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EXCEL - IDEA: XBRL DOCUMENT - CHINA SHEN ZHOU MINING & RESOURCES, INC.Financial_Report.xls
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EX-31.2 - EXHIBIT 31.2 - CHINA SHEN ZHOU MINING & RESOURCES, INC.v239049_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - CHINA SHEN ZHOU MINING & RESOURCES, INC.v239049_ex31-1.htm
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark one)
x
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2011
 
or
 
¨
Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 000-50491

China Shen Zhou Mining & Resources, Inc.
(Name of small business issuer in its charter)

Nevada
   
87-0430816  
(State or other jurisdiction
of incorporation or organization)
   
(I.R.S. Employer Identification No.)  

No. 166 Fushi Road, Zeyang Tower, Suite 1211
Shijingshan District, Beijing, China 100043
People’s Republic of China
   
100043
(Address of principal executive offices)
   
(Zip Code)
 
Issuer's telephone number:   86-010-88906927

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  x  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨
Accelerated filer  ¨
Non-accelerated filer  ¨
(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 Exchange Act) Yes ¨ No x

As of November 14, 2011, the Registrant had 32,285,973 shares of common stock outstanding.

 Except as otherwise indicated by the context, references in this Form 10-Q to:

SHZ,” the “Company,” “we,” “our,” or “us” are references to China Shen Zhou Mining & Resources, Inc and its subsidiaries, unless the context indicates otherwise.
U.S. Dollar,” “$” and “US$” mean the legal currency of the United States of America.
RMB” means Renminbi, the legal currency of China.
China” or the “PRC” are references to the People’s Republic of China.
U.S.” is a reference to the United States of America.
SEC” is a reference to the Securities & Exchange Commission of the United States of America.
 
 
 

 
 
China Shen Zhou Mining & Resources, Inc.

Table of Contents
 
     
Page
 
         
PART I
FINANCIAL INFORMATION
   
3
 
Item 1.
Financial Statements:
   
3
 
 
Consolidated Balance Sheets as of September 30, 2011 (Unaudited) and December 31, 2010 (Audited)
   
3
 
 
Consolidated Statements of Operations and Comprehensive Income (Unaudited)
Nine and Three Months Ended September 30, 2011 and 2010
   
4
 
 
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2011 and 2010
   
5
 
           
 
Notes to Consolidated Financial Statements (Unaudited)
   
6
 
           
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
23
 
           
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
   
28
 
           
Item 4.
Controls and Procedures
   
28
 
           
PART II
OTHER INFORMATION
   
30
 
           
Item 1.
Legal Proceedings
   
30
 
           
Item 1A.
Risk Factors
   
30
 
           
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
   
30
 
           
Item 3.
Defaults Upon Senior Securities
   
30
 
           
Item 4.
(Removed and Reserved)
   
30
 
           
Item 5.
Other Information
   
30
 
           
Item 6.
Exhibits
   
30
 
 
 
2

 

  PART I - FINANCIAL INFORMATION

  Item 1. Financial Statements 
 
CHINA SHEN ZHOU MINING & RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
 
   
September 30,
2011
   
December 31,
2010
 
   
(Unaudited)
   
(Audited)
 
ASSETS
           
             
Current assets:
           
Cash and cash equivalents
 
$
8,422
   
$
1,545
 
Notes receivable
   
992
     
-
 
Accounts receivable, net
   
1,032
     
162
 
Prepayment for office rent
   
-
     
82
 
Advances to suppliers
   
2,184
     
333
 
Other deposits, net
   
1,853
     
517
 
Inventories
   
8,066
     
7,243
 
Restricted assets
   
174
     
70
 
Assets - Discontinued operations
   
-
     
1,188
 
Total current assets
   
22,723
     
11,140
 
                 
Property, machinery and mining assets, net
   
49,166
     
33,052
 
Total assets
 
$
71,889
   
$
44,192
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Current liabilities:
               
Accounts payable
 
$
2,325
   
$
2,434
 
Short term loans
   
10,078
     
8,061
 
Receipts in advance
   
4,794
     
2,058
 
Other payables and accruals
   
2,052
     
4,053
 
Taxes payable
   
851
     
644
 
Liabilities - Discontinued operations
   
-
     
100
 
Total current liabilities
   
20,100
     
17,350
 
                 
Long term loans
   
-
     
2,630
 
Due to related parties
   
157
     
2,439
 
Total liabilities
   
20,257
     
22,419
 
                 
STOCKHOLDERS’ EQUITY:
               
Common stock ($0.001 par value; 50,000,000 shares authorized; 32,285,973 shares and 27,974,514 shares issued and outstanding as of September 30, 2011 and December 31, 2010 respectively)
 
 
32
  
 
  
28
 
Additional paid-in capital
   
58,427
     
29,508
 
Statutory reserves
   
1,672
     
1,672
 
Accumulated other comprehensive income
   
5,663
     
4,357
 
Accumulated deficit
   
(14,430
)
   
(13,630
)
Stockholders' equity - China Shen Zhou Mining & Resources, Inc. and Subsidiaries
   
51,364
     
21,935
 
Noncontrolling interest
   
268
     
-
 
Noncontrolling interest—Discontinued operations
   
-
     
(162
)
Total stockholders’ equity
   
51,632
     
21,773
 
Total liabilities and stockholders’ equity
 
$
71,889
   
$
44,192
 

The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
3

 
 
  CHINA SHEN ZHOU MINING & RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Amounts in thousands, except per share data)
 
   
For the Three Months Ended
   
For the Nine Months Ended
 
   
September 30,
2011
   
September 30,
2010
   
September 30,
2011
   
September 30,
2010
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Net revenue
 
$
7,104
   
$
3,619
   
$
18,117
   
$
6,722
 
Cost of sales
   
4,242
     
1,878
     
10,247
     
4,455
 
Gross profit
   
2,862
     
1,741
     
7,870
     
2,267
 
                                 
Operating expenses:
                               
Selling and distribution expenses
   
24
     
16
     
84
     
67
 
General and administrative expenses
   
2,033
     
1,107
     
7,459
     
2,986
 
Total operating expenses
   
2,057
     
1,123
     
7,543
     
3,053
 
                                 
Net income (loss) from operations
   
805
     
618
     
327
     
(786
)
                                 
Other income (expense):
                               
Interest expense
   
(174
)
   
(197
)
   
(520
)
   
(387
)
Other, net
   
(79
   
106
     
(6
   
406
 
Total other income (loss)
   
(253
)
   
(91
)
   
(526
   
19
 
                                 
Income (loss) from continuing operations before income taxes
   
552
     
527
     
(199
)
   
(767
)
                                 
Income tax benefits (expenses)
   
36
     
-
     
(244
   
-
 
                                 
Income (loss) from continuing operations
   
588
     
527
     
(443
)
   
(767
)
                                 
Discontinued operations :
                               
Loss from operations of discontinued component, net of taxes
   
-
     
(12
)
   
(7
   
(35
)
Loss on disposal of discontinued subsidiary, net of taxes
   
-
     
-
     
(82
)
   
-
 
Loss from discontinued operations
   
-
     
(12
   
(89
   
(35
)
                                 
Net income (loss)
   
588
     
515
     
(532
)
   
(802
)
Add (less): Noncontrolling interests attributable to the noncontrolling interests
   
93
     
-
     
(268
)
   
-
 
Net income (loss) - attributable to China Shen Zhou Mining & Resources, Inc. and Subsidiaries
   
681
     
515
     
(800
)
   
(802
)
                                 
Other comprehensive income:
                               
Foreign currency translation adjustments
   
534
     
295
     
1,306
     
341
 
Comprehensive income (loss)
 
$
1,215
   
$
810
   
$
506
   
$
(461
)
                                 
Net income (loss) per common share – basic and diluted
                               
From continuing operations
 
0.02
   
0.02
 
 
$
(0.03
)
 
$
(0.03
)
From discontinued operations
   
-
     
(0.00
)
   
(0.00
   
(0.00
)
   
$
0.02
   
$
0.02
 
 
$
(0.03
)
 
$
(0.03
)
                                 
Weighted average common shares outstanding
                               
- Basic and Diluted
   
32,270
     
27,975
     
31,060
     
27,878
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
4

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

   
For the Nine Months Ended September 30,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
Cash flows from operating activities:
           
Net loss
 
$
(800
)
 
$
(802
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Loss from operations of discontinued component, net of income tax benefits
   
7
     
35
 
Loss on sale of discontinued operations, net of income taxes
   
82
     
-
 
Provision for doubtful accounts
   
(99
)
   
-
 
Depreciation and amortization
   
2,838
     
2,182
 
Noncontrolling interests
   
268
     
-
 
Forgiveness of payroll payables
   
-
     
(300
Stock-based compensation
   
972
     
-
 
Changes in operating assets and liabilities:
               
(Increase) decrease in -
               
Notes receivable
   
(992
   
-
 
Accounts receivable
   
(771
)
   
42
 
Advances to suppliers
   
(1,840
   
(140
Other deposits
   
(1,313
   
(175
Prepayment for office rent
   
82
     
147
 
Inventories
   
(578
)
   
(4,157
Restricted assets
   
(103
)
   
746
 
Increase (decrease) in -
               
Accounts payable
   
(867
)
   
(1,939
)
Receipts in advance
   
2,666
     
(578
)
Other payables and accruals
   
(2,848
)
   
118
 
Taxes payable
   
184
     
316
 
Net cash used in operating activities from continuing operations
   
(3,112
)
   
(4,505
Net cash used in operating activities from discontinued operations
   
(37
)
   
23
 
Net cash used in operating activities
   
(3,149
)
   
(4,482
)
Cash flows from investing activities:
               
Purchases of property, machinery and mining assets
   
(3,368
)
   
(1,353
)
Acquisition of subsidiaries, net of cash and cash equivalents acquired
   
(3,642
   
-
 
Sales of property, machinery and mining assets
   
-
     
28
 
Net cash used in investing activities from continuing operations
   
(7,010
)
   
(1,325
)
Net cash provided by disposal of discontinued operations
   
-
     
(21
Net cash used in investing activities
   
(7,010
)
   
(1,346
)
Cash flows from financing activities:
               
Due to related parties
   
(737
)
   
(20
)
Proceeds from issuance of common shares
   
20,000
     
-
 
Issuance costs of common shares
   
(1,516
)
   
-
 
Repayment at short-term bank loans
   
(7,599
)
   
(3,464
Proceeds from short-term bank loans
   
6,521
     
10,583
 
Net cash provided by financing activities
   
16,669
     
7,099
 
                 
Foreign currency translation adjustment
   
367
     
(107
                 
Net increase in cash and cash equivalents
   
6,877
     
1,164
 
                 
Cash and cash equivalents at the beginning of the period
   
1,545
     
333
 
Cash and cash equivalents at the end of the period
 
$
8,422
   
$
1,497
 
                 
Non-cash investing and financing activities
               
Shares issued to employees as share based compensation
 
$
972
   
$
752
 
Shares issued to Acquire Xinyi Fluorite
 
$
9,467
   
$
-
 
                 
Supplemental disclosures of cash flow information:
               
Cash paid for interest expenses
 
$
424
   
$
285
 
Cash paid for income tax
 
$
54
   
$
-
 

The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
5

 
 
China Shen Zhou Mining & Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements 
(Unaudited)

NOTE 1 - DESCRIPTION OF BUSINESS AND ORGANIZATION

China Shen Zhou Mining & Resources, Inc. and its subsidiaries (collectively known as the “Company” or “we”) are principally engaged in the exploration, development, mining, and processing of fluorite, zinc, lead, copper, and other nonferrous metals in the People’s Republic of China (“PRC” or “China”).  

At September 30, 2011, the subsidiaries of China Shen Zhou Mining & Resources, Inc. are as follows:
Name 
   
Domicile and Date
of Incorporation
 
Paid-in Capital
 
Percentage 
of Effective
Ownership
   
Principal Activities
 
   
  
  
  
  
   
  
   
  
 
  
 
American Federal Mining Group, Inc. (“AFMG”)
 
Illinois
November 15, 2005
 
USD
10
 
100
 
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
 
                       
Xinjiang Buerjin County Xingzhen Mining Company (“Xingzhen Mining”)
 
The PRC
April 10, 2006
(Acquired on April 28, 2006)
 
RMB
50,000,000
 
90
 
Exploration of solid metals, processing and sales of mining products
 
                       
Jinde Xinyi Fluorite Company (“Xinyi Fluorite”)
 
The PRC
September 18, 2003
(Acquired on January 13, 2011)
 
RMB
3,200,000
 
55
 
Extraction, processing and sales of fluorite products
 
 
 NOTE 2- BASIS OF PRESENTATION AND GOING CONCERN

These consolidated financial statements for interim periods are unaudited. In the opinion of management, all adjustments, consisting of normal, recurring adjustments, and disclosures necessary for a fair presentation of these interim statements have been included. The results reported in these consolidated financial statements are not necessarily indicative of the results that may be reported for the entire year. The accompanying consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted in the United States of America.  These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed on March 29, 2011.

The accompanying consolidated financial statements have been prepared on a going concern basis. The Company had net operating income of approximately $0.33 million and net operating loss of approximately $0.79 million for the nine months ended September 30, 2011 and 2010, 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.

The Company is addressing its liquidity needs and has taken positive steps by accomplishing the following:

 
·
It obtained approximately $20 million from issuance of common shares in January 2011.
 
·
Xiangzhen Mining, Xingzhen Mining and Xinyi Fluorite were all under normal operation at the end of March 2011, and are expected to remain in normal operation for the foreseeable future.
 
·
During 2010 and the nine months ended September 30, 2011, the average sale price of fluorite powder steadily increased. The average sale price of fluorite powder for the nine months ended September 30, 2011 was approximately $339 per ton, which increased by approximately 161% from approximately $130 per ton for the same period of 2010.
 
In addition, if needed management plans to issue additional equity securities and or debt to meets its obligations on a timely basis. 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.

 
6

 
 
NOTE 3 – ACQUISITION

On January 13, 2011, the Company, through its subsidiary Xingzhen Mining, entered into an equity transfer agreement to acquire 55% of the equity interests of Xinyi Fluorite.  

Pursuant to the Agreement, the Company acquired the equity from the three original shareholders (Jia Xiangfu, a Chinese citizen, Yu Wuqiang, a Chinese citizen, and Chen Qiaolin, a Chinese citizen) of Xinyi Fluorite for total consideration in the amount of RMB 86.71 million (approximately US$ 13.15 million) (the “Purchase Price”). Pursuant to the terms of the agreement, the consideration was agreed to be RMB 62.44 million (approximately US$ 9.47 million) of the Company’s common stock and RMB 24.27 million (approximately US$ 3.68 million) in cash. Also, two additional investors (Min Yong, a Chinese citizen, and Wang Changman, a Chinese citizen) agreed to acquire 15% of the equity interests of Xinyi Fluorite under the terms of the Agreement. Pursuant to the Agreement, Xingzhen Mining and the Other Investors also agreed to pay an additional RMB 20 million (US$ 3.03 million) for the renovation of Xinyi Fluorite’s mining facilities.

During January 13, 2011 to September 30, 2011, the Company had paid cash total amount to RMB 23.29 million (approximately US$ 3.53 million) and 1,074,576 shares of the Company’s common stock to the original shareholders of Xinyi Fluorite. Approximately RMB 0.98 million (approximately US$ 0.15 million) will be paid to the original shareholders of Xinyi Fluorite. The fair value of the Company’s common stock at the date of the transaction was $8.81. As a result, we recorded a total of $13,148,165 of transaction costs in connection with the acquisition of Xinyi Fluorite.

The following is a reconciliation of the purchase:
 
   
Shares
   
Price per share
       
Fair value of the Company’s stock issued
   
1,074,576
   
$
8.81
   
$
9,467,015
 
Cash
                   
3,681,150
 
Total purchase price
                 
$
13,148,165
 
                         
Acquired assets and liabilities
                 
Fixed assets
           
$
159,498
 
Estimated Fair value of intangible assets
             
40,862,193
 
Liabilities
             
-
 
       
41,021,691
 
Acquisition of 55% share
     
55
%
       
22,561,930
 
Purchase price
     
13,148,165
 
Negative goodwill to be taken into other income (bargain purchase)
   
$
9,413,765
 
           
     
Minority
Interest
 
     
$
41,021,691
 
       
45
%
     
$
18,459,761
 
 
Company management believes that the bargain purchase is a result of the distressed financial situation of the former majority shareholders of Xinyi Fluorite who were not able to fully develop the mineral extraction potential of the properties to which Xinyi Fluorite had rights to. Management estimates the bargain purchase to be approximately $9,414,000. This will be taken into other income when the Company finalizes the valuation of the acquired assets of Xinyi Fluorite. The Company is still in the process of determining the fair value of assets acquired and liabilities assumed. Once determined, the Company will record the acquisition at fair value. In addition, the minority interest will reflect the full value of their share of Xinyi Fluorite upon completion of the valuation.
 
The following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of Xinyi Fluorite had occurred as of January 1, 2010 through September 30, 2010:

Net revenue
 
$
7,456
 
Cost of sales
   
4,946
 
Gross profit
   
2,510
 
         
Operating expenses:
       
Selling and distribution expenses
   
87
 
General and administrative expenses
   
4,655
 (a)
Total operating expenses
   
4,742
 
         
Net loss from operations
   
(2,232
)
         
Other income (expense):
       
Interest expense
   
(395
)
Other, net
   
377
 
Total other income
   
(18
         
Loss from continuing operations before income taxes
   
(2,250
)
         
Income tax expenses
   
(18
         
Loss from continuing operations
   
(2,268
)
         
Discontinued operations :
       
    Loss from operations of discontinued component, net of taxes
   
(35
)
    Loss from discontinued operations
   
(35
)
         
Net loss
   
(2,303
)
Add: Noncontrolling interests attributable to the noncontrolling interests
   
675
 (b)
Net loss - attributable to China Shen Zhou Mining & Resources, Inc. and Subsidiaries
   
(1,628
)
         
Other comprehensive income:
       
Foreign currency translation adjustments
   
341
 
Comprehensive loss
 
$
(1,287
)
         
Net loss per common share – basic and diluted
       
    From continuing operations
 
$
(0.06
)
    From discontinued operations
   
(0.00
)
   
$
(0.06
)
         
Weighted average common shares outstanding
       
- Basic and Diluted
   
28,953
 (c)
 
 
7

 
 
(a)  
Includes amortization of acquired intangible assets of approximately $1,559,000 based on the unit-of-production method.
(b)  
Minority interest of 45% of ownership in Xinyi Fluorite for purpose of pro forma. Upon final evaluation of assets acquired, the Company will reflect the proper value of the noncontrolling interest.
(c)  
Assumes 1,074,576 common shares issued for the purchase of Xinyi Fluorite are outstanding for the entire nine month pro forma period.
(d)  
Not included in the pro forma is the other income generated from the bargain purchase of Xinyi Fluorite. Company management believes that the bargain purchase is a result of the distressed financial situation of the former majority shareholders of Xinyi Fluorite who were not able to fully develop the mineral extraction potential of the properties to which Xinyi Fluorite had rights to. Management estimates the bargain purchase to be approximately $9,414,000. This will be taken into other income when the Company finalizes the valuation of the acquired assets of Xinyi Fluorite.

The following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of Xinyi Fluorite had occurred as of July 1, 2010 through September 30, 2010:
 
Net revenue
 
$
3,619
 
Cost of sales
   
1,878
 
Gross profit
   
1,741
 
         
Operating expenses:
       
Selling and distribution expenses
   
16
 
General and administrative expenses
   
1,134
 
Total operating expenses
   
1,150
 
         
Net income from operations
   
591
 
         
Other income (expense):
       
Interest expense
   
(197
)
Other, net
   
91
 
Total other income
   
(106
         
Income from continuing operations before income taxes
   
485
 
         
Income tax expenses
   
-
 
         
Income from continuing operations
   
485
 
         
Discontinued operations :
       
Loss from operations of discontinued component, net of taxes
   
(12
)
Loss from discontinued operations
   
(12
)
         
Net income
   
473
 
Add: Noncontrolling interests attributable to the noncontrolling interests
   
19
 (a)
Net income - attributable to China Shen Zhou Mining & Resources, Inc. and Subsidiaries
   
492
 
         
Other comprehensive income:
       
Foreign currency translation adjustments
   
295
 
Comprehensive income
 
$
787
 
         
Net income per common share – basic and diluted
       
From continuing operations
 
$
0.02
 
From discontinued operations
   
(0.00
)
   
$
0.02
 
         
Weighted average common shares outstanding
       
- Basic and Diluted
   
29,050
 (b)
 
 
8

 
 
(a)  
Minority interest of 45% of ownership in Xinyi Fluorite for purpose of pro forma. Upon final evaluation of assets acquired, the Company will reflect the proper value of the noncontrolling interest.
(b)  
Assumes 1,074,576 common shares issued for the purchase of Xinyi Fluorite are outstanding for the entire nine month pro forma period.
(c)  
Not include on the pro forma is the other income generated from the bargain purchase of Xinyi Fluorite. Company management believes that the bargain purchase is a result of the distressed financial situation of the former majority shareholders of Xinyi Fluorite who were not able to fully develop the mineral extraction potential of the properties to which Xinyi Fluorite had rights to. Management estimates the bargain purchase to be approximately $9,414,000. This will be taken into other income when the Company finalizes the valuation of the acquired assets of Xinyi Fluorite.

The unaudited pro forma information does not purport to be indicative of the results that would have been obtained had these events actually occurred at the beginning of the period presented and is not intended to be indicative of future results.

NOTE 4 - DISCONTINUED OPERATIONS

On April 12, 2011, the Company through its subsidiary Qianzhen Mining entered into an equity transfer agreement (the “Agreement”) to sell its 60% equity interest Qingshan Metal to a Chinese citizen Mr. Mao Huang (the “Investor”), a related party of the Company.

Pursuant to the Agreement, Qianzhen Mining sold all of its Equity in Qingshan Metal to the Investor for total consideration in the amount of RMB 8.5 million (approximately $1.3 million). The payment of the Transfer Price has been offset the debt owed by Qianzhen Mining to the Investor. After the transfer, Qianzhen Mining will no longer hold any equity interests in Qingshan Metal.

The Company has recorded a loss from operations of discontinued component, net of income taxes, of approximately $7,000, and a loss on disposal of discontinued subsidiary, net of income taxes, of approximately $82,000 for the nine months ended September 30, 2011. In accordance with Accounting Standard Codification (“ASC”) 360 (Formerly FAS 144) of Financial Accounting Standards Board (“FASB”), Accounting for Impairment or Disposal of Long-Lived Assets, the Company has reflected Qingshan Metal’s results of operations in the consolidated statements of operations through the date of the sale as discontinued operations for all periods presented. The assets and liabilities of Qingshan Metal in the Company’s consolidated balance sheet as of December 31, 2010 have been reclassified. The cash flows of discontinued operations also have been reclassified.
 
The following table presents the revenue, net loss from discontinued operations and on disposal of Qingshan Metal for the periods presented:
 
   
Nine Months Ended September 30, 2011,
 
   
2011
   
2010
 
   
(In thousands)
   
(In thousands)
 
Revenue
  $ -     $ -  
                 
Net loss from discontinued operations,
  $ (7 )   $ (35 )
                 
Net loss on disposal of subsidiary
  $ (82 )   $
Not Applicable
 

NOTE 5 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of estimates
The Company’s consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”). The preparation of the Company’s consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting periods. The 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.
 
 
9

 
 
Certain of the Company’s accounting policies require higher degrees of judgment than others in their application. Management evaluates all of its estimates and judgments on an on-going basis

Principles of consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries (AFMG, Xiangzhen Mining, and Qianzhen Mining) and its majority owned subsidiaries (Xingzhen Mining and Xinyi Fluorite).  All inter-company balances and transactions have been eliminated.

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.

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 collectability 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.

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.

 
10

 
 
Estimated useful lives of the Company’s assets are as follows:

     
Useful Life
   
(In years)
Land use rights
25
Buildings
3-25
Machinery
12
Mining assets
License term
Motor vehicle
6
Equipment
5
Extraction rights
License term
Exploration rights
License term
 
Foreign Currency
The Company’s principal country of operations is the PRC. The financial position and results of operations of the Company’s subsidiaries located in the PRC are recorded in Renminbi (“RMB”) 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.
 
The exchange rates used to translate amounts in RMB into US Dollars for the purposes of preparing the consolidated financial statements were as follows:  

   
 
September 30, 2011
  
December 31, 2010
Balance sheet items, except for the registered and paid-up capital and retained earnings, as of year end
 
US$1=RMB6.3952
 
US$1=RMB6.6118
 
   
For the
Nine Months Ended
September 30, 2011
  
For the
Nine Months Ended
September 30, 2010
Amounts included in the statements of operations and statements of cash flows for the period
 
US$1=RMB6.4941
 
US$1=RMB6.8164
 
   
For the
 
For the
   
Three Months Ended
 
Three Months Ended
   
September 30, 2011
 
September 30, 2010
Amounts included in the statements of operations and statements of cash flows for the period
 
US$1=RMB6.4222
 
US$1=RMB6.8109
 
For the nine months ended September 30, 2011 and 2010, foreign currency translation adjustment is approximately $1,306,000 and $341,000 respectively, have been reported as comprehensive income in the consolidated statements of operations and comprehensive income. For the three months ended September 30, 2011 and 2010, foreign currency translation adjustment is approximately $534,000 and $295,000 respectively, have been reported as comprehensive income in the consolidated statements of operations and comprehensive income.

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

The value of RMB against the U.S. dollars and other currencies may fluctuate and is affected by, among other things, changes in Chinese political and economic conditions.  Any significant revaluation of RMB may materially affect the Company’s financial condition in terms of U.S. dollar reporting.

Noncontrolling Interest
Noncontrolling interests in the Company’s subsidiaries are recorded in accordance with the provisions of FASB ASC 810 and are reported as a component of equity, separate from the parent’s equity.  Purchase or sale of equity interests that do not result in a change of control are accounted for as equity transactions.  Results of operations attributable to the noncontrolling interest are included in our consolidated results of operations and, upon loss of control, the interest sold, as well as interest retained, if any, will be reported at fair value with any gain or loss recognized in earnings.

Revenue Recognition
Revenue is recognized on the sale of products when title has transferred to the customer in accordance with the specified terms of each product sales agreement and all the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectability 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

 
11

 
 
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.
 
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.

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, notes receivable, accounts payable, 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.

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.

 
12

 
 
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 September 30, 2011, 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 September 30, 2011, 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.

(c) Resource Tax
All units and individuals engaged in the exploitation of mineral products as prescribed in the Regulations within the territory of the PRC are taxpayers of Resource Tax and shall pay Resource Tax. The specific tax amount applicable to taxpayers shall be determined within a prescribed tax amount range, by the Ministry of Finance in consultation with the relevant departments of the State Council in accordance with the resource situation of the taxable products exploited or produced by taxpayers. Exploiting or producing taxable products under different taxable items. The tax payable for Resource Tax shall be computed in accordance with the assessable volume of the taxable products and the prescribed unit tax amount.
 
Transportation charges
Transportation charges represent costs to deliver the Company’s inventory to point of sale. Transportation costs are expensed and charged to cost of sales as incurred.

Stock Based Compensation
In December 2004, the Financial Accounting Standards Board, or FASB, issued FASB ASC 718-10-55 - Compensation-Stock Compensation, or ASC 718-10-55. Under ASC 718-10-55, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. In addition, FASB ASC 825-10-50-10 – Financial Instruments – Overall – Disclosures, or ASC 825-10-50-10, expresses views of the Securities and Exchange Commission, or the SEC, staff regarding the interaction between ASC 718-10-55 and certain SEC rules and regulations and provides the staff's views regarding the valuation of share-based payment arrangements for public companies. The Company’s compensation cost is measured on the date of grant at its fair value.   Such compensation amounts, if any, are amortized over the respective vesting periods or period of service of the option grant.

Net income per common share
Basic and diluted earnings per share are presented for net income and for income from continuing operations. Basic earnings per share is computed by dividing net income by the weighted-average number of outstanding common shares for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts that may require the issuance of common shares in the future were converted. Diluted earnings per share is computed by increasing the weighted-average number of outstanding common shares to include the additional common shares that would be outstanding after conversion and adjusting net income for changes that would result from the conversion. Only those securities or other contracts that result in a reduction in earnings per share are included in the calculation.

Comprehensive Income (loss)
Accumulated other comprehensive income includes foreign currency translation adjustments. Total comprehensive income (loss) for the nine months ended September 30, 2011 and 2010 was approximately $506,000 and ($461,000), respectively. Total comprehensive income for the three months ended September 30, 2011 and 2010 was approximately $1,215,000 and $810,000, 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.
 
Recently Issued Accounting Standards
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.
 
 
13

 
 
NOTE 6 – NOTES RECEIVABLE

Notes receivable amounted to approximately $992,000 as of September 30, 2011 consist of bank's acceptance bills from two customers for the purchase of the Company’s products. Bank’s acceptance bills are accepted by the remitters’ banks that entitle the holders to receive the full face amount from the banks at maturity, which bears no interest and generally ranges from three to nine months from the date of issuance. The Company can also endorse the bank’s acceptance bills as payment to its suppliers before the bank’s acceptance bills’ maturity date.

NOTE 7 – ACCOUNTS RECEIVABLE
        
Accounts receivable consist of the following:
 
    
September 30,
2011
     
December 31,
2010
  
     
(In thousands)
     
(In thousands)
 
Accounts receivable
 
$
1,107
   
$
328
 
Less: Allowance for doubtful accounts
   
(75
)
   
(166
)
   
$
1,032
   
$
162
 

The activities in the Company’s allowance for doubtful accounts are summarized as follows:
 
   
September 30,
2011
   
December 31,
2010
 
   
(In thousands)
   
(In thousands)
 
Balance at the beginning of the year
 
$
166
   
$
66
 
Add: provision during the period
   
-
     
100
 
Less: write off the provision during the period
   
(91
   
-
 
Balance at the end of the period
 
$
75
   
$
166
 
 
NOTE 8 - ADVANCES TO SUPPLIERS

Advances to suppliers consist of the following:
 
   
September 30,
2011
   
December 31,
2010
 
   
(In thousands)
   
(In thousands)
 
Advances to suppliers
 
$
2,278
   
$
525
 
Less: Allowance for doubtful accounts
   
(94
)
   
(192
)
   
$
2,184
   
$
333
 
 
The activities in the Company’s allowance for doubtful accounts are summarized as follows:
 
   
September 30,
2011
   
December 31,
2010
 
   
(In thousands)
   
(In thousands)
 
Balance at the beginning of the year
 
$
192
   
$
-
 
Add: provision during the period
   
-
     
192
 
Less: write off the provision during the period
   
(98
)
   
-
 
Balance at the end of the period
 
$
94
   
$
192
 
 
NOTE 9 - OTHER DEPOSITS
 
Other deposits consist of the following:
 
   
September 30,
2011
   
December 31,
2010
 
   
(In thousands)
   
(In thousands)
 
Loan receivable
 
$
1,251
   
$
-
 
Other deposits
   
755
     
580
 
Less: Allowance for doubtful accounts
   
(153
)
   
(63
)
   
$
1,853
   
$
517
 
 
The activities in the Company’s allowance for doubtful accounts are summarized as follows:
 
   
September 30,
2011
   
December 31,
2010
 
   
(In thousands)
   
(In thousands)
 
Balance at the beginning of the year
 
$
63
   
$
-
 
Add: provision during the period
   
90
     
63
 
Balance at the end of the period
 
$
153
   
$
63
 

The other deposits as of September 30, 2011 included a loan to a third party of approximately $1.25 million without interest and collateral. This loan had been collected at October 8, 2011.
 
NOTE 10 - INVENTORIES

Inventories consist of the following:
 
   
September 30,
2011
 
December 31,
2010
 
   
(In thousands)
 
(In thousands)
 
Raw materials
 
$
1,056
 
$
708
 
Unprocessed ore
(a)
 
3,625
   
4,818
 
Consumables
   
205
   
227
 
Finished goods and semi-manufactured goods
   
3,180
   
1,490
 
   
$
8,066
 
$
7,243
 
 
(a) Unprocessed ore is the inventory that consists of materials extracted from the mines that have not been processed. These inventories are primarily maintained in large mounds of materials stored in the mine field in the form of a “stockpile.” These stockpiles are measured at the reporting date by qualified experts using industry standards. Such standards taking into account the volume, density, and mineral content in such stockpiles. The cost for such stockpiles includes extraction cost from mines, labor, amortization and depreciation, and other overhead costs. The proven and probable reserves are not included in the Company’s inventory.
 
 
14

 
 
NOTE 11 - RESTRICTED ASSETS

Restricted assets are the deposits saved in our bank account as the guarantee money for the environment protection, mining safety, and for issuing bank drafts. As of September 30, 2011 and December 31, 2010, the Company has restricted assets of approximately $174,000 and $70,000, respectively.
          
NOTE 12 - PROPERTY, MACHINERY AND MINING ASSETS, NET

Property, machinery and mining assets consist of the following:
 
   
September 30,
2011
   
December 31,
2010
 
   
(In thousands)
   
(In thousands)
 
Land use rights
  $ 1,754     $ 1,697  
Buildings
    15,537       13,068  
Machinery
    12,993       11,820  
Mining assets
    12,156       10,809  
Motor vehicles
    2,352       1,343  
Equipment
    422       451  
Extraction rights
    20,615       7,155  
Construction in progress
    649       234  
      66,478       46,577  
Less:
               
Accumulated depreciation and amortization
    (16,245 )     (12,497 )
Impairment provision
    (1,067 )     (1,028 )
    $ 49,166     $ 33,052  
    
Depreciation and Amortization
Depreciation and amortization expense in aggregate for the nine months ended September 30, 2011 and 2010 was approximately $2,838,000 and $2,182,000, respectively.

Impairment Provision
The accumulated impairment provision was recorded for the assets of Qianzhen Mining, 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 reserves 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 reserves, the exploration licensees have the privileged priority to obtain mining rights to the mineral reserves 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 reserves 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 three years and extension of the exploration license shall not exceed two years and two extensions.
 
 
15

 
 
NOTE 13 - SHORT-TERM LOANS

Short-term loans consist of the following:
 
   
September 30,
2011
   
December 31,
2010
 
   
(in thousands)
   
(in thousands)
 
10.01% note payable to Baiyin Credit Union matures on February 4, 2011 with interest due on the 20th day of each quarter and principal due at date of maturity, guaranteed by Qianzhen Mining
 
$
-
   
$
189
 
10.01% note payable to Baiyin Credit Union matures on February 4, 2011 with interest due on the 20th day of each quarter and principal due at date of maturity, guaranteed by Qianzhen Mining
   
-
     
68
 
7.01% note payable to China Citic Bank matures on February 15, 2011, collateralized with Xiangzhen’s extraction right, land use right and some machineries
   
-
     
756
 
7.01% note payable to China Citic Bank matures on February 12, 2011, collateralized with Xiangzhen’s extraction right, land use right and some machineries
   
-
     
2,269
 
7.01% note payable to China Citic Bank matures on February 14, 2011, collateralized with Xiangzhen’s extraction right, land use right and some machineries
   
-
     
3,025
 
9.45% note payable to Baiyin Credit Union matures on March 21, 2011 with interest due on the 20th day of each quarter and principal due at date of maturity, which is in the name of a related party and guaranteed by Xiangzhen Mining
   
-
     
242
 
13.28% note payable to Wulatehouqi Credit Union matures on April 11, 2011 , which is in the name of a related party and guaranteed by Qianzhen Mining
   
-
     
423
 
6.37% note payable to Baiyin Credit Union matures on August 18, 2011 with interest due on the 20th day of each quarter and principal due at date of maturity, guaranteed by Qianzhen Mining and secured by the certificate of deposit of Ms. Xiaojing Yu, a director of the Company
   
-
     
121
 
6.97% note payable to Baiyin Credit Union matures on December 28, 2011 with interest due on the 20th day of each quarter and principal due at date of maturity, guaranteed by Qianzhen Mining and secured by the certificate of deposit of Ms. Helin Cui, a director of the Company
   
94
     
91
 
9.45% note payable to Baiyin Credit Union matures on December 21, 2011 with interest due on the 20th day of each quarter and principal due at date of maturity, guaranteed by Xingzhen Mining
   
907
     
877
 
7.01% note payable to China Citic Bank matures on March 31, 2012, collateralized with Xiangzhen’s extraction right, land use right and some machineries
   
3,127
     
-
 
7.01% note payable to China Citic Bank matures on March 31, 2012, collateralized with Xiangzhen’s extraction right, land use right and some machineries
   
3,127
     
-
 
5.15% note payable to Ms. Yanling Ding matures on January 26, 2012, collateralized with Xingzhen’s extraction right and the ore processing plant
   
2,823
     
-
 
                 
   
$
10,078
   
$
8,061
 
 
NOTE 14 - LONG-TERM LOANS
 
Long-term loans consisted of the following:
 
   
September 30,
   
December 31,
 
   
2011
   
2010
 
   
(in thousands)
   
(in thousands)
 
5.15% note payable to Ms. Yanling Ding matures on January 26, 2012, collateralized with Xingzhen’s extraction right and the ore processing plant
 
$
-
   
$
2,630
 
 
The long-term loan has been classified to short-term loan for the remained term shorter than a year in 2011.
 
NOTE 15 – RECEIPTS IN ADVANCE

Receipts in advance consist of the following:
 
   
September 30,
2011
   
December 31,
2010
 
   
(In thousands)
   
(In thousands)
 
Receipts in advance from fluorite customers
  $ 4,071     $ 453  
Receipts in advance from nonferrous metals customers
    723       1,605  
    $ 4,794     $ 2,058  
  
As of September 30, 2011, Receipts in advance totaled approximately $4,794,000, which consists of advances from 23 customers.
    
The following table shows the receipts in advance of the Company’s major customers (10% or more of consolidated receipts in advance) as of September 30, 2011:

   
Receipts in advance
   
Percentage
 
Customer
 
(In thousands)
   
(%)
 
RuiPeng Mining Ltd
 
$
723
     
15
%
Shandong Bofeng Lidzhong ltd
   
633
     
13
%
Handan Hongzhi Ltd
   
586
     
12
%
Chengde Yijia Ltd
   
469
     
10
%
   
 $
2,411
     
50
%

 
16

 
 
As of December 31, 2010, Receipts in advance totaled approximately $2,058,000, which consists of advances from 10 customers.
 
The following table shows the receipts in advance of the Company’s major customers (10% or more of consolidated receipts in advance) as of December 31, 2010:

   
Receipts in advance
   
Percentage
 
Customer
 
(In thousands)
   
(%)
 
RuiPeng Mining Ltd
 
$
1,514 
     
74
%
 
NOTE 16 – OTHER PAYABLES AND ACCRUALS

Other payables and accruals consist of the following:
 
 
September 30,
2011
 
December 31,
2010
 
 
(In thousands)
 
(In thousands)
 
Accruals for payroll, bonus and other operating expenses
$
908
 
$
689
 
Payables for construction service vender  
 
254
   
1,635
 
Others payables
 
890
   
1,729
 
 
$
2,052
 
$
4,053
 
 
NOTE 17 - DUE TO RELATED PARTIES
 
Due to related parties classified as long term liabilities consist of the following:

   
September 30,
2011
   
December 31,
2010
 
   
(In thousands)
   
(In thousands)
 
Due to directors of the Company:
           
Ms. Xiaojing Yu, CEO of the Company
 
$
15
   
$
102
 
Mr. Xueming Xu, Director of the Company
   
12
     
12
 
Due to Mr. Xiaoming Yu, General Manager of Xiangzhen Mining
   
126
     
431
 
Due to Mr. Mao Huang, the minority shareholder of Xingzhen Mining
   
4
     
1,894
 
   
$
157
   
$
2,439
 

Amounts due to related parties are interest-free, unsecured and due on December 8, 2012.
 
NOTE 18 – Equity
 
Common Stock

We have 50,000,000 shares of common stock, par value $0.001, authorized. At September 30, 2011 and December 31, 2010 there were 32,285,973 shares and 27,974,514 shares of common stock issued and outstanding, respectively.

On January 19, 2011, the Company agreed to sell to certain institutional investors 2,836,883 shares of the Company’s common stock and warrants to purchase up to 851,066 shares of the Company’s common stock in a registered direct public offering (the “Offering”). The Offering was effected as a takedown from the Company’s shelf registration statement on Form S-3 (File No. 333-171243), which became effective on January 7, 2011, pursuant to a prospectus supplement to be filed with the U.S. Securities and Exchange Commission.

On January 13, 2011, the Company, through its subsidiary Xingzhen Mining, entered into an equity transfer agreement to acquire 55% of the equity interests of Xinyi Fluorite. Pursuant to the Agreement, the Company acquired the Equity from the three original shareholders of Xinyi Fluorite for total consideration in the amount of RMB 65 million (approximately US$ 9.85 million) (the “Purchase Price”). Pursuant to the terms of the agreement, the consideration was agreed to be RMB 50 million (approximately US$ 7.58 million) of the Company’s common stock at $7.05 per share and RMB 15 million (approximately US$ 2.27 million) in cash.

During the nine months ended September 30, 2011, we issued a total of 4,311,459 shares of our common stock comprised of: 2,836,883 shares to certain institutional investors in connection with the January 19, 2011 agreement discussed above, 1,074,576 shares as part of the Purchase Price for our acquisition of an 55% interest in Xinyi Fluorite, and 400,000 shares to its employees as share based on the 2009 Omnibus Long-term Incentive Plan.

Common Stock Purchase Warrants
 
On January 19, 2011, the Company agreed to sell to certain institutional investors 2,836,883 shares of the Company’s common stock and warrants to purchase up to 851,066 shares of the Company’s common stock in a registered direct public offering (the “Offering”).  The Offering was effected as a takedown from the Company’s shelf registration statement on Form S-3 (File No. 333-171243), which became effective on January 7, 2011, pursuant to a prospectus supplement to be filed with the U.S. Securities and Exchange Commission.
 
The common stock and warrants were sold in fixed combinations, with each combination consisting of one share of common stock and a warrant to purchase 0.30 shares of common stock.  The purchase price is $7.05 per fixed combination.  The warrants are exercisable immediately following the closing date of the Offering and will remain exercisable for three years thereafter at an exercise price of $8.46 per share.  The exercise price of the warrants is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and in the event the Company issues or is deemed to issue shares of common stock for less than the exercise price then in effect.  The exercise price of the warrants has not been adjusted as of September 30, 2011 or the date of this filing. 
 
 
17

 
 
If the adjustment feature with respect to the warrants should be triggered, such as if the Company were to issue common shares at a price lower than the granted warrants, the Company might have to account for these warrants in accordance with the Derivative and Hedging Topic of ASC 815. If the warrants are determined not to have a scope exception under ASC Section 815-10-15, and the warrants are determined to not be indexed to the Company’s common stock, these warrants may be reclassified from equity to a derivative liability for their future fair market value at the time the Company should issue common shares, or their equivalents, below the original exercise price of $8.46 for such warrants. The valuation of warrants, if they are deemed to be a derivative liability, would be valued at market. Under ASC 815, the warrants would be carried at fair value and adjusted during each reporting period subsequent to reclassification to a derivative liability from that of an equity instrument.
 
The exercisability of the warrants may be limited if, upon exercise, the holder or any of its affiliates would beneficially own more than 4.99% of the Company’s common stock.

The Company has also agreed to grant to the placement agent at the closing of the Offering warrants (the “Placement Agent’s Warrants”) to purchase that number of shares of our common stock equal to 8% of the aggregate number of shares underlying the warrants placed in the Offering.  The Placement Agent’s Warrants shall have the same terms as the warrants offered in the Offering, except that the exercise price will be 120% of the exercise price in the warrants offered in the Offering.  The Placement Agent’s Warrants, and shares underlying the Placement Agent’s Warrants, are each included in the prospectus supplement to be filed with the U.S. Securities and Exchange Commission.
 
During the nine months ended September 30, 2011, no warrants were exercised.

   
Warrants to
purchase
The
Company’s
common stock
   
Average
exercise price
 
    
(Shares)
   
(In US dollars)
 
Outstanding warrants at January 19, 2011
    851,066     $ 8.46  
Warrants granted to the placement agent
    68,085       10.15  
Exercised
    -       -  
Expired
    -       -  
Outstanding warrants at September 30, 2011
    919,151     $ 8.59  

NOTE 19 - 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 January 1, 2002, the Company is 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.  
 
NOTE 20 - 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 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. There was no statutory reserve transferred for the nine months ended September 30, 2011 and 2010.
 
NOTE 21 - 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 September 30, 2011 and December 31, 2010 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 22 - 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.

 
18

 

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 23 - COMMITMENTS AND CONTINGENCIES

General
The Company follows ASC 450, Accounting for Contingencies , in determining its accruals and disclosures with respect to loss contingencies. 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 be been incurred and the amount of the loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is made in the financial statements when it is at least reasonably possible that a material loss could be incurred.
    
Mining Industry in PRC
The Company's mining operations are and will be subject to extensive national and local governmental regulations in China, which may be revised or expanded at any time. A broad number of matters are subject to regulations.  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 terms and conditions.  The Company cannot predict whether it will be able to obtain or renew such permits or whether material changes in permit terms and conditions will be imposed. The inability to obtain or renew permits or the imposition of additional terms and 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
   
September 30,
2011
   
December 31,
2010
 
    
(In thousands)
   
(In thousands)
 
Purchase of machinery - within one year
  $ 60     $ 27  
Acquisition or construction of buildings-within one year
    -       36  
    $ 60     $ 63  
 
 
19

 

Contingent assets and liabilities
On January 13, 2011, the Company and two additional investors (the “transferee”) entered into an equity transfer agreement (the “Agreement”) to acquire total 70% of the equity interests of Xinyi Fluorite from the three original shareholders (the “transferor”). The Company acquired 55% of the equity interests of Xinyi Fluorite.
 
Pursuant to the Agreement, the transferor warrants that a total amount of five hundred thousand (500,000) metric tons of ore can be extracted from within the mining permit area of the Qingzheng Mine. If five hundred thousand (500,000) metric tons are not extracted, transferee shall undertake such loss and compensate transferor for each ton of shortage with RMB two hundred Yuan (RMB 200).

Pursuant to the Agreement, the transferee warrants that if income tax incurred from the first payment of RMB five million Yuan (5,000,000.00) and the second payment of RMB fifteen million Yuan (15,000,000.00), Xinyi shall bear such cost.

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 subsidiary, Xiangzhen Mining and Xinyi Fluorite. The nonferrous metals segment consists of the Company’s copper, zinc, lead and other nonferrous metal exploration, extraction and processing activities conducted through the Company’s subsidiaries, Qianzhen Mining, Xingzhen Mining.

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

The segment data presented below were prepared on the same basis as the Company’s consolidated financial statements.
 
Nine Months Ended September 30, 2011
 
Fluorite
   
Nonferrous metals
   
Consolidated
 
    
(In thousands)
   
(In thousands)
   
(In thousands)
 
Segment revenue
  $ 14,315     $ 3,802     $ 18,117  
Inter-segment revenue
    -       -       -  
Revenue from external customers
  $ 14,315     $ 3,802     $ 18,117  
                         
Segment income (loss)
  $ 3,804     $ (2,162 )   $ 1,642  
                         
Unallocated corporate income
                    (1,841 )
Loss from continuing operations before income taxes
                  $ (199 )
Income tax expenses
                   
(244
)
Loss from discontinuing operations, net of taxes
                   
(89
)
Net loss
                  $ (532 )
                         
Total segment assets
  $ 64,041     $ 27,207     $ 91,248  
Inter-segment receivables
    (12,588 )     (8,179 )     (20,767 )
    $ 51,453     $ 19,028     $ 70,481  
Other unallocated corporate assets
                    1,408  
                    $ 71,889  
Other segment information:
                       
Depreciation and amortization
  $
2,016
    $
823
    $
2,838
 
Expenditure for segment assets
  $
2,547
    $ 821     $
3,368
 
 
20

 

Nine Months Ended September 30, 2010 (unless indicated)
  
Fluorite
     
Nonferrous metals
     
Consolidated
  
     
(In thousands)
     
(In thousands)
     
(In thousands)
 
Segment revenue
 
$
3,089
   
$
3,633
   
$
6,722
 
Inter-segment revenue
   
-
     
-
     
-
 
Revenue from external customers
 
$
3,089
   
$
3,633
   
$
6,722
 
                         
Segment loss
 
$
(1,219
)
 
$
443
   
$
(776
)
                         
Unallocated corporate income
                   
9
 
Loss from continuing operations before income taxes
                 
$
(767
)
Income tax expenses
                   
-
 
Loss from discontinuing operations before income taxes
                   
(35
Net loss
                 
$
(802
)
                         
Total segment assets as of December 31, 2010
 
$
37,616
   
$
25,826
   
$
63,442
 
Inter-segment receivables as of December 31, 2010
   
(12,175
)
   
(8,343
)
   
(20,518
)
   
$
25,441
   
$
17,483
   
$
42,924
 
Assets —discontinuing operations as of December 31, 2010
                   
1,188
 
Other unallocated corporate assets as of December 31, 2010
                   
80
 
                   
$
44,192
 
                         
Other segment information:
                       
Depreciation and amortization
 
$
1,298
   
$
884
   
$
2,182
 
Expenditure for segment assets
 
$
1,067
   
$
307
   
$
1,374
 
 
The following summarizes identifiable assets by geographic area:

   
September 30,
2011
     
December 31,
2010
  
     
(In thousands)
     
(In thousands)
 
China
 
$
70,481
   
$
44,112
 
Unallocated corporate assets
   
1,408
     
80
 
   
$
71,889
   
$
44,192
 
 
The following summarizes net losses before provision for income tax:
  
   
For Nine Months Ended September 30, 2011,
  
     
2011
     
2010
  
     
(In thousands)
     
(In thousands)
 
China
 
$
1,553
   
$
(811
)
Unallocated corporate operating income (loss)
   
(1,841
   
9
 
   
$
(288
 
$
(802
)
 
NOTE 25 - OTHER INCOME, NET

       
For Nine Months Ended September 30, 2011,
 
         
2011
   
2010
 
         
(In thousands)
   
(In thousands)
 
Penalty income
 
(a)
  $ 147