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EX-32 - CHINA SHEN ZHOU MINING & RESOURCES, INC.v179454_ex32.htm
EX-31.1 - CHINA SHEN ZHOU MINING & RESOURCES, INC.v179454_ex31-1.htm
EX-21.1 - CHINA SHEN ZHOU MINING & RESOURCES, INC.v179454_ex21-1.htm
EX-31.2 - CHINA SHEN ZHOU MINING & RESOURCES, INC.v179454_ex31-2.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

COMMISSION FILE NUMBER: 001-33929

CHINA SHEN ZHOU MINING & RESOURCES, INC.
(Name of Small Business Issuer Specified in its Charter)

Nevada
87-0430816
(State of incorporation)
(IRS Employer Identification Number)

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:
Name of Each Exchange on Which Registered
Common Stock, par value $.001
NYSE Amex

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 o No þ

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 o No þ

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 þ No o

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 ¨ No ¨

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. o

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 filero
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller
reporting company)
Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):
Yes o No þ

The aggregate market value of the 4,970,914 shares of voting and non-voting common equity stock held by non-affiliates of the registrant was $ 6,909,570.46 as of June 30, 2009, the last business day of the registrant’s most recently completed second fiscal quarter, based on the last sale price of the registrant’s common stock on such date of $1.39 per share, as reported by NYSE Amex Market.

As of March 25, 2010, there were 27,974,514 shares of common stock of China Shen Zhou Mining & Resources, Inc. outstanding.


 
TABLE OF CONTENTS

PART I
 
 
  ITEM 1. BUSINESS  
3
 
Corporate History
 
 4
 
Our Industry
 
 4
 
Current Business Operations
 
 5
 
Description of Products
 
 5
 
Sales and Marketing
 
 5
 
Our Major Customers
 
 6
 
Competition
 
 6
 
Business Strategies
 
 7
 
Resumption of Production Capacity to Meet Demand
 
 7
 
Exploration Activities
 
 8
 
Acquire More Mineral Resources
 
 8
 
Competitive Advantages
 
 8
 
Government Regulation
 
 9
 
Employees
 
 10
  ITEM 1A. RISK FACTORS  
 11
  ITEM 1B. UNRESOLVED STAFF COMMENTS     
  ITEM 2. PROPERTIES  
19
 
General
 
 19
 
Sumochaganaobao Fluorite Mine (Xiangzhen Mining)
 
 20
 
Mining Site No. 2 of Qingxing Copper Mine, in production Stage (Qingshan Metal)
 
24
 
Keyinbulake Cu-Zn Property in development stage (Xingzhen Mining)
 
26
 
Inner Mongolia Wulatehouqi Qianzhen Ore Processing Co., Ltd (Qianzhen Mining)
 
 28
  Kichi Chaarat Closed Company (Kuru-Tegerek Mine)   
29
  ITEM 3. LEGAL PROCEEDINGS  
 29
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  
 29
PART II
   
  ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES  
 29
 
Equity Compensation Plan Information
 
 
  ITEM 6. SELECTED FINANCIAL DATA  
30
  ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  
 30
 
Business
 
 30
 
Business Strategy
 
32
 
Results of Operation Business 
 
 33
  ITEM 8. FINANCIAL STATEMENTS  
 37
  ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  
 37
  ITEM 9A. CONTROLS AND PROCEDURES  
 37
  ITEM 9B. OTHER INFORMATION  
 38
PART III
 
 
  ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE  
  39
 
Involvement in Certain Legal Proceedings
 
  40
 
Compliance with Section 16(a) of the Securities Exchange Act of 1934
 
  41
 
Code of Ethics
 
  41
 
Director Nominees Recommended by Stockholders
 
  41
 
Board Composition; Audit Committee and Financial Expert
 
  41
  ITEM 11. EXECUTIVE COMPENSATION  
  42
 
Outstanding Equity Awards at Fiscal Year-End
 
  42
 
Director Compensation
 
  43
 
Retirement, Post-Termination and Change in Control
 
  43
  ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.  
  43
  ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE  
  44
  ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES  
  44
PART IV
  ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES  
  45
 
2


PART I

ITEM 1.
BUSINESS

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”) with 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 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”) 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 now hold 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 now hold 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 68% of the registered capital of Inner Mongolia Xiangzhen Mining Group Co., Ltd., a limited liability company organized in the PRC (“Xiangzhen Mining”), with the remaining 32% of the registered capital of Xiangzhen Mining being held by AFMG, thus effectively making Xiangzhen Mining a wholly-owned subsidiary of AFMG. The percentage of ownership interest in Xiangzhen Mining by AFMG and Qianzhen Mining changed from 67% and 33% in 2006 to 68% and 32% in 2007, respectively, due to additional investment into Xiangzhen Mining by AFMG and Qianzhen Mining. Qianzhen Mining owns 60% of Wulatehouqi Qingshan Nonferrous Metal Development Co., Ltd. (“Qingshan Metal”). The other 40% of Qingshan Metal is owned by several individual shareholders. Xiangzhen Mining owns 90% of Xinjiang Buerjin County Xingzhen Mining Co., Ltd. (“Xingzhen Mining”). The other 10% is owned by Xinjiang Tianxiang New Technology Development Co., Ltd (5%) and an individual shareholder (5%).

In December 2007, the Company disposed one of its subsidiaries, Tianzhen Mining, an exploration stage company located in Wuqia County, Xinjiang Uygur Autonomous Region.

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 its wholly-owned subsidiary, Inner Mongolia Xiangzhen Mining Group Co., Ltd., a company organized under the laws of People’s Republic of China, 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 the entire equity of Tun Lin in the Kyrgyz Republic.
 
3


The table below illustrates the corporate structure of the Company:
corporatestructure

Our common stock is listed on the NYSE AMEX under the symbol “SHZ.”

Our executive offices are located at No. 166 Fushi Road, Zeyang Tower, Suite 1210 Shijingshan District, Beijing, China 100043. Our telephone number is 86-010-88906927.

Our Industry

Our primary business activity is mining, processing and distributing fluorite ores and processed fluorite powder, copper, zinc, lead, and other mineral concentrates. Along with China’s modernization drive, its economy has witnessed significant growth in the past three decades, which brought about a rapid growth in its manufacturing capacity. Moreover, due to its investment environment and cheap labor, China has attracted many manufacturers from developed countries.

Fluorite is mainly used by the steel industry as a melting agent and the fluorite chemical industry to manufacture hydrofluoric acid, a widely used raw material for the chemical industry. As an extremely scarce and non-renewable resource, fluorite has much wider applications. Under such background, China's State Council issued the notification SCS [2010] No. 1" On Adoption of Comprehensive Measures on Exploration and Production Control of the Refractory Clay and Fluorite " in January 2010, The notification was issued mainly to restrict the excessive exploitation of fluorite mineral resources through the integration of small fluorite mines, and shutting down part of small-scale processing plants and mines with poor resources, and to ensure the rational use of resources. In addition, for a certain period of time no application to 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 the domestic fluorspar price. Because Xiangzhen Mining has the largest fluorite mine in northern China, while the Company serves as the member of Vice Executive President of the China Fluorite Industry Association, this new policy will have a positive effect to Xiangzhen Mining operations.

China produced 3.85 million metric tons of fluorite ore in 2007, 4.416 million metric tons in 2008 and 3.83 million metric tons in 2009. In 2009, about 95.3% of the annual output was consumed within China and 4.7% was exported, according to the statistics of China’s Fluorite Industry Association. In recent years, large exports of fluorite and hydrofluoric acid have depleted fluorite resources in China. In order to protect fluorite reserves, the Chinese government instituted an export quota system in 2001.
 
4

 
In 2009, 1.85 million metric tons of fluorite powder were consumed by the producers of hydrofluoric acid and aluminum fluoride, 1.5 million metric tons by the producers of steel, 0.3 million metric tons by others in China, according to the publication of China’s Inorganic Fluoride Industry Association.

Current Business Operations

Our primary business activity is mining, processing and distributing fluorite ore, zinc, copper, lead, and other mineral products. All of our business is conducted through our China-based subsidiaries. We operate mines in the Inner Mongolia Autonomous Region and Xinjiang Uygur Autonomous Region, which are known for their rich minerals of fluorite, copper, lead and zinc. Regional human resources of general labor and specialized professional mining teams are available to us at a low cost. We maintain good relationships with the local governments by providing employment opportunities to the local work force and tax revenues to the government. We have also achieved stable long term cooperative relationships with several large-scale domestic steel, nonferrous refining and chemical enterprises after years of experience and relationships in the mineral markets. Such relationships combined with the large resources available on hand provide the Company with a competitive advantage over others in the same industry.

The following table summarizes the business activities of AFMG’s subsidiaries:

Subsidiaries
 
Current Business Activities
Qianzhen Mining
 
Engage mainly in the processing of zinc-lead ore
Xiangzhen Mining
 
Engage in the extraction and processing of fluorite ore
Xingzhen Mining
 
Engage mainly in exploration and development of zinc-copper mine
Qingshan Metal
 
Engage mainly in the extraction of copper-zinc ore, some processing

Description of Products

Fluorite:

We extract and process fluorite ores or fluorspar in northern Inner Mongolia. In 2009, we extracted a total amount of 47,900 metric tons of fluorite ores. There are two final products from extraction and processing of fluorites: high grade fluorite ores with a purity of above 75% CaF2 and fluorite powder with a purity of greater than 97% CaF2 The high grade fluorite ores, selected directly from the mined ores, are sold to steel making companies to be used as a melting agent in steel making. The fluorite powder is a key upstream material for the manufacture of fluorine compounds by the fluorine chemical industry.

In 2009, we extracted approximately 47,900 metric tons of fluorite ores and sold 28,100 metric tons of fluorite lumps with total sales of approximately US$2.54 million, accounting for approximately 65% of the revenues of our fluorite business. We also produced 15,300 metric tons of fluorite powder and sold 12,000 metric tons for approximately US$1.38 million, which accounts for approximately 35% of the revenues of our fluorite business.

Nonferrous:

We extract and process zinc, copper and lead ores in the central part of Inner Mongolia and northeastern part of Xinjiang Uygur Autonomous Region. Our final products are zinc concentrate, copper concentrate and lead concentrate which are sold to metallurgical companies which in turn refine them into zinc, copper and lead ingots.

In 2009, we produced and sold zinc concentrates and copper concentrates equivalent to 178 metric tons of zinc metal, 10 metric tons of copper metal and also sold 3,041 metric tons of oxide zinc-copper ore, accounting for approximately 56%, 16% and 28%, respectively, of the total revenues of our nonferrous business of approximately $0.27 million.

Sales and Marketing

We do not have 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 ability and delivers the products to our customers through railways or trucks. We expect these relationships with our customer to continue.

Major Suppliers

During the year 2009, we have no concentrated suppliers. We extract and process zinc, copper and fluorite ores from our mines and purchase fuel and very few raw materials.
 
5


Our Major Customers

In 2009, our revenues from our fluorite business and nonferrous metals business were $3.92 million and $0.27 million, respectively.

The following table shows our major customers (10% or more) for our nonferrous business for the year ended 2009:

Number
 
Customer
 
Revenue*
(In thousands)
   
Percentage
(%)
 
 
1
 
RuiPeng Mining Ltd
  $ 197       72 %
 
2
 
Xinjiang Chenguang Oxide-zinc Ltd
    76       28 %
TOTAL
      $ 273       100 %
 

*
The total revenue from our nonferrous segment is $0.27 million

The following table shows our major customers (10% or more) for our fluorite business for the year ended 2009:

Number
 
Customer
 
Revenue*
(In thousands)
   
Percentage
(%)
 
 
1
 
Handan Hongzhi Ltd
  $ 892       23 %
 
2
 
Ningxia Jinhe Ltd
    815       21 %
 
3
 
Laiwu Steel Ltd
    638       16 %
 
4
 
Inner Mongolia Huadesanli Trading Ltd
    621       16 %
 
5
 
Zibo Bofeng Ltd
    475       12 %
TOTAL
      $ 3,441       88 %


*
Total revenue from our fluorite segment is $3.92 million.

Competition

Rapid industrialization and development in China have been the main drivers for its increase in non ferrous 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 any difficulty in selling our products and therefore we do not expect to devote large financial resources to sales and promotion.

Our competitors mainly are similar companies in China.

Our main competitors in the fluorite business are:

·
Zhejiang Wuyi Shenlong Mining Co., Ltd., which produced 40,000 metric tons of fluorite lumps and 35,000 metric tons of fluorite powder in 2009.

·
Inner Mongolia Linxi County Jingyuan Mining Co., Ltd., which produced 30,000 metric tons of fluorite lumps and 35,000 metric tons of fluorite powder in 2009.

·
Gansu Gaotai Hongyuan Mining Co., Ltd., which produced 65,000 metric tons of fluorite ore in 2009.

·
Jinghua Huaying Mining Co., Ltd., which produced 20,000 metric tons of fluorite lumps and 28,000metric tons of fluorite powder in 2009.

Our competitors in the zinc, lead and copper concentrates are local mining companies such as Inner Mongolia Wulatehouqi Huogeqi Copper Mine (Huogeqi Mining) and Dongshengmiao Mining Industry Co, Ltd, (Dongshengmiao Mining). Our production volume in zinc, lead and copper concentrates are relatively small compared to these local mining companies. As the demand for non ferrous metal concentrate exceeds the supply, we believe that we should have no difficulty in selling our products.
 
6


Competitor
 
Capacity
Huogeqi Mining
 
1,000,000 metric tons of extracting and ore processing capacity
Dongshengmiao Mining
 
600,000 metric tons of extracting and ore processing capacity
Wancheng Trading Co.,Ltd
 
400,000 metric tons of extracting and ore processing capacity

Business Strategy

Prospect in 2010

From the perspective of China’s overall micro-economic condition, China’s economic output will increase gradually in 2010. Non-ferrous metals and fluorite industry will have new development opportunities. The non-metallic mineral industry especially will be an industry in the positive direction.

Resumption of Production Capacity to Meet Demand

▼ Fluorite

In early 2006, we began a mining project at Xiangzhen Mining to produce 300,000 metric tons of fluorite ore and the project was completed in November 2007. At the same, at our mine site, we also started to build a plant with an annual processing capacity of 200,000 metric tons of fluorite ore, and the project was also completed in November 2007. We continued mining operations but the new plant remained in trial production in 2009.

We extracted approximately 47,900 metric tons of fluorite ore in 2009. We expect to extract 130,000 metric tons of fluorite ore in 2010.

We produced and sold approximately 12,000 metric tons of fluorite powder and 28,100 metric tons of fluorite lumps in 2009. We are planning to start the normal production in April 2010 to process 45,000 tons of fluorite ore and produce 19,000 metric tons of fluorite powder. In addition, we plan to sell 55,000 metric tons of fluorite lumps and 19,000 tons of fluorite powder.

Xiangzhen Mining has the largest fluorite ore reserves in Northern China. Xiangzhen is a vice-president member in the China Fluorite Association. The new national policy of tighter restriction for new entrants into the fluorite production will have positive effect on Xiangzhen Mining. We expect the trend will continue for the business to concentrate in large enterprises through the acquisition of smaller enterprises.
 
▼ Zinc, Copper and Lead

No production was planned at Qianzhen Mining in 2009 due to the low grade of the ore supplied by Qingshan Metal and low copper price. Because the price of sulfur concentrate decreased greatly in 2009, Qianzhen Mining did not go into produce any sulfur products. We do not plan to produce at Qianzhen Mining and Qingshan Metal in 2010 due to the potential asset reorganization activity.

In July 2006, Xingzhen Mining began a project at Keyinbulake Multi-Metal Mine in Buerjin County, Aletai Zone, Xinjiang Uygur Autonomous Region. The project has a mining and processing capacity of 200,000 metric tons of mineralized zinc-copper ore per year. On April 28, 2008, Xingzhen Mining completed a successful testing at its first trial, and then went into production. In parallel with processing, Xingzhen did exploration in the area. In 2009, Xingzhen stopped operations due to price decrease of non-ferrous metals.

In 2009, Xingzhen Mining produced and sold zinc concentrates and copper concentrates equivalent to 178 metric tons of zinc and 10 metric tons of copper, and sold 3,041 metric tons of oxide zinc-copper ore. We continued excavating and mining operations, and have been carrying out the operations until present time. Subject to purchase orders and weather conditions, we plan to start processing in May 2010. We plan to produce extracted ore of 70,000 tons, excavate tunnels of 2,500 meters, process ores of 80,000 tons equivalent to 4,410 metric tons of zinc and 241 metric tons of copper. We plan to sell out all the products to be produced. In addition, we plan to sell 10,000 metric tons of oxide copper-zinc ore.
 
7


Exploration Activities

üKeyinbulake Cu-Zn Mine

In 2009, Xingzhen Mining made a great breakthrough in prospecting, though it did not finish its processing plan. Based on previous exploration, especially according to the results of the IP sounding work in geological prospecting carried out in 2009, the mineral formation conditions and the genesis of ore bodies shows that Keyinbulake Copper-Zinc Mine belongs to the submarine volcanogenic sediments. The analysis on the data of exploration shows that within the mineralized belt the ore bodies continue along with the strike and distribute in parallel and en echelon arrangement. The method of sounding indicates that the inclined deepening of the ore-bodies in this area is longer than the length of their strike prolongation. There are five high-polarization abnormal zones found through IP sounding methods and they coincide in space and positions with the known copper-zinc ore bodies controlled under current underground extraction, which confirms that Keyinbulake Copper-Zinc Mine exists with high potential of ore prospecting and the previous work greatly assists the Company to delimit the accurate target area for further verification.

In the first half of 2010, Xingzhen Mining will still focus on geophysical research, IP sounding prospecting, verification drilling design, and carrying out construction in strict accordance with design, as well as conducting the necessary geophysical investigations in the mining area. Xingzhen Mining is striving to explore further for more reserves as a public company before the end of 2010, and achieving breakthroughs in further identifying mineral resources in 2011.

Following the exploration in 2009, further exploration activities are planned in 2010 in the southern and northern parts of Keyinbulake Cu-Zn Mine. The exploration details are scheduled as follows:

Table 1-3: Exploration Program for Keyinbulake Property

Item
 
Method
 
Unit
 
Quantity
Geophysical
 
Surface scanning
 
km 2
 
2.5
Drilling
 
four medium/deep holes
 
m
 
3000
Trenching
 
-
 
m 3
 
500
Geophysical prospecting
 
IP sounding
 
points
 
1108

The exploration activities listed above will be completed by a Geophysical Prospecting Team of Xinjiang Nonferrous Geophysical Prospecting Bureau at the end of September 2010 with a total budget of approximately $0.88 million, which will be funded by a shareholder (natural person) of Xingzhen Mining.

Acquire More Mineral Resources

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 opportunity arises. We also expect to acquire additional nonferrous metal mines and fluorite mines domestically that have good extracting and operating conditions and possess all necessary governmental licenses.

Competitive Advantages

We believe we have the following competitive advantages:

·
All of our current businesses are conducted through our China-based subsidiaries. We operate mines in the Inner Mongolia Autonomous Region and Xinjiang Uygur Autonomous Region, which are known for their rich minerals of fluorite, copper, lead and zinc.

·
We own one of the best fluorite mines in China which has high purity fluorite ore and good extracting conditions with the single largest processing plant in northern China.

·
We have an experienced management team. Most of our executive officers have more than 20 years of experience in the mining industry.

·
We have good relationships with local government agencies. Regional human resources of labor and specialized professional mining teams are available to us at a low cost.
 
8


 
·
Many of our subsidiaries are located in the western part of China and therefore enjoy many preferential tax and regulatory policies.

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 policy and foreign investment.

The principal regulations governing the mining business in the PRC include:

·
China Mineral Resources Law, which requires a mining business to have exploration and mining licenses from provincial or local land and resources agencies.

·
China Mine Safety Law, which requires a mining business to have a safe production license and provides for random safety inspections of mining facilities.

·
China Environmental Law, which requires a mining project to obtain an environmental feasibility study of the project.


·
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, Renminbi (“RMB”) is freely convertible into 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 investment, 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 after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from SAFE.

The Guidance to Businesses by Foreign Investments revised in 2007 by the Chinese government no longer allows foreign investments into the fields of exploration, development and mining of fluorite in China. The policy is intended to protect Chinese businesses.

Our operating subsidiaries in China have been authorized by land and resources departments of local governments. Chinese regulations require that mining enterprises procure an exploration or mining license from the land and resource department of local governments before they can carry out exploration or mining activities. This license ensures that an enterprise follow proper procedures in its own exploring or mining activities and in selling its products to customers. We have secured the necessary exploration or mining licenses from local governments. Most of our mining companies possess exploration or mining licenses and some of them are applying for mining licenses after exploration.

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 certification from the Administration of Work Safety of 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.
 
9


Employees

As of December 31, 2009, we employed 281 full-time employees, of whom approximately 6.1% are with our Beijing Representative Office, 25.6% are with Qianzhen Mining, 54.8% are with Xiangzhen Mining, 2.9% are with Qingshan Metal (copper and zinc ore mining) and 10.6% are with Xingzhen Mining (holding exploration rights of copper ore and zinc ore). Approximately 17% of our employees are management personnel, and 6.5% 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 which 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 all 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 arrangement organized by Chinese municipal and provincial governments. We are required to contribute to the arrangement at the rate of 20% of the 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 the average monthly salary. We have purchased social insurance for all of our employees. Expense related to social insurance was approximately $51,104 for fiscal year 2009.

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.
 
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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 related to the current national and worldwide financial crisis, 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.

A significant amount of our revenue is derived from only a small number of customers mainly in the iron and steel and fluorite chemical industries. 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 ton/year processing capacity for zinc-lead ore. However, it does not produce any ore it processes. Currently, it obtains its supply of ore from third parties. Its contracts with third parties expired in June 2008. We don’t have a third party supplier now and we may need third party suppliers in the future. Although we plan to increase the quantity of nonferrous metal ore at Qingshan Metal to replace third party suppliers, we may not be able to produce a sufficient quantity to ensure the supply of ore for Qianzhen Mining. As a result, our revenues may be reduced and our business would suffer.

Inclement weather may affect our fluorite business.

Our fluorite business is conducted through Xiangzhen Mining which 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 is a strong snow storm, our fluorite 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 time. As a result, our revenues may be negatively impacted.

Our administrative costs could affect our ability to be profitable.

Our exploration and mining operations are scattered across several geographical locations in China and we will make acquisition of mines in the future. Our administrative costs may increase as a result and our profitability may be 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 would have a material adverse effect on our business.
 
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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 on 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, or we may encounter environmental conditions or requirements 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 during the life of the project. Obtaining and renewing the necessary governmental permits is a complex and time-consuming process. Obtaining or renewing 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 those that we previously estimated. 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

We have prepared 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:

·
the accuracy of our mineralization and reserves estimates;

·
the accuracy of assumptions regarding ore grades and recovery rates;

·
ground conditions and physical characteristics of the mineralization, such as hardness and the presence or absence of particular metallurgical characteristics;

·
the accuracy of estimated rates and costs of mining and processing; and

·
our ability to obtain and keep effective all permits for our mines and facilities.

Our actual production may vary from our estimates if any of our assumptions prove to be incorrect.

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 possibly hurting 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 exploration and mining over the next few years. Although most of management personnel have extensive experience in the mining industry, their training is in mining operations rather than contemporary management principles. They may be not able to cope with the challenges presented by being a U.S. public company and the competitive business environment due to 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:

·
the continued demand of our products by the iron and steel, and fluorite chemical industries;

·
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;

·
rapid technological change; and

·
the highly cyclical nature of the mining industry.

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 we may be unable to meet the needs of our customers.

There is certain risk for the company to maintain listing on NYSE Amex.

The Company is currently listed on NYSE Amex. To maintain the listing on Amex, the Company shall meet the continual listing standards required by the Amex, which include but not limited to financial criteria. If a company falls below any criteria, the Amex will notify the Company and review the appropriateness of continued listing. Once notified, the company shall submit a plan to return to compliance. If the Amex accepts the plan, it will monitor the company's performance throughout the plan period. If the company fails to achieve stated goals in a timely manner, the Amex will move to remove it from the listing. Therefore, the Company faces the risk of delisting if it is not able to comply with the continual listing standards of Amex.

Risks Related to Our Industry

Fluctuations in the market price of fluorite and nonferrous metals could adversely affect the value of our company and our securities

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 the control of any mining company. These factors 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 a number of other factors. Any drop in the price of the metals important to our operations would adversely impact our revenues, profits and cash flows. In particular, a sustained drop in prices could:

§
cause suspension of our development and, ultimately our mining operations, if such operations become uneconomic at the then-prevailing prices, thus further reducing revenues;

§
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

§
reduce financing available to us.

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.
 
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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 unpatented mining claims are often uncertain and may be contested. 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 mineralization and 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 we have. 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.

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:

§
availability of labor, power, transportation, commodities and infrastructure;
   
§
increases in input commodity prices and labor costs;

§
fluctuations in exchange rates;
   
§
availability of financing;

§
difficulty of estimating construction costs over a period of years; and
   
§
delays in obtaining environmental or other government permits.

Risks Related to Doing Business in China

The Company’s business may be adversely affected by political unrests such as the one occurred in Xinjiang Uygur Autonomous Region.

On July 5, 2009 in Urumqi, the capital of the Xinjiang Uygur Autonomous region, a political unrest erupted because of ethnic conflicts between the minority Uygur and the Han Chinese. One of our mines, Xingzhen Mining, is located at 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. As a result, the Company's business had suffered. Our operations may face adverse uncertainties and challenges in the future should such unrests occur.
 
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The Company’s business will be affected by PRC government regulation and the country’s economic environment because most of our sales will be in the China market.

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 sales in the near future. As a result of our reliance on the China 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 has been transitioning from a planned economy to 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 lands are 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 it could 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 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 never certain to be obtained.

There are risks inherent in doing business in China.

The PRC is a developing country with a young market economic system overshadowed by the state. Its political and economic systems are very different from the more developed countries and are still in the state of change. China also faces many social, economic and political challenges that may produce major shocks and instabilities and even crises, in both its domestic arena and in its relationship with other countries, including but not limited to the United States. Such shocks, instabilities and crises may in turn significantly and adversely affect our performance.

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.

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.
 
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The new merger and acquisition rules may impact our ability to make acquisitions of Chinese businesses.

On August 8, 2006, six PRC regulatory agencies namely, the PRC Ministry of Commerce, the State Assets Supervision and Administration Commission (“SASAC”), the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission (“CSRC”), and the State Administration of Foreign Exchange (“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.

New tax law 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 percent and abolishes the favorable policy for foreign invested enterprises. After this law takes effect, newly established foreign invested enterprises will not enjoy favorable tax treatment as in effect under current tax laws. Our subsidiaries were benefiting from the preferred tax rates for foreign invested companies and are subject to the new tax rate of 25 percent. Our net income margin and results of operations may be negatively affected.

Risks Related to the Market for Our Stock

The market for our Common Stock is limited.

The shares of our common stock have been traded on the American Stock Exchange under the trading symbol “SHZ” since January 31, 2008. Before the listing on the American Stock Exchange, the shares of our common stock were traded on the OTC Bulletin Board.

We currently have approximately 642 shareholders. But the trading volume 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:

·
Shareholders may have difficulty buying and selling or obtaining market quotations;
   
·
market visibility for our Common Stock may be limited; and

·
a lack of visibility for our Common Stock may have a depressive effect on the market price for our Common Stock.

You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited, as our subsidiaries are incorporated in non-U.S. jurisdictions, we conduct substantially all of our operations in China, and all of our officers reside outside the United States.

We conduct substantially all of our operations in China through our wholly owned subsidiaries in China. All of our officers reside outside the United States and some or all of the assets of those persons are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in China in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers. As a result of all of the above, our public stockholders may have more difficulties in protecting their interests through actions against our management, directors or major stockholders than would stockholders of a corporation doing business entirely within the United States.
 
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The trading prices of many companies that have business operations only in China 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. These fluctuations 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:

·
actual or anticipated variations in our quarterly operating results;
   
·
announcements of technological innovations or new products or services by us or our competitors;

·
announcements relating to strategic relationships or acquisitions;
   
·
additions or terminations of coverage of our Common Stock by securities analysts;

·
statements by securities analysts regarding us or our industry;
   
·
conditions or trends in the our industry; and

·
changes in the economic performance and/or market valuations of other industrial fire safety companies.

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 remains 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.

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 related 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:

·
the diversion of our management’s attention from our everyday business activities;
   
·
the contingent and latent risks associated with the past operations of, and other unanticipated problems arising in, the acquired business; and

·
the need to expand management, administration, and operational systems.

If we make such acquisitions we cannot predict whether:

·
we will be able to successfully integrate the operations and personnel of any new businesses into our business;
   
·
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.

In addition, future acquisitions by us may result in:

·
potentially dilutive issuances of our equity securities;
   
·
the incurrence of additional debt;

·
restructuring charges; and
   
·
the recognition of significant charges for depreciation and amortization related to intangible assets.

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.

We are not currently compliant with certain Sarbanes-Oxley Act standards.

The enactment of the Sarbanes-Oxley Act in July 2002 created a significant number of new corporate governance and internal control requirements. Although we expect to implement the requisite changes to become compliant with existing requirements, and new requirements when they do apply to us, we may not be able to do so, or to do so in a timely manner. If we do not come into compliance with the Sarbanes-Oxley Act corporate governance requirements, we may not be able to continue listing our securities on either AMEX in the event we ever attempt to do so.

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.

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 88.9% 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.

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.
 
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ITEM 2.  DESCRIPTION OF PROPERTY

General

As of December 31, 2009, China Shen Zhou Mining & Resources Inc. owns two properties in the production in the Inner Mongolia Autonomous Region, the People’s Republic of China (“PRC”), and one property under development in Xinjiang Uygur Autonomous Region in the PRC.

The two properties in production are:
- Sumochaganaobao Fluorite Mine in Siziwangqi of Inner Mongolia Autonomous Region in the PRC (Xiangzhen Mining);
- Mining site No. 2 of Qingxing Copper Mine (Tanyaokou Copper Mine) in Wulatehouqi of Inner Mongolia Autonomous Region in the PRC (Qingshan Metal);

The one property under development is:

- Keyinbulake Cu-Zn Multi-metal Mine located in Buerjin County, Aletai, Xinjiang Uygur Autonomous Region in the PRC (Xingzhen Mining).

No
 
Name of property
 
Type
 
Ownership
 
Status
 
Location/Country
1
 
Sumochaganaobao Fluorite Mine
 
Non-metal Fluorite
 
100%
 
Production
 
Inner Mongolia, PRC
2
 
Qingxing Copper Mine
 
Copper and zinc
 
60%
 
Production
 
Inner Mongolia, PRC
3
 
Keyinbulake Multi-metal Mine
 
Copper and zinc
 
90%
 
Development
 
Xinjiang Uygur Autonomous Region , PRC
 
map1
 
Figure 2-1: China Shen Zhou’s Properties in China

China Shen Zhou Mining & Resources Inc. holds three mining licenses and two exploration licenses at December 31 of 2009. The licenses are:

-Mining license of Sumochaganaobao Fluorite Mine, Siziwangqi, Inner Mongolia, PRC;
 
-Mining license of Mining Site No. 2 of Qingxing Copper Mine, Wulatehouqi, Inner Mongolia, PRC;
 
-Mining license of Keyinbulake Cu-Zn Mine in Buerjin County, Xinjiang Uygur Autonomous Region, PRC;

-Exploration license of Southern Part of Keyinbulake Zn Mine in Xinjiang Uygur Autonomous Region of the PRC;
 
-Exploration license of Northern Part of Keyinbulake Zn Mine in Xinjiang Uygur Autonomous Region of the PRC;
 
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Tables 2-1/2 present detailed information about the licenses.

Table 2-1: 3 Mining Licenses Held by the Company

Property
 
Sumochaganaobao fluorite deposit (between prospecting line 21-04)
 
Mining Site No. 2 of Qingxing Copper Mine(Tanyaokou Multi-metal Mine)
 
Keyinbulake Cu-Zn Multi-metal Mine
License Number
 
1500000820156
 
1500000820421
 
6500000712980
Owner
 
Inner Mongolia Xiangzhen Mining  Group Ltd.
 
Qingshan Nonferrous Metal Development Co Ltd.
 
Buerjin County Xingzhen Mining.
Validated period
 
April 2008 to March 2011
 
September 2008 to September 2011
 
August 2007.to August 2013
Area
 
0.9088 km2
 
0.6495km2
 
1.955km2
Mining mode
 
Underground mining
 
Underground mining
 
Underground mining
Mining scale
 
150,000 metric tons/annum
 
100,000 metric tons/ annum
 
21,000 metric tons/ annum
Ore types
 
Fluorite
 
Copper, Zinc and sulfur
 
Copper and zinc
Mining Level
 
1075m-497m
 
1455m-855m
 
1420m-1516m

Table 2-2: 2 Exploration licenses held by the Company

Property
 
Southern Region of
Keyinbulake Zn Mine
 
Northern Region of
Keyinbulake Zn Mine
License Number
 
650000061272
 
650000061273
Owner
 
Xingzhen Mining
 
Xingzhen Mining
Validated period
 
December 2009 to December 2010
 
December 2009 to December 2010
Area
 
13.37km 2
 
12.06 km 2

There are two types of mineral rights in China: exploration right and mining right. Exploration right is the right for exploring mineral resources within the areas authorized by the exploration license. Mining right is the right for exploitation of mineral resources and production of mineral products. According to Chinese law, an exploration license is valid for 3 years and shall not be extended beyond two additional periods and each no more than two years. 10, 20 and 30 years are the periods of time for mining licenses for small, medium and large deposits or mine s respectively . The mining license can be extended in scope or periods of time if the company intends to continue to operate. Application for extension needs to be submitted at least 30 days before the expiration date

Sumochaganaobao Fluorite Mine in Production Stage (Xiangzhen Mining)

The Company holds 100% ownership of Sumozaganaobao fluorite mine, which was acquired by Xiangzhen Mining from Inner Mongolia Siziwangqi Northern Fluorite Ltd, Co. in July 2002.

Location, Access and Traffic

Sumozaganaobao 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 mud road of approximate 90km from the mine to Erlianhot and then a freeway or national highway of about 250km to Hohhot, the capital city of Inner Mongolia, China. It has a typical continental climate characterized mainly by low precipitation and high evaporation, a big temperature difference 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.
 
20

 
map2
 
Figure 2-2: Sumochaganaobao Fluorite Mine

Mining Licenses

Inner Mongolia Xiangzhen Mining Group Co Ltd. (Xiangzhen Mining) holds the mining licenses of the area between prospecting line 21 and 04 of Sumochaganaobao Fluorite Deposit. The mining license Number is 1500000820156, issued by the Bureau of Land and Resources in April 2008, Wulanchabu City, Inner Mongolia and expires in March 2011.

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 Sumochaganaobao Fluorite deposit. The mineral resource was estimated at 1.716 million metric tons of fluorite at that time.

From 1981 to 1987, Geological Survey Brigade No.102 of Inner Mongolia conducted prospecting with continual 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. The mining right was then 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 was conducted by a state-owned company of Siziwang Banner. The mining capacity was 8,000-20,000 tons per year and the mining depth reached 58m from 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 mining capacity designed is 300,000 metric tons per year and the treatment capacity is 200,000 metric tons per year from a concentrator located near the fluorite mine. At the end of 2007 when the expanding construction had basically been completed and commissioning started. The Company had invested USD$2,895,380 in underground expansion and USD$7,760,300 in the new concentrator.
 
21


Water and Power Supply

Before October 2007, a state power network was not built into the mining area, and power for production and living was supplied by diesel generators. Since October 2007, power has been supplied to the mine by the state power network.

Water supply for production and living is from three wells about one kilometer away from the mine.

Current Mining Operation

Inclined shaft development has been assumed. As a result, currently there are 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, ores are transported by the electric locomotive to a shaft station and then lifted to ground by the hoister and unloaded onto a storage platform where high grade lumps (CaF2>80%) are directly sold to consumers (steel plant) after manual classification and the remaining 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 exhausted out from 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 on the 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 newly established concentrator has an annual 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, Φ 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
 
22

 
The processing recovery is 83%. 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

The Sumochaganaobao fluorite deposit is located in the Suniteyou Banner Fold Zone in 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.

The mineralized body is bedded, which strikes 40°-60°, dips to 310°-330° at angle 21°-40°, exceptional with 47°. The distribution is stable and continual. The length of mineralized body is 1100 meters; the maximum dip length controlled at present is 1540 meters. The thickness is 0.52 meters to 22.48 meters averaged at 5.80 meters. The mineral is fluorite only, whose main composition is CaF2. The gangue minerals are: quartz, chlorite and sericite. By the contents of useful component, the mineralized body is divided to high grade mineralized material (rich ore), CaF2≥60%, and low grade mineralized material (lean ore), 20% ≤ CaF2≥ 60%.

Mineralized Materials

In March 2007, the Bureau of Land and Resource of Wulanchabu City commissioned the Land-resources Institute of Inner Mongolia to verify the mineralized materials in the Mining License area. The Institute submitted “the Verification Report of Resources/Reserve between Prospecting line 21 and 04, of Sumochaganaobao Fluorite Deposit in Siziwangqi, Inner Mongolia.” The “Consulting Center of the China Mining Association” had reviewed and assessed the verification report and recognized the mineralized material statement in the report, and the indicated mineralized materials were confirmed as 5.051 million metric tons of fluorite with the average grade of 57.58%. In 2009, we extracted a total amount of 47,900 metric tons of fluorite ore, which consumed 57,500 metric tons of the indicated mineralized materials. There are 4.83 million metric tons of retained mineralized materials.

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.
 
23


Products and Output:

The mine produces fluorite ores which are 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 2007-2009, Xiangzhen Mining

Year
 
Product
 
Output (t)
   
Average Price per Year (USD$/t)
 
2007
 
Fluorite lumps
    52,523.96       84.62  
   
Fluorite concentrate
    22,447.23       144.13  
2008
 
Fluorite lumps
    24,135.33       106.54  
   
Fluorite concentrate
    6,747.16       167.91  
2009
 
Fluorite lumps
    28,083.86       91.65  
   
Fluorite concentrate
    11,972.52       112.86  

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 it, Category of this fluorite mine is upgraded.

There is low possibly to find new ore bodies or extensions to existing ore bodies since the deposit is well defined and well understood geologically.

Mining Site No. 2 of Qingxing Copper Mine in Production Stage (Qingshan Metal)

Qingshan Metal owns 100% of Qingxing Copper Mine. Before April 2006, Qingshan Metal was owned by several individuals such as Zhu Yongxia. On April 12, 2006, 60% of the shares of Qingshan were transferred to Qianzhen Mining by the shareholders such as Zhu Yongxia.

Location

Mining site No. 2 of the Qingxing Copper Mine is located in Qingshan Town, Wulatehouqi, Bayannoer City, Inner Mongolia Autonomous Region of the PRC.

The coordinates are E 106º45′15″-106º45’45”, N 47º57′14” - 40º57′45”.

The mine is 59 kilometers southeast to Linhe Railway Station of Beijing-Lanzhou Railway Line. It is conveniently accessible by highways and telecommunications.

map3
 
Figure 2-3: Mining Site No. 2 of Qingxing Copper Mine
 
24


History of Operation

Qingshan Metal had been in operation for 3 years before it was acquired by the Company. The Mining Project was designed by the Inner Mongolia Metallurgy Design Institute, and the mining capacity designed was 60,000 metric tons per year. The actual mining capacity is 50,000 metric tons of ores per year, of which copper ores account for about 40,000 metric tons and the remaining pertains to 10,000 metric tons of zinc and lead ores.

Geology of the Property

Qingxing Copper Mine is located at west part of the Langshan-Baiyunebo geotectogene, north boundary of North China Platform. The main strata spread over the mine area are Zhaetaishan Formation member 2 (Pt2zh2) and member 3 (Pt2zh3).

The Zhaetaishan member 2 (Pt2zh21) consists of three sequences which are set forth below.

Upper Sequence (Pt2zh23): mineralized bodies occur in this sequence which is comprised of mica quartz schist, carbonaceous mica quartz schist and carbonaceous phyllitic quartz schist.

Middle Sequence (Pt2zh22): carbonaceous slate, carbonaceous phyllite, banded carbonaceous quartzite, bearing-carbon quartzite, dark quartzite and tremolite, diopsidite etc.

Lower Sequence (Pt2zh21): lower part consists of carbonaceous phyllite; carbonaceous slate inter-bedded calcareous chlorite schist, chlorite quartz schist and lens of crystal carbonate, followed by biotitic quartz schist, andalusite-mica schist and bearing-carbon mica quartz schist.

The Zhaetaishan member 3 (Pt2zh3) consists of lower sequence of quartz schist and upper sequence of middle-thick quartzite inter-bedded thin quartzite.

The strata occur as monocline which strikes southwest and dips to northwest at 30-89 ° . All faults were formed after the metallic mineralization that re-constructed the mineralized -bodies.

Mineralized bodies, strictly controlled by the stratum, are blind and covered by gossans. There are two known mineralization zones, mineralization zone 3# and mineralization zone 5#. Zone 3# is distributed in north of the property which is 500 meters long and 10-30 meters wide, within which the mineralized body No.1 Cu-1 and No.2 Zn-1, No.3 Zn-2 were defined. Zone 5# is distributed in middle-south of the property which is 850 meters in length and 10-40 meters in width, where mineralized body No.4 Cu-2, No.5 Zn-3 as well as No.6 Zn-4 were defined.

Main metallic minerals are comprised of chalcopyrite, galena, sphalerite and pyrite and main gangue consists of quartz, calcite and chlorite.

Mining and Extraction technical conditions:

Mineralized body is inclined with the occurrence stratified and stratoid with small thickness but stable. It has simple conditions of hydrogeology and engineering geology with well stability of slake on top of mineralized body. In topography, incision is deep. It is available with good conditions of pit mining.

The Current Situation of the Mine

When the mine was acquired by the Company, the mining system already existed. Adit development system has been assumed.

Transportation: Underground transportation is carried out by electric locomotives. After they are loaded by rock loaders, ores are transported by the electric locomotive underground, and then lifted to ground by the hoister and unloaded onto a storage yard.

Ventilation: fresh air is blown in from sublevel adit, passes through the work area and is exhausted out from the special shaft of ventilation connected to ground.

Drainage system: Adit development has the conditions of underground water naturally discharged from waterway in adits.

Mining Method: Short-hole shrinkage stopping method with the mining loss at 25% and dilution at 15% and comprehensive recovery rate at 80%.
 
25


Major equipment in the mine is as follows:

Name 
 
Type
 
Qty (set)
 
Life of Service (year)
 
Notes
Hoisters
 
Ф 2M
 
2
 
20
   
Rock loaders
 
Z-20W
 
3
 
20
   
Compressors
 
20M 3
 
2
 
20
 
Power driven
Electric Locomotives
     
3
 
20
   
Ventilators
     
4
 
20
   
Transformers
     
5
 
20
   

Power and Water Supply

There is a 10 KV power supply line for mining production. Water is supplied by a special water pipe line from the He Tao Plain about 5 kilometers to the south of the Mining Ares.

Mineralized Materials

In January 2007, Wulatehouqi Qingshan Non-ferrous Metals entrusted No.3 Geological Exploration Institute of China Metallurgy Geological Bureau to conduct the supplementary geological survey on the “Tanyaokou Multi-Metal Zinc-copper Mine”, between prospecting line 42-58. The final supplementary geological survey was reported in May 2007, which confirmed the mineralized materials and category within the mining area. As of December 31, 2009, the total retained indicated mineralized material is 1.81 million metric tons with the average grade at 0.6%. Our plan for 2009 was to carry out exploration and prepare for mining in the first half of the year, and start mining in the second half of the year and then supply ores to Qianzhen. Due to the decrease in the price of copper, Qingshan did not move on to mining in 2009.

Potential for Further Exploration

In the mining process, two mining tunnels in 1 ,390m level and in 1,350m level intercepted Cu-2 mineralized body which improves the control degree and has increased the resources of Cu-2 mineralized body from 0.0286 million metric tons to 1.3778 million metric tons. Our geological consultant believes that if further exploration is conducted in the future, more minerals could be defined. Drilling will upgrade some of the mineralized materials to Category C (332). Underground exploration (associated with mining operation) should upgrade the mineralized material categories, and explore the extension deeply. In 2009, 356 meters of drilling holes was completed in exploration.

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 together. 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″-87º9’30”, N 47º58′30” - 47º59′45”, and the area is in 3.59 km 2 . It is 65 kilometers west-north of Aletai city, and 60 kilometers east-north of Buerjin County, and 26 km east-north 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.
 
26

 
map4
 
Figure 2-4: 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. At the end of 2007, ground drilling completed 5909 meters and underground exploration 4322 meters and underground drilling 7389 meters.

In 2009, IP sounding work in geological prospecting was carried out. The information of the mineral formation conditions and the genesis of ore bodies given by IP sounding shows that Keyinbulake Copper-Zinc Mine belongs to the submarine volcanogenic sediments. The analysis on the data of exploration shows that within the mineralized belt the ore bodies continue along with the strike and distribute in parallel and en echelon arrangement. The method of sounding indicates that the inclined deepening of the ore-bodies in this area is longer than the length of their strike prolongation. There are five high-polarization abnormal zones found through IP sounding methods and they coincide in space and positions with the known copper-zinc ore bodies controlled under current underground extraction, which confirms that Keyinbulake Copper-Zinc Mine exists with high potential of ore prospecting and the previous work greatly assists the Company to delimit the accurate target area for further verification.

Ore Processing:

In April 2007, the Company began to build a concentrator in the mining area with a daily processing capacity of 600 metric tons (200,000 metric ton/annually). Such a concentrator started to be put into a trial operation in May 2008.

The process of concentrator consists of two-stage closed crushing with one stage grindings, flotation of copper primary and zinc secondary, scavenging, two steps of dehydrating (thickening and filtrating). The final products are copper concentrates and zinc concentrates. 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=16 º
 
set
 
1
10
 
Belt conveyor No.4
 
B=650 Lh=20.713m a=15 º
 
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=13kw
 
set
 
1
21
 
Ceramic filter
 
TT-8 P=13kw
 
set
 
1
 
27

 
All equipment is brand new and their lives of service are 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 has built the power line itself.

Three wells 4km away from the mining area provide production and drinking water.

Mineralized Materials

Earth-Physics Exploration Brigade of Xinjiang Non-ferrous Geological Exploration Bureau completed the Geological Evaluation between May 2002 and July 2006, and the survey was 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 China Metallurgical Geological Bureau conducted a supplementary survey on the Keyinbulake property. In December 2007, it presented the final supplementary prospecting report confirming relevant mineralized materials within the mining property. In this report, the total indicated mineralized materials included 0.6035 million metric tons with an average grade of copper at 0.68% and zinc at 4.19%.

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 process of concentrator 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 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, 2.1mx3m and 1.5mx3m), 4m³ flotation machines (24 sets), 2m³flotation machines (12 sets),Φ12m thickeners(1 set), classifiers (2 sets, 1.5mx10m), 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 is new.

Qianzhen Mining conducts the operation by purchasing zinc, copper and/or lead ore from Qingshan Nonferrous Metal or other suppliers. The final products are in bulk. The transportation means for the products is truck. Table 2-4 shows the annual output and the concentrate’s average price of Qianzhen Mining in past three years.
 
28


Table 2-4: Annual treatment & concentrate average price in last three years of Qianzhen Mining

Year
 
Product
 
Treatment
(t)
   
Concentrate
(t)
   
Average Metal Price
Per Year (USD$/t)
 
2007
 
Zn concentrate
    66,270       5,582.5       2,628.55  
   
Pb concentrate
            777.21       2,231.13  
   
Cu concentrate
    29,512       402.27       7,130.13  
2008
 
Cu concentrate
    5,420       36.83       7,006.98  
   
Concentrate sulphur
    77,463       18,146.70    
54.53
(Average price of concentrate)
 
2009
 
-
    -       -    
No production in this year.
 

Kichi Chaarat Closed Stock Company (Kuru-Tegerek Mine)

Prior to September 2009, the Company owned 100% of the registered capital of Tun-Lin, a Kyrgyz Republic registered company, which in turn owned 100% of Kichi Chaarat Closed Stock Company. On September 21, 2009, the Company entered into a Share Purchase Agreement with Fortune Pegasus International Limited, a company organized under the laws of British Virgin Islands, pursuant to which the Company transferred to Fortune the entire equity of Tun Lin in the Kyrgyz Republic. Prior to the disposal of Kuru Tegerek in 2009, we had not made any products from this mine.
 
ITEM 3.
LEGAL PROCEEDINGS

None.

ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

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, 2009
 
High
   
Low
 
First Quarter
  $ 0.54     $ 0.25  
Second Quarter
  $ 0.59     $ 0.44  
Third Quarter
  $ 1.97     $ 1.11  
Fourth Quarter
  $ 1.75     $ 0.71  

Year ending December 31, 2008
 
High
   
Low
 
First Quarter
  $ 9.85     $ 2.5  
Second Quarter
  $ 6.47     $ 3.05  
Third Quarter
  $ 3.00     $ 0.90  
Fourth Quarter
  $ 1.00     $ 0.30  

Holders. As of March 22, 2010, we had 673 holders of record of our common stock. Our common stock had a closing bid price of $1.15 per share on March 22, 2010.

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.
 
29


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 award for 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.

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 consists 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 are 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.
 
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 harbour” 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”) at various pertinent dates and for pertinent periods.

OVERVIEW

We are principally engaged in the exploration, development, mining, and processing of fluorite, zinc, lead, copper, and other nonferrous metals, through our subsidiaries in the PRC.

BUSINESS

▼ Fluorite

In early 2006, we started a 300,000 metric tons fluorite ore project at Xiangzhen Mining, which was completed in November 2007. We extracted approximately 122,000 metric tons of fluorite ores in 2008.
 
30


In early 2006, we started to build a 200,000 metric tons/year fluorite ore processing plant at the mine site. The new processing plant was constructed and went into trial production in November 2007 (the new processing plant). We produced approximately 6,700 metric tons (“metric tons” hereinafter) of fluorite powder in 2008.

2009 is the second year of operation and production after the mining capacity of 300,000 metric tons per year and the processing capacity of 200,000 metric tons per year were built up. Besides, Xiangzhen Mining owns an old production line with annual fluorite powder production capacity of 60,000 metric tons (the old processing plant). During 2009, mining continued, but processing did not operate as planned. We are planning to start production at an appropriate time in April 2010.

In 2009, 47,900 metric tons of fluorite ore were extracted; 27,700 metric tons of fluorite lump were produced and 28,100 metric tons of fluorite lump were sold. 43,800 metric tons of fluorite ore were processed and produced 15,300 metric tons of fluorite powder and 12,000 metric tons of fluorite powder were sold.

We did not reach our projected targets for 2009 for the following reasons. First, we re-started production in May 2009 and had only produced for eight months throughout the year. Second, because downstream enterprises in steel and fluorine chemical industry were greatly affected by the financial crisis, market demand was weak. Third, the water supply around the mining area failed temporarily to meet processing requirements for large-scaled production.

In 2010, Xiangzhen Mining will focus on solving the following problems to achieve a breakthrough.
 
First, the existing water resource of the mining area is able to sustain the production of the old processing plant. We will try our best to explore new water resource for the production of the new processing plant as early as possible. Second, we will make an effort to develop new fluorite products for  metallurgical industry, and thus increase the sales percentage of the new fluorite products. Third, by our leading position in the industry we will strive to acquire appropriate fluorite projects.
 
Subject to purchase orders and weather conditions, we plan to begin mining in the tunnel and start processing in April 2010.We plan to extract fluorite ore of 130,000 metric tons, and process fluorite ore of 45,000 metric tons. In addition, we plan to sell fluorite lump of 55,000 metric tons and fluorite powder of 19,000 metric tons in 2010.

▼Zinc, Copper and Lead

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 testing at its first trial, and then went into production. In parallel with processing, Xingzhen did exploration in the area. In 2009, Xingzhen stopped operations due to a price decrease of non-ferrous metals.

In 2009, Xingzhen extracted ores of 14,300 metric tons, processed ores of 6,000 metric tons, and produced zinc ore powder of 178.3 metric tons and copper ore powder of 9.76 metric tons. Xingzhen sold zinc ore powder of 178.3 metric tons, copper ore powder of 9.76 metric tons and copper and zinc oxide ores of 3,000 metric tons.

Xingzhen did not reach projected targets in 2009 for the following reasons.  First, due to inclement weather, Xingzhen re-started production late. Xingzhen did not re-start production trial until June 2009. Shortly after that, due to the Xinjiang Uygur violence in July 2009, materials needed could not be delivered from outside Xinjiang to the mining area, and production was delayed. Second, although the results of trial processing reached requirements, the technological adjustment was not finished in time. Therefore, the actual processing did not fully meet production requirements and needed further adjustments and trials. Third, after technological readjustments, Xingzhen did not undergo normal production, due to large price decreases of non-ferrous metals because of  the low grade of ores available to Xingzhen.

In 2010, Xingzhen plans to focus on starting full production, and increase geophysical prospecting efforts at the same time. The main products will be zinc concentrates, copper concentrates, and zinc oxide ore (in the mining area there were high-grade zinc oxide ore, which can be sold with no processing). As weather conditions permit, we plan to start production in late April or early May 2010. With production trials in 2009, Xingzhen has basically finished technological readjustments and is able to re-start processing. In the mean time, we never stopped excavating and mining operations, and have been carrying out the operations to this day. We plan to produce extracted ores of 80,000 metric tons, process ores of 80,000 metric tons, and produce zinc ore powder of 4,410 metric tons and copper ore powder of 241.6 metric tons. We plan to sell all the above products. Besides, we plan to sell copper and zinc oxide ores of 10,000 metric tons.
 
31


Qianzhen Mining

Before the end of 2007, Qianzhen Mining processed ores supplied by local mining companies.  Since then, the supplier contracts expired.

No production was planned at Qianzhen Mining in 2009 due to the low grade of the ores supplied by Qingshan Metal and low copper price. Because the price of sulfur concentrates dropped greatly in 2009, Qianzhen Mining did not go into production of sulfur.

We do not plan to produce at Qianzhen Mining in 2010 due to the potential asset reorganization activity.

Qingshan Metal

Due to the decrease in the price of copper in 2008, Qingshan completed exploration only and did not begin mining.

No production was planned in 2009 at Qingshan due to the low copper price.

We do not plan to produce at Qingshan Metal in 2010 due to the potential asset reorganization activity.

Kichi Chaarat Copper and Gold Mine

In November 2007, We completed the acquisition of Tun-Lin Co. Ltd, a company that exists under the law of the Republic of Kyrgyzstan, which owns the 100% of the equity in Kichi Chaarat, which major asset is the subsoil use right for (i) mining for gold, copper and other metals within the Kuru-Tegerek licensed area; and (ii) exploration for gold, copper and other metals within the Kuru-Tegerek licensed area.

Due to the financial crisis, it was extremely difficult to raise funds. The mine was not ready for mining at the same time. After careful consideration and investigation, the Board of Directors of the Company decided to sell the entire equity in Tun-Lin Co. Ltd. and the Kichi Chaarat Copper and Gold Mine on September 21,2009.

On September 21, 2009, Xiangzhen Mining and Fortune Pegasus International Limited signed an equity transfer agreement. Xiangzhen Mining sold the entire equity in Tun-Lin Co. Ltd to Fortune Pegasus International Limited. On November 20, 2009, the sale of Tun-Lin was closed.

Exploration Activities

Keyinbulake Cu-Zn Mine

In the first half of 2010, Xingzhen will focus on geophysical research and the electric logging project, make drilling plans, carry out construction in strict accordance with results given by our prospecting team, and conduct necessary geophysical investigations in the mining area. Xingzhen Mining is striving to explore further reserves as a public company before the end of 2010, and achieving breakthroughs in further identifying mineral resources in 2011.

Acquiring More Mineral Resources

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 opportunity arises. 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.

BUSINESS STRATEGY

Prospect in 2010

With respect to China’s overall micro-economic situation, we believe that China’s economy will gradually turn for better in 2010. Non-ferrous metal and fluorite industry will face new development opportunities. we also believe that non-metallic mineral industry is an industry with a bright future.
 
32


RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2009 AS COMPARED TO YEAR ENDED DECEMBER 31, 2008

Selected information from the Consolidated Statements of Operations

 
For the years ended
December 31,
 
 
2009
 
2008
 
 
(in thousands)
 
(in thousands)
 
Net revenue
 
$
4,192
   
$
7,137
 
Gross profit
   
258
     
1,307
 
- Gross profit margin
   
6.15
%
   
18.31
%
General and administrative expenses
   
5,853
     
8,213
 
Other income(expenses)
   
11,068
     
(3,491
)
Net income (loss)
 
$
3,014
   
$
(12,149
)

REVENUES. Net revenues for the year ended December 31, 2009 were $4.19 million, representing a $2.95 million or 41% decrease as compared to $7.14 million of 2008. The decrease in net revenues is mainly attributable to Qianzhen Mining and Qingshan Metal, which had no operations in 2009. In addition, Xingzhen Mining did not achieve its targets in 2009.

Due to the low price of nonferrous metals and the low grade of the ore supplied by Qingshan Metal, Qianzhen Mining did not operate in fiscal year 2009. In 2008, Qianzhen Mining sold sulfur concentrates of 18,000 metric tons. Qingshan did not operate in 2009 due to its low grade of the ores produced.

Nonferrous metals segment revenue for 2009 amounted to approximately $0.3 million, representing a decrease of approximately $3.1million or 91% decrease compared to 2008.The revenue decrease is entirely attributable to Xingzhen Mining’s revenue decrease in 2009.

For fluorite production, Xiangzhen revenue increased by 5.4% from $3.7 million for 2008 to $3.9 million for 2009, For maintaining the revenue level, the Company increased the production of our fluorite powder and lump when the price of the fluorite powder and lump dropped in 2009.

GROSS PROFIT AND GROSS PROFIT MARGIN. For the year ended December 31, 2009, gross profit was $0.26 million, representing a decrease of approximately 80% as compared to $1.31 million of 2008. Gross profit margin decreased from approximately 18% in 2008 to approximately 6% in 2009. The gross profit margin decrease was mainly due to the market price of the fluorite powder and fluorite lump dropped in 2009.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses decreased by approximately $2.3 million to $5.9 million in 2009 from $8.2 million in 2008. The significant decrease in general and administrative expenses was primarily due to Xiangzhen Mining’s cutting down of the general and administrative expenses on a large scale from $4.0 million in 2008 to $ 1.5million in 2009. In 2009, new mineral processing plant prepare cost was $0.01 million, a decrease of approximately $1.91 million compared to $1.92 million in 2008, which was primary factor of the cut down general and administrative expenses.

OTHER INCOME
Other income increased by approximately $14.6 million to $11.1 million in 2009 from a net expense of $3.5 million in 2008 due to the $14.0 million income from the gain of convertible debt extinguishment.

NET INCOME. Net income for the year ended December 31, 2009 was $3.0 million, an increase of $15.1 million compared to net loss of $12.1 million for 2008. Basic earnings per share were $0.13 or $0.13 fully diluted for the year ended December 31, 2009.
 
33


SEGMENT PERFORMANCE ANALYSIS

 
Segment revenue
For year Ended December 31,
 
Segment profit (loss)
For year Ended December 31,
 
(amounts in thousand)
2009
 
2008
 
2009
 
2008
 
Fluorite
  $ 3,919     $ 3,704     $ (2,293 )   $ (3,898 )
                                 
Nonferrous metals
  $ 273     $ 3,433     $ (1,832 )   $ (3,058 )

Fluorite

Fluorite segment revenue increased by 5.4% from $3.7 million for 2008 to $3.9 million for 2009. The increase was primarily due to the increases in sales volume in both fluorite powder and lumps. We did not operate at full capacity of our plant, Xiangzhen Mining, due to low price of fluorite powder and lumps which both decreased compared to 2008.

Xiangzhen Mining sold a total of 11,972 metric tons of fluorite powder, representing an increase of 77% compared to 2008. During this period, the average sales price for fluorite powder decreased by 55% to $113 per metric tons compared to $168 per metric tons in 2008. The sales of fluorite lumps increased by 15% from 24,135 metric tons in 2008 to 27,663 metric tons in 2009. The Company did not produce more fluorite powder and fluorite lumps due to the low market price.

Revenue contributed from our fluorite segment accounted for 94% of the Company’s total revenue for the year ended December 31, 2009 as compared to 52% in 2008.

Our fluorite segment reported a segment loss of $2.3 million for the year ended December 31, 2009 compared to a segment profit of $3.9 million in 2008.

Nonferrous metals

Nonferrous metals segment revenue for 2009 amounted to $0.27 million, representing a decrease of approximate $3.4 million or 91% compared to 2008. In addition, the nonferrous metals segment has reported a significant change in segment loss to $1.8 million in 2009 from segment loss of $3 million in 2008. The performance of the nonferrous metals segment was materially impacted by (i) No production occurred at Qianzhen Mining in 2009 due to the low grade of the ores supplied by Qingshan Metal and low copper price. Also, no production occurred in 2009 at Qingshan due to the low copper price and (ii) Xingzhen did not achieve projected targets in 2009 for the aforementioned reasons. () we sold a part of inventory due to the price increase compared to 2008.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $0.3 million as of December 31, 2009, an increase of $0.1 million as compared to the balance at December 31, 2008 of $0.2 million. The increase in cash position was mainly due to the decrease of capital expenditures for mine developments, construction, and purchase of processing plants and mining equipments at Xiangzhen Mining and Xingzhen Mining.

Net cash used in operating activities for the year ended December 31, 2009 was $1.2 million, as compared to $2.2 million used for the year ended December 31, 2008. The increase in operating cash flows was mainly due to the $3 million operating net income in 2009 compared to net loss $12.1 million in 2008.

Net cash provided by investing activities of $7.7 million for the year ended December 31, 2009, as compared to $1.9 million used for the year end December 31, 2008 , The increase of the cash position in investing activities cash flows was mainly due to the disposal of discontinued operations.

Net cash used in financing activities for the year ended December 31, 2009 was $6.3 million, which was mainly due to repurchase of the convertible notes. For the same period in 2008, net cash provided by financing activities were $1.0 million, which was mainly due to proceeds from short-term borrowings from banks and relative parties.
 
34


The Company has incurred net operating losses of approximately $5.7 million and $7.1 million during the years ended December 31, 2009 and 2008, respectively. The Company had cash used in operation of $1.1 million and $2.2 million for the years ended December 31, 2009 and 2008, respectively. The Company’s ability to continue as a going concern is dependent upon its ability to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due, to fund possible future acquisitions, and to generate profitable operations in the future. Management plans to continue to provide for its capital requirements by issuing additional equity securities and debt in addition to executing their business plan. The outcome of these matters cannot be predicted at this time and there are no assurances that if achieved, the Company will have sufficient funds to execute its business plan or generate positive operating results. These financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.


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, 2009 and 2008 Natural Resource Compensation Charges of $78,383 and $108,180, respectively, were charged to operations and included in cost of sales.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

Convertible Notes

On December 27, 2006, the Company entered into a Notes Purchase Agreement with Citadel Equity Fund Ltd. (“Citadel”), under the terms of which Citadel purchased a total of US$28,000,000 in convertible senior notes. The Notes have a maturity of December 27, 2012.

Redemption of Convertible Notes

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 ( “Notes”), originally issued to Citadel. Mountview is the current legal and beneficial owner of the entire amount of the Notes.

The consideration payable in the transaction consists of US $8,000,000 in cash and 5 million shares of the Company’s common stock. The gain on convertible note redemption is $14.0 million, or approximate 0.56 per share. Mountview were entitled to any accrued and unpaid interest on the Notes. The closing of this transaction occurred on December 23, 2009.

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.
 
35


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 the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of 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 according to the term of license granted to the Company. 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 and other costs incurred prospectively to develop the property 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. At the Company’s surface mines, these costs include costs to further delineate the mineralized body and remove overburden to initially expose the mineralized body. At the Company’s underground mines, these costs include the cost of building access ways, shaft sinking and access, lateral development, drift development, ramps and infrastructure development.

Major development costs incurred after the commencement of production are amortized using the UOP method based on estimated recoverable volume in mineralized material. 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.

The Company’s depreciation and amortization policies on fixed assets are summarized as follows:
 
   
Useful Life
   
(In years)
Land use rights
 
25
Buildings
 
25
Machinery
 
12
Mining assets
 
License term
Motor vehicle
 
6
Equipment
 
5
Extraction rights
 
License term
Exploration rights
 
License term
 
36

 
CONCENTRATION OF CUSTOMERS

We had five main customers who contributed approximately $3,441,000 or 81% of the Company’s consolidated net revenue for the year ended December 31, 2009. For the same period of 2008, the Company had five main customers who contributed approximately $5,330,000 or 76% of the Company’s consolidated net revenue.

The following table shows the Company’s major customers (10% or more of consolidated net revenue) for the year ended December 31, 2009:

   
Revenue
   
Percentage
 
Customer
 
(In thousands)
   
(%)
 
Handan Hongzhi Ltd
  $ 892       21 %
Ningxia Jinhe Ltd
    815       19 %
Laiwu Steel Ltd
    638       15 %
Inner Mongolia Huadesanli Trading Ltd
    621       15 %
Zibo Bofeng Ltd
    475       11 %
    $ 3,441       81 %

The following table shows the Company’s major customers (10% or more of consolidated net revenue) for the year ended December 31, 2008:

   
Revenue
   
Percentage
 
Customer
 
(In thousands)
   
(%)
 
RuiPeng Mining Ltd
  $ 2,185       31
Laiwu Steel Ltd
    925       13 %
Inner Mongolia Huadesanli Trading Ltd
    781       11 %
Handan Hongzhi Ltd
    754       11 %
Ningxia Jinhe Chemistry Ltd
 
  685
      10
    $ 5,330       76 %
 
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not required.

ITEM 8.
FINANCIAL STATEMENTS.

Please see the “Consolidated Financial Statements of the Company”.

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.
 
37


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, 2009.

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, 2009.  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, 2009, 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, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.
OTHER INFORMATION.

None
 
38


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 31, 2010. None of our directors or executive officers holds directorships in other public companies as of March 31, 2010 except Gene Michael Bennett who is also an independent director for Kunming Shenghuo Pharmaceutical (NYSE Amex: KUN) and Konman Wong who is also an independent director for Group Sense International Ltd. a company listed in Hong Kong stock exchange (stock quote 601). The directors listed below will serve until the Company’s next annual meeting of the stockholders:

Name
 
Age
 
Position
Xiao-Jing Yu
 
53
 
Director, CEO and Chairman of the Board
Helin Cui
 
54
 
Director, President and Chief Operating Officer
Xueming Xu
 
49
 
Director
Jiusheng Zhang
 
46
 
Chief Financial Officer
Youming Yang
 
55
 
Director, Chairman of Compensation Committee
Jian Zhang
 
68
 
Director, Chairman of Corporate Governance and Nominating Committee
Konman Wong
 
46
 
Director
Ligang Wang
 
49
 
Vice President and President of Qianzhen Mining
Gene Michael Bennett
 
62
 
Director and Chairman of Audit Committee

Ms. Xiaojing Yu has served as Director, Chief Executive Officer and Chairman of the Board of Directors of the Company since September 15, 2006. She has over 20 years’ experience in the mining industry. 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, she was the general manager of Dalian Zhikun Metal Materials Co. Ltd and finance manager of Gansu Baiyin Nonferrous Industrial Corporation. Ms. Yu also serves as the Executive Vice President of China Fluorite Industry Association. She attended an advanced Management Program run by Tsing Hua University.

Mr. Helin Cui has served as Director, President and Chief Operating Officer. He has more than 20 years’ experience in the mining industry. 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 serves in that capacity since May 2002. Prior to that, Mr. Cui worked at Gansu Province’s No. 3 Geological Team as a technician, engineer and team leader and deputy general manager at Baiyin Trading Company in Gansu Province. He graduated from the Xi'an Geology College.

Mr. Xueming Xu has served as Director. He has more than 20 years’ experience in the mining industry. 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, Mr. Xu served as technician, vice-superintendent and superintendent at Inner Mongolia’s Huiyaokou Iron Ore Plant and 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. Youming Yang has served as Director. He has 25 years’ experience in nonferrous geological prospecting field and was responsible for the prospecting of a number of large sized nonferrous mining projects in China. He has served as Chief of the Nonferrous Geological Prospecting Bureau of Xinjiang Uygur Autonomous Region since May 2000. Prior to that, Mr. Yang worked as a Chief Engineer at the Nonferrous Geological Prospecting Bureau of Xinjiang Uygur Autonomous Region from October 1994 to April 2000. Mr. Yang studied geology and graduated from Central South China Mining and Metallurgy College.

Mr. Jian Zhang has served as Director. He has over 30 years’ experience in nonferrous mining, project construction and management and is currently an external director of China Construction Materials Company Ltd. since August 2005. Prior to that, Mr. Zhang was General Manager of China Nonferrous Mining Construction Group from September 2003 to August 2005. He served as General Manager 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. Konman Wong has served as Director since July 2009. He is currently Managing Director of Action Precision Ltd., a metal casting manufacturer for the telecommunication industry. Mr. Wong is a member of CPA in both U.S. and Hong Kong and has extensive experience in direct investment, fund raising, financial management, auditing and forming strategic alliances. From April 2000 to July 2009, he served as the managing director of Fortune Capital Group Ltd. Fortune Capital Group provides venture capital and investment fund services to enterprises.  Mr. Wong graduated in December 1989 from the University of Hawaii at Manoa in the United States with a bachelor’s degree in Accounting. Currently, he also serves as Independent and non-executive director of Group Sense International Ltd. a company listed in Hong Kong stock exchange (stock quote 601).
 
39


Mr. Jiusheng Zhang has served as the Chief Financial Officer of the Company since March 2009. Mr. Zhang is a senior economist and has over 15-year experience in financing and investment. From August 2004 to December 2008, he served as Chief Financial Officer and Vice General Manager of Zhong Xing Company. From January 2001 to August 2004, he served as Chief Financial Officer of Tianjin Olympic Garden Investment Limited of China Sport Industry Group Co. LTD. Mr. Zhang has a Master of Arts in economics from the Xi’an Finance and Economics College in China.

Mr. Gene Michael Bennett has served as Director and Chairman of the Audit Committee. He has over 25 years’ experience as CFO, Professor and Consultant. His abundant working experience in China has assisted Chinese firms to develop "Good Corporate Governance" and transparent infrastructures. He is a CPA (inactive), and has experience working for one of the top auditors in the world, Grant Thornton. He graduated from Michigan State University. He was Independent Director of one US-listed Chinese company: Kunming ShengHuo Pharmaceutical (AMEX: KUN). Currently, he also holds positions for other two US-listed Chinese companies: China AgriTech Group, Inc (CAGC, Amex) (Audit Chair - Audit Committee BOD) and China Pharma Holding, Inc. (CPHI, OTC-BB) (Audit Chair-Audit Committee BOD).

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 participate 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 the 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 25 years’ experience in the relevant industry, such as Messrs. Helin Cui, Xueming Xu, Jian Zhang, Youming Yang, who all have over 20 years’ experience in the management of nonferrous mining. They are qualified for being directors of the Company which is mainly conducting the business of mining operation. As an Amex listed company, we also hire some financial experts as the director of the Company, who are Messrs. Gene Michael Bennett and Konman Wong.

Ms. Xiaojing Yu has over 20 years’ experience in the mining and financing industry. As the founder of the Company, she is a major shareholder (54.58%) 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 CEO of the Company.

We do not have a Lead independent Director. We consider the diversity in identifying nominees for directors in two aspects: sufficient experiences in management of mining operations and financing.

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
 
40

 
(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.

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., No. 166 Fushi Road, Zeyang Tower, Suite 1210, 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 seven (7) members, of which four (4) are independent directors. The independent directors are Gene Michael Bennett, Jian Zhang, Konman Wong and Youming Yang. 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. Gene Michael Bennett, 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 Gene Michael Bennett, Konman Wong and Jian Zhang, with Gene Michael Bennett 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 has held 3 meetings in 2009 and the attendance rates for all committee members are 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 Konman Wong, Jian Zhang and Youming Yang, with Youming Yang as the chairman, all of whom are “independent” directors.

Compensation Committee has not held any meeting in 2009.

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, Konman Wong, and Youming Yang with Jian Zhang as the chairman.
 
41


Nominating and Corporate Governance Committee has not held any meeting in 2009.

In 2009, the board of directors held five meetings and attendance rates for all board members are 100%.

ITEM 11.
EXECUTIVE COMPENSATION

During 2009, no executive officer’s total annual salary and bonus exceeded $100,000.

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
 
2009
  $ 70,287     $ 0     $ 0       0     $ 0     $ 0     $ 0     $ 70,287  
   
2008
  $ 179,985     $ 0     $ 0       98,307     $ 0     $ 0     $ 0     $ 278,292  
Xueming Xu,
President and COO*
 
2009
  $ 39,550     $ 0     $ 0       0     $ 0     $ 0     $ 0     $ 39,550  
   
2008
  $ 82,494     $ 0     $ 0       48,865     $ 0     $ 0     $ 0     $ 131,359  
Helin Cui, President and COO*
 
2009
  $ 29,587     $ 0     $ 0       0     $ 0     $ 0     $ 0     $ 29,587  
   
2008
  $ 26,994     $ 0     $ 0       3,323     $ 0     $ 0     $ 0     $ 30,317  
Hu Ye, CFO**
 
2009
  $ 9,747     $ 0     $ 0       0     $ 0     $ 0     $ 0     $ 9,747  
   
2008
  $ 42,029     $ 0     $ 0       0     $ 0     $ 0     $ 0     $ 42,029  
Jiusheng Zhang, CFO**
 
2009
  $ 22,980     $ 0     $ 0       0     $ 0     $ 0     $ 0     $ 22,980  
   
2008
  $ 0     $ 0     $ 0       76,000     $ 0     $ 0     $ 0     $ 76,000  
Ligang Wang, Vice President
 
2009
  $ 10,538     $ 0     $ 0       0     $ 0     $ 0     $ 0     $ 10,538  
   
2008
  $ 23,764     $ 0     $ 0       3,000     $ 0     $ 0     $ 0     $ 26,764  


* Helin Cui was appointed as Chief Operating Officer and President in addition to being a director on December 3, 2009. On this date, Xueming Xu resigned from the position of Chief Operating Officer and President and he remains a director of the Company.

** Hu Ye was CFO from May 2008 to February 2009. Jiusheng Zhang was appointed CFO in March 2009 and his stock awarded in 2008 was issued for his service of financial consultancy.

*** Common shares awarded under 2009 Omnibus Long-term Incentive Plan approved on October 29, 2009. The number of shares of stock award for each officer or director 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. The stock awards are included in the total compensation in 2008. (The salary of 2008 amounting to $153,495 has not been paid, including Xiaojing Yu’s salary amounting to $98,307, Xueming Xu’s salary amounting to $48,865, Helin Cui’s salary amounting to $3,323 and Ligang Wang’s salary amounting to $3,000.)
 
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 award for 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.
 
42

 
Director Compensation

Compensation for all directors in 2008-2009 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)
 
Yonming Yang*
 
2009
  $ 10,538                                   $ 10,538  
   
2008
  $ 13,391       4,000                             $ 17,391  
Jian Zhang*
 
2009
  $ 10,538                                   $ 10,538  
   
2008
  $ 13,391       4,000                             $ 17,391  
Konman Wong*
 
2009
  $ 5,269                                   $ 5,269  
Gene Michael Bennett*
 
2009
  $ 13,200                                   $ 13,200  
   
2008
  $ 19,800       4,000                             $ 23,800  


* Independent director. Mr. Konman Wong was appointed the director of the Company in July 2009.

** Common shares awarded under 2009 Omnibus Long-term Incentive Plan approved on October 29, 2009. The number of shares of stock award for each director 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. The stock awards are included in the total compensation in 2008.

We currently pay an independent director the compensation of $10,538 in 2009, except the Chairman of Audit Committee, Gene Michael Bennett whose 2009 compensation was $13,200.

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 31, 2010 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 31, 2010, 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, CEO
    15,267,000       54.58 %
Xueming Xu, COO & President
    1,990,000       7.11 %
Helin Cui, COO & President
    208,800       *  
Jiusheng Zhang, CFO
    200,000       *  
Jian Zhang, Independent Director
    10,000       *  
Youming Yang, Independent Director
    10,000       *  
Gene Michael Bennett, Independent Director
    10,000       *  
Konman Wong, Indepdent Director
    0       *  
Ligang Wang, Vice President
    107,900       *  
American Eastern Securities, Inc. (4)
    2,060,000       7.36 %
Mountview Path Ltd.
    5,000,000       17.87 %
Directors and executive officers as a group (9 persons)
    17,803,700 **     63.64 %
 

*
Less than 1%

**
Including the common shares awarded under 2009 Omnibus Long-term Incentive Plan approved on October 29, 2009.

(1)
As of March 31, 2010, there were 27,974,514 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.
 
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(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 31, 2010, 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.

(4)
Held by American Eastern Group, Inc., American Eastern Securities, Inc., EIC Investments, LLC, and Trang Chong Hung individually. The shares so held are directly or indirectly owned by Trang Chong Hung and his family members.
 
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

On June 25, 2007, the Company entered into a share transfer agreement with Xinjiang Tianxiang New Technology Development Co. Ltd (“Tianxiang”), the minority shareholder of Xiangzhen Mining to acquire an additional 10% ownership interest in Xingzhen Mining for a cash consideration of $479,150. On August 10, 2007, the share transfer agreement was approved by the China local government authorities. As a result, the Company’s shareholding in Xingzhen Mining has increased from 80% to 90%.

Tianxiang provided exploration services to Xingzhen Mining for service fees of $52,073 in 2008 and did not provide any service to Xingzhen Mining in 2009.

ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES

Sherb & Co. LLP (“Sherb”) has audited our financial statements for the 2009 and 2008 fiscal years. Grobstein, Horwath & Company, LLP (“Horwath”), has reviewed our financial statements for the 2008 fiscal year. All of the services described below were approved by our board prior to performance. Our board has determined that the payments made to its 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, 2009 and 2008 both were $160,000 and $130,000, respectively. The aggregate fees billed by Horwath for professional services rendered for the review services of the Company’s interim quarterly financial statements for the fiscal year ended December 31, 2008 were $66,000 respectively.

Audit-Related Fees. There were no fees for assurance and related services by Sherb and Horwath for the fiscal year ended December 31, 2009 and 2008.

Tax Fees. We engage E-Fang Accountancy Corp (“E-Fang”) to provide service for the income tax returns in the U.S. The tax service fee for the fiscal year ended December 31, 2009 is estimated to be $5,000, and the tax service fee for the fiscal year ended December 31, 2008 was $5,742. There were no fees for tax compliance, tax advice or tax planning services by Sherb and Horwath for the fiscal year ended December 31, 2009 and 2008.

All Other Fees. There were no other fees for either audit-related or non-audit services billed by Sherb, E-Fang and Horwath for the fiscal years ended December 31, 2009 and 2008.
 
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ITEM 15.
EXHIBITS

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 8-k filed with SEC on November 05, 2007.)
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)

45

 
Exhibit
Number
 
Description of Exhibit 
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 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 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 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 Form 8-K filed on September 25, 2009.
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
* 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.
 

* Filed herewith.
 
46


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 31, 2010
/s/ Xiaojing Yu
 
   
Xiaojing Yu
 
   
Director, Chief Executive Officer, and Chairman of the Board
 
   
 
 
 
Dated: March 31, 2010
 
/s/ Jiusheng Zhang
 
   
Jiusheng Zhang
 
   
Chief Financial Officer
(Principal Financial and Accounting 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 31, 2010
Xiaojing Yu
 
(Principal Executive Officer)
   
         
/s/ Helin Cui
 
Director, Chief Operating Officer
 
March 31, 2010
Helin Cui
       
         
/s/ Xueming Xu
 
Director
 
March 31, 2010
Xueming Xu
       
         
/s/ Gene Michael Bennett
 
Director
 
March 31, 2010
Gene Michael Bennett
       
         
/s/ Jian Zhang
 
Director
 
March 31, 2010
Jian Zhang
       
         
/s/ Konman Wong
 
Director
 
March 31, 2010
Konman Wong
       
         
/s/ Youming Yang
 
Director
 
March 31, 2010
Youming Yang
       

47


China Shen Zhou Mining & Resources, Inc. and Subsidiaries
 
Index to Consolidated Financial Statements

   
Page
 
Report of Independent Registered Public Accounting Firm
    49  
         
Consolidated Balance Sheets
    50  
         
Consolidated Statements of Operations
    51  
         
Consolidated Statements of Changes in Stockholders’ Equity
    52  
         
Consolidated Statements of Cash Flows
    53  
         
Notes to Consolidated Financial Statements
    55-83  

48

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, 2009 and 2008 and the related consolidated statements of operations and comprehensive income, stockholders' equity and cash flows for the years ended December 31, 2009 and 2008. 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. The Company is not required to have, nor were we engaged to perform, audits of its 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, 2009 and the results of their operations and their cash flows for the years ended December 31, 2009 and 2008, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred operating losses and negative cash flows as more fully described in Note 2. These issues raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 

/s/Sherb & Co., LLP
Certified Public Accountants
New York, New York
March 31, 2010

49

 
CHINA SHEN ZHOU MINING & RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)

     
December 31,
 
     
2009
   
2008
 
ASSETS
 
 
   
   
   
 
               
Current assets:
 
 
   
   
   
 
Cash and cash equivalents
    $ 333     $ 200  
Accounts receivable, net
 
    302       561  
Other deposits and prepayments, net
      855       1,111  
Inventories
 
    3,721       2,958  
Restricted assets
      740       -  
Assets - Discontinued operations
 
    -       10,915  
Total current assets
      5,951       15,745  
 
 
               
Prepayment for office rent
      280       505  
Available for sale investment
 
    146       146  
Property, machinery and mining assets, net
      34,902       36,862  
Deferred debt issuance costs
 
    -       1,755  
Total assets
    $ 41,279     $ 55,013  
                   
LIABILITIES AND STOCKHOLDERS’ EQUITY
                 
 
 
               
Current liabilities:
                 
Accounts payable and accrued liabilities
 
  $ 4,694     $ 3,470  
Fair value of detachable warrants liability
      -       33  
Short term bank loans
 
    3,603       1,756  
Other payables and accruals
      6,667       4,639  
Taxes payable
 
    333       415  
Due to related parties
      -       2,490  
Liabilities - Discontinued operations
 
    -       328  
Total current liabilities
      15,297       13,131  
 
 
               
Due to related parties
      2,297       -  
Convertible notes payable
 
    -       24,251  
Total liabilities
      17,594       37,382  
                   
STOCKHOLDERS’ EQUITY:
 
               
Common Stock ($0.001 par value; 50,000,000 shares authorized;
                 
27,214,514 shares and 22,214,514 shares issued and outstanding
 
               
as of December 31, 2009 and 2008, respectively
    $ 27     $ 22  
Additional paid-in capital
 
    28,518       25,251  
PRC statutory reserves
      1,672       1,672  
Accumulated other comprehensive income
 
    3,839       4,020  
Accumulated deficit
      (10,342 )     (13,356 )
Stockholders' equity - China Shen Zhou Mining & Resources, Inc. and Subsidiaries
 
    23,714       17,609  
Noncontrolling interest
      (29 )     22  
Total stockholders’ equity
 
    23,685       17,631  
Total liabilities and stockholders’ equity
    $ 41,279     $ 55,013  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
50

 
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,
 
     
2009
   
2008
 
Net revenue
 
  $ 4,192     $ 7,137  
Cost of sales
      3,934       5,830  
Gross profit
 
    258       1,307  
                   
Operating expenses:
 
               
     Selling and distribution expenses
      94       146  
     General and administrative expenses
 
    5,853       8,213  
          Total operating expenses
      5,947       8,359  
 
 
               
Net income (loss) from operations
      (5,689 )     (7,052 )
 
 
               
Other income (expense):
                 
Interest expense
 
    (2,989 )     (2,744 )
Gain on convertible debt extinguishment
      13,959       -  
Impairment of goodwill
 
    -       (1,127 )
Other, net
      98       380  
          Total other income (loss)
 
    11,068       (3,491 )
                   
Income (loss) from continuing operations before income taxes
 
    5,379       (10,543 )
                   
Provision of income taxes
 
    (200 )     (544 )
                   
Income (loss) from continuing operations
 
    5,179       (11,087 )
                   
Discontinued operations (Note 3):
 
               
     Loss from operations of discontinued component
      (740 )     (1,192 )
     Loss on disposal of discontinued subsidiary
 
    (1,476 )     -  
         Loss from discontinued operations
      (2,216 )     (1,192 )
 
 
               
Net income (loss)
      2,963       (12,279 )
 
Less: Noncontrolling interests attributable to the noncontrolling interests
 
    51       130  
Net income (loss) - attributable to China Shen Zhou Mining & Resources, Inc. and Subsidiaries
      3,014       (12,149 )
 
 
               
Other comprehensive  (loss) income:
                 
Foreign currency translation adjustments
 
    (181 )     1,908  
Comprehensive income (loss)
    $ 2,833     $ (10,241 )
 
 
               
Net income (loss) per common share – basic and diluted
                 
     From continuing operations
 
  $ 0.22     $ (0.50 )
     From discontinued operations
      (0.09 )     (0.05 )
 
 
  $ 0.13     $ (0.55 )
                   
Weighted average common shares outstanding
 
               
      - Basic and Diluted
      24,743       22,215  

 The accompanying notes are an integral part of these consolidated financial statements.
 
51

 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(Amounts in thousands)
 
     
Common Stock
Number of
   
Additional
Paid-in
   
PRC
Statutory
   
Accumulated
   
Accumulated Other Comprehensive
   
Noncontrolling
   
Total Stockholders'
 
     
Shares
   
Amount
   
Capital
   
Reserves
   
Deficit
   
Income
   
Interest
   
Equity
 
Balance at January 1, 2008
 
    22,215     $ 22     $ 25,251     $ 1,672     $ (1,207 )   $ 2,112     $ 144     $ 27,994  
    Net income (loss) for the years ended December 31, 2008
      -       -       -       -       (12,149 )     -       (130 )     (12,279 )
    Foreign currency translation adjustment
 
    -       -       -       -       -       1,908       8       1,916  
                                                                   
Balance at December 31, 2008
 
    22,215       22       25,251       1,672       (13,356 )     4,020       22       17,631  
                                                                   
  Repayment of convertible debt
      -       -       (4,878 )     -       -       -       -       (4,878 )
  Issuance of shares for repurchase the convertible notes
 
    5,000       5       8,145       -       -       -       -       8,150  
    Net income (loss) for the year ended December 31, 2009
      -       -       -       -       3,014       -       (51 )     2,963  
    Foreign currency translation adjustment
 
    -       -       -       -       -       (181 )     -       (181 )
                                                                   
Balance at December 31, 2009
 
    27,215     $ 27     $ 28,518     $ 1,672     $ (10,342 )   $ 3,839     $ (29 )   $ 23,685  

The accompanying notes are an integral part of these consolidated financial statements.

52


CHINA SHEN ZHOU MINING & RESOURCES, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands, except share data)
     
For the years Ended
 
     
December 31
 
     
2009
   
2008
 
Cash flows from operating activities:
 
           
Net income (loss)
    $ 3,014     $ (12,149 )
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
               
Loss from operations of discontinued component
      740       1,192  
Write off deferred tax abilities of discontinued operations 
 
    -       (1,201 )
Loss on sale of discontinued operations, net of income taxes
      1,476       -  
Gain on sale of repurchase convertible notes
 
    (13,959 )     -  
Provision for doubtful accounts
      -       (2 )
Provision for deferred tax asset
 
    -       685  
Impairment provision for inventories
      34       -  
Impairment of goodwill
 
    -       1,127  
Depreciation and amortization
      2,514       4,343  
Write off of deferred tax abilities 
 
    -       -  
Loss from investments
      -       -  
Deferred income tax benefits
 
    -       (178 )
Fair value adjustment of warrants
      7       (1,067 )
Loss on disposal of property, machinery and mining assets
 
    15       -  
Accrual of coupon interests and accreted principal
      1,169       1,489  
Amortization of deferred financing costs
 
    1,207       1,576  
Amortization of debt issuance costs
      318       415  
Noncontrolling interests
 
    (51 )     (122 )
Changes in operating assets and liabilities:
                 
Increase (decrease) in -
 
               
Accounts receivable
      259       1,922  
Other deposits and prepayments
 
    256       40  
Prepayment for office rent
      225       (505 )
Inventories
 
    (797 )     (1,319 )
Due from related companies
      -       (625 )
Restricted assets
 
    (740 )     -  
Increase (decrease) in -
                 
Accounts payable and accrued liabilities
 
    1,224       989  
Other payables and accruals
      2,028       1,200  
Taxes payable
 
    (82 )     167  
Net cash used in operating activities from continuing operations
      (1,143 )     (2,023 )
Net cash used in operating activities from discontinued operations
 
    (33 )     (213 )
Net cash used in operating activities
      (1,176 )     (2,236 )

53

 
CHINA SHEN ZHOU MINING & RESOURCES, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Amounts in thousands, except share data)

     
For the year Ended
December 31
 
     
2009
   
2008
 
Cash flows from investing activities:
 
 
 
   
 
 
Purchases of property, machinery and mining assets
    $ (2,520 )   $ (1,894 )
Sales of property, machinery and mining assets
 
    1,987       -  
Net cash used in investing activities from continuing operations
      (533 )     (1,894 )
Net cash provided by disposal of discontinued operations
 
    8,200       -  
Net cash provided by (used in) investing activities
      7,667       (1,894 )
Cash flows from financing activities:
 
               
Repayment at the convertible notes
      (8,000 )     -  
Due to related parties
 
    (193 )     604  
Repayment at short-term bank loans
      (2,518 )        
Proceeds from short-term bank loans
      4,362       442  
Net cash (used in) provided by financing activities
      (6,349 )     1,046  
Foreign currency translation adjustment
 
    (9 )     335  
                   
Net increase (decrease) in cash and cash equivalents
 
    133       (2,749 )
                   
Cash and cash equivalents at the beginning of the year
 
    200       2,949  
Cash and cash equivalents at the end of the year
    $ 333     $ 200  
 
 
               
Non-cash investing and financing activities
                 
Shares issued to repurchase debt (5 million shares)
 
  $ 8,150,000     $ -  
                   
Supplemental disclosures of cash flow information:
 
               
Cash paid for interest expenses
    $ 241     $ 254  
Cash paid for income tax
    $ -     $ -  

The accompanying notes are an integral part of these consolidated financial statements.
 
54

CHINA SHEN ZHOU MINING & RESOURCES, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - DESCRIPTION OF BUSINESSS 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, 2009, 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
%
 
Investments holdings
 
 
 
 
 
 
 
 
 
   
 
Inner Mongolia Xiangzhen Mining Industry Group Co. Ltd. (“Xiangzhen Mining”)
 
 
The PRC
July 3,2002
 
 
RMB  
 88,860,699
 
 
 
100
%
 
Acquisition, exploration and extraction, and development of natural resource properties
 
 
 
 
 
 
 
 
 
 
 
 
Inner Mongolia Wulatehouqi Qianzhen Ore Processing Co.,  Ltd. (“Qianzhen Mining”)
 
 
The PRC
September 22, 2002
 
 
RMB
37,221,250
 
 
 
100
%
 
Sales and processing of nonferrous metals and chemical products
 
 
 
 
 
 
 
 
 
   
 
Wulatehouqi Qingshan Non-Ferrous Metal Developing Company Ltd. (“Qingshan Metal”)
 
 
 
The PRC
April 23, 1995
(Acquired on April 12, 2006)
 
 
 
RMB
 
4,100,000
 
 
 
 
60
%
 
Exploration, extraction and processing of copper, zinc, lead etc
 
 
 
 
 
 
 
 
 
   
 
Xinjiang Buerjin County Xingzhen Mining Company (“Xingzhen Mining”)
 
 
 
The PRC
April 10, 2006
(Acquired on April 28, 2006)
 
 
 
RMB
 
1,000,000
 
 
 
 
90
%
 
Exploration of solid metals, processing and sales of mining products.

NOTE 2 - RECAPITALIZATION, REORGANIZATION AND GOING CONCERN

On July 14, 2006, American Federal Mining Group, Inc. (“AFMG”, the then holding company of China Shen Zhou’s PRC subsidiaries) completed the terms of 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 to management of AFMG and 1,300,000 shares to the financial advisors of AFMG, in exchange for a 100% equity interest in AFMG, making AFMG a wholly-owned subsidiary of EPTI.
 
55


The above stock exchange transaction resulted in those 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.

The accompanying consolidated financial statements have been prepared on a going concern basis. The Company has incurred net operating losses of approximately $5.7 million and $7 million during the years ended December 31, 2009 and 2008, respectively. The Company had cash used in operations of approximately $1.2 million and $2.2 million for the years ended December 31, 2009 and 2008, respectively. The Company’s ability to continue as a going concern is dependent upon its ability to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due, to fund possible future acquisitions, and to generate profitable operations in the future. Management plans to continue to provide for its capital requirements by issuing additional equity securities and debt in addition to executing their business plan. The outcome of these matters cannot be predicted at this time and there are no assurances that if achieved, the Company will have sufficient funds to execute its business plan or generate positive operating results.  These consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.

NOTE 3 - DISCONTINUED OPERATIONS

On November 20, 2009, the Company completed the sale of all its ownership interest in Tun-Lin Limited Liability Company (“Tun-Lin”), a subsidiary of the Company within the nonferrous metals segment. The Company received cash proceeds of $8.2 million.

The Company has recorded a loss from operations of discontinued component, net of income taxes, of approximately $740,000, and a loss on disposal of discontinued subsidiary, net of income taxes, of approximately $1,476,000. 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 Tun-Lin’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 and liabilities of Tun-Lin in the Company’s consolidated balance sheet as of December 31, 2008 have been reclassified. The cash flows of discontinued operations also have been reclassified.
 
56

 
The following table presents the revenue, net loss from discontinued operations and on disposal of Tun-Lin for the periods presented:
 
   
Years Ended December 31,
   
2009
 
  2008
   
(In thousands)
 
(In thousands)
Revenue
  $
-
  $                         -
           
Net loss from discontinued operations,
  $
(740)
  $             (1,192)
           
Net gain (loss) on disposal of subsidiary
  
$
(1,476)
  $ Not Applicable 

NOTE 4 - 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 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.

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 (Qingshan Metal and Xingzhen Mining).  All inter-company balances and transactions have been eliminated.

Minority interest in the net assets and earnings or losses of Xingzhen Mining have been absorbed by the Company as minority interest holders in the subsidiary have no basis in their investment in the subsidiary.
 
57


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, its current credit-worthiness and current economic trends.

Inventories
Inventories are stated at the lower of cost, determined on a weighted average basis, or 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. The management also regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine if valuation allowance is required.
   
Available-for-sale securities
 
The Company accounts for its investments in auction rate securities in accordance with FASB ASC 320. Specifically, when the underlying security of an auction rate security has a stated or contractual maturity date in excess of 90 days, regardless of the frequency of the interest rate reset date, the security is classified as an available-for-sale marketable debt security.

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 according to the term of license granted to the Company. 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 and other costs incurred prospectively to develop the property 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. At the Company’s surface mines, these costs include costs to further delineate the mineralized body and remove overburden to initially expose the mineralized body. At the Company’s underground mines, these costs include the cost of building access ways, shaft sinking and access, lateral development, drift development, ramps and infrastructure development.
 
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Major development costs incurred after the commencement of production are amortized using the UOP method based on estimated recoverable volume in mineralized material. 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
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 and one of the subsidiaries is located in Kyrgyz Republic. The financial position and results of operations of the Company’s subsidiaries located in the PRC and Kyrgyz Republic are recorded in Renminbi (“RMB”) and Kyrgyz Som (“KGS”) as the functional currency, respectively. The results of operations denominated in foreign currency 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 ruling 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.
 
59


The exchange rates used to translate amounts in RMB and KGS into US Dollars for the purposes of preparing the consolidated financial statements were as follows:-

 
December 31, 2009
 
December 31, 2008
Balance sheet items, except for the registered and paid-up capital and retained earnings, as of year end
US$1=RMB6.8282
US$1=KGS42.6393
 
US$1=RMB6.8346
US$1=KGS39.4181
       
Amounts included in the statements of operations, statements of changes in stockholders’ equity and statements of cash flows for the years then end.
US$1=RMB6.8321
US$1=KGS42.7090
 
US$1=RMB6.9351
US$1=KGS36.6184

For the years ended December 31, 2009 and 2008, foreign currency translation adjustment of approximately ($181,000) and $1,908,000, respectively, have been reported as comprehensive income in the consolidated statement of stockholders’ equity and comprehensive income.

Although government regulations now allow convertibility of RMB and KGS for current account transactions, significant restrictions still remain.  Hence, such translations should not be construed as representations that RMB or KGS could be converted into U.S. dollars at that rate or any other rate.

The value of RMB and KGS against the U.S. dollars and other currencies may fluctuate and is affected by, among other things, changes in China and Kyrgyz Republic’s political and economic conditions.  Any significant revaluation of RMB and KGS 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 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 sales returns are immaterial and has not made allowance for estimated sales returns

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 inventory.
 
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Debt Issuance Costs
 
Debt issuance costs are costs of commissions, interest expenses for bridge loan and legal fees for convertible notes. Debt issuance costs are deferred and amortized over the life of the convertible notes using the effective interest rate method.

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 at acquisition 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 be significantly different than 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.

(b) Goodwill
 
The Company evaluates, on at least an annual basis, the carrying amount of goodwill to determine whether current events and circumstances indicate that such carrying amount may no longer be recoverable. To accomplish this, the Company compares the estimated fair value of its reporting units to their carrying amounts. If the carrying value of a reporting unit exceeds its estimated fair value, the Company compares the implied fair value of the reporting unit’s goodwill to its carrying amount, and any excess of the carrying value over the fair value is charged to earnings. The Company’s fair value estimates are based on numerous assumptions and it is possible that actual fair value will be significantly different than the estimates, as actual future quantities of recoverable minerals, gold and other commodity prices, production levels and operating costs of production and capital are each subject to significant risks and uncertainties.

Goodwill of $1,001,000 arose from the Company’s acquisition of Qingshan Metal within its nonferrous metals segment on April 27, 2006. Impairment of goodwill is tested at least annually at the reporting unit. The test consists of two steps. First, we identify potential impairment by comparing the fair value of the reporting unit to its carrying amount, including goodwill. If the fair value of the reporting unit is greater than its carrying amount, goodwill is not considered impaired. Second, if there is impairment identified in the first step, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No 141, “Business Combinations”. The Company’s performed financial valuation indicated impairment on the goodwill as of December 31, 2008.
 
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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, which require the use of the reporting entity’s own assumptions.

The Company values its financial instruments as required 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, available for sale investment, accounts payable, warrant liability, other payables and accruals,, short-term bank loans, 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 short maturities of these instruments and that the interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profile at 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 effect the benefits from any special tax credits or “tax holidays” allowed in the PRC.
 
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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 statements 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.

Based on all known facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits as of December 31, 2009, is not material to its results of operations, financial condition or cash flows. The Company also believes that the total amount of unrecognized tax benefits as of December 31, 2009, if recognized, would not have a material effect on its effective tax rate. The Company further believes that there are no tax positions for which it is reasonably possible, based on current Chinese tax law and policy, that the unrecognized tax benefits will significantly increase or decrease over the next 12 months producing, individually or in the aggregate, a material effect on the Company’s results of operations, financial condition or cash flows.

(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, 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 respect of both goods and services, 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.

Transportation charges
 
Transportation charges represent costs to deliver the Company’s inventory to point of sale.  Transportation costs are expensed and charged to cost of sales as incurred.
 
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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 income (loss) for the years ended December 31, 2009 and 2008 was approximately $2,833,000 and $(10,241,000), 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 reserve.

 
-
In June 2009, the FASB issued authoritative guidance which eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. The guidance is applicable for annual periods beginning after November 15, 2009 and interim periods therein and thereafter. The Company does not expect the adoption of this standard to have a material effect on its financial position or results of operations.

 
-
In August 2009, the FASB issued guidance on measuring liabilities at fair value. This guidance amends the fair value measurements and disclosures by providing additional guidance clarifying the measurement of liabilities at fair value. This new accounting guidance is effective for reporting period ending after December 15, 2009. The Company is evaluating this new guidance and the possible impact that the adoption of this new accounting guidance will have on their consolidated financial statements.
 
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Recent accounting pronouncements
 
Recent accounting pronouncements applicable to the Company are summarized below.
 
 
-
In June 2009, the FASB issued authoritative guidance which eliminates the exemption for qualifying special-purpose entities from consolidation requirements, contains new criteria for determining the primary beneficiary of a variable interest entity, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity. The guidance is applicable for annual periods beginning after November 15, 2009 and interim periods therein and thereafter. The Company does not expect the adoption of this standard to have a material effect on its financial position or results of operations.

 
-
EITF Issue No. 07-5 (ASC 815), “Determining Whether an Instrument (or embedded Feature) is Indexed to an Entity’s Own Stock” (EITF 07-5) was issued in June 2008 to clarify how to determine whether certain instruments or features were indexed to an entity’s own stock under EITF Issue No. 01-6 (ASC 815), “The Meaning of “Indexed to a Company’s Own Stock” (EITF 01-6) (ASC 815),. EITF 07-5(ASC 815), applies to any freestanding financial instrument (or embedded feature) that has all of the characteristics of a derivative as defined in FAS 133, for purposes of determining whether that instrument (or embedded feature) qualifies for the first part of the paragraph 11(a) scope exception. It is also applicable to any freestanding financial instrument (e.g., gross physically settled warrants) that is potentially settled in an entity’s own stock, regardless of whether it has all of the characteristics of a derivative as defined in FAS 133 (ASC 815), for purposes of determining whether to apply EITF 00-19 (ASC 815). EITF 07-5(ASC 815) does not apply to share-based payment awards within the scope of FAS 123(R), Share-Based Payment (FAS 123(R) (ASC 718)). However, an equity-linked financial instrument issued to investors to establish a market-based measure of the fair value of employee stock options is not within the scope of FAS 123(R) and therefore is subject to EITF 07-5(ASC 815).

 
-
In January 2009, the FASB issued FSP EITF 99-20-1 (ASC 325), to amend the impairment guidance in EITF Issue No. 99-20 (ASC 325) in order to achieve more consistent determination of whether an other-than-temporary impairment (“OTTI”) has occurred. This FSP amended EITF 99-20 (ASC 325) to more closely align the OTTI guidance therein to the guidance in Statement No. 115 (ASC 320, 10-35-31). Retrospective application to a prior interim or annual period is prohibited. The guidance in this FSP was considered in the assessment of OTTI for various securities at December 31, 2008.

 
-
On June 5, 2003, the United States Securities and Exchange Commission (“SEC”) adopted final rules under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), as amended by SEC Release No. 33-9072 on October 13, 2009. Commencing with its annual report for the year ending December 31, 2010, the Company will be required to include a report of management on its internal control over financial reporting. The internal control report must include a statement of:

 
·
Management’s responsibility for establishing and maintaining adequate internal control over its financial reporting;
 
 
·
Management’s assessment of the effectiveness of its internal control over financial reporting as of year- end; and
 
 
·
The framework used by management to evaluate the effectiveness of the Company’s internal control over financial reporting.
 
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Furthermore, it is required to file the auditor’s attestation report separately on the Company’s internal control over financial reporting on whether it believes that the Company has maintained, in all material respects, effective internal control over financial reporting.

 
-
 In August 2009, the FASB issued the FASB Accounting Standards Update No. 2009-04 “Accounting for Redeemable Equity Instruments - Amendment to Section 480-10-S99” which represents an update to section 480-10-S99, distinguishing liabilities from equity, per EITF Topic D-98, Classification and Measurement of Redeemable Securities. The Company does not expect the adoption of this update to have a material impact on its consolidated financial position, results of operations or cash flows. In August 2009, the FASB issued the FASB Accounting Standards Update No. 2009-05 “Fair Value Measurement and Disclosures Topic 820 – Measuring Liabilities at Fair Value”, which provides amendments to subtopic 820-10, Fair Value Measurements and Disclosures – Overall, for the fair value measurement of liabilities. This update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques: 1. A valuation technique that uses: a. The quoted price of the identical liability when traded as an asset b. Quoted prices for similar liabilities or similar liabilities when traded as assets. 2. Another valuation technique that is consistent with the principles of topic 820; two examples would be an income approach, such as a present value technique, or a market approach, such as a technique that is based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability. The amendments in this update also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The amendments in this update also clarify that both a quoted price in an active market for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The Company does not expect the adoption of this update to have a material impact on its consolidated financial position, results of operations or cash flows.

 
-
In September 2009, the FASB issued the FASB Accounting Standards Update No. 2009-08 “Earnings Per Share – Amendments to Section 260-10-S99”,which represents technical corrections to topic 260-10-S99, Earnings per share, based on EITF Topic D-53, Computation of Earnings Per Share for a Period that includes a Redemption or an Induced Conversion of a Portion of a Class of Preferred Stock and EITF Topic D-42, The Effect of the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock. The Company does not expect the adoption of this update to have a material impact on its consolidated financial position, results of operations or cash flows.

 
-
In September 2009, the FASB issued the FASB Accounting Standards Update No. 2009-09 “Accounting for Investments-Equity Method and Joint Ventures and Accounting for Equity-Based Payments to Non-Employees”. This update represents a correction to Section 323-10-S99-4, Accounting by an Investor for Stock-Based Compensation Granted to Employees of an Equity Method Investee. Additionally, it adds observer comment Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees to the Codification. The Company does not expect the adoption to have a material impact on its consolidated financial position, results of operations or cash flows.
 
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-
In September 2009, the FASB issued the FASB Accounting Standards Update No. 2009-12 “Fair Value Measurements and Disclosures Topic 820 – Investment in Certain Entities That Calculate Net Assets Value Per Share (or Its Equivalent)”, which provides amendments to Subtopic 820-10, Fair Value Measurements and Disclosures-Overall, for the fair value measurement of investments in certain entities that calculate net asset value per share (or its equivalent). The amendments in this update permit, as a practical expedient, a reporting entity to measure the fair value of an investment that is within the scope of the amendments in this update on the basis of the net asset value per share of the investment (or its equivalent) if the net asset value of the investment (or its equivalent) is calculated in a manner consistent with the measurement principles of Topic 946 as of the reporting entity’s measurement date, including measurement of all or substantially all of the underlying investments of the investee in accordance with Topic 820. The amendments in this update also require disclosures by major category of investment about the attributes of investments within the scope of the amendments in this update, such as the nature of any restrictions on the investor’s ability to redeem its investments at the measurement date, any unfunded commitments (for example, a contractual commitment by the investor to invest a specified amount of additional capital at a future date to fund investments that will be made by the investee), and the investment strategies of the investees. The major category of investment is required to be determined on the basis of the nature and risks of the investment in a manner consistent with the guidance for major security types in U.S. GAAP on investments in debt and equity securities in paragraph 320-10-50-1B. The disclosures are required for all investments within the scope of the amendments in this update regardless of whether the fair value of the investment is measured using the practical expedient. The Company does not expect the adoption to have a material impact on its consolidated financial position, results of operations or cash flows.

 
-
In October 2009, the FASB issued guidance for amendments to FASB Emerging Issues Task Force on EITF Issue No. 09-1 “Accounting for Own-Share Lending Arrangements in Contemplation of a Convertible Debt Issuance or Other Financing” (Subtopic 470-20) “Subtopic”. This accounting standards update establishes the accounting and reporting guidance for arrangements under which own-share lending arrangements issued in contemplation of convertible debt issuance. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2009. Earlier adoption is not permitted. The Company does not expect the adoption to have a material impact on its consolidated financial position, results of operations or cash flows.

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 be material to our consolidated financial statements.

NOTE 5 -ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following:

 
December 31
 
 
2009
 
2008
 
 
(In thousands)
 
(In thousands)
 
Accounts receivable
  $ 368     $ 612  
Less: Allowance for doubtful accounts
    (66 )     (51 )
    $ 302     $ 561  
 
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The activities in the Company’s allowance for doubtful accounts are summarized as follows:

 
December 31
 
 
2009
 
2008
 
 
(In thousands)
 
(In thousands)
 
Balance at the beginning of the year
  $ 51     $ 53  
Add: provision during the year
    15       (2 )
Balance at the end of the year
  $ 66     $ 51  

NOTE 6 - OTHER DEPOSITS AND PREPAYMENTS

Other deposits and prepayments consist of the following:
 
   
December 31
 
   
2009
 
2008
 
   
(In thousands)
 
(In thousands)
 
Prepayments and advances
 (a)
$
628     $ 955  
Other receivables
    227       156  
   
$
855     $ 1,111  

(a) Prepayments and advances as of December 31, 2009 and 2008 include payments of $461,199 and $936,237 to mining service providers, respectively.

NOTE 7 - INVENTORIES

Inventories consisted of the following:
 
 
December 31
 
 
2009
 
2008
 
 
(In thousands)
 
(In thousands)
 
Raw materials
  $ 586     $ 737  
Unprocessed ore
    1,391       1,276  
Consumables
    103       41  
Finished goods and semi-manufactured goods
    1,641       904  
    $ 3,721     $ 2,958  

NOTE 8 - RESTRICTED ASSETS

Restricted assets are the deposits saved in China Citic bank account of Xiangzhen Mining as collateral for the Company to issue bank drafts. As of December 31, 2009 and 2008, the Company has restricted assets of approximately $740,000 and $0, respectively.
 
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NOTE 9 - PROPERTY, MACHINERY AND MINING ASSETS, NET

 Property, machinery and mining assets consisted of the following:
 
   
December 31
 
   
2009
   
2008
 
   
(In thousands)
   
(In thousands)
 
Land use rights
  $ 1,702     $ 1,700  
Buildings
    12,986       12,957  
Machinery
    10,838       10,140  
Mining assets
    9,890       8,205  
Motor vehicles
    1,318       1,343  
Equipment
    332       331  
Extraction rights
    8,242       8,235  
Exploration rights
    -       1,683  
Construction in progress
    269       2,115  
      45,577       46,709  
Less:
               
Accumulated depreciation and amortization
    (10,570 )     (9,742 )
Impairment provision
    (105 )     (105
    $ 34,902     $ 36,862  

Depreciation and amortization
 
Depreciation and amortization expense in aggregate for the years ended December 31, 2009 and 2008 was approximately $2,514,000 and $4,343,000 respectively.

Impairment provision
 
An impairment provision of $105,000 for the year ended December 31, 2008 was recorded for the equipment of Qingshan Metal, a subsidiary of the Company within the nonferrous metals segment.

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 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.

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NOTE 10 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

At December 31, 2009 and 2008, accounts payable and accrued liabilities were approximately $4,694,000 and $3,470,000, respectively. Accounts payable and accrued liabilities are primarily payments due to suppliers and vendors for mining and transportation services.

NOTE 11   WARRANTS LIABILITY

In connection with the issuance of the convertible notes (as further described in Note 16), the Company issued a put warrant to one of the Company’s financial advisors for the purchase of 875,000 shares of the Company’s common stock at an exercise price of $3.20 per share. This Warrant should be vest and be exercisable at any time, or from time to time during the period commencing from the date hereof, and expiring at 5:00 p.m., Eastern Standard Time on January 1, 2010 (the “Termination Date”)exercisable on or before 3 years from the date of grant. The Company has had the fair value of the put warrant computed by using the Black-Scholes model. As of December 31, 2009, the fair value of the put warrant is zero due to the Company’s common share market price being lower than exercise price. As of December 31, 2008, the put warrant had a fair value of approximately$33,000. No warrant has been exercised due by January 1, 2010 and the warrant was expired then.
 
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NOTE 12   SHORT-TERM BANK LOANS
 
Short-term bank loans consisted of the following:
 
   
December 31,
   
2009
 
2008
   
(in thousands)
 
(in thousands)
10.85% note payable to Baiyin Credit Union matures on February 14, 2009 with interest due on the 20th day of each quarter and principal due at date of maturity, guaranteed by Qianzhen Mining.
 
$ 
 -
 
$ 
             220
10.85% note payable to Baiyin Credit Union matures on February 14, 2009 with interest due on the 20th day of each quarter and principal due at date of maturity, guaranteed by Qianzhen Mining.
 
 
-
 
 
             102
8.50% note payable to Baiyin Credit Union matures on March 26, 2009 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.
 
 
-
 
 
             351
9.99% note payable to Baiyin Credit Union matures on May 21, 2009 with interest due on the 20th day of each quarter and principal due at date of maturity, guaranteed by Xiangzhen Mining.
 
  
-
 
  
             878
8.22% note payable to Baiyin Credit Union matures on August 15, 2009 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 time deposit of Ms. Xiaojing Yu, a director of the Company.
 
  
-
 
  
             117
6.37% note payable to Baiyin Credit Union matures on December 26, 2009 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 time deposit of Ms. Helin Cui, a director of the Company.
   
-
 
  
               88
6.37% note payable to Baiyin Credit Union matures on December 28, 2010 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 time deposit of Ms. Helin Cui, a director of the Company.
 
 
                  88
 
 
-
6.37% note payable to Baiyin Credit Union matures on August 18, 2010 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 time deposit of Ms. Xiaojing Yu, a director of the Company.
 
 
                117
 
 
-
8.50% note payable to Baiyin Credit Union matures on December 29, 2010 with interest due on the 20th day of each quarter and principal due at date of maturity, guaranteed by Xiangzhen Mining.
 
 
                878
 
 
-
8.50% note payable to Baiyin Credit Union matures on February 13, 2010 with interest due on the 20th day of each quarter and principal due at date of maturity, guaranteed by Qianzhen Mining.
   
                220
   
-
8.50%% note payable to Baiyin Credit Union matures on February 13, 2010 with interest due on the 20th day of each quarter and principal due at date of maturity, guaranteed by Qianzhen Mining
 
 
                103
 
 
-
8.50% note payable to Baiyin Credit Union matures on March 23, 2010 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.
   
                322
   
-
7.65% note payable to China Citic Bank matures on May 21, 2010, guaranteed by Xiangzhen Mining (a).
 
 
             1,465
 
 
-
12.21% note payable to Wulatehouqi Credit Union matures on March 11, 2010 , which is in the name of a related party and guaranteed by Qianzhen Mining
 
 
                410
 
 
-
   
$
3,603
 
$
1,756


(a) This loan is collateralized with Xiangzhen’s extraction right.
 
71

 
NOTE 13 - OTHER PAYABLES AND ACCRUALS

Other payables and accruals consisted of the following:
 
   
December 31,
 
   
2009
   
2008
 
   
(In thousands)
   
(In thousands)
 
Accrued debt issuance costsa
  $ 46     $ 53  
Receipts in advance
    1,788       1,142  
Accruals for payroll, bonus and other operating expenses
    1,380       281  
Payables for construction service vender  
    882       1,047  
Others payables
    2,571       2,116  
    $ 6,667     $ 4,639  
 

(a)  
The balance mainly represents outstanding legal service fees payable in connection with the issuance of the convertible notes.
 
NOTE 14 DUE TO RELATED PARTIES

Due to related parties consisted of the following:
 
   
December 31,
 
   
2009
   
2008
 
   
(In thousands)
   
(In thousands)
 
Due to directors of the Company:  
           
Ms. Xiaojing Yu, CEO of the Company (a)
  $ 145     $ 94  
Mr. Xueming Xu, COO of the Company (b)
    27       239  
Mr. Helin Cui , Director of the Company(c)
    1       73  
Due to Mr. Xiao Ming Yu, General Manager of Xiangzhen (d)
    305       621  
Due to Wulatehouqi Mengxin Co., Ltd, the former minority shareholder of Xingzhen Mining (e)
    479       1463  
Mr. Mao Huang the minority shareholder of Xingzhen Mining (f)
    1,340       -  
    $ 2,297     $ 2,490  

On December 8, 2009, the Company entered into agreements with all their related parties, that their advances are  interest-free, unsecured and have no fixed terms of repayment until December 8, 2012. Amount due to related parties as of December 31, 2008 are interest-free, unsecured and with no fixed terms of repayment.
 
(a)
Ms. Yu is the CEO of the Company.
 
(b)
Mr. Xu is the COO of the Company.

(c)
Mr. Cui is a director of the Company.

(d)
Mr. Yu is the General Manager of Xiangzhen Mining.
 
(e)
Wulatehouqi Mengxin Co., Ltd is the former minority shareholder of Xingzhen Mining.

(f)
Mr. Huang the minority shareholder of Xingzhen Mining

NOTE 15 CONVERTIBLE NOTES PAYABLE

On December 27, 2006, the Company entered into a Notes Purchase Agreement with Citadel Equity Fund Ltd. (“Citadel”), under the terms of which Citadel purchased a total of US$28,000,000 (“Original Principal Amount”) in convertible senior notes (“Notes”). The Notes have a Maturity Date of December 27, 2012. The Bank of New York is the trustee (“Trustee”), between whom and the Company there is a indenture (“Indenture”) for the Notes dated December 27, 2006.
 
72


Conversion Feature
 
The Notes are convertible at the option of the holders, at any time on or prior to maturity, into common shares of the Company. Pursuant to Second Supplemental Indenture entered into between the Company and the Trustee on September 28, 2007, the conversion price has been revised from $3.20 to $2.25 per share and is subject to adjustment in certain circumstances but shall in no event fall below $2.00 per share.  In no event shall the number of conversion shares issuable upon conversion of all the outstanding Notes exceed 49.9% of all outstanding shares upon the conversion of all of the outstanding Notes.
 
The intrinsic value of the beneficial conversion feature (“BCF”) on the commitment date, i.e. the Second Supplementary Indenture Date of September 28, 2007, has been recalculated: the change of conversion price in the Second Supplemental Indenture resulted in a BCF. The BCF was recognized on the effective date of September 28, 2007 as a discount and will be amortized using the effective interest rate method from September 28, 2007 to the maturity date.

Redemption
 
The Notes contain a feature reflected in the Accreted Principal Amount based on which the redemption or repurchase price of the Notes is determined.  The Accreted Principal Amount is determined as follows: the Accreted Principal Amount on December 27, 2009 shall be 116.0% of the Original Principal Amount, and the Accreted Principal Amount at the Maturity Date shall be 134.5% of the Original Principal Amount. The Company can redeem all of the Notes on or after December 27, 2009 at 110% of the then Accreted Principal Amount, plus accrued and unpaid interest to, but excluding, the redemption date. The Notes holders have the right to require the Company to repurchase the Notes at a price in cash equal to 104% of the then Accreted Principal Amount plus accrued and unpaid interest to the repurchase date if there is a change of control of the Company.  From and after December 27, 2009, the Notes holders have the right to require the Company to repurchase the Notes for 100% of the then Accreted Principal Amount plus accrued and unpaid interest to the repurchase date.

Interest Rate
 
The Notes initially bore interest at 6.75% per annum, which were subject to upward adjustments and were payable semi-annually. Pursuant to Second Supplemental Indenture entered into between the Company and the Trustee on September 28, 2007 and Third Supplemental Indenture entered into between the Company and the Trustee on December 21, 2007, the interest rate has been revised as follows:

(a) at the rate of 6.75% per annum of the Original Principal Amount of the Notes, from and including the Issue Date to and including September 30, 2007;

(b) at the rate of 0.00% per annum of the Original Principal Amount of the Notes, from and including October 1, 2007 to and excluding January 31, 2008; and

(c) at the rate of 0.00% per annum of the Original Principal Amount of the Notes, from and including January 31, 2008 to but excluding the Maturity Date, if the Public Listing has occurred on or prior to January 31, 2008 and if the Company maintains such listing.
 
73


Repurchase
 
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 ( “Notes”), originally issued to Citadel Equity Fund Ltd (“Citadel”). Mountview was the legal and beneficial owner of the entire amount of the Notes at that time.

In connection with the Notes Repurchase Agreement, Mountview agreed to waive all defaults for the Company’s failure to duly observe and perform covenants set forth in the indenture entered into between the Company and Bank of New York as trustee and forebear to take any action against the Company for the defaults. The Company and Mountview also agreed to take all actions necessary in order for the Bank of New York, to cancel the entire Notes and promptly release the pledged security interest created pursuant to the share pledge agreement dated December 27, 2006 and entered into by and among Ms. Xiao Jing Yu and Mr. Xue Ming Xu, the Bank of New York, as collateral agent and Citadel.

Mountview is not an affiliate of the Company or any of the Company’s directors or officers. The consideration payable in the transaction consisted of US $8,000,000 in cash and 5 million shares of the Company’s common stock. Mountview shall not be entitled to any accrued and unpaid interest on the Notes.  This transaction was completed on December 23, 2009

Detachable warrants
 
Together with the issuance of the Notes, the Company issued a put warrant to one of the Company’s financial advisors in the transaction for the purchase of 875,000 shares of the Company’s common stock at an exercise price of $3.20 per share. This Warrant should be vest and be exercisable at any time, or from time to time during the period commencing from the date hereof, and expiring at 5:00 p.m., Eastern Standard Time on January 1, 2010 (the “Termination Date”)exercisable on or before 3 years from the date of grant.  As of December 31, 2009, the put warrant had a fair value of $0. As of December 31, 2008, the put warrant had a fair value of approximately$33,000. No warrant has been exercised due by January 1, 2010 and the warrant was expired then.

Deferred debt issuance cost
 
The issuance costs directly associated with the Notes and the put warrant aggregated $2,522,497.  The amount was capitalized as deferred debt issuance costs, and is being amortized using the effective interest rate method over the term of the convertible loan, with the amounts amortized being recognized as interest expense. Any unamortized debt issuance costs remaining at the date of conversion of the loan will be recognized as interest expense in the period the conversion takes place. As the convertible notes were all repurchased by the Company in 2009, the remaining of the issuance costs was all amortized in 2009. As of December 31, 2009 and December 31, 2008, the deferred debt issuance costs were approximately $0 and $1,755,000, respectively.

NOTE 16 - DEFINED CONTRIBUTION RETIREMENT PLANS

As stipulated by the regulations of the PRC government, companies operating in the PRC have defined contribution retirement plans for their employees. The PRC government is responsible for the pension liability to these retired employees. Commencing from 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.  
 
74


NOTE 17 - 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 of the PRC Companies Law which was effective from 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.

NOTE 18 - 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 local governments administering the “Rules on Mineral Resources Administration” and “Rules on Land Rehabilitation” on the Company’s two mines, “Sumochaganaobao Fluorite Mine” and “Mining site No. 2”, have confirmed that the Company is not required to restore or rehabilitate the two mining sites because those two mining sites are located at distant areas and the Company’s mining and extraction activities have not affected the surrounding environment. The Company’ property, machinery and mining assets related to those two mining sites at December 31, 2009 and 2008 were not subject to an asset retirement obligation.

The Company has identified but not recognized the asset retirement obligations related to the Company’s other mining sites for which the Company is applying the extraction rights. These sites are still at the exploration stage. The asset retirement obligations related to these sites are not estimable until extraction rights and licenses are granted. Upon the approval and issuance of the extraction licenses, the Company will be able to reasonably estimate the settlement dates of, and apply an expected present value technique to determine and recognize the asset retirement obligations related to these mining sites.

NOTE 19 - 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 charging rate varies in different cities in the PRC. Xiangzhen Mining and Xingzhen Mining were charged at net revenue * 2%* a special index solely determined by the local government. Qingshan Metal and Qianzhen Mining was engaged in refinery of metals and no involved in any mining activities in 2009. As such, they are not subject to the charge.

For the years ended December 31, 2009 and 2008, Natural Resource Compensation Charges of approximately $78,000 and $108,000 respectively, were charged to operations and included in cost of sales.
 
75

 
NOTE 20 - 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 the ability to attract more qualified personnel. There can be no assurance that the Company will remain competitive with larger competitors.
 
Exchange risk
 
The Company can not 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) converted 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 executive management in China. The loss of any of their services would be detrimental to the Company and could have an adverse effect on business development. The Company does not currently maintain key-man insurance on their lives. 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 financing 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 financing. The Company might be subject to liquidated damages and other penalties if they continue to obtain future financing requiring registration statements, and not having those registration statements filed and declared effective in a prompt manner.

NOTE 21 - 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.
 
76


Mining industry in PRC and Kyrgyz
 
The Company's mining operations are and will be subject to extensive national and local governmental regulations in China or Kyrgyz, 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 from 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 purchase which have not been received as of:
 
   
December 31,
 
   
2009
   
2008
 
   
(In thousands)
   
(In thousands)
 
Purchase of machinery - within one year
  $ 75     $ 456  
Acquisition or construction of buildings-within one year
    -       9  
    $ 75     $ 465  
 
77

 
NOTE 22 - 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 does not maintain fund in U.S. banks as of December 31, 2009 and 2008.

The Company is operating in China, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between the U.S. dollar and the RMB.

Financial instruments that potentially subject the Company to concentration 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 high credit quality financial institutions; however, such funds are not insured in the PRC.

The Company had five main customers who contributed approximately $3,441,000 or 81% of the Company’s consolidated net revenue for the year ended December 31, 2009. For the same period of 2008, the Company had five main customers who contributed approximately $5,330,000 or 76% of the Company’s consolidated net revenue.

The following table shows the Company’s major customers (10% or more of consolidated net revenue) for the year ended December 31, 2009:
 
   
Revenue
   
Percentage
 
Customer
 
(In thousands)
   
(%)
 
Handan Hongzhi Ltd
  $  892    
   21
Ningxia Jinhe Ltd      815        19 %
Laiwu Steel Ltd       638        15 %
Inner Mongolia Huadesanli Trading Ltd     621       15 %
Zibo Bofeng Ltd  
   475
   
   11
    $  3,441       81 %

The following table shows the Company’s major customers (10% or more of consolidated net revenue) for the year ended December 31, 2008:

   
Revenue
   
Percentage
 
Customer
 
(In thousands)
   
(%)
 
RuiPeng Mining Ltd   $ 2,185    
  31
Laiwu Steel Ltd     925       13 %
Inner Mongolia Huadesanli Trading Ltd     781       11 %
Handan Hongzhi Ltd     754       11 %
Ningxia Jinhe Chemistry Ltd     685    
  10
    $ 5,330       76 %

As of December 31, 2009, accounts receivable total approximately $302,000, net of allowance of doubtful accounts, which consists of receivables from 15 customers.
 
78


The following table shows the receivable distribution of the Company’s major customers (10% or more of consolidated accounts receivable) as of December 31, 2009:

    
 
Receivables
   
Percentage
 
   Customer
 
(In thousands)
   
(%)
 
Ningxia Jinhe Chemistry Ltd.
  $ 135       45 %
Laiwu Steel, Ltd.
      88       26 %
Handan Hongzhi Ltd.
      75       15 %
       
  $ 298       86 %

As of December 31, 2008, accounts receivable total approximately $612,000 which consists of receivables from 19 customers.

The following table shows the receivable distribution of the Company’s major customers (10% or more of consolidated accounts receivable) as of December 31, 2008:

   
Receivables
   
Percentage
 
Customer
 
(In thousands)
   
(%)
 
Laiwu Steel, Ltd
 
$
219
     
36
%
Handan Hongzhi Ltd
   
152
     
25
%
Ningxia Jinhe Chemistry Ltd
   
69
     
11
%
   
$
440
     
72
%

In the years of 2009 and 2008, the Company had no concentrated suppliers.
 
NOTE 23 - RELATED PARTY TRANSACTION

Xinjiang Tianxiang New Technology Development Co., Ltd, the minority shareholder of Xingzhen Mining, provided exploration services to Xingzhen Mining for a related service fee paid by the Company of $52,073 in 2008. No related service fee was paid by the Company in 2009.

NOTE 24 - SEGMENT INFORMATION

The Company follows FASB ASC 280-Segment Reporting, which requires that companies disclose segment data based on how management makes decision 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 wholly-owned subsidiary, Xiangzhen Mining. 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 wholly-owned subsidiaries, Qianzhen Mining, Xingzhen Mining and Qingshan Mining.

The Company primarily evaluates performance based on income before income taxes and excluding non-recurring items.
 
79


The segment data presented below were prepared on the same basis as the Company’s consolidated financial statements.
 
Year ended December 31,2009
 
Fluorite
   
Nonferrous metals
   
Consolidated
 
Segment revenue
  $ 3,919     $ 273     $ 4,192  
Inter-segment revenue
    -       -       -  
Revenue from external customers
  $ 3,919     $ 273     $ 4,192  
                         
Segment loss
  $ (2,293 )   $ (1,832 )   $ (4,125 )
                         
Unallocated corporate income (loss)
                  $ 9,504  
Income before income taxes and minority interests
                  $ 5,379  
 
                       
Total segment assets
  $ 34,194     $ 26,982     $ 61,176  
Inter-segment receivables
    (11,789 )     (8,127 )     (19,916 )
    $ 22,405     $ 18,855     $ 41,260  
Other unallocated corporate assets
                    19  
                    $ 41,279  
Other segment information:
                       
Depreciation and amortization
  $ 1,680     $ 833     $ 2,514  
Expenditure for segment assets
  $ 2,432     $ 89     $ 2,520  

Year ended December 31,2008
 
Fluorite
   
Nonferrous metals
   
Consolidated
 
Segment revenue
  $ 3,704     $ 3,433     $ 7,137  
Inter-segment revenue
                       
Revenue from external customers
  $ 3,704     $ 3,433     $ 7,137  
                         
Segment loss
  $ (3,898 )   $ (3,058 )   $ (6,956 )
                         
Unallocated corporate expenses
                  $ (3,587 )
Income (loss) from continuing operations before income taxes and minority interests
                  $ (10,543 )
                         
Total segment assets
  $ 50,273     $ 88,034     $ 138,307  
Inter-segment receivables
    (25,647 )     (59,403 )     (85,050 )
    $ 24,626     $ 28,631     $ 53,257  
Deferred debt issuance costs
                    1,755  
Other unallocated corporate assets
                    1  
    $       $       $ 55,013  
Other segment information:
                       
Depreciation and amortization
  $ 2,499     $ 1,844     $ 4,343  
Expenditure for segment assets
  $ 1,605     $ 289     $ 1,894  
 
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The following summarizes identifiable assets by geographic area:
 
   
December  31,
2009
   
December 31,
2008
 
   
(In thousands)
   
(In thousands)
 
China
  $ 41,260     $ 42,342  
Discontinued operation - Kyrgyzstan
    -       10,915  
Unallocated corporate assets
    19       1,756  
    $ 41,279     $ 55,013  

The following summarizes operating losses before provision for income tax:
 
Year Ended December 31,
 
 
2009
 
2008
 
 
(In thousands)
 
(In thousands)
 
China
  $ (4,905 )   $ (7,500 )
Discontinued operation - Kyrgyzstan
    (2,216 )     (1,192 )
Unallocated corporate operating income (loss)
    10,084       (3,587 )
    $ 2,963     $ (12,279 )

NOTE 25 - OTHER INCOME, NET
 
   
Years ended December 31,
 
   
2009
   
2008
 
   
(In thousands)
   
(In thousands)
 
Exchange gain
  $ 103     $ 536  
Gain (loss) on disposal of fixed assets
    (15 )     -  
Subsidies
    23       -  
Tax imposition
    -       (54 )
Penalty and late fee
    (9 )     (52 )
Donation
    (4 )     (44 )
Impairment of assets
    -       (6 )
    $ 98     $ 380  
 
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NOTE 26 - INCOME TAXES

The PRC and Kyrgyz subsidiaries within the Company are subject to PRC or Kyrgyz income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which they operate.

The Company’s income tax benefit (expenses) consists of:
 
   
For the Year ended December 31,
 
   
2009
   
2008
 
   
(In thousands)
   
(In thousands)
 
Current:
           
- PRC
  $ -     $ (544 )
- US
    (200 )      -  
Deferred:
               
- PRC
    -       -  
    $ (200 )   $ (544 )
 
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:
 
   
For the Year ended December 31,
 
   
2009
   
2008
 
   
(In thousands)
   
(In thousands)
 
Pre-tax income (loss) from continuing operations
  $ 5,379     $ (10,543 )
United States statutory corporate income tax rate
    35 %     35 %
Income tax benefit (expense) computed at United States statutory
 corporate income tax rate
  $ (1,882 )   $ 3,690  
Reconciling items
               
Net loss from China subsidiaries
    (927 )     (576 )
Rate differential for PRC or Kyrgyz earnings
    (372 )     (1,938 )
Non-deductible expense
    (377 )     (1,720 )
Utilization of net operating loss
    3,558       -  
Alternative minimum tax expense
    (200     -  
Effective tax (expense) benefit
  $ (200   $ (544 )

As of December 31, 2009 and 2008, the Company’s deferred income tax assets mainly arose from the temporary difference in depreciation and amortization under PRC GAAP and U.S. GAAP.

In March 2007, the Chinese government enacted new tax law which took effect beginning January 1, 2008. Under the new tax law of China, all domestic and foreign invested enterprises are generally subject to a unified tax rate of 25%. The new tax law provide for a five-year transition period from its effective date for those enterprises which were established before the promulgation date of the new tax law and which were entitled to preferential tax treatments under the previous tax laws and regulations. Therefore, Xiangzhen Mining and Qianzhen Mining will continue to enjoy the tax exemption benefit during their tax holidays.
 
The Company’s parent, China Shen Zhou Mining & Resources, Inc., and their subsidiary AFMG, are incorporated in the United States and has incurred an aggregate net operating loss of approximately $1,000,000 for income tax purposes through December 31, 2009, 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 future years’ taxable income. These carryforwards will expire, if not utilized, through 2029. Management believes that the realization of the benefits from these losses appears not more than likely 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 $350,000 to reduce the asset to zero. Management will review this valuation allowance periodically and make adjustments as warranted.
 
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NOTE 27 - 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,
 
   
2009
   
2008
 
   
(In thousands, except per share data)
   
(In thousands, except per share data)
 
Income (loss) from continuing operations available to common shareholders:
 
 
   
 
 
-Basic and Diluted
  $ 5,179     $ (11,087 )
                 
Income (loss) from discontinued operations available to common shareholders:
               
-Basic and Diluted
  $ (2,216 )   $ (1,192 )
Weighted average number of shares:
               
-Basic and Diluted
    24,743       22,215  
                 
Earnings (loss) per share from continuing operations
               
-Basic and Diluted
  $ 0.22     $ (0.50 )
                 
Earnings (loss) per share from discontinued operations
               
- Basic and Diluted
  $ (0.09 )   $ (0.05 )
                 

NOTE 28 - SUBSEQUENT EVENT

In accordance with ASC 855, Subsequent Events” the Company evaluated subsequent events after the balance sheet date of December 31, 2009 through March 31, 2010, which is the date the financial statements were issued.

On February 4, 2010, the Company issued 760,000 shares to its employees as share based compensation. The share based compensation is declared and approved by the board of directors in October 29, 2009 and had been accrued as payroll payable of approximately $750,200 on December 31, 2009.

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