a material loss could be incurred.
Mining industry in PRC
The Company's mining operations
are and will be subject to extensive national and local governmental regulations in China which regulations may be revised or expanded
at any time. A broad number of matters are subject to regulation. Generally, compliance with these regulations requires the Company
to obtain permits issued by government, state and local regulatory agencies. Certain permits require periodic renewal or review
of their conditions. The Company cannot predict whether it will be able to obtain or renew such permits or whether material changes
in permit conditions will be imposed. The inability to obtain or renew permits or the imposition of additional conditions could
have a material adverse effect on the Company's ability to develop and operate its properties.
Environmental matters
Environmental laws and regulations
to which the Company is subject as it progresses from the development stage to the production stage mandate additional concerns
and requirements of the Company. Failure to comply with applicable laws, regulations and permits can result in injunctive actions,
damages and civil and criminal penalties. The laws and regulations applicable to the Company's activities change frequently and
it is not possible to predict the potential impact on the Company due to any such future changes.
Although management believes that
the Company is in material compliance with the statutes, laws, rules and regulations of every jurisdiction in which it operates,
no assurance can be given that the Company’s compliance with the applicable statutes, laws, rules and regulations will not
be challenged by governing authorities or private parties, or that such challenges will not lead to material adverse effects on
the Company’s financial position, results of operations, or cash flows.
The Company is not involved in any
legal matters arising in the normal course of business. While incapable of estimation, in the opinion of the management, the individual
regulatory and legal matters in which it might be involved in the future are not expected to have a material adverse effect on
the Company’s financial position, results of operations, or cash flows.
Capital commitment
The following table shows the Company
Contracted unpaid purchases which have not been received as of:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Purchase of machinery - within one year
|
|
$
|
-
|
|
|
$
|
27
|
|
Acquisition or construction of buildings-within one year
|
|
|
-
|
|
|
|
36
|
|
|
|
$
|
-
|
|
|
$
|
63
|
|
NOTE 27 - CONCENTRATION OF CUSTOMERS
AND SUPPLIERS
Substantially all of the Company’s
bank accounts in banks located in the PRC are not covered by any type of protection similar to that provided by the FDIC on funds
held in U.S. banks. The Company did not maintain any funds in U.S. banks as of December 31, 2011 and 2010.
The Company is operating in China,
which may give rise to significant foreign currency risks from fluctuations and the degree of the volatility of foreign exchange
rates between the U.S. Dollar and the RMB.
Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of cash and trade receivables, the balances of which are
stated on the balance sheet. The Company places its cash in highly credible financial institutions; however, such funds are not
insured in the PRC.
The Company had three main customers
who contributed approximately $18,682,000 or 61% of the Company’s consolidated net revenue for the year ended December 31,
2011. For the same period of 2010 the Company had two main customers who contributed approximately $7,527,000 or 65% of the Company’s
consolidated net revenue.
The following table shows revenue
from the Company’s major customers (10% or more of consolidated net revenue) for the year ended December 31, 2011:
|
|
Revenue
|
|
|
Percentage
|
|
Customer
|
|
(In thousands)
|
|
|
(%)
|
|
Ningxia Jinhe chemistry Ltd
|
|
$
|
9,117
|
|
|
|
30
|
%
|
Ruipeng Mining Ltd
|
|
|
4,981
|
|
|
|
16
|
%
|
Henan Zhongse Ltd
|
|
|
4,585
|
|
|
|
15
|
%
|
|
|
$
|
18,683
|
|
|
|
61
|
%
|
The following table shows revenue
from the Company’s major customers (10% or more of consolidated net revenue) for the year ended December 31, 2010:
|
|
Revenue
|
|
|
Percentage
|
|
Customer
|
|
(In thousands)
|
|
|
(%)
|
|
Ruipeng Mining Ltd
|
|
$
|
3,601
|
|
|
|
31
|
%
|
Ningxia Jinhe Ltd
|
|
|
3,926
|
|
|
|
34
|
%
|
|
|
$
|
7,527
|
|
|
|
65
|
%
|
As of December 31, 2011, accounts
receivable totaled approximately $3,332,000, net of allowance for doubtful accounts, and consisted of receivables from 6 customers.
The following table shows the distribution
of receivables amongst the Company’s major customers (10% or more of consolidated accounts receivable, net) as of December
31, 2011:
|
|
Receivables
|
|
|
Percentage
|
|
Customer
|
|
(In thousands)
|
|
|
(%)
|
|
Ningxia Jinhe Ltd
|
|
$
|
1,874
|
|
|
|
56
|
%
|
Shandong Bofeng Lizhong
|
|
|
767
|
|
|
|
23
|
%
|
Henan Zhongse Ltd
|
|
|
527
|
|
|
|
16
|
%
|
|
|
$
|
3,168
|
|
|
|
95
|
%
|
As of December 31, 2010, accounts
receivable totaled approximately $162,000, net of allowance for doubtful accounts, and consisted of receivables from 2 customers.
The following table shows the distribution
of receivables amongst the Company’s major customers (10% or more of consolidated accounts receivable, net) as of December
31, 2010:
|
|
Receivables
|
|
|
Percentage
|
|
Customer
|
|
(In thousands)
|
|
|
(%)
|
|
Laiwu Steel, Ltd.
|
|
$
|
102
|
|
|
|
63
|
%
|
Handan Hongzhi Ltd
|
|
|
60
|
|
|
|
37
|
%
|
|
|
$
|
162
|
|
|
|
100
|
%
|
As of December 31, 2011, receipts
in advance totaled approximately $1,528,000, which consists of receipts in advance from 15 customers.
The following table shows the receipts
in advance of the Company’s major customers (10% or more of consolidated receipts in advance) as of December 31, 2011:
|
|
Receipts in advance
|
|
|
Percentage
|
|
Customer
|
|
(In thousands)
|
|
|
(%)
|
|
Inner Mongolia Huadesanli Trading Ltd
|
|
$
|
472
|
|
|
|
31
|
%
|
Weichang Jintai Mining Ltd
|
|
|
295
|
|
|
|
20
|
%
|
Houma Huatai Furnace Charge Ltd
|
|
|
215
|
|
|
|
14
|
%
|
Anhui Jinyang fluorine Chemical Ltd
|
|
|
157
|
|
|
|
10
|
%
|
|
|
$
|
1,139
|
|
|
|
75
|
%
|
As of December 31, 2010, receipts
in advance totaled approximately $2,058,000, which consists of receipts in advance from 10 customers.
The following table shows the receipts
in advance of the Company’s major customers (10% or more of consolidated receipts in advance) as of December 31, 2010:
|
Receipts in advance
|
|
Percentage
|
|
Customer
|
(In thousands)
|
|
(%)
|
|
RuiPeng Mining Ltd
|
$
|
1,514
|
|
|
74
|
%
|
In the years 2011 and 2010, the
Company had no concentrated suppliers.
NOTE 28 - RELATED PARTY TRANSACTION
On April 12, 2011, the Company through
its subsidiary Qianzhen Mining entered into an equity transfer agreement to sell its 60% equity interest Qingshan Metal to a Chinese
citizen Mr. Mao Huang, a minority shareholder of Xingzhen Mining.
In December 2011, the Company transferred
the 5.15%-interest note payable from Ms. Yanling Ding to Mr. Mao Huang, a minority shareholder of Xingzhen Mining. The amount due
under the note was approximately equivalent to the amount owed by Mr. Mao Huang to the Company..
There were no other related party
transactions for the years ended December 31, 2011 and 2010, except for the loan and repayment to the related parties. (See Note
19)
NOTE 29 - SEGMENT INFORMATION
The Company follows FASB ASC
280-Segment Reporting, which requires that companies disclose segment data based on how management makes decisions about allocating
resources to segments and evaluating their performance. The Company has two operating segments identified by product, “fluorite”
and “nonferrous metals”. The fluorite segment consists of our fluorite extraction and processing operations conducted
through the Company’s subsidiaries, Xiangzhen Mining and Xinyi Fluorite. The nonferrous metals segment consists of the Company’s
copper, zinc, lead and other nonferrous metal exploration, extraction and processing activities conducted through the Company’s
subsidiaries, Qianzhen Mining and Xingzhen Mining.
The Company primarily evaluates
performance based on income before income taxes and excluding non-recurring items.
The segment data presented below
was prepared on the same basis as the Company’s consolidated financial statements.
Year ended December 31, 2011
|
|
Fluorite
|
|
|
Nonferrous
metals
|
|
|
Consolidated
|
|
Segment revenue
|
|
|
$
|
25,571
|
|
|
$
|
4,980
|
|
|
$
|
30,551
|
|
Inter-segment revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Revenue from external customers
|
|
$
|
25,571
|
|
|
$
|
4,980
|
|
|
$
|
30,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss)
|
|
|
$
|
6,992
|
|
|
$
|
(3,247
|
)
|
|
$
|
3,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated corporate loss
|
|
|
|
|
|
|
|
|
|
|
(2,218
|
)
|
Income from continuing operations before income taxes and minority interests
|
|
|
|
|
|
|
|
|
|
|
1,527
|
|
Income tax expenses
|
|
|
|
|
|
|
|
|
|
|
(1,235
|
)
|
Loss from discontinuing operations before income taxes and minority interests
|
|
|
|
|
|
|
|
|
|
$
|
(89
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
$
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets
|
|
$
|
79,076
|
|
|
$
|
15,392
|
|
|
$
|
94,468
|
|
Inter-segment receivables
|
|
|
(12,660
|
)
|
|
|
2,966
|
|
|
|
(9,694
|
)
|
|
|
$
|
66,416
|
|
|
$
|
18,358
|
|
|
$
|
84,774
|
|
Other unallocated corporate assets
|
|
|
|
|
|
|
|
|
|
|
542
|
|
|
|
|
|
|
|
|
|
|
|
$
|
85,316
|
|
Other segment information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
3,183
|
|
|
$
|
988
|
|
|
$
|
4,171
|
|
Expenditure for segment assets
|
|
$
|
3,475
|
|
|
$
|
1,718
|
|
|
$
|
5,193
|
|
Year ended December 31, 2010
|
|
Fluorite
|
|
|
Nonferrous
metals
|
|
|
Consolidated
|
|
Segment revenue
|
|
|
$
|
8,012
|
|
|
$
|
3,600
|
|
|
$
|
11,612
|
|
Inter-segment revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Revenue from external customers
|
|
$
|
8,012
|
|
|
$
|
3,600
|
|
|
$
|
11,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment loss
|
|
|
$
|
(436
|
)
|
|
$
|
(2,444
|
)
|
|
$
|
(2,880
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated corporate income (loss)
|
|
|
|
|
|
|
|
|
|
$
|
(215
|
)
|
Loss from continuing operations before income taxes and minority interests
|
|
|
|
|
|
|
|
|
|
$
|
(3,095
|
)
|
Income tax expenses
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Loss from discontinuing operations before income taxes and minority interests
|
|
|
|
|
|
|
|
|
|
|
(193
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(3,288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets
|
|
$
|
37,616
|
|
|
$
|
25,826
|
|
|
$
|
63,442
|
|
Inter-segment receivables
|
|
|
(12,175
|
)
|
|
|
(8,343
|
)
|
|
|
(20,518
|
)
|
|
|
$
|
25,441
|
|
|
$
|
17,483
|
|
|
$
|
42,924
|
|
Assets —discontinuing operations
|
|
|
|
|
|
|
|
|
|
|
1,188
|
|
Other unallocated corporate assets
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
$
|
44,192
|
|
Other segment information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
1,488
|
|
|
$
|
946
|
|
|
$
|
2,434
|
|
Expenditure for segment assets
|
|
$
|
1,455
|
|
|
$
|
644
|
|
|
$
|
2,099
|
|
The following summarizes identifiable
assets by geographic area:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
China
|
|
$
|
84,774
|
|
|
$
|
44,112
|
|
Unallocated corporate assets
|
|
|
542
|
|
|
|
80
|
|
|
|
$
|
85,316
|
|
|
$
|
44,192
|
|
The following summarizes net income
(loss) by geographic area:
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
China
|
|
$
|
2,421
|
|
|
$
|
(3,073
|
)
|
Unallocated corporate operating income (loss)
|
|
|
(2,218
|
)
|
|
|
(215
|
)
|
|
|
$
|
203
|
|
|
$
|
(3,288
|
)
|
NOTE 30 - OTHER INCOME, NET
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Penalty income
|
|
|
(a)
|
|
|
$
|
147
|
|
|
$
|
-
|
|
Liabilities exemption
|
|
|
|
|
|
|
-
|
|
|
|
300
|
|
Exchange gain
|
|
|
|
|
|
|
-
|
|
|
|
235
|
|
Gain (loss) on disposal of fixed assets
|
|
|
|
|
|
|
-
|
|
|
|
(19
|
)
|
Donation
|
|
|
|
|
|
|
(178
|
)
|
|
|
-
|
|
Others
|
|
|
|
|
|
|
(9
|
)
|
|
|
(44
|
)
|
|
|
|
|
|
|
$
|
(40
|
)
|
|
$
|
472
|
|
(a)
|
Penalty income was mainly attributable
to the recovery of certain “short-swing” profits accidentally realized by one of our directors. The director has
been fully disgorged of such profits via Section 16(b) of the Securities Exchange Act of 1934, as amended.
|
NOTE 31 - INCOME TAXES
The Company and its subsidiaries
file separate income tax returns, mainly in the U.S. and PRC.
The United States of America
The Company is incorporated in the
State of Nevada in the U.S., and is subject to U.S. federal corporate income tax at gradual rates of up to 35%.
PRC
The PRC’s statutory income
tax rate is 25%. The Company’s PRC subsidiary and consolidated variable entities are subject to PRC income tax at 25% unless
otherwise specified.
The components of earnings (losses)
before income taxes are as follows:
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
China
|
|
$
|
3,656
|
|
|
$
|
(3,073
|
)
|
Unallocated corporate operating income (loss)
|
|
|
(2,218
|
)
|
|
|
(215
|
)
|
|
|
$
|
1,438
|
|
|
$
|
(3,288
|
)
|
The Company’s income tax benefit
(expenses) consists of:
|
|
|
For the Year ended December 31,
|
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
|
(In thousands)
|
|
|
|
(In thousands)
|
|
Current: tax expense
|
|
$
|
1,235
|
|
|
$
|
-
|
|
Deferred: tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
1,235
|
|
|
$
|
-
|
|
A reconciliation of the provision
for income taxes determined at the statutory average state and local income tax to the Company’s effective income tax rate
is as follows:
|
|
Year ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Expected income tax expense at statutory US rate of 35%
|
|
$
|
503
|
|
|
$
|
1,151
|
|
Current year US loss not utilized
|
|
|
776
|
|
|
|
-
|
|
Current year China loss not utilized
|
|
|
1,486
|
|
|
|
(777
|
)
|
Prior year PRC losses utilized in current year
|
|
|
(1,094
|
)
|
|
|
-
|
|
Income tax rate difference between US and PRC statutory rates
|
|
|
(477
|
)
|
|
|
(309
|
)
|
Non-deductible expense
|
|
|
-
|
|
|
|
(65
|
)
|
Other
|
|
|
41
|
|
|
|
-
|
|
|
|
$
|
1,235
|
|
|
$
|
-
|
|
The Company’s parent, China
Shen Zhou Mining & Resources, Inc., and its subsidiary AFMG, are incorporated in the United States and have incurred an aggregate
net operating loss of approximately $6,122,000 for income tax purposes through subsidiary December 31, 2011, subject to the Internal
Revenue Code Section 382, which places a limitation on the amount of taxable income that can be offset by net operating losses
after a change in ownership. The net operating loss carries forward for United States income taxes, and may be available to
reduce a future years’ taxable income. These carryforwards will expire, if not utilized, in 2031. Management believes that
the realization of the benefits from these losses appears unlikely due to the Company’s limited operating history and continuing
losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance on the deferred
tax asset benefit of approximately $2,143,000 to reduce the asset to zero. Management will review this valuation allowance periodically
and make adjustments as warranted.
The tax effects of temporary differences
that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 2011 and 2010 are presented
below:
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Deferred tax asset:
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
$
|
2,143
|
|
|
$
|
1,367
|
|
Less: Valuation at deferred tax asset
|
|
|
(2,143
|
)
|
|
|
(1,367
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Convertible debt extinguishment
|
|
$
|
(200
|
)
|
|
$
|
(200
|
)
|
|
|
$
|
(200
|
)
|
|
$
|
(200
|
)
|
NOTE 32 - EARNINGS PER SHARE
The following table is a reconciliation
of the weighted average shares used in the computation of basic and diluted earnings per share from continuing and discontinued
operations for the periods presented (amounts in thousands, except per share data):
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
(In thousands,
except per
share data)
|
|
|
|
(In thousands,
except per
share data)
|
|
Income (loss) from continuing operations available to common shareholders:
|
|
|
|
|
|
|
|
|
-Basic and Diluted
|
|
$
|
435
|
|
|
$
|
(3,095
|
)
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations available to common shareholders:
|
|
|
|
|
|
|
|
|
-Basic and Diluted
|
|
$
|
(89
|
)
|
|
$
|
(193
|
)
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
|
-Basic and Diluted
|
|
|
31,369
|
|
|
|
27,902
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations
|
|
|
|
|
|
|
|
|
-Basic and Diluted
|
|
$
|
0.01
|
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
(Loss) income per share from discontinued operations
|
|
|
|
|
|
|
|
|
- Basic and Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
For the year ended December 31, 2011, the
warrants were excluded from the diluted earnings per share calculation because their exercise prices were higher than the average
market price of the Company’s common stock.
NOTE 33 - SUBSEQUENT EVENT
On January 16, 2012, the Company
through its subsidiary Xiangzhen Mining, entered into an equity transfer and capital increase agreement to acquire 60% of the equity
interests of Wuchuan Dongsheng Mining Co., Ltd., a company based in Wuchuan Yilao and Miao Autonomous County, Zunyi City, in the
province of Guizhou, People’s Republic of China.
On February 7, 2012, the Company
through its subsidiary Xiangzhen Mining purchased a 60% equity interest in Guizhou Qianshi Resources Development Co., Ltd., Yanhe
Tujiazu Autonomous County, Tongren City, Guizhou Province.
On February 7, 2012, the Company,
through its subsidiary Xiangzhen Mining purchased a 60% equity interest in Yanhe Tujiazu Autonomous County Meilan Mining Co., Ltd.,
a company based in Yanhe Tujiazu Autonomous County, Tongren City, Guizhou Province.
On February 13, 2012 the Company
issued an additional 1,139,128 shares of common stock to the original Sellers of Xinyi Fluorite.
On February 28, 2011, the Company’s 9.76%
note payable in an amount of approximately $2,536,000 to Baiyin Credit Union matures on May 9, 2012, guaranteed by the bank
drafts of the Company.
On March 21, 2012, the Company entered into a Securities Purchase
Agreement (the “SPA”) with a certain institutional investors, pursuant to which the Company will offer up to an aggregate
of $10 million of Series A Convertible Preferred Stock, and warrants to purchase approximately 1,960,785 shares of common stock
of the Company (such offer being the “Offering”). Under the SPA, the Investors may purchase up to an aggregate of 10,000
shares of preferred stock in the Offering. The initial conversion price of the preferred stock is $2.04, subject to anti-dilution
adjustments. The Company has also agreed to grant to the placement agent at the initial closing of the Offering warrants
to purchase 392,157 shares of common stock. The placement agent’s warrants shall have the same general terms as the
warrants offered in the Offering, except that the exercise price will be 120% of the exercise price in the warrants offered in
the Offering.
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