20-F 1 d523877d20f.htm FORM 20-F Form 20-F
Table of Contents

As filed with Securities and Exchange Commission on April 29, 2013

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

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

For the fiscal year ended December 31, 2012

OR

 

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

OR

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

Commission file number: 001-14714

 

 

 

LOGO

(Exact name of Registrant as specified in its charter)

Yanzhou Coal Mining Company Limited

(Translation of Registrant’s name into English)

 

 

People’s Republic of China

(Jurisdiction of incorporation or organization)

298 Fushan South Road

Zoucheng, Shandong Province

People’s Republic of China

(Address of principal executive offices)

Zhang Baocai

298 South Fushan Road

Zoucheng, Shandong Province

People’s Republic of China (273500)

Tel: (86)537 5382319

Fax: (86)537 5383311

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class

 

Name of each exchange on which registered

American Depositary Shares   New York Stock Exchange
Class H Ordinary Shares   New York Stock Exchange*

 

* Not for trading in the United States, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.

 

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

(Title of class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

(Title of class)

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

2,960,000,000 Domestic Shares, par value RMB1.00 per share

1,958,400,000 H Shares, par value RMB1.00 per share, including H Shares that were represented by 13,933,698 ADSs

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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 (§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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  x   Accelerated filer  ¨   Non-accelerated filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ¨   

International Financial Reporting Standards as issued

by the International Accounting Standards Board  x

   Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ¨    Item 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  
Cautionary Statement Regarding Forward-looking Statements      1   
Definitions and Supplemental Information      1   
Conventions      6   
   PART I   
ITEM 1.    Identity of Directors, Senior Management and Advisers      7   
ITEM 2.    Offer Statistics and Expected Timetable      7   
ITEM 3.    Key Information      7   
ITEM 4.    Information on the Company      25   
ITEM 4A.    Unresolved Staff Comments      73   
ITEM 5.    Operating and Financial Review and Prospects      74   
ITEM 6.    Directors, Supervisors, Senior Management and Employees      96   
ITEM 7.    Major Shareholders and Related Party Transactions      109   
ITEM 8.    Financial Information      114   
ITEM 9.    The Offering and Listing      115   
ITEM 10.    Additional Information      118   
ITEM 11.    Quantitative and Qualitative Disclosures about Market Risk      132   
ITEM 12.    Description of Securities Other Than Equity Securities      135   
   PART II   
ITEM 13.    Defaults, Dividend Arrearages and Delinquencies      136   
ITEM 14.    Material Modifications to the Rights of Security Holders and Use of Proceeds      136   
ITEM 15.    Controls and Procedures      136   
ITEM 16A.    Audit Committee Financial Expert      137   
ITEM 16B    Code of Ethics      137   
ITEM 16C.    Principal Accountant Fees and Services      138   
ITEM 16D.    Exemptions from the Listing Standards for Audit Committees      138   
ITEM 16E.    Purchases of Equity Securities by the Issuer and Affiliated Purchasers      139   
ITEM 16F.    Change in Registrant’s Certifying Accountant      139   
ITEM 16G.    Corporate Governance      139   
   PART III   
ITEM 17.    Financial Statements      141   
ITEM 18.    Financial Statements      141   
ITEM 19.    Exhibits      141   
Signatures   


Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This annual report includes statements of our expectations, intentions, plans and beliefs that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are intended to come within the safe harbor protection provided by those sections. The statements relate to future events or our financial performance, including, but not limited to, projections and estimates concerning the timing and success of specific projects and acquisitions. We use words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will” and the negatives of such terms or other similar expressions to identify forward-looking statements.

Without limiting the foregoing, all statements relating to our future operating results and anticipated capital expenditures, borrowings and sources of funding are forward-looking statements and speak only as of the date of this annual report. These statements are based on numerous assumptions that we believe are reasonable, but are subject to a wide range of risks, uncertainties and contingencies, which may cause actual results to differ materially from those discussed in these statements. Among the factors that could cause actual results to differ materially are:

 

   

price volatility for our coal and other related products;

 

   

demand for coal in the PRC and overseas markets;

 

   

difficulty in managing our rapid growth, business diversification, geographic expansion and integrating our acquisitions;

 

   

changes in legislation, regulations and policies;

 

   

the factors affecting the methanol industry and methanol prices;

 

   

our ability to compete effectively;

 

   

our need for, and ability to obtain, capital to finance our future expansion plans and capital expenditures;

 

   

expected increases in production capacity and utilization of new facilities;

 

   

competitive landscape;

 

   

uncertainties in estimating our proven and probable coal reserves and our ability to replace and develop coal reserves;

 

   

effects of land reclamation and other liabilities;

 

   

geologic, equipment and operational risks related to mining;

 

   

changes in economic strength and political stability of countries in which we have operations or serve customers;

 

   

our ability to realize the anticipated benefits of our acquisition of equity interests or assets of coal mines;

 

   

obtaining governmental permits and approvals for our operations;

 

   

proximity of our coal resources to end-markets and costs of transportation;

 

   

availability, timing of delivery and cost of key supplies;

 

   

impacts of natural disasters, epidemics and safety accidents; and

 

   

other factors, including, but not limited to, those discussed under “Risk Factors”, set forth in Part D of Item 3 of this annual report.

All of the forward-looking statements made in this annual report are qualified by this cautionary statement. We cannot assure you that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected effect on us, our business or our operations. We caution you not to place undue reliance on any such forward-looking statements. Unless we are required to do so under U.S. federal securities laws or other applicable laws, we do not intend to update or revise any forward-looking statements.

DEFINITIONS AND SUPPLEMENTAL INFORMATION

As used in this annual report, references to “Yanzhou Coal,” “we,” “our,” “our Company,” “the Group” or “us” refer to Yanzhou Coal Mining Company Limited and its subsidiaries, which have been consolidated into its accounts for the purpose of the consolidated financial statements, unless the context indicates otherwise. References to “the Company” refer to Yanzhou Coal as a stand-alone statutory entity.

 

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“ADSs” are to the American depositary shares of the Company.

“A Shares” are to domestic shares in the ordinary share capital of the Company, with nominal value of RMB1.00 each, which are listed on the Shanghai Stock Exchange.

“Articles of Association” are to our Articles of Association, as amended from time to time.

“ASX” are to ASX Limited or, as the context requires, the financial market known as the Australian Securities Exchange operated by it.

“Austar Company” are to Austar Coal Mine Pty Limited, a wholly owned subsidiary of Yancoal Australia Limited incorporated in Australia, which mainly engages in the mining, processing and sale of coal in Australia.

“Australia” are to the Commonwealth of Australia.

“BBSY” are to the Australian Bank Bill Swap Rate.

“Beisheng Industry and Trade” are to Zoucheng Yankuang Beisheng Industry and Trade Co., Ltd., a limited liability company incorporated in the PRC.

“Beisu Company” are to Yankuang Group Beisu Coal Mine Co., Ltd., a limited liability company incorporated in the PRC, which is a wholly owned subsidiary of Yankuang Group.

“CAGR” are to the compound annual growth rate.

“CASs” are to Accounting Standard for Business Enterprises (2006) and the relevant regulations and explanations issued by the Ministry of Finance of the PRC.

“China” or the “PRC” are to the People’s Republic of China, excluding, for purposes of this annual report, the Hong Kong Special Administrative Region (“Hong Kong”), Macau Special Administrative Region and Taiwan.

“CSRC” are to the China Securities Regulatory Commission.

“CVR Shares” are to fully paid shares in the share capital of Yancoal Australia as defined in the amended merger proposal deed for the Gloucester acquisition.

“Directors” as used herein refer to our directors as discussed in Item 6 herein.

“eastern China” are collectively to Shandong Province, Jiangsu Province, Anhui Province, Zhejiang Province, Fujian Province, Jiangxi Province and Shanghai Municipality; “southern China” are to Guangdong Province, Hunan Province and Guangxi Zhuang Autonomous Region; “northern China” are to Beijing Municipality, Tianjin Municipality, Hebei Province, Shanxi Province and the Inner Mongolia Autonomous Region; and “northwestern China” are to Shaanxi Province, Gansu Province, Qinghai Province, Xinjiang Uyghur Autonomous Region and Ningxia Hui Autonomous Region.

 

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“Excluded Assets” are the following assets which are excluded from Yancoal Australia prior to the merger with Gloucester and currently held by Yancoal International (Holding):

 

   

all of the issued shares in Tonford Pty Limited and as a result a 100% interest in the Harrybrandt Project tenements near Nebo in Queensland’s Bowen Basin (“Harrybrandt”);

 

   

all of the issued shares in Athena Coal Pty Limited and as a result a 51% interest in the Athena Coal Project joint venture in Queensland (“Athena”);

 

   

100% interest in certain Wilpeena tenements held by Yarrabee Coal Company Pty Limited in Queensland (“Wilpeena”);

 

   

all of the issued shares in each of Syntech Holdings Pty Limited and Syntech Holdings II Pty Limited and as a result a 100% interest in the Cameby Downs open-pit mine located approximately 30 kilometers from the town of Chinchilla in the Surat Basin, Queensland (“Syntech”);

 

   

all of the issued shares in Premier Coal Limited (“Premier Coal”) and Premier Char Pty Limited (“Premier Char”) and thereby, among other things, a 100% interest in the Premier Coal Mine (together, “Premier”);

 

   

all of the issued shares in Yancoal Technology Development Pty Limited; and

 

   

all of the issued shares in UCC Energy Pty Limited.

“Felix” are to Yancoal Resources (formerly Felix Resources Limited).

“FOB” are to Free on Board, meaning the risk passes to the buyer, including payment of all transportation and insurance costs, once goods are delivered on board of the ship by the seller, as defined in the latest edition of the International Rules for the Interpretation of Trade Terms as published by ICC Publishing SA, 38 cours Albert 1er, 75008 Paris, France from time to time or such official rules for interpretation of trade terms as issued by the ICC in substitution therefore as amended from time to time.

“Gloucester” are to Gloucester Coal Ltd., a company incorporated in Australia, which focuses on the exploration, mining and sale of coal in Australia. We completed the merger with Gloucester in June 2012, which turned Gloucester a wholly-owned subsidiary of Yancoal Australia.

“Grant Thornton” are to a registered firm of certified public accountants in the People’s Republic of China and is the principal auditor for the purpose of reporting to the United States Securities and Exchange Commission and other relevant U.S. regulatory bodies.

“Grant Thornton Hong Kong” are to a firm of certified public accountants in Hong Kong, which originally practised as a partnership under the name of Grant Thornton Jingdu Tianhua and now operates as a corporate practice under the name of Grant Thornton Hong Kong Limited. This firm is the auditor for the purpose of the Hong Kong H Share listing only.

“H Shares” are to overseas listed foreign invested shares in the ordinary share capital of the Company, with nominal value of RMB1.00 each, which are listed on the HKSE.

“Haosheng Company” are to Inner Mongolia Haosheng Coal Mining Company Limited, a Company incorporated in the PRC and a 74.82%-owned subsidiary of the Company, which engages in project development for Shilawusu Coal Field in the Inner Mongolia Autonomous Region.

“Heze Nenghua” are to Yanmei Heze Nenghua Company Limited, a Company incorporated in the PRC and a 98.33%-owned subsidiary of the Company, which manages our exploration for coal resources at the Juye Mine in Heze City, Shandong Province.

“Hong Kong Listing Rules” are to the Rules Governing the Listing of Securities on the HKSE.

“Hong Kong Stock Exchange” or “HKSE” are to The Stock Exchange of Hong Kong Limited.

“Hua Ju Energy” are to Shandong Hua Ju Energy Co., Limited, a Company incorporated in the PRC and a 95.14%-owned subsidiary of the Company, which engages in the generation of electric power from coal gangue and coal slurry, which are byproducts of our coal mining process.

 

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“IFRS” are to International Financial Reporting Standards, as issued by the International Accounting Standard Board (“IASB”).

“Industry Guide 7” are to the United States Securities and Exchange Commission Industry Guide 7.

“Inner Mongolia Xintai” are to Inner Mongolia Xintai Coal Mining Company Limited, a company incorporated in the PRC that is a 80%-owned subsidiary of Ordos Neng Hua, which operates the Wenyu Coal Mine in Inner Mongolia Autonomous Region.

“Jiemei Wall Materials” are to Jining Jiemei New Wall Materials Co., Ltd., a limited liability company incorporated in the PRC.

“JORC Code” are to the 2004 Australasian Code for Reporting Exploration Results, Mineral Resources and Ore Reserves prepared by the Joint Ore Reserves Committee of the Australasian Institute of Mining and Metallurgy, Australian Institute of Geoscientists and Minerals Council of Australia.

“LIBOR” are to the London Interbank Offered Rate.

“MEP” are to the Ministry of Environmental Protection of the PRC.

“MLR” are to the Ministry of Land and Resources of the PRC.

“MOC” are to the Ministry of Commerce of the PRC.

“MOT” are to the Ministry of Transportation of the PRC.

“MRRT” are to the Minerals Resource Rent Tax, a tax on assessable profits generated from the extraction of coal and iron ore in Australia.

“NDRC” are to the National Development and Reform Commission of the PRC.

“NYSE” are to the New York Stock Exchange, Inc.

“Ordos Neng Hua” are to Yanzhou Coal Ordos Neng Hua Company Limited, a wholly owned subsidiary of the Company incorporated in the PRC that is principally engaged in the development of coal resources and the development of coal chemical business in the Inner Mongolia Autonomous Region.

“PBOC” are to the People’s Bank of China.

“PRC government” are to the central, provincial or municipal government of the PRC.

“PRC Standards” are to the standards in the Solid Mineral Resource/Reserve Classification of the PRC (GB/T17766-1999).

“Promoter Shares” are to the domestic legal person shares held by Yankuang Group.

“SAFE” are to the State Administration of Foreign Exchange of the PRC.

“SASAC” are to the State-owned Assets Supervision and Administration Commission.

“SAT” are to the State Administration of Taxation of the PRC.

 

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“SEC” are to the United States Securities and Exchange Commission.

“SERC” are to the State Electricity Regulatory Commission of the PRC.

“Shanxi Nenghua” are to Yanzhou Coal Shanxi Nenghua Company Limited, a wholly owned subsidiary of the Company incorporated in the PRC that manages our investment projects in Shanxi Province.

“Shares” refers collectively to our (i) domestic invested shares listed on the Shanghai Stock Exchange, par value RMB1.00 each (the “Domestic Shares” or “A Shares”), (ii) foreign-invested shares issued and traded in HK dollars and listed on the Hong Kong Stock Exchange, par value RMB1.00 each (the “H Shares”) and (iii) American Depositary Shares, each of which represents ten H Shares.

“Shengyang Wood” are to Shandong Shengyang Wood Co., Ltd., a limited liability company incorporated in the PRC.

“significant subsidiary” are to a significant subsidiary as defined in Rule 1-02 of Regulation S-X under the U.S. Securities Act of 1933.

“SSE” are to the Shanghai Stock Exchange.

“Tianhao Chemicals” are to Shanxi Tianhao Chemicals Company Limited, a 99.89%-owned subsidiary of Shanxi Nenghua and a Company incorporated in the PRC, which is principally engaged in the operation of a 100,000 tonne methanol project in Shanxi Province.

“Tonne” are to metric tonne, which is equivalent to 1,000 kilograms or approximately 2,205 pounds.

“Twelfth Five-Year Plan” are to the Twelfth Five-Year Plan (2011 to 2015) for National Economic and Social Development in the PRC.

“Yancoal Australia” are to Yancoal Australia Limited, an ASX-listed subsidiary of the Company incorporated in Australia that manages our investment projects in Australia, which is 78%-owned by the Company.

“Yancoal Canada” are to Yancoal Canada Resources Co., Ltd., a wholly owned subsidiary of the Company that manages our investment projects in Canada.

“Yancoal Resources” are to Yancoal Resources Limited, formerly known as Felix Resources Limited (“Felix”), a limited company incorporated under the laws of Australia and an indirect wholly owned subsidiary of Yancoal Australia, which mainly engages in coal mining, sales and exploration of coal.

“Yancoal International (Holding)” are to Yancoal International (Holding) Co., Limited, a wholly owned subsidiary of the Company.

“Yankuang Finance” is Yankuang Group Finance Company Limited, a joint venture established by the Yankuang Group, China Credit Trust Co., Ltd. and Yanzhou Coal Mining.

“Yankuang Group” or “Controlling Shareholder” are to Yankuang Group Corporation Limited (formerly known as Yanzhou Mining (Group) Corporation Limited), a wholly state-owned enterprise established in the PRC, and the Controlling Shareholder of our Company.

“Yulin Nenghua” are to Yanzhou Coal Yulin Nenghua Company Limited, a wholly owned subsidiary of the Company incorporated in the PRC, which is principally engaged in the operation of a 600,000-tonne methanol project in Shaanxi Province. Certain mining terms used in this annual report are defined in the “Glossary of Mining Terms”, which was included as Appendix B to our registration statement on Form F-l that we filed with the U.S. Securities and Exchange Commission. A copy of the “Glossary of Mining Terms” may be obtained upon written request to the Company.

 

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CONVENTIONS

Unless otherwise specified, all references in this annual report to “U.S. dollars”, “USD” or “US$” are to United States dollars, the lawful currency of the United States of America; all references to “HK dollars”, “HKD” or “HK$” are to Hong Kong dollars, the lawful currency of Hong Kong; all references to “AUD” or “A$” are to Australian dollars, the lawful currency of Australia; all references to “RMB” are to Renminbi, the lawful currency of the PRC; all references to “Euro” or “€” are to Euro, the lawful currency of the European Union; and all references to “British Pound” or “£” are to British Pound, the lawful currency of the British Kingdom. Our financial statements are denominated in RMB and, except as otherwise stated, all monetary amounts in this annual report are presented in RMB.

Solely for your convenience, certain items in this annual report contain translations of Renminbi amounts into U.S. dollars, which have been made at the rate of RMB6.2301 to US$1.00, being the exchange rate as set forth in the H.10 weekly statistical release of the Board of Governors of the Federal Reserve System of the United States on December 31, 2012. All such translations in this annual report are provided solely for your convenience and no representation is made that the Renminbi amounts could have been or could be converted into U.S. dollars at that rate, or at all.

In this annual report, where information has been presented in percentages, or thousands or millions or billions of units, amounts may have been rounded up or down. Accordingly, the amounts identified as total amounts in tables may not be equal to the apparent sum of the amounts listed therein.

In this annual report, business taxes and surcharges have been reclassified as corresponding costs of each category of revenue to provide a more appropriate presentation. The same adjustments have been made to the corresponding prior year. The reclassification has no impact on our overall results. The attention of Shareholders and potential investors is drawn to such adjustments.

Coal resources and reserves are key elements in our Company’s investment decision-making process. The term “resources” describes a concentration or occurrence of material of intrinsic economic interest in or on the Earth’s crust in such form, quality and quantity that there are reasonable prospects for eventual economic extraction. The location, quantity, grade, geological characteristics and continuity of a mineral resource are known, estimated or interpreted from specific geological evidence and knowledge. The term “reserves” describes the recoverable quantity of coal that is commercially viable for development given the prevailing economic situation, particularly with respect to the prices of coal at the time of estimation. Reserves are estimated using a deterministic method, in which a single best estimate is made based on known geological, engineering and economic data, or a probabilistic method, in which known geological, engineering and economic data are used to generate a range of estimates and their associated probabilities. All coal reserves data are estimates, which are revised when additional information becomes available (for example, when additional coal mines commence operations or when actual coal production or extraction commences). “Proven reserves” refers to estimated quantities of coal that geological and engineering data demonstrate have reasonable certainty of being recovered in future years from known deposits under existing economic and operating conditions (that is, prices and costs at the date the estimate is made). “Probable reserves” refers to the estimated quantities of coal that geological and engineering data demonstrate have fair to good probability of being recovered in future years from known deposits under existing economic and operating conditions. To qualify as proven reserves, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the proven estimate. To qualify as probable reserves, there should be at least a 50% probability that the quantities actually recovered will equal or exceed the proven plus probable estimate. Our total in-place proven and probable reserves are presented to include all mining and preparation losses that occur during the processing of coal after it is mined. Recoverable reserves refer to the amount of in-place proven and probable reserves but exclude all mining and preparation losses that occur during the processing of coal after it is mined. Our estimates of recoverable reserves are reported after deduction of actual production volume and nonaccessibe reserves up to December 31, 2012. Unless otherwise specified, coal reserves and resources are presented on a 100% basis.

 

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A majority of our Company’s total estimated proven coal reserves are located in China and Australia. The coal reserves data in this annual report represent estimates of our Company that were calculated by its internal reserves system, which includes, among others, procedures for classifying and estimating reserves. Our Company believes that the methods it uses to estimate these reserves are consistent with definitions and classifications in Securities Act Industry Guide 7, the JORC Code and the PRC Standards, as applicable, to its PRC and Australian mines. Our Company’s internal geological team focuses on periodically estimating reserves information based on geological data obtained from various geological, geophysical and engineering studies. Estimates of net reserves are based on numerous assumptions and estimates relating to technical factors such as initial coal reserves, initial production rates, production decline rates, ultimate recovery of reserves, as well as commercial factors such as future coal prices, timing and amount of capital expenditures, and operating costs that may occur during the production life of the coal reserves.

Unless otherwise indicated, information regarding our Company’s coal production in this annual report refers to our Company’s share of production based on its percentage of equity interest in the relevant subsidiaries or coal mining projects.

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

ITEM 3. KEY INFORMATION

 

A. Selected Financial Data

Historical Financial Data

The following table sets forth selected financial data as of and for the years ended December 31, 2008, 2009, 2010, 2011 and 2012. The selected income statement and cash flow data for the years ended December 31, 2010, 2011 and 2012 and the summary balance sheet data as of December 31, 2010, 2011 and 2012 have been derived from our audited consolidated financial statements included elsewhere in this annual report and should be read in conjunction with those financial statements and the accompanying notes. Unless otherwise indicated, the financial statements have been prepared and presented in accordance with IFRS, as issued by the IASB.

 

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     As of and for the Year Ended December 31,  
     2008     2009     2010     2011     2012     2012  
     RMB     RMB     RMB     RMB     RMB     US$  
     (in millions except per Share and per ADS data)  

INCOME STATEMENT DATA

            

Total revenue1

     25,287.4        20,677.1        33,944.3        47,065.8        58,146.2        9,333.1   

Gross sales of coal

     24,933.3        19,947.8        32,590.9        45,181.2        56,200.6        9,020.8   

Railway transportation service income

     255.7        267.3        513.3        476.9        464.1        74.5   

Gross sales of electricity power

     59.8        187.5        185.5        328.0        323.6        51.9   

Gross sales of methanol

     38.6        258.9        629.3        1,059.3        1,118.0        179.5   

Gross sales of heat supply

     —          15.6        25.2        20.5        39.9        6.4   

Transportation costs of coal

     (508.7     (403.3     (1,160.5     (1,248.3     (2,104.2     (337.7

Cost of sales and service provided

     (12,201.1     (10,590.0     (16,801.3     (25,725.3     (41,961.5     (6,735.3

Cost of electricity power

     (88.3     (190.8     (195.5     (362.5     (330.8     (53.1

Cost of methanol

     (37.8     (352.9     (716.8     (930.2     (911.2     (146.3

Cost of heat supply

     —          (9.7     (12.5     (13.8     (25.1     (4.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     12,451.5        9,130.4        15,057.6        18,785.8        12,813.3        2,056.7   

Selling, general and administrative expenses

     (3,832.0     (3,820.2     (5,093.4     (6,570.2     (7,987.6     (1,282.1

Share of profit of associates

     (67.4     109.8        8.9        68.9        142.0        22.8   

Share of loss of jointly controlled entities

     —          —          (0.5     —          (103.2     (16.6

Other income

     351.5        311.0        3,108.1        1,075.8        2,930.4        470.4   

Interest expense

     (38.4     (45.1     (603.3     (839.3     (1,448.7     (232.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit before income taxes

     8,865.2        5,685.8        12,477.3        12,521.0        6,346.2        1,018.6   

Income taxes

     (2,385.6     (1,553.3     (3,171.0     (3,545.4     (123.9     (19.9

Profit for the year

     6,479.6        4,132.5        9,306.3        8,975.6        6,222.2        998.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit attributable to our equity holders

     6,488.9        4,117.3        9,281.4        8,928.1        6,219.0        998.2   

Earnings per Share

     1.32        0.84        1.89        1.82        1.26        0.2   

Earnings per ADS

     13.19        8.37        18.87        18.15        12.64        2.0   

Operating income per Share before income tax

     1.80        1.16        2.54        2.55        1.29        0.21   

Profit from continuing operation per ADS before income tax

     18.02        11.56        25.37        25.46        12.90        2.07   

CASH FLOW DATA

            

Net cash from operating activities

     7,095.5        6,520.1        5,399.8        17,977.3        6,503.6        1,043.9   

Net cash from (used in) investing activities

     (2,091.5     (24,842.9     (5,884.4     (25,611.1     (3,187.4     (511.6

Net cash from (used in) financing activities

     (921.7     18,503.7        1,360.5        9,441.1        1,145.1        183.8   

BALANCE SHEET DATA

            

Total current assets

     14,994.4        20,000.9        24,281.4        30,431.1        30,282.4        4,860.7   

Total current liabilities

     5,297.0        10,410.4        10,133.9        34,721.5        28,622.7        4,594.3   

Net current assets/(liabilities)

     9,697.4        9,590.5        14,147.5        (4,290.4     1,659.7        266.4   

Property, plant and equipment

     14,149.4        18,877.1        19,874.6        31,273.8        39,503.1        6,340.7   

Total assets

     32,338.6        62,432.6        72,755.9        97,151.6        122,702.3        19,695.1   

Long-term bank borrowing

     176.0        20,911.7        22,400.8        14,869.3        33,283.8        5,342.4   

Equity attributable to our equity holders

     26,755.1        29,151.8        37,331.9        42,634.5        45,826.4        7,355.6   

DIVIDEND PER SHARE

            

A and H Shares

     0.40        0.25        0.59        0.57        0.36        0.06   

ADS

     4.0        2.5        5.9        5.7        3.6        0.58   

 

1 In this annual report, business taxes and surcharges have been reclassified as corresponding costs of each category of revenue to provide a more appropriate presentation. The same adjustments have been made to the corresponding prior year. The reclassification has no impact on the overall results of the Group. The attention of Shareholders and potential investors is drawn to such adjustments. For details, please see Note 2 of the consolidated financial statements attached to this annual report.

 

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Number of Shares Outstanding

 

     As of December 31,  
     2008      2009      2010      2011      2012  

A Shares

     2,960,000,000         2,960,000,000         2,960,000,000         2,960,000,000         2,960,000,000   

H Shares

     1,958,400,000         1,958,400,000         1,958,400,000         1,958,400,000         1,958,400,000   

ADS

     18,919,105         19,403,533         19,744,158         13,933,698         12,915,380   

Exchange Rate Information

The following table sets forth information concerning exchange rates between the Renminbi and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we use in this annual report or will use in the preparation of our periodic reports or any other information to be provided to you. The source of these rates is the Federal Reserve H.10 Statistical Release.

 

Period

   Period End      Average(1)      High      Low  
     (expressed in RMB per US$)  

2006

     7.8041         7.9579         8.0702         7.8041   

2007

     7.2946         7.5806         7.8127         7.2946   

2008

     6.8225         6.9193         7.2946         6.7800   

2009

     6.8259         6.8295         6.8470         6.8176   

2010

     6.6000         6.7603         6.8330         6.6000   

2011

     6.2939         6.4475         6.6364         6.2939   

2012

     6.2301         6.3093         6.3449         6.2221   

October

     6.2265         6.2338         6.2454         6.2221   

November

     6.2301         6.2328         6.2502         6.2251   

December

     6.2186         6.2215         6.2303         6.2134   

2013

           

January

     6.2213         6.2323         6.2438         6.2213   

February

     6.2301         6.3093         6.3449         6.2221   

March

     6.2108         6.2154         6.2246         6.2105   

April (through April 19, 2013)

     6.1772         6.1926         6.2078         6.1720   

 

(1) Determined by averaging the rates on the last business day of each month during the respective period, except for monthly averages, which are determined by averaging the rates on each business day of the month.

On April 19, 2013, the noon buying rate was US$1.00 = RMB6.1772.

 

B. Capitalization and Indebtedness

Not applicable.

 

C. Reasons for the Offer and Use of Proceeds

Not applicable.

 

D. Risk Factors

Our business, financial condition and results of operations are subject to various changing business, industry, competitive, economic, political and social conditions in China and worldwide. In addition to the factors discussed elsewhere in this annual report, the following are some of the important factors that could cause our actual results to differ materially from those projected in any forward-looking statements.

 

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Risks Relating to Our Business and Industry

Our business and profitability are affected by global economic conditions.

The coal industry depends on general economic conditions, including the conditions of global and local economies. For the past several years, the economies of the United States, Europe and certain countries in Asia experienced a severe and prolonged recession and China experienced a slowdown in overall economic growth, which has led to a reduction in economic activity. Moreover, the economic conditions in Europe remain uncertain. In this regard, following GDP growth of 9.2% in 2011 and 7.8% in 2012, according to statistics published by the National Bureau of Statistics of the PRC, the PRC maintained its GDP growth target for 2013 at approximately 7.5% in the face of continuing global turbulence and pressing domestic demand for economic restructuring. In the first quarter of 2013, the PRC’s GDP grew at an annualized rate of 7.7%, according to statistics published by the National Bureau of Statistics of the PRC. Australia’s overall economy, as well as its export-oriented coal industry, has also been adversely affected by these developments. Australia experienced GDP growth of 3.4% in 2012 and, according to the Reserve Bank of Australia, Australia’s GDP was expected to grow by 3.0% in 2013, lower than its actual growth in 2012. From late 2008 to mid-2009, the export prices of thermal coal in the PRC and Australia each decreased significantly. Since late 2009, the export prices of thermal coal in China and Australia have recovered but continue to fluctuate. In addition, in the period from February 2011 to April 2012, demand for semi-hard coking coal declined considerably and demand for semi-soft coking coal also declined.

We expect that the export coal market and, in particular, the semi-soft coking coal segment of the market, will remain weak for the balance of the current financial year. Despite policies and initiatives implemented by the PRC government to alternately stimulate and then moderate economic conditions, recession or a decline in overall economic conditions may recur in the future. In the event of such a recession or decline in economic conditions, whether globally, locally in the PRC or Australia or in our other major markets, our business and profitability may be materially and adversely affected. In addition, increases in inflation and the consumer price index may put pressure on governments to maintain caps on the price of coal and to subsidize power generation companies. At various times, the PRC or Australian governments may implement policies to stimulate or slow the growth of the economy in the future which may, in turn, affect coal prices. In the event that this occurs, our business, results of operations and financial condition may be materially and adversely affected.

Our business, results of operations and financial condition depend on volatile domestic and international coal markets.

Coal sales accounted for 96.0%, 96.0% and 96.7% of our revenues in 2010, 2011 and 2012, respectively, and we expect our coal sales to continue to account for a substantial portion of our revenue. As we derive a substantial portion of our revenue from sales of coal and coal-related products, our business and operating results depend heavily upon supply and demand for coal and coal-related products in the domestic and international coal markets. Accordingly, we are vulnerable to downturns in the demand for coal, increases in supply of coal through new or expanded coal production and declines in coal prices.

The prices of coal and coal-related products have historically been volatile and fluctuate in response to general economic conditions, supply and demand and the level of global inventories. In 2012, the sluggish global economy has led to weak demand for coal in both the PRC and the overseas markets and the average selling price of our coal products decreased as compared with that of 2011. The average selling price of our coal products was RMB663.5, RMB707.7 and RMB599.3 per tonne in 2010, 2011 and 2012, respectively, representing a drop of RMB108.4 per tonne from 2011 to 2012, which in turn had a direct and adverse impact on our sales income. Our operating profit also decreased by 30.7% from 2011 to 2012. We cannot assure you that demand for and prices of coal will not further decline, the occurrence of which may adversely affect our business, results of operations and financial condition.

Global coal demand correlates strongly with the global economy and the performance of coal-consuming industries, including but not limited to the power generation, chemical, metallurgy and construction materials industries. In addition, the availability and prices of alternative energy sources to coal, as well as international shipping costs, also affect coal demand. Coal supply is primarily affected by the geographic location of coal reserves, transportation capacity, the level of domestic and international coal supplies and the type, quality and price of coal from various producers. Developments in the international coal market may adversely affect our overseas sales. A significant increase in global coal supply or reduction in demand for coal from key consuming industries may decrease coal prices, which in turn may significantly reduce our profitability and adversely affect our business, results of operations and financial condition.

 

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The PRC government’s new policy on removing state-sponsored contracts and ceasing to reserve allocations of railway capacity for thermal coal transportation may materially and adversely affect our business, results of operations, financial condition and prospects.

Historically, power utilities purchased coal either on the spot market or through the annual NDRC coordinated contracts. The prices negotiated under this system were lower than prevailing market prices on the spot market and many producers were unwilling to fulfill their contracts when market prices were higher than contract prices. In December 2012, the NDRC announced a policy to change the Chinese domestic thermal coal pricing mechanism. The stated goal of the policy is to eliminate the state-controlled annual contracts which currently govern a large share of domestic coal sales. At the same time, the NDRC has also ceased reserving allocations of railway capacity for thermal coal transportation. Similarly, the stated aim of the new railway capacity ruling is to force coal producers and power utilities to compete with other railway users and negotiate directly with local railway departments.

By removing these state-sponsored contracts, the intended aim of the NDRC policy change is to expose domestic thermal coal pricing to market forces and encourage coal suppliers and power utilities to reach medium- to long-term contracts. The policy change of thermal coal transportation capacity reservation is intended to encourage sales to local customers and stable supply agreements between miners and power plants. However, we cannot assure you that we will obtain enough coal sale contracts without the coordination of the NDRC, or obtain sufficient railway capacity for thermal coal transportation under the new policy, to sustain our historical operating results. As a result, our business, results of operations, financial condition and prospects may be materially and adversely affected.

We derive a significant portion of our revenue from a limited number of customers, and the loss of, or a significant reduction in, sales to any of these customers could materially and adversely affect our business, results of operations and financial condition.

For the years ended December 31, 2010, 2011 and 2012, our top five customers accounted for 24.7%, 19.4% and 19.4% of our revenue, respectively, and sales to our largest customer accounted for 13.0%, 8.5% and 6.3% of our revenue, respectively. We expect that our results of operations will continue to depend on sales to a limited number of customers for the foreseeable future. We may not be able to rely on these customers for revenue generation in the future. We may lose these customers due to the intensified competition. See “— Competition in the PRC and the international coal industry is intensifying, and we may not be able to maintain our competitiveness.” We may also experience reduction, delay or cancellation of orders from one or more of our significant customers, and any decline in the businesses of our customers could also reduce their purchases of our products. The loss of sales to any of these customers could have a material adverse effect on our business, results of operations and financial condition.

We face risks associated with our sales contracts and strategic framework agreements, which may materially and adversely affect our business, results of operations and financial condition.

Sales of our coal produced in China are made primarily on the spot market or pursuant to strategic framework agreements and to a lesser extent, pursuant to sales contracts. Sales of our coal produced in Australia are made pursuant to sales contracts and spot market sales. Our PRC sales contracts generally have terms of one year and specify the price, quantity and quality of coal and delivery schedule of coal. Our Australian sales contracts generally have terms of one year and specify the quantity and quality of coal and delivery schedule of coal, while the purchase price is determined every month or quarter by our customer and us, subject to market conditions. In 2012, due to the volatile international coal markets, customers purchasing our coal produced in Australia generally entered into quarterly contracts with us. As such, if we experience a weak coal pricing environment that results in a decline in coal prices at the time of actual delivery, our revenue and profitability may be materially and adversely affected. In addition, our sales contracts are not automatically renewable. If we are not able to maintain our sales contracts with our major customers on terms commercially acceptable to us or at all, our business, results of operations and financial condition may be adversely affected.

In addition, the strategic framework agreements used in the sales of our coal produced in China generally only specify the quantity and quality of coal, while the purchase price is determined in the annual or monthly sales contracts we enter into under the strategic framework agreements. As a result, we are subject to market conditions at the time of actual delivery. Moreover, as letters of intent are not legally binding, customers entering into letters of intent with us are not obligated to purchase the agreed quantity of products, or any products at all. In addition, in accordance with industry practice, our customers do not enter into long-term contracts (those exceeding one year) with us. Therefore, we do not have long-term commitments from our customers to purchase our products, and our customers may reduce or stop purchasing products from us for various reasons, which may also materially and adversely affect our business, results of operations and financial condition.

 

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We rely primarily on ports, highways and third party operated railway systems in the PRC and Australia to deliver our coal, any major disruption of which may adversely affect our business, results of operations and financial condition.

We rely primarily on highways and our own railway network, as well as third party operated railway system, to deliver coal to customers in China. We also deliver small volumes of coal through ports and canals. Coal resources and production in China are mainly located in northern and northwestern China, while coal consumption is primarily in eastern and southern China. As a result, coal suppliers must transport coal via third party operated railway systems from major supply areas to major demand areas. Although the PRC government has taken steps to upgrade and expand the national railway systems, its current capacity is not sufficient to meet the entire domestic coal transportation demand resulting from regional imbalances. Even though our domestic customers are mainly located in eastern China, where the railway system is more developed than other regions of China, our ability to deliver coal is still restricted by the transportation capacity. Pursuant to the Twelfth Five-Year Plan, the PRC government plans to construct several railways for coal transportation in cities in northern China and northwestern China, such as Shanxi Province, Shaanxi Province and the Inner Mongolia Autonomous Region. However, as it will take a significant amount of time for the relevant PRC authorities to grant approvals and permits and to complete the construction of the railway, we anticipate that we will continue to face challenges with respect to access to railway transportation. In addition to railway transportation, we use major coal shipping ports along the coast of China to deliver coal to customers located along the coastal regions of China. However, we may not be able to continue securing sufficient railway or port capacity to deliver our coal and may experience material delivery delays or substantial increases in transportation costs as a result of insufficient railway capacity.

In Australia, we rely substantially on third party operated railway networks to deliver coal to ports in New South Wales and Queensland, for onward shipping to our customers. We generally enter into transportation agreements with national and privately operated railway networks, rail haulage operators and ports to secure transportation capacity, generally for terms of five to ten years and generally on a “take or pay” basis. As the transportation capacity secured by these agreements is based on assumed production volume, we may not have sufficient capacity if our actual production volume exceeds our estimated production volume. Conversely, we may have excess transportation capacity (which, in the case of “take or pay” agreements, we will have to pay for even if unused) if our actual production volume is lower than our estimated production volume. In 2012, the sluggish global economy led to weak demand for coal in both the PRC and overseas markets. We expect that global economic conditions will remain uncertain and international coal markets to continue to be volatile in 2013, and as a result, we cannot assure you that we will fully use the transportation capacity secured on a “take or pay” basis. In addition, we may not be able to secure sufficient transportation capacity to deliver our coal in the future and may experience material delivery delays or substantial increases in transportation costs as a result of insufficient transportation capacity, which may also adversely affect our business, results of operations and financial condition.

Competition in the PRC and the international coal industry is intensifying, and we may not be able to maintain our competitiveness.

We face competition in all aspects of our business, including pricing, production capacity, coal quality and specifications, transportation capacity, cost structure and brand recognition. Our coal business competes in the domestic and international markets with other large domestic and international coal producers. The ongoing consolidation in the PRC and Australian coal industry has increased the level of competition we face in our core business. In addition, countries such as Mongolia and U.S. have significantly increased their coal exports, which has intensified the competition among international coal exporters. Our competitors may have higher production capacities, stronger brand names and more financial, marketing, distribution and other resources than we do. We may not be able to maintain our competitiveness if changes or developments in the market weaken our existing competitive advantages. Efforts by our competitors to improve the quality of their coal may render obsolete or irrelevant any quality advantage we have over them. Our failure to compete effectively may have a material adverse impact on our business, results of operations and financial condition.

We may not be able to meet our capital expenditure requirements or secure additional external financing in the future.

Our business is capital intensive and will require substantial expenditures for, among other things, the acquisition of equity interests in and assets of coal mines as well as mining rights, purchase of and investment in properties, machinery and equipment and operational capital expenditures. In 2010, 2011 and 2012, our total capital expenditures were approximately RMB3,785.3 million, RMB23,336.4 million and RMB20,809.2 million, respectively, largely due to investment in our core coal businesses. We intend to use cash on hand, funds from operations and additional debt and equity financing to finance our capital expenditures going forward. However, we may not be able to obtain sufficient amounts of capital in a timely manner, on terms acceptable to us, or at all, which could result in a material adverse effect on our business, results of operations and financial condition.

 

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In recent years, the size of our interest-bearing debt obligations has increased along with our expansion plans. In May and July 2012, we issued U.S. dollar and RMB denominated corporate bonds in aggregate principal amounts of US$1.0 billion and RMB5.0 billion, respectively. As of December 31, 2012, we had approximately RMB40,996.4 million in bank borrowings, of which approximately RMB7,712.6 million is due within a year and approximately RMB33,283.8 million is due after one year. In the first quarter of 2013, we entered into several U.S. dollar and RMB denominated loan agreements for aggregate amounts of US$601.4 million and RMB700 million. This level of debt could have significant consequences for our operations, including reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes as a result of our debt servicing obligations, limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, our industry and the general economy and potentially limiting our ability to obtain, or increasing the cost of, any additional financing. In addition, our business plans may change from time to time due to changing circumstances, new opportunities or unforeseen contingencies. If we change our business plans, we may need to obtain additional external financing which may include bank borrowings or issuances of debt securities to meet our capital expenditure plans. If we raise additional funds through debt financing, our interest and debt repayment obligations will increase and we may be subject to additional covenants that could limit our ability to access cash flows from operations. We may not be able to raise sufficient financing to fund our future capital expenditures and service our debt obligations or at all. Failure to obtain sufficient financing could cause delays or abandonment of business development plans and have a material adverse effect on our business, results of operations and financial condition.

The coal reserve data in this annual report are only estimates, which may differ materially from actual reserve amounts.

Our coal reserve data are only estimates, which may differ materially from actual reserve amounts. There are inherent uncertainties in estimating reserves, which require the consideration of a number of factors, assumptions and variables, many of which may be beyond our control and cannot be ascertained despite due investigation. Our reserve estimates may change substantially if new information becomes available.

In addition, reserve data for certain of our PRC mines are estimated in accordance with Industry Guide 7 for proven and probable reserves and the JORC Code for reserves. Reserve data for our Australian mines are typically estimated in accordance with the JORC Code. As the mining standards and mining terminology of the JORC Code may differ substantially from Industry Guide 7, our reserve data may materially vary when we compile and present such data. As such, our actual results of operations may differ materially from our long-term business and operational projections, which are based on our coal reserve estimates. We may adjust our coal reserve estimates downward in the future, and in such event, our long-term production and the useful lives of our mines may be materially and adversely affected.

Our business, results of operations and financial condition depend on in part our ability to continue acquiring or developing suitable coal reserves.

Coal reserves in existing mines decline as coal is produced. Due to limitations in significantly increasing our production capacity at existing mines, our ability to expand our coal production capacity depends on our development of coal reserves, as well as our newly acquired coal reserves and resources domestically and overseas.

The acquisition of new mines by PRC coal companies, either within China or overseas, and the procurement of related licenses and permits are subject to PRC government approvals. Delays or failures in securing the required PRC government approvals, licenses or permits, as well as any adverse change in government policies, may hinder our expansion plans, which may materially and adversely affect our future profitability and growth prospects. In connection with overseas acquisitions and expansion, we may encounter challenges due to our unfamiliarity with local laws and regulations, and may suffer foreign exchange losses on overseas investments or face political or regulatory obstacles to acquisitions. As a result of these challenges, our overseas expansion plans and investments may not be successful and may not achieve our anticipated results.

In addition, the acquisition of new mines or the grant of mining leases in Australia are subject to approval under Australia’s foreign acquisition legislation and policy, including the Foreign Acquisitions and Takeovers Act 1975, which is administered by the Treasurer of Australia acting through the Foreign Investment Review Board. Such foreign investment approvals may be granted subject to conditions imposed by the Treasurer of Australia. This foreign investment regime subjects us to additional risks and uncertainties, and may adversely impact our ongoing and potential expansion plans in Australia.

 

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Moreover, we may not be able to continue to identify suitable acquisition targets or acquire these targets on competitive terms, at an acceptable cost or in a timely manner. We may not be able to successfully develop new coal mines or expand our existing ones in accordance with our development plans, or at all. Failure to acquire suitable targets on competitive terms, develop new coal mines or expand our existing coal mines could have an adverse effect on our competitiveness and growth prospects.

We may experience difficulty integrating our acquisitions, which could result in a material adverse effect on our business, results of operations and financial condition.

We may from time to time expand our business through acquisitions of other coal mining companies, assets or other coal or mining-related businesses. We are devoting significant resources to the integration of our operations in order to achieve the anticipated synergies and benefits of the acquisitions and expansion.

Acquisitions and expansion involve uncertainties and a number of risks, including:

 

   

difficulty in integrating the assets, operations and technologies of the acquired companies or assets, including their employees, corporate cultures, managerial systems, processes and procedures and management information systems and services;

 

   

complying with the laws, regulations and policies applicable to the acquired businesses;

 

   

failure to achieve the objectives or benefits, or to generate sufficient revenue to recover the costs and expenses, resulting from the acquisition and integration of such companies or assets;

 

   

managing relationships with employees, customers and business partners during the course of integrating new businesses;

 

   

integrating other acquired employee groups with our employee groups and on maintaining productive employee relations;

 

   

attracting, training and motivating members of our management and workforce;

 

   

accessing our capital resources and internally generated funds to fund acquisitions, which may divert financial resources otherwise available for other purposes;

 

   

strengthening our operational, financial and management controls, particularly those of our newly acquired assets and subsidiaries, to maintain the reliability of our reporting processes;

 

   

difficulty in exercising control and supervision over the newly acquired operations, including failure to implement and communicate our safety management procedures resulting in additional safety hazards and risks;

 

   

potential ongoing financial obligations and unforeseen or hidden liabilities of the acquired companies or coal or potash-related businesses; and

 

   

failure to diversify our operations to include new products or successfully manage our operations in new markets, such as potash.

In the event that we are unable to efficiently and effectively integrate newly acquired companies or coal or potash-related businesses into our Company, we may be unable to achieve the objectives or anticipated benefits of such acquisitions, which may adversely impact our business, results of operations and financial condition. In addition, we may have to write down the carrying value of the intangible assets associated with any acquired companies, which could adversely affect our earnings.

Our merger with Gloucester may not strengthen our coal mining operations and market profile, globally and in Australia, as we expect.

In June 2012, Gloucester became a wholly owned subsidiary of Yancoal Australia, and the Company and Gloucester shareholders held 78% and 22%, respectively, of the ordinary share capital of Yancoal Australia. However, as a condition of the foreign investment approval for our merger with Gloucester, we are required by the Treasurer of Australia to reduce our economic ownership in Yancoal Australia to less than 70% by December 31, 2013, and our economic ownership must not exceed 70% thereafter. In addition, we must reduce our economic ownership in Yancoal Resources’s underlying assets to no more than 50% by December 31, 2013.

 

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Although we believe this transaction has significantly increased our total resource base and strengthened our coal mining operations and market profile in Australia and globally, we may face difficulty integrating the operations of Gloucester. The continued integration of Yancoal Resources and Gloucester into Yancoal Australia specifically may be affected by the terms and conditions of our merger with Gloucester, as it will result in Yancoal Australia, other than the Excluded Assets, ceasing to be a wholly owned subsidiary of our Company. As a result of this reduced control, we may not be able to influence the actions or implement the measures necessary to successfully integrate Yancoal Resources and Gloucester. See “— We may experience difficulty integrating our acquisitions, which could result in a material adverse effect on our business, results of operations and financial condition” and “– Our business, results of operations and financial condition depend on in part our ability to continue acquiring or developing suitable coal reserves.” We also expect that we will make significant capital expenditures to develop Gloucester’s projects.

We may be required to allocate additional funds for land subsidence, restoration, rehabilitation and environmental protection.

Underground and surface mining may cause the land above mining sites to subside, or may otherwise adversely affect the environment. We may compensate inhabitants in areas surrounding our mining sites for their relocation expenses or for any property loss or damage as a result of our mining activities. PRC regulations require us to set aside provisions to cover the costs associated with land subsidence, restoration, rehabilitation and environmental protection. An estimated provision is deducted as a cost and expense item in our income statement based on the amount of coal actually extracted. In addition, under the relevant Australian environmental regulations, rehabilitation costs are generally estimated in accordance with the expected costs of land rehabilitation. These land rehabilitation costs may exceed current estimates. Environmental legislation may also change, which could result in mandated modifications to mining operations that are costly.

In 2010, 2011 and 2012, we expensed approximately RMB1,532.2 million, RMB1,513.1 million and RMB1,450.6 million, respectively, of our provisions for land subsidence, restoration, rehabilitation and environmental protection as determined by our directors based on estimations of various factors, including past occurrences of land subsidence. However, the provisions that we make are only estimates and may be adjusted to reflect the actual effects of our mining activities on the land above and surrounding our mining sites. Therefore, such estimates may not be accurate and land subsidence, restoration, rehabilitation and environmental costs may substantially increase in the future. Moreover, governments may impose new fees or change the basis of calculating compensation and reclamation costs in respect of land subsidence, the occurrence of any of which could increase our costs and have a material adverse effect on our business, results of operations and financial condition.

Our business and industry may be affected by the development of alternative energy sources and climate change.

We supply coal as fuel to, among others, the PRC thermal power generation industry and, as a result, are affected by the demand and growth of the PRC thermal power industry, which in turn is affected by the development of alternative energy sources, climate change and global environmental factors. If alternative combustion technologies develop and reduce the demand for coal in electricity generation, then demand for coal in the PRC thermal power generation industry may decrease, which would materially and adversely affect its demand for our products.

In addition, while the majority of global energy consumption is from conventional energy sources such as coal, alternative energy industries are rapidly developing and are gradually gaining widespread acceptance. Coal combustion generates significant greenhouse gas and other pollutants, and the effects of climate change resulting from global warming and increased pollution levels may provide incentives for governments to promote or invest in “green” energy technologies such as wind, solar, nuclear and biomass power plants, or to reduce their consumption of conventional energy sources such as coal. In particular, pursuant to the Twelfth Five-Year Plan, the PRC government plans to continue to encourage the development of non-fossil fuel energy sources, such as wind power, solar power, biomass and geothermal energy, in the next five years. As such, alternative energy industries may rapidly develop and gradually gain mainstream acceptance in the PRC and the rest of the world. If alternative energy technologies continue to develop and prove suitable for wide commercial application in the PRC and overseas, demand for conventional energy sources such as coal could gradually be reduced, which would have a material adverse effect on the coal mining industry and, consequently, our business, results of operations and financial condition. See “— Our business, results of operations and financial condition may be adversely affected by present or future environmental regulations.”

 

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Exploration of mineral properties and development of resources could involve significant uncertainties.

We currently have exploration projects in Australia and Canada and we may have additional exploration projects in the PRC and other countries and regions in the future. The success of any mining exploration program depends on various factors including, among other things, whether mineral bodies can be located and whether the locations of mineral bodies are economically viable to mine. In addition, the development of these resources could face significant uncertainties. It can take several years and would require capital expenditures from the initial exploration phase until production commences, during which time market fundamentals, capital costs and economic feasibility may change, and the actual results may differ from those anticipated by third party independent technical studies. Furthermore, there are a number of uncertainties inherent in the development and expansion of mining operations, including: (i) the availability and timing of necessary governmental permits, licenses and approvals; (ii) the timing and cost necessary to construct mining and processing facilities; (iii) the availability and cost of labor, utilities, and supplies; (iv) the accessibility of transportation and other infrastructure; and (v) the availability of funds to finance construction and production activities. As a result, we cannot assure you that any of our exploration activities will result in the discovery of valuable resources or reserves, or that reported resources can be converted into reserves in the future.

We are exposed to fluctuations in exchange rates and interest rates.

We face risks relating to fluctuations in exchange rates for RMB against other currencies, primarily the Australian dollar and the U.S. dollar. China has adopted a managed floating exchange rate system to allow the value of the Renminbi to fluctuate within a regulated band based on market supply and demand with reference to a basket of currencies. In April 2012, the PRC government further enlarged the trading band. In this regard, the PBOC has allowed the Renminbi to rise or fall 1% against the U.S. dollar from the daily central parity rate, effective April 16, 2012, compared with its previous 0.5% limit. We expect that the PRC government will continue to adopt prudent monetary policy in 2013, which could result in further and more significant revaluations of the Renminbi against the U.S. dollar or any other foreign currency. We are primarily affected by exchange rate fluctuations that arise from our export sales denominated in Australian dollars and U.S. dollars, which may affect the RMB values of such export sales. In addition, exchange rate fluctuations can result in exchange losses on our foreign currency deposits and loans and other indebtedness. As of December 31, 2012, the exchange rate for the Australian dollar against the U.S. dollar was US$1.00 = A$1.0393, compared with US$1.00 = A$1.0251 as of December 30, 2011. We recorded an exchange gain of RMB518.6 million for the year ended December 31, 2011 and RMB714.2 million for the year ended December 31, 2012, respectively. Exchange rate fluctuations can affect our cost of imported equipment and components. See “Item 3. — Key Information — A. Selective Financial Data — Exchange Rate Information.”

On April 9, 2013, with the authorization of the PBOC, the China Foreign Exchange Trade System (CFETS) launched direct trading between Renminbi and Australian dollar on the inter-bank foreign exchange market, which is based on the direct exchange rate between the two currencies. We expect that this will help lower the currency conversion costs between the two currencies. However, we cannot assure you that the new policy will decrease our currency conversion costs. The conversion costs we realized in the previous trading scheme, which used U.S. dollars, may be lower, reflecting that the U.S. dollar is more liquid than the Australian dollar.

We are exposed to interest rate risk caused by interest rate changes in relation to our bank borrowings and our other indebtedness, as well as our variable rate bank balances, term deposits and restricted cash held with banks. Our interest rate risk primarily arises from fluctuations in the PBOC benchmark interest rate in relation to our RMB-denominated borrowings, and fluctuations in the LIBOR rate in relation to our U.S. dollar-denominated borrowings. As of December 31, 2012, we had approximately US$4,162.0 million of borrowings denominated in U.S. dollars and RMB13,493.5 million of borrowings denominated in RMB. A substantial majority of our borrowings denominated in RMB are linked to the benchmark lending rate published by the PBOC, which is subject to fluctuations as the PRC government adjusts interest rates and related policies from time to time as a matter of national economic policy.

 

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In addition, a substantial majority of our borrowings denominated in U.S. dollars are linked to floating LIBOR rates, the fluctuation of which are beyond our control. Our lending rates may increase in the future as a result of reasons beyond our control, and may result in an adverse effect on our business, results of operations and financial condition.

To manage uncertainty in our revenue stream and capital expenditures caused by exchange rate fluctuations, we have entered into forward foreign exchange contracts to sell or purchase specified amounts of foreign currencies at stipulated exchange rates. We have also entered into interest rate swap contracts with banks to hedge a portion of our variable interest rate borrowings. As of December 31, 2012, the fair value of our derivative assets in respect of our forward foreign exchange contracts was RMB76.6 million, compared with the fair value liability of our forward foreign exchange contracts and interest rate swap contracts of approximately RMB128.1 million. See “Item 11. Quantitative and Qualitative Disclosures of Market Risks.” Our hedging arrangements may not be effective and our business, results of operations and financial condition may be materially and adversely affected by fluctuations in exchange rates or interest rates.

Our business, results of operations and financial condition are subject to resource taxes and we may not be able to pass on our increased costs relating to resource taxes to our customers.

We currently pay a resource tax of RMB3.60, RMB3.20 and RMB3.20 per tonne of raw coal output in Shandong Province, Shanxi Province and Inner Mongolia Autonomous Region, respectively. The PRC government is considering changes to this tax whereby it would be based on pricing and not on volume. If such a change is adopted and the tax based on pricing is significantly higher than current tax, we may fail to pass on all of the increased costs to our customers, which could have a material adverse effect on our business, results of operations and financial condition. In addition, on March 29, 2012, the Australian MRRT was passed into law, effective July 1, 2012. The MRRT is a profits-based tax that is charged at an effective rate of 22.5% on the assessable profits (excess of annual mining revenue over annual mining expenditures with respect to mineral interests, less certain allowances) of, among others, coal mining enterprises. In 2012, as the result of the MRRT, our Australian subsidiaries recognized deferred tax assets, leading to a decrease in the income tax expense of our Australian subsidiaries by RMB1,085.2 million. However, this is a one-off tax impact and we expect the MRRT has the potential to increase the overall tax liability of our Australian subsidiaries and adversely affect our results of operations and financial condition in the future.

Our Controlling Shareholder has significant influence over us.

As of December 31, 2012, our Controlling Shareholder, the Yankuang Group, owned 52.86% of our outstanding shares and has significant influence over us. Pursuant to approval granted at the annual shareholder meeting of the Company held on June 22, 2012, the Company entered into five continuing connected transaction agreements with the Yankuang Group, namely a materials supply agreement, a supply of labor and services agreement, a pension fund management agreement, a coal products and materials supply agreement and an electricity and heat energy supply agreement, together with the respective annual caps for such transactions from 2012 to 2014, in the ordinary course of business. In addition, pursuant to approval granted at the third meeting of the fifth session of the Board of Directors held on August 19, 2011, the Company entered into a financial services agreement. These related party transactions were reviewed and approved according to the procedures under relevant regulations and standards of the HKSE, SSE, NYSE and SEC. However, we may continue to enter into related party transactions with Yankuang Group and, as such, any material financial or operational developments experienced by the Yankuang Group that lead to the disruption of its operations or impairs its ability to perform its obligations under the agreements could materially affect our business, results of operations and financial condition and future prospects.

 

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As our Controlling Shareholder, the Yankuang Group has the ability to exercise control over the Company’s business and affairs, including, but not limited to, decisions with respect to:

 

   

mergers or other business combinations;

 

   

the acquisition or disposition of assets;

 

   

the issuance of additional shares or other debt or equity securities; and

 

   

management of our Company.

Accordingly, our Controlling Shareholder may vote, take other actions or make decisions that conflict with our interests or the interests of our other security holders.

Our coal operations are extensively regulated by the PRC and Australian government, and government regulations may limit our activities and adversely affect our business, results of operations and financial condition.

Our coal operations in China are subject to extensive regulation by the PRC government. National governmental authorities, such as the NDRC, the MEP, the MLR, the State Administration of Coal Mine Safety (“SACMS”), the State Administration of Work Safety, the National Energy Administration and the State Bureau of Taxation, as well as corresponding provincial and local authorities and agencies, exercise extensive control over the mining and transportation (including rail and sea transport) of coal within China. Our operations in Australia are subject to similar laws and regulations of general application governing mining and processing, land tenure and use, environmental requirements, including site-specific environmental licenses, permits and statutory authorizations, workplace health and safety, trade and export, competition, access to infrastructure, foreign investment and taxation. These regulations may be implemented by various federal, state and local government departments and authorities including the Department of Resources, Energy and Tourism, the Department of Sustainability, Environment, Water, Population and Communities, and the National Native Title Tribunal. Regulatory oversight from these authorities and agencies may affect the following aspects of our operations, among others:

 

   

the use and granting of mining rights;

 

   

access to land for mining and mining-related purposes;

 

   

exploration and production licenses;

 

   

rehabilitation of mining sites and surrounding areas;

 

   

mining recovery rates;

 

   

pricing of our transportation services for coal in China;

 

   

taxes, levies and fees on our business;

 

   

return on investments;

 

   

application of capital investments;

 

   

pension fund contributions;

 

   

technological innovations;

 

   

preferential tax treatment;

 

   

environmental and safety standards; and

 

   

MRRT and carbon tax for Australian operations.

As a result of the foregoing regulation, our ability to execute our business strategies or to carry out or expand our business operations may be restricted. We are still in the process of obtaining or renewing some of the regulatory approvals, permits and licenses required for our business operations, and may experience substantial delays in obtaining such regulatory approvals, permits and licenses.

 

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Our business may also be adversely affected by future changes in PRC or Australian regulations and policies that affect the coal industry. The adoption of new legislation or regulations or the new interpretation of existing legislation or regulations or changes in conditions attaching to approvals may materially and adversely affect our operations, our tax costs and cost structure or product demand. The occurrence of any of the foregoing may cause us to substantially change our existing operations, incur significant compliance costs and increase the risk of our future investment or prevent us from carrying out mining operations, which could have a material adverse effect on the profitability of our operations in Australia and our overall business, results of operations and financial condition. See “— Our business, results of operations and financial condition may be adversely affected by present or future environmental regulations” and “— Our business, results of operations and financial condition are subject to resource taxes and we may not be able to pass on our increased costs relating to resource taxes to our customers.”

We may not be able to obtain all necessary approvals, permits and licenses.

Pursuant to applicable laws and regulations in China, we are required to renew approvals, permits and licenses with respect to our exploration activities, mining operations and environmental protection for our existing operational mines and obtain more approvals, permits and licenses for our development-stage or exploration projects such as Zhuanlongwan, Shilawusu, Yingpanhao and Wanfu. In addition, we are required to obtain or maintain land use rights certificates and building ownership certificates for property we own or lease properties from owners possess valid land use rights certificates or building ownership certificates.

With respect to our operations in Australia and Canada, we are also required to obtain a number of material regulatory approvals, permits and license. We are in the process of obtaining or renewing certain regulatory approvals, permits and licenses for our coal mines, such as the open-pit project at Moolarben Coal Mine and the Southeast open-pit project at Ashton Coal Mine.

If any of these or our other mining licenses, coal production licenses, safety production licenses or other certificates, approvals or permits are revoked, not renewed or not obtained, we could be required to cease operations of the affected mine or production facility. The loss of some or all of our mining licenses, coal production licenses, safety production licenses or other certificates, approvals or permits may have a material adverse effect on our business, results of operations and financial condition.

Our business, results of operations and financial condition may be adversely affected by present or future environmental regulations.

Our coal mining operations produce waste water, gas emissions and solid waste materials. In addition, surface mining operations also produce noise pollution. As a PRC and Australian coal producer, we are subject to extensive and increasingly stringent environmental protection laws and regulations. These laws and regulations:

 

   

impose fees for the discharge of waste substances;

 

   

require provisions for land reclamation and rehabilitation;

 

   

impose fines and other penalties for serious environmental offenses;

 

   

authorize the government to close any facility that fails to comply with environmental regulations and suspend any coal operation that causes excessive environmental damage; and

 

   

establish the conditions (including environmental requirements) for domestic mining operations.

Due to the increasing awareness of environmental issues, the PRC government has tightened its enforcement of applicable laws and regulations and adopted more stringent environmental standards. On December 1, 2011, the State Council issued the Working Plan for the Control of Discharge of Greenhouse Gases under the Twelfth Five-Year Plan (the “Working Plan”), pursuant to which China plans to continue to increase the proportion of non-fossil fuels used as an overall primary energy source to 11.4% by 2015 and reduce the proportion of coal used as an overall primary energy source. In addition, pursuant to the Working Plan, the PRC government aims to reduce energy consumption per unit of GDP by 17% by 2015 compared to 2010. In addition, pursuant to the administrative energy-saving and emission reduction policies carried out by the central and provincial governments in accordance with the Twelfth Five-Year Plan of Energy-Saving and Emission Reduction issued in August 6, 2012, the PRC government aims to reduce approximately 670 million tonnes of coal from 2011 to 2015, develop clean coal technology such as underground coal gasification, desulfurization and coal water fuel and improve the utilization of coal gangue.

 

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Similarly, our Australian operations are subject to Australia’s stringent federal and state and territory environmental laws and regulations. In March 2012, the Australian government enacted a carbon pricing mechanism (or carbon tax) law, effective July 1, 2012, which imposed a charge on the amount of carbon dioxide emissions with an eventual transition to a “cap and trade” carbon emissions scheme. The carbon tax law imposes a charge based on tonnage of carbon dioxide equivalent (CO2-e) emissions, which is intended to disincentivize the use of fossil fuels such as coal.

In addition, there have recently been cases in New South Wales and Queensland relating to the environmental effects of greenhouse gas emissions produced as a result of coal mining. Compliance with laws and involvement in litigation can be expensive, lengthy and disruptive to normal business operations. If this area of law develops further, more stringent regulations may be developed, particularly in relation to greenhouse gas emissions, which could increase the costs of using coal and reduce demand for coal as a fuel source, thus adversely affecting the sales volumes and prices of our coal. Moreover, Australian environmental approval processes require a technical environmental assessment to be prepared prior to granting approval, as well as public consultation. Community groups may lobby for more restrictive conditions to be imposed on approvals granted or for the approval to be declined, either of which may result in a material adverse effect on our business and results of operations.

If efforts to increase energy efficiency, control greenhouse gas emissions and enhance environmental protection result in a decrease in coal consumption, our revenue may decrease and our business may be adversely affected. In addition, our budgeted amount for environmental regulatory compliance may not be sufficient, and we may need to allocate additional funds for this purpose. If we fail to comply with current or future environmental laws and regulations, we may be required to pay penalties or fines or take corrective actions, any of which may have a material adverse effect on our business, results of operations and financial condition.

Our ability to operate effectively could be impaired if we lose key personnel, including mine planners, or if we are unable to attract and retain skilled and qualified personnel.

In the conduct of our operations, we rely substantially on the services of our key employees with professional skills, qualifications and experience, including mine planners. We may not be able to continue to employ our key personnel or attract and retain skilled and qualified personnel and the loss of any of these personnel could materially and adversely affect our operations.

As our business expands, we believe our success will depend on our continued ability to attract and retain skilled and qualified personnel familiar with internationalized operation. Any difficulty in attracting, recruiting, training and retaining skilled and qualified personnel could materially and adversely affect our business, results of operations and financial condition.

Our operations may be affected by uncertain mining conditions and we may suffer losses resulting from mining safety incidents.

Our coal mines and operating facilities may be damaged by water, gas, fire or cave-ins due to unstable geological structures, which may affect the safety of our workforce as well as our costs of producing coal, including without limitation, roof collapses, deterioration in the quality or variations in the thickness of coal seams, mine water discharge and flooding, inclement weather, explosions from methane gas or coal dust, ground falls and other mining hazards. Additionally, we are exposed to operational risks associated with industrial or engineering activities, such as maintenance problems or equipment failures. Although we conduct geological assessments on mining conditions and adapt our mining plans to the mining conditions at each mine, adverse mining conditions may endanger our workforce, increase our production costs, reduce our coal output or temporarily suspend our operations. Although we have implemented safety measures at our mining sites, trained our employees on occupational safety and maintain liability insurance for personal injuries as well as limited property damage for certain of our operations, safety incidents may occur. The occurrence of any of the foregoing events or conditions would have a material adverse impact on our business, results of operations and financial condition.

 

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We face price volatility and intense competition in our methanol operations.

We entered the PRC methanol market and commenced production of coal-based methanol at Tianhao Chemicals and Yulin Nenghua in September 2008 and August 2009, respectively. In 2010, 2011 and 2012, we generated revenue of RMB629.3 million, RMB1,059.3 million and RMB1,118.0 million from sales of methanol, respectively, which represented 1.9%, 2.3% and 1.9% of our total revenue for the same periods, respectively. However, we ceased production of coal-based methanol at Tianhao Chemicals in April 2012 due to the shortage of raw materials and are in the process of disposing of its methanol assets.

The methanol business is a cyclical and competitive commodity industry with rapidly changing supply and demand fundamentals. In addition, there is currently significant overcapacity in the methanol industry, which is not expected to change, and the market demand of methanol is not expected to grow significantly in the short term.

We expect our methanol prices to be affected by a number of factors, including, without limitation:

 

   

global and domestic methanol production;

 

   

global energy prices;

 

   

methanol plant utilization rates, capacity expansions and shutdowns;

 

   

global economic conditions;

 

   

compliance costs and environmental risks; and

 

   

competition from low-cost methanol producers.

As of the end of 2012, we had a total annual methanol production capacity of 600,000 tonnes. In addition, we are currently constructing a 600,000-tonne methanol project in Ordos City, Inner Mongolia Autonomous Region, which we expect to become operational in the second half of 2013. We may not be able to optimize the utilization of our new facilities as planned. If our projections for the domestic methanol market prove incorrect or if we are unable to otherwise compete effectively, we may not recover the capital and resources we have invested in our methanol operations and may not realize the intended benefits of our expansion into this industry. In either event, our business, results of operations and financial condition will be adversely affected.

Our insurance will not cover all the potential risks associated with our operations.

Our business is subject to a number of risks and hazards generally, including adverse environmental conditions, industrial accidents, labor disputes, unusual or unexpected geological conditions, ground or slope failures, changes in regulatory environment and natural phenomena such as inclement weather conditions, floods, earthquakes and fires. Such occurrences could result in damage to mineral properties or production facilities, personal injury or death, environmental damage to our properties or properties of others, delays in development or mining, monetary losses and possible legal liability. Customary to what we believe to be industry practice, we have maintained insurance to protect against certain risks in such amounts we consider to be reasonable. However, our insurance may not cover all potential risks associated with our operations. We may also be unable to maintain insurance to cover these risks at economically feasible premiums and may not be able to pass on any increased costs relating to insurance to our customers. If such costs exceed the levels which we expect, there could be a material adverse effect on our business, results of operations and financial condition.

We may not be able to protect our patents or other intellectual property rights, which could have a material adverse effect on our business.

From 2010 to 2012, we completed 306 technology improvement projects, and obtained 103 patents and over 10 technology advancement prizes, which have enhanced our coal mining and related business operations. Further, we own other intellectual property such as proprietary technologies procedures and processes. We believe our patents and other intellectual property rights are important to our success. Existing laws in China offer limited protection for our intellectual property rights. We rely upon a combination of patents, confidentiality policies and agreements, nondisclosure and other contractual arrangements to protect our intellectual property rights. We cannot assure you that we will be able to detect any unauthorized use of, or take appropriate, adequate and timely actions to enforce, our intellectual property rights. Consequently, we may not be able to effectively prevent unauthorized use of our patents in other countries where such patents are not registered.

 

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The measures we take to protect our intellectual property rights may not be adequate, and monitoring and preventing unauthorized use is difficult. The protection of our intellectual property may be compromised as a result of (i) expiration of the protection period of our registered intellectual property rights, (ii) infringement by others of our intellectual property rights; and (iii) refusal by relevant regulatory authorities to approve our pending patent applications. Furthermore, the application of laws governing intellectual property rights in China and abroad is uncertain and evolving, and could involve substantial risks to us. If we are unable to adequately protect our intellectual property rights, our reputation may be negatively impacted and our business may be materially and adversely affected.

The audit report included in this annual report is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Board and, as such, you are deprived of the benefits of such inspection.

Auditors of companies that are registered with the SEC and traded publicly in the United States, including our independent registered public accounting firm, must be registered with the United States Public Company Accounting Oversight Board (the “PCAOB”) and are required by the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and professional standards in connection with their audits of financial statements filed with the SEC. Because we have substantial operations within the Peoples’ Republic of China and the PCAOB is currently unable to conduct inspections of the work of our auditors as it relates to those operations without the approval of the Chinese authorities, our auditor’s work related to our operations in China is not currently inspected by the PCAOB.

This lack of PCAOB inspections of audit work performed in China prevents the PCAOB from regularly evaluating the audits performed by Grant Thornton and its quality control procedures. As a result, investors are deprived of the full benefits of PCAOB inspections of auditors.

The inability of the PCAOB to conduct inspections of audit work performed in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures as compared to auditors in other jurisdictions that are subject to PCAOB inspections on all of their work. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

Risks Relating to the PRC

Changes in China’s economic, political and social conditions as well as governmental policies could affect our business, results of operations and financial condition.

China’s economy differs from the economies of more developed countries in many respects, including the structure of the economy, level of government involvement, level of development, growth rate, control of capital investment, control of foreign currency and allocation of resources. China’s economy has been in transition from a planned economy to a more market-oriented economy. For the past three decades, the PRC government authorities have implemented economic reform measures to emphasize market forces in economic development. The PRC government authorities implement various macroeconomic and other policies and measures from time to time, including contractionary and expansionary policies and measures at times of, or in anticipation of, changes in China’s economic conditions. Economic reform measures, however, may be adjusted, modified or applied inconsistently from industry to industry or across different regions of the country. We cannot predict whether changes in the PRC’s political, economic and social conditions, laws, regulations and policies will have any adverse effect on our current or future business, results of operations and financial condition.

 

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Interpretation of PRC laws and regulations involves uncertainty.

The PRC legal system is a civil law system based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, due to the fact that these laws and regulations have not been fully developed, and because of the limited volume of published cases and the non-binding nature of prior court decisions, interpretation of PRC laws and regulations involves a degree of uncertainty. Under certain circumstances, some of these laws may be changed without being immediately published or may be amended with retroactive effect. We cannot predict the effect of future developments in the PRC legal system, particularly with regard to the coal mining industry in China, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of our resources and management attention.

Government control of currency conversion and future movements in exchange rates may adversely affect our business, results of operations and financial condition.

A portion of our Renminbi revenue may need to be converted into other currencies to meet our substantial requirements for foreign currencies, including debt service on foreign currency denominated debt, overseas acquisitions of mining properties, purchases of imported equipment, and payment of dividends declared in respect of shares held by international investors.

Foreign exchange transactions under the capital account, including principal payments with respect to foreign currency denominated obligations, are subject to the approval requirements of SAFE. In addition, the value of Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. Fluctuations in the exchange rate of the Renminbi against the U.S. dollar, the Australian dollar and certain other foreign currencies may adversely affect our business, results of operations and financial condition. For further information, please see “Item 11. Quantitative and Qualitative Disclosures of Market Risks — Foreign Currency Exchange Rate Risk.”

Our subsidiaries are subject to restrictions on the payment of dividends to us.

The ability of our subsidiaries to pay dividends to their shareholders is subject to, among other things, distributable earnings and restrictions contained in the articles of association of our subsidiaries, restrictions contained in the debt instruments and the requirements of PRC laws and regulations. For example, certain loan agreements of our subsidiaries contain covenants that limit their ability to pay dividends to us if there is a default in such loan agreements, or unless certain thresholds are satisfied or, in certain cases, limit their ability to pay dividends to us if their after-tax profits are nil or negative. PRC laws and regulations permit payment of dividends only out of accumulated profits as determined in accordance with PRC accounting standards and regulations. Such profits differ from profits determined in accordance with IFRS in certain significant respects, including the use of different bases of recognition of expenses. Our PRC subsidiaries are also required to set aside a portion of their after-tax profits according to PRC accounting standards and regulations to fund certain reserves that are not distributable as such dividends.

Risks Relating to Australia

Coal mining operations in Australia have inherent title risks associated with renewal and native title rights.

Interests in tenements in Australia are governed by the respective State and Territory legislation and are evidenced by the granting of licenses or leases. Each license or lease is for a specific term and carries with it annual expenditure and reporting commitments, as well as other conditions requiring compliance. Consequently, we could lose title to or our interest in tenements if license or lease conditions are not met or if insufficient funds are available to meet expenditure commitments.

 

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It is also possible that, in relation to tenements which we have an interest in or will in the future acquire, there may be areas over which legitimate native title rights of Aboriginal Australians exist. If native title rights do exist, our ability to gain access to tenements (through obtaining consent of any relevant landowner), or to progress from the exploration phase to the development and mining phases of operations, may be adversely affected. The tenements in which we have an interest are subject to applications for renewal. There is a risk that these applications will not be granted or transfers not approved.

All of the granted tenements in which we have or may earn an interest in will be subject to applications for renewal or grant (as the case may be). The renewal or grant of each tenement or license is usually at the discretion of the relevant government authority which will consider various factors, including our compliance with any conditions placed on an existing license, when making its decisions. It is possible that the government authority may reject our applications for renewal or grant, in which case, our operations in Australia may be adversely affected.

Additionally, tenements are subject to a number of specific legislative conditions including payment of rent and meeting minimum annual expenditure and reporting commitments. Our inability to meet these conditions could affect the standing of a tenement or restrict its ability to be renewed. If a tenement is not renewed, we may suffer significant damage through loss of the opportunity to discover and/or develop any mineral resources on that tenement.

Coal mining operations in Australia are subject to certain domestic operational risks.

Our coal mining operations in Australia are subject to certain domestic operational risks, which include the following.

Land access. The granting of mining tenure does not remove the need to enter into land access arrangements with third party land holders (where the land underlying the mining tenure is owned by a third party). In some cases, the underlying land may be owned by a competitor, pastoralist or other third parties. In addition, elements of the agricultural industry and other groups are opposed to the future development of land for mining or mining-related purposes. These groups are actively lobbying the relevant government entities or seeking public support in an effort to limit the amount of land available for mining, and to make access arrangements for mines more difficult.

Coordination agreements. Coal mining tenure in Australia is frequently granted over land over which coal seam gas tenure has or may be granted. Where coal mining and coal seam gas tenures overlap, it is necessary for the coal miner and coal seam gas producer to enter into a coordination agreement. Where overlapping tenure exists, mining operations cannot commence without a coordination agreement. In some cases, the interests of the coal miner and coal seam gas producer may not be aligned and accordingly, mining operations may be delayed or adversely affected.

Environmental conditions and action groups. Before any mining tenure is granted in Australia, it is required that a comprehensive public environmental assessment on the impact of the proposed mining operations be undertaken. Such an assessment involves a public consultation process, which often involves encountering organized environmental or community groups that seek to restrict or block contemplated mining operations. Generally, where environmental approvals are granted, conditions are frequently imposed that materially affect mining operations.

 

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ITEM 4. INFORMATION ON THE COMPANY

 

A. History and Development of our Company

Overview

Yanzhou Coal Mining Company Limited was established on September 25, 1997 as a joint stock company with limited liability under the Company Law of the PRC (the “Company Law”). The predecessor of our Company, Yanzhou Mining Bureau, was established in 1976. With the approval of the former State Economic and Trade Commission and the former Ministry of Coal Industry in 1996, the predecessor was incorporated under the name Yanzhou Mining (Group) Corporation Limited and subsequently renamed Yankuang Group Corporation Limited after undergoing a reorganization in 1999.

In 1999, the Minister of Foreign Trade and Economic Cooperation, the predecessor of the Ministry of Commerce, approved our conversion into a Sino-foreign joint stock company with limited liability under the Company Law and the Sino-Foreign Joint Venture Law of the PRC.

Our contact information is:

 

Business address    :    298 South Fushan Road
      Zoucheng, Shandong Province
      People’s Republic of China (273500)
Telephone number    :    (86) 537 538 2319
Website    :    http://www.yanzhoucoal.com.cn
      (the contents of our website do not form part of this annual report)

Acquisitions

We were involved in three acquisitions in 2012, a description of which is as follows:

Acquisition of Equity Interests in Haosheng Company

On May 22, 2012, upon approval obtained at the general manager working meeting, we completed the acquisition of 9.45% of the equity interests in Haosheng Company held by Jinchengtai Chemical for a consideration of RMB863.86 million. This amount represented approximately 15.5% of the Group’s audited total profits under CASs of RMB5.5604 billion in 2012. Upon the completion of the acquisition, our equity interests in Haosheng Company increased to 74.82%.

Gloucester Acquisition

In December 2011, we and our subsidiary Yancoal Australia entered into a merger proposal deed with Gloucester (amended in March 2012), pursuant to which Yancoal Australia implemented a merger by way of a scheme of arrangement under Australian law pursuant to which it or its wholly owned subsidiary acquired all of the shares of Gloucester, and Gloucester’s shareholders received a combination of Yancoal Australia ordinary shares and CVR Shares, unless they elected to receive only Yancoal Australia ordinary shares.

Upon approval obtained from the SASAC of the Shandong Provincial Government, the NDRC and the MOC and approval or permission obtained from the Treasury of Australia, the ASX, Gloucester Shareholders and the Supreme Court of Victoria, Australia, the Merger was completed in June 2012 and Yancoal Australia was listed on the ASX on June 28, 2012. Gloucester is currently a wholly owned subsidiary of Yancoal Australia, which is a 78%-owned subsidiary of the Company

Acquisition of Coal Mines From Yankuang Group

On April 23, 2012, Yankuang Group and its wholly owned subsidiary, Beisu Company, and our Company entered into an assets transfer agreement, pursuant to which we purchased from Yankuang Group and Beisu Company all of the assets and liabilities of Beisu Coal Mine and Yangcun Coal Mine. The assets included mining rights, building ownership certificates, mining and related equipment and other fixed assets, as well as certain equity investments of Beisu Coal Mine and Yangcun Coal Mine and in Beisheng Industry and Trade, Shengyang Wood and Jiemei Wall Materials. Our entry into the assets transfer agreement constituted a connected transaction of our Company under Chapter 14A of the Hong Kong Listing Rules.

 

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The consideration was determined by the appraised net asset value of the target assets, or RMB824,142,000, as appraised by Beijing China Enterprise Appraisal as of August 31, 2011. The appraisal value was approved by the SASAC of the Shandong Provincial Government on April 16, 2012. We completed the acquisition in May 2012.

Assets Disposal of Tianhao Chemicals

Tianhao Chemicals methanol project has ceased production since April 2012, due to a shortage of raw materials supply. At the 2012 first extraordinary general meeting of Tianhao Chemicals, the shareholders approved to publicly sell the methanol assets. According to Shandong Zhongxin Assets Appraisal Co., Ltd., the valuation of Tianhao Chemicals’ assets was RMB268 million as of April 30, 2012. The transaction is currently undergoing a sale procedure on the Shandong Property Right Exchange Center.

Bond Offerings

The RMB Bond Offering

In August 2012, we completed the issuance of RMB5 billion aggregate principal amount of guaranteed notes in a public offering in the PRC, comprising one tranche of RMB1 billion notes due 2017 bearing interest of 4.20% per year, and one tranche of RMB4 billion notes due 2022 bearing interest of 4.95% per year (together, the “RMB Bond Offering”). The notes are guaranteed by the Yankuang Group. The notes were listed on the SSE on August 15, 2012. As of the date of this annual report, we have utilized all of the net proceeds of approximately RMB4.95 billion for working capital purposes.

The RMB Bond Offering include covenants that, in the event of the Company’s default in payments, limit our ability to, among other things: distribute dividends to Shareholders, make material investments, merge with or into other companies, pay salaries and bonus to Directors and senior management and transfer major responsible staff to other positions.

The US$ Bond Offering

In May 2012, we completed the issuance of US$1 billion aggregate principal amount of guaranteed notes through Yancoal International Resources Development Co., Limited, our second-tier wholly owned subsidiary in a private placement exempt from registration under the Securities Act, comprising one tranche of US$450 million notes due 2017 bearing interest of 4.461% per year and one tranche of US$550 million notes due 2022 bearing interest of 5.730% per year (together, the “US$ Bond Offering”). The notes are guaranteed by our Company. The notes were listed on the HKSE on May 17, 2012. As of the date of this annual report, we have utilized all of the net proceeds of approximately US$991.2 million for working capital purposes.

The indenture of the US$ Bond Offering includes covenants that limit our ability to, among other things: use assets as securities in other transactions, enter into sale and leaseback transactions and sell certain assets or merge with or into other companies. If we experience a change of control (as defined in the indenture), we will be required to offer to purchase the notes at a purchase price equal to 101% of the principal amount , plus accrued and unpaid interest.

Capital Expenditures

Our principal source of cash in 2012 was cash generated from our operating activities, the RMB Bond Offering, the US$ Bond Offering and bank borrowings. Our capital expenditures in 2012 were primarily for operational capital expenditures, purchase of properties, machinery and equipment, payment of dividends, and consideration paid for our acquisitions of assets and equity interests.

The following table sets forth a summary of our capital expenditures in the periods indicated:

 

     Year Ended December 31,  
     2010      2011      2012      2012  
     RMB      RMB      RMB      US$  
     (in millions)  

Capital Expenditure

           

Coal mining

     3,298.0         22,736.5         19,170.1         3,077.0   

Coal railway transportation

     34.5         40.9         33.8         5.4   

Electricity power and methanol

     452.8         555.2         1,605.3         257.7   

Undistributed items

     —           —           —           —     

Corporate

     —           3.8         0.1         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3,785.3         23,336.4         20,809.2         3,340.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Our planned capital expenditures for 2013 are approximately RMB12,004.6 million. For more information, see “Item 5. Operating and Financial Review and Prospects — B. Liquidity and Capital Resources — Capital Expenditures” in this annual report.

Potential Takeovers by Third Parties

There were no indications of any public takeover offers by third parties in respect of our common shares in 2012.

 

B. Business Overview

We are one of the primary coal producers in China and Australia, with rapidly growing coal mining operations. We primarily engage in the mining, washing, processing and distribution of coal through railway transportation. We offer a wide variety of coal products including thermal coal, semi-hard coking coal, semi-soft coking coal, PCI coal and other mixed coal products which are sold to power plants, metallurgical mills, chemical manufacturers, construction material manufacturers and fuel trading companies in China and other countries, including Japan and South Korea. Since 2004, we have expanded our operations to include the production of coal chemicals and the generation of electricity and heat. We also commenced our potash exploration business in 2011.

As of December 31, 2012, we were 52.86% owned by our parent, the Yankuang Group, which is wholly owned by the Shandong Provincial Government under the control of the SASAC of the Shandong Provincial Government. The Yankuang Group was founded in 1973 to focus on coal mining and sales, the coal chemical industry, power generation, aluminum production, machinery manufacturing and financial investments. We were established in 1997 and listed on the SSE, HKSE and NYSE in 1998. In addition, our subsidiary, Yancoal Australia, was listed on the ASCX in 2012. Our revenue increased from RMB33,944.3 million in 2010 to RMB47,065.8 million in 2011 and further to RMB58,146.2 million in 2012, representing a CAGR of 30.9%.

As of December 31, 2012, we owned and operated 21 coal mines across regions with abundant coal resources, including Shandong and Shanxi Provinces and the Inner Mongolia Autonomous Region in China, as well as Queensland, New South Wales and Western Australia in Australia. In addition, as of December 31, 2012, we had nine developmental-stage projects in China and Australia and a number of exploration tenements in Australia that might be potentially developed.

We directly own and operate six coal mines in the PRC, namely, Nantun, Xinglongzhuang, Baodian, Dongtan, Jining II and Jining III, which produced in the aggregate approximately 48.8% of our total coal output in 2012. As of December 31, 2012, these six mines had approximately 1,729.43 million tonnes of in-place proven and probable reserves. In addition, we directly own and operate Beisu and Yangcun Coal Mines. We also hold equity interests in a number of coal mines in China through our subsidiaries. Shanxi Nenghua operates Tianchi Coal Mine, which holds approximately 25.7 million tonnes of recoverable reserves; Heze Nenghua operates Zhaolou Coal Mine, which holds approximately 102.2 million tonnes of recoverable reserves; and Ordos Neng Hua operates Anyuan Coal Mine and Wenyu Coal Mine. In addition, we had four projects under development in China as of December 31, 2012.

 

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The map below shows the approximate locations of our coal mines and project in China.

 

LOGO

We conduct our operations in Australia primarily through our subsidiaries, Yancoal Australia and Yancoal International (Holding). Yancoal Australia currently operates six coal mines in Australia including Austar, Yarrabee, Ashton, Moolarben, Gloucester and Donaldson which collectively held approximately 703.7 million tonnes of JORC-compliant reserves as of December 31, 2012. In addition, Yancoal Australia owns approximately 50% of the equity interest in the joint venture that owns and operates Middlemount Coal Mine, which held approximately 96.0 million tonnes of JORC-compliant reserves as of December 31, 2012. Yancoal Australia also holds a developmental-stage project, Monash. Yancoal International (Holding) currently owns Cameby Downs and Premier Coal Mines, which collectively held approximately 590.2 million tonnes of JORC-compliant reserves as of December 31, 2012, as well as the developmental-stage projects Athena, Harrybrandt, Wilpeena and Wilga. In addition, we had a number of exploration tenements in Australia with potential for developments as of December 31, 2012.

 

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The map below shows the approximate locations of our coal mines and projects in Australia.

 

LOGO

Coal Business

We are primarily engaged in the production of coal, which involves the mining, washing, processing and distribution of coal. Historically, our coal operations were primarily based in the PRC, but we began our operations in Australia in 2004 after we acquired the Austar Coal Mine, and have rapidly expanded our Australian coal operations since the fourth quarter of 2009 when we acquired Felix and in June 2012 when we completed the merger with Gloucester. Our products consist primarily of thermal coal, semi-soft coking coal, semi-hard coking coal, PCI coal and other mixed coal products which are suitable for power generation and metallurgical production. The following table sets forth the specifications and principal applications of our coal products.

 

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Table of Contents
     Sulfur
Content
   Range of and
Average Ash
Content
   Calorific Value    Washed   

Principal
Applications

     %    %   

(megajoule/

kilogram)

         

The Company

              

No. 1 clean coal

   0.43    7-8 average 7.75    26-28 average 28    Yes    High quality metallurgical production

No. 2 clean coal

   0.53    8-9 average 8.36    26-28 average 27.94    Yes    Metallurgical production, construction, liquid coal production

No. 3 clean coal

   0.57    10-11 average 10.32    26.3-26.9 average 26.79    Yes    Electricity generation and coal chemical production

Lump coal

   0.51    9-14 average 10.83    25-28 average 27.44    Yes    Construction, power generation, coal for oven application

Mixed coal

   0.90    22-30 average 27.93    18-22 average 20.37    Yes    Power generation

Shanxi Nenghua

              

Screened raw coal

   1.07    27-35, average 33.91    19-23, average 19.93    No    Power generation

Lump coal

   0.77    9-11, average 9.09    30-32, average 30.72       Power generation, construction

Heze Nenghua

              

No. 2 clean coal

   0.71    8-9, average 8.41    average 29.73    Yes    Metallurgical production, construction

Mixed coal

   1.2    average 31.87    average 19.07    Yes    Power generation

Ordos Nenghua

              

Screened raw coal

   <0.63    7.85-14.00, average 13.50    20.90-21.33, average 22.0    No    Power generation

Yancoal Australia

              

Semi-hard coking coal

   1.30    5.0    average 33.18    Yes    Metallurgical production

Semi-soft coking coal

   0.65    9.5    average 29.82    Yes    Metallurgical production, construction

PCI coal

   0.7    9.5-10.5    average 30.66    Yes    Metallurgical production

Thermal coal

   0.5-0.6    13.5-17.0    27.30-27.93    No    Power generation

The following table sets forth our principal coal products by sales volume and sales income of coal for the periods indicated. For the purposes of the table below, the figures of sales income and sales volume include inter-segment sales.

 

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Table of Contents
    Year Ended December 31,  
    2010     2011     2012  
    Sales volume
(‘000 tonnes)
    Sales income(1)
(RMB
in millions)
    Sales volume
(‘000 tonnes)
    Sales income(1)
(RMB
in millions)
    Sales volume
(‘000 tonnes)
    Sales income(1)
(RMB in
millions)
 

The Company

    33,657        21,324.8        33,276        22,827.6        33,943        20,789.4   

No. 1 clean coal

    691        677.2        534        587.9        385        353.0   

No. 2 clean coal

    9,002        8,771.2        8,950        9,373.4        9,042        8,039.5   

No. 3 clean coal

    1,560        1,293.7        2,222        1,969.3        2,540        1,829.1   

Lump coal

    1,297        1,206        1,786        1,845.5        1,245        1,112.9   

Screened raw coal

    16,726        8,085.5        13,495        6,714.0        14,190        7,195.4   

Mixed coal and others

    4,381        1,290.7        6,289        2,337.5        6,541        2,259.5   

Shanxi Nenghua

    1,498        572.3        1,223        572.1        1,343        469.5   

Screened raw coal

    1,498        572.3        1,223        572.1        1,343        469.5   

Heze Nenghua

    1,079        833.0        2,004        1,829.2        2,292        1,662.5   

No. 2 clean coal

    546        603.2        1,211        1,471.0        1,183        1,234.4   

Screened raw coal

    119        62.6        37        19.7        —          —     

Mixed coal and others

    414        167.2        756        338.4        1,109        428.1   

Ordos Neng Hua

    —          —          4,379        1,273.0        6,834        1,621.7   

Screened raw coal

    —          —          4,379        1,273.0        6,834        1,621.7   

Yancoal Australia

    8,022        6,210.2        10,060        9,353.4        14,350        9,296.0   

Semi-hard coking coal

    1,146        1,043.3        914        1,023.2        506        377.4   

Semi-soft coking coal

    1,279        1,202.3        1,049        1,319.6        1,124        1,048.1   

PCI coal

    2,046        1,893.8        2,333        2,988.9        2,056        1,917.6   

Thermal coal

    3,551        2,070.8        5,764        4,021.7        10,663        5,952.9   

Yancoal International (Holding)

    —          —          —          —          2,965        994.3   

Thermal coal

    —          —          —          —          2,965        994.3   

Externally purchased coal

    5,378        3,990.0        13,308        9,613.2        32,421        21,586.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    49,634        32,930.3        64,250        45,468.5        94,148        56,419.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Sales income comprises the invoiced amount of coal sold net of returns and discounts.

Sales and Marketing

A significant portion of our PRC domestic sales is made on the spot market or pursuant to strategic framework agreements, while the remainder of our coal sales are made pursuant to sales contracts generally for a term not exceeding one year. These strategic framework agreements generally specify the quantity of the coal to be purchased. Prices for strategic framework agreements are generally determined in the annual sales contracts or monthly sales contracts which we enter under the strategic framework agreements.

 

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We sell the majority of our domestic coal products to power plants, metallurgical mills, coking manufacturers, chemical manufacturers and construction material manufacturers with whom we have established long-standing and stable relationships. The majority of the coal sales of our Australian subsidiary, Yancoal Australia, are to power plants and metallurgical mills. The following table sets forth a breakdown of our sales income, which represents the invoiced amount of products sold net of returns and discounts of coal by the industry of our customers for the periods indicated. For the purposes of the table below, the figures of sales income include inter-segment sales.

 

     Year Ended December 31,  
     2010      2011      2012  
     Sales income(1)      % of
Sales income
     Sales income(1)      % of
Sales income
     Sales income(1)      % of
Sales income
 
    

(RMB

in millions)

           

(RMB

in millions)

           

(RMB

in millions)

        

Power plants

     7,493.8         22.8         8,875.0         19.5         8,230.0         14.6   

Metallurgical mills

     5,200.2         15.8         6,445.7         14.2         4,902.7         8.7   

Chemical manufacturers

     1,405.3         4.3         1,740.6         3.8         6,830.0         12.1   

Others(2)

     18,831.0         57.2         28,407.2         62.5         36,457.2         64.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     32,930.3         100.0         45,468.5         100.0         56,419.8         100.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Sales income comprises the invoiced amount of coal sold net of returns and discounts.
(2) Others comprises industries such as coking and construction material manufacturing.

The following table sets forth a breakdown of sales income of coal by geographical region for the periods indicated. For the purposes of the table below, the figures of sales income include inter-segment sales.

 

     Year Ended December 31,  
     2010      2011      2012  
     Sales income(1)      % of
sales income
     Sales income(1)      % of sales
income
     Sales income(1)      % of
sales income
 
     (RMB
in millions)
            (RMB
in millions)
            (RMB
in millions)
        

China

     27,619.7         83.9         36,703.8         80.7         46,792.6         82.9

Eastern China

     21,861.5         66.4         28,464.1         62.6         42,835.4         75.9

Southern China

     511.9         1.6         2,449.6         5.4         76.1         0.1

Northern China

     251.1         0.8         211.4         0.5         2,957.6         5.3

Other regions

     4,995.2         15.2         5,578.8         12.3         923.5         1.6

Japan

     2,349.0         7.1         4,030.3         8.9         1,777.9         3.2

South Korea

     1,920.0         5.8         1,972.4         4.3         2,394.2         4.2

Australia

     482.2         1.5         271.0         0.6         2,297.6         4.1

Others

     559.3         1.7         2,490.9         5.5         3,157.6         5.6
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     32,930.3         100.0         45,468.5         100.0         56,419.8         100.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Sales income comprises the invoiced amount of coal sold net of returns and discounts.

Our domestic coal sales are concentrated primarily in eastern China, particularly in Shandong and, to a lesser extent, in northern China. Our sales income, which represents the invoiced amount of products sold net of returns and discounts, generated from eastern China as a percentage of total sales income was 66.4%, 62.6% and 75.9% in 2010, 2011 and 2012, respectively. The majority of our sales income is in the PRC. In 2010, 2011 and 2012, we generated 83.9%, 80.7% and 82.9%, respectively, of our sales income from the PRC.

 

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The following table sets forth a breakdown of export sales of our Company and Yancoal Australia for the periods indicated.

 

     Year Ended December 31,  
     2010      2011      2012  
     Sales income(1)      % of
sales income
     Sales income(1)      % of
sales income
     Sales
income(1)
     % of
sales  income
 
     (RMB
in millions)
            (RMB
in millions)
            (RMB
in millions)
        

The Company

                 

Japan

     9.7         0.2         14.3         0.2         7.4         0.1   

Our Australian subsidiaries

                 

South Korea

     2,349.0         38.5         4,030.3         44.2         2,394.2         29.9   

Japan

     1,910.3         31.3         1,958.1         21.5         1,770.5         22.1   

China

     909.4         14.9         603.0         6.6         670.4         8.4   

Others

     926.4         15.2         2,506.7         27.5         3,157.6         39.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     6,104.8         100.0         9,112.4         100.0         8,000.1         100.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Sales income comprises the invoiced amount of coal sold net of returns and discounts.

Export sales, excluding the coal sales in Australia by our Australian subsidiaries, represent only a small percentage of our total coal sales income. In 2010, 2011 and 2012, we generated 18.5%, 20.0% and 14.2%, respectively, of our sales income from export sales. Our major overseas markets include South Korea and Japan. The majority of our overseas customers are located in Asia, and South Korea is our biggest market in this region. Even though we conduct all of our export sales from the PRC through export agents, we maintain close relationships with our overseas customers.

In 2010, 2011 and 2012, our Australian subsidiaries’ domestic sales income was 1.9%, 2.7% and 22.3%, respectively, of their total sales income and in these same years their export sales income was 98.1%, 97.3% and 77.7%, respectively, of its total sales income. Our Australian subsidiaries’ export sales income represented 99.8%, 99.8% and 99.9% of our total export sales income in 2010, 2011 and 2012, respectively. Our Australian subsidiaries primarily conduct their export sales directly by entering into agreements with end user customers. Our Australian subsidiaries also export a small portion of coal through export agents with which our Australian subsidiaries have established longstanding relationships. The primary destinations for the export sales of our Australian subsidiaries are South Korea, Japan and China.

Customers

As of December 31, 2012, our major customers include Huadian International, Yongcheng Coal and Electricity Holding Group Shanghai Co., Ltd., Noble Resources Limited, Linyi Yehua Coking Co., Ltd. and Baoshan Iron & Steel Co., Ltd., among which Huadian International was our largest customer. In 2010, 2011 and 2012, sales to our top five largest customers accounted for 24.7%, 19.4% and 19.4% of our sales income, respectively. In 2010, 2011 and 2012, sales to our largest customer, Huadian International, accounted for 13.0%, 8.5% and 6.3%, respectively, of our sales income. A substantial portion of Huadian International’s coal purchases was, in turn, supplied to Zouxian Power Plant.

Leveraging the high quality of our products and the strength of our brand, we have established long-term relationships with our customers. We make significant efforts to establish and maintain long-term cooperative relationships with our customers, and in particular, with our key customers. We have annual evaluations of our customers to identify key customers. To maintain the relationships with our key customers, we generally provide favorable price terms and product delivery priority. Our sales and marketing department conducts routine customer visits and customer surveys to keep abreast of market developments, collect and evaluate customers’ responses, maintain customer relationships and continually improve our business. In addition, we closely monitor the market information about eastern China, South Korea, Japan and other regions, which we use for business planning and execution.

We have a flexible credit policy, and the credit terms we grant to our customers may vary from customer to customer depending on each customer’s creditworthiness, historical relationship with the Company and the credit amount involved. We may allow open accounts, require acceptance bills or require cash on delivery. We rely on data from our enterprise resource planning system to determine the appropriate payment arrangement and credit terms for each customer, which generally do not exceed 180 days. We evaluate the creditworthiness of potential new customers before entering into a sales contract with them and reassess the creditworthiness of all of our customers on an annual basis. For customers without a strong credit history, we require them to settle their accounts upon delivery.

 

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Pricing

The pricing for our coal products sold in the PRC is generally based on negotiations between the contracting parties that reflect market conditions. However, a portion of our thermal coal sales may be affected by pricing guidelines announced by the PRC government from time to time or subject to temporary price controls. For example, the State Council and the NDRC adopted measures to control the prices of thermal coal in 2010 and 2011, pursuant to which prices of thermal coal supplied to power generating enterprises in 2012 may not increase by more than 5% from 2011 prices, and the spot prices of thermal coal (5,500 kcal/kg) received at major domestic ports must be less than RMB800 per tonne. In December 2012, the General Office of the State Council issued a guideline to further implement the market reform for thermal coal. Pursuant to the guideline, beginning in 2013, the PRC government will discontinue the compulsory thermal coal supply contracts arrangement, which required coal producers to sell thermal coal to power generation enterprises at preferential prices set by the government. In addition, prices of thermal coal will be negotiated between power generation enterprises and coal producers, instead of pursuant to government-guided prices. See “— Regulatory Oversight of Our Group.” For our Australian operations, the pricing of our coal products is dependent on negotiations between the contracting parties, as well as prevailing market prices. There are no price control schemes in Australia. In both our PRC and Australian markets, to price our coal products, we consider the prevailing prices in the relevant local coal markets, the grade and quality of the coal and our relationship with the purchaser. Our sales and marketing department monitors domestic and international market information, enabling us to keep abreast of pricing developments in our principal markets.

Transportation

Most of our major coal customers are located in eastern China and our remaining domestic customers are located in southern and northern China. We deliver coal to our customers primarily by railways and highways. We also deliver our coal by domestic and international shipping lanes. With our private railway network, we are able to connect to the national railway system or deliver coal directly to Zouxian Power Plant.

We also ship coal on the national railway system to ports, such as Rizhao, Qingdao and Lianyungang, for delivery to customers. Rizhao Port is our main port for shipping coal. We also use the Beijing-Hangzhou Grand Canal to ship coal on barges to customers located in the area serviced by the canal, primarily Jiangsu and Zhejiang. In Shanxi, we rely on the Yangshe Railway, which intersects the Tianchi Coal Mine, and trucks to deliver coal to Hebei, Shandong and other nearby areas. We rely on the Baoshen Railway and trucks to deliver coal from Anyuan Coal Mine and Wenyu Coal Mine to Hebei and the surrounding areas.

We plan to construct a privately operated railway to connect Zhaolou Coal Mine with the national railway system. Before completing the construction, we will continue to rely on trucks to deliver coal from Zhaolou Coal Mine to the national railway and customers.

We transport Yancoal Australia’s coal products to Newcastle Port and Gladstone Port in Australia at our cost using third parties’ railway networks. These coal products are then exported to South Korea, Japan and other destinations by sea. Yancoal Australia owns a 27.0% interest in NCIG, a joint venture responsible for constructing and operating the third export terminal at Newcastle Port, and will have an annual port capacity of 14.6 million tonnes through NCIG’s facility when it reaches its full design capacity of 66.0 million tonnes per annum. Yancoal Australia also had an annual port capacity of 11.0 million tonnes at Newcastle Port in 2012 through a facility owned by PWCS pursuant to an agreement between Yancoal Australia and PWCS, increasing to 11.5 million tonnes per year from 2013 and 11.9 million tonnes from 2015. Yancoal Australia may apply for additional capacity at PWCS’s terminal 4 if the approval to construct this terminal can be granted. In addition, Yancoal Australia owns a 5.6% interest in Wiggins Island Coal Export Terminal Holdings Pty Limited in Queensland, which is the parent company of the developer of the Wiggins Island Coal Export Terminal. Yancoal Australia has been allocated an annual port capacity of 26.8 million tonnes in 2013. We believe these allocated port capacities will support current export sales.

Mining process

The geological characteristics of our reserves largely determine the coal mining method that we employ. We use two primary methods to mine coal: underground mining and open-pit mining.

PRC underground mining operations

Our PRC underground mining operations consist of four main steps: tunneling, coal extraction, transportation and coal preparation. The tunneling process is necessary for the construction of underground roadways, which are required for the installation of mining equipment. We conduct a majority of our tunneling using high-powered headers and use this method whenever geological conditions permit. The extraction process is undertaken by a standardized and fully mechanized longwall operation, which includes shearers that work in conjunction with conveyers to cut and transport the coal away from the longwall work face.

 

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The shaft hoist system equipment that we use at most of our mines was imported. Coal is transported from the coal shaft either to a surface storage or directly to a coal preparation plant. In addition to the main coal shaft, our mines also have a service shaft and supplemental roadways and rail systems within the mines that provide a means of underground transportation for workers and equipment.

After raw coal is carried to the surface, it undergoes a mechanized selection process that separates coal from other mineral materials. A small portion of such selected coal is directly sold to customers as raw coal, and the remainder is transported to our coal preparation plants for further processing and classification.

Australian open-pit mining operations

The open-pit mining process involves the removal of topsoil and overburden (earth and rock covering the coal), tunneling and extraction of coal from coal seams. The extracted coal undergoes selection and is then transported to treatment facilities for preparation. After coal is removed, we restore the affected land by replacing the overburden and topsoil.

Australian mining operations

With respect to underground mines in our Yancoal Australia mining operations, we conduct continuous tunneling, longwall operations and coal extraction by the fully mechanized caving method. Open-pit mining is used when coal is found relatively close to the surface, which is the same as our domestic open-pit mining operations.

Materials, Water and Energy Supply

PRC mining operations

The primary materials we use to conduct our coal mining and processing operations are steel to support work faces and underground tunnels, cement for the construction of underground tunnels and ground structures and water used in our production process. We procure steel primarily from Shandong Shiheng Special Steel Group Co., Ltd., Shandong Iron and Steel Group Co., Ltd., Xilin Steel Group Acheng Steel Co., Ltd. and Angang Steel Company Limited and cement primarily from Shandong Lucheng Cement Company, Ltd. and Shandong Luzhu Group Cement Company Ltd. We procure water primarily from the Yankuang Group pursuant to the Materials Supply Agreement and its supplemental agreements, and, to a lesser extent, from local water companies. The prices of steel, cement and water is set at market rates or determined through negotiations. We believe that we have well-established, cooperative relationships with our suppliers, enabling us to secure reliable supplies of materials required in our production process. We believe that a number of alternative suppliers exist for our key materials in our coal operations, accordingly, we do not foresee any difficulty in obtaining adequate supplies.

We use a significant amount of electricity in our operations. Even though we have not experienced any material disruptions in our electricity supply in the past, we acquired Hua Ju Energy to secure a stable supply of energy for Nantun, Xinglongzhuang, Baodian, Dongtan, Jining II, Jining III, Beisu and Yangcun Coal Mines and to reduce our electricity costs. After we commenced selling substantially all of the electricity generated by Hua Ju Energy to the local grid company in 2011, we began to purchase electricity from the local grid company for Nantun, Xinglongzhuang, Baodian, Dongtan, Jining II, Jining III Coal Mines. We also purchase electricity from the local grid company for Beisu and Yangcun Coal Mines after we acquired them in May 2012.

Australian mining operations

Similar to our domestic coal mining and preparation operations, the primary materials we use in our Australian mining operations are steel, cement, explosives and water. We procure such materials primarily from local suppliers with which we have established long-standing relationships, and are able to procure sufficient materials for our mining and preparation operations.

Competition

PRC mining operations

Our primary market, the PRC domestic coal market, is characterized by numerous small-scale coal suppliers. Although the PRC coal market is segmented principally by geographic regions due to the wide distribution of coal reserves, the domestic market in China is dominated by a number of large-scale coal producers. We compete principally on the basis of the availability and cost of transportation, coal quality and timely deliveries.

 

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Our PRC competitors primarily include a number of coal mines located in Shanxi, Shaanxi and Inner Mongolia. Certain of our competitors from these regions have substantial reserves and favorable geological conditions. However, these competitors incur significant transportation costs when they supply to their end-user customers located in eastern China. In addition to coal mines located in Shanxi, Shaanxi Provinces and Inner Mongolia Autonomous Region, we also compete with local mines located in close proximity to our customers. In addition, we expect to face increasingly intense competition among coal mining enterprises as the results of an significant increase in the amount of coal export to China and an increase of industry giants in the coal mining industry due to the industry reform. Although we have strengths in the quality of our coal product and our sales network, we may not be able to compete effectively with Shandong Energy in this region. Our failure to compete effectively may in turn materially and adversely affect our results of operations.

Australian mining operations

We primarily compete with several large coal mining enterprises in Australia, including BHP Billiton, Peabody Energy Australia, Rio Tinto Coal, Xstrata and Whitehaven Coal. Given that we mainly export our coal production in Australia to other Asian countries, particularly South Korea and Japan, we also compete with other mining enterprises located in China, Indonesia and Inner Mongolia, some of which are located in close proximity to our customers. Some of our competitors are large mining companies with a longer operating history, greater financial resources, stronger brand recognition and greater economies of scale as compared to our Company. However, we believe we are able to maintain our competitiveness. Through the use of our independently developed longwall top caving mining method, we believe we are able to extract coal more efficiently in our mining operation than our competitors, particularly those competitors with mining operations that involve coal extraction from thick coal seams.

Seasonality

Our coal business is not affected by seasonality.

Quality control

We have implemented a quality assurance program at each of our PRC coal mines to control quality throughout our coal operations from production to transportation. Utilizing advanced processing technology and management techniques, our coal preparation plants are able to separate both metal and non-metal impurities from coal. Our quality inspection division within our sales and marketing department conducts spot inspections on our coal production to maintain high quality standards.

Each of Nantun, Xinglongzhuang, Baodian, Dongtan, Jining II, Jining III, Beisu, Yangcun, Zhaolou and Tianchi Coal Mines has obtained the Quality/Environmental Management/Occupational Health and Safety Certificate.

Each of Nantun, Baodian, Dongtan, Jining II, Jining III Coal Mines has obtained Measurement Management System AAA certificate. We have been awarded a National Quality Management Award, a China Quality Tripod and an Asia-Pacific International Quality Gold Medal. In addition, we were awarded the Quality Excellence Award (Asian Recognition for Excellent in Quality Practice) by the Asian Network for Quality in 2012, which made us the only Chinese coal company which has ever won this prize.

Yancoal Australia has engaged Bureau Veritas, Societe Generale De Surveillance and ALS Laboratory Group to supervise and inspect the quality of the coal produced from the respective mines in Australia to ensure quality control and advise on quality improvement.

Safety control

In our PRC operations, we have implemented a safety control program to achieve the targets set in our internal guidelines for safety and risk control management and to maintain compliance with the PRC Coal Industry Law and the National Mining Safety Law in China. In Australia, our operations in New South Wales comply with the Coal Mine Health and Safety Act 2002 (NSW) and Occupational Health and Safety Act 2011 (NSW), our operations in Queensland comply with the Occupational Health and Safety Act 2011 (QLD) and Coal Mining Safety and Health Act 1999 (QLD) and our operations in West Australia comply with the Coal Mine Safety and Inspection Act 1994 (WA) and Occupational Health and Safety Act 1984 (WA).

Our safety control program combines close supervision and routine inspection of mining conditions with continual implementation of safety features and procedures at our mines and safety training for our production team. In addition, in our PRC operations, the compensation of the officers and managers of each division reflects the division’s safety record. Each of our mines has a safety inspection unit which is responsible for the supervision and inspection of our mining activities. We reward employees who report unsafe mining conditions to encourage accident prevention.

 

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As a result of our safety control program, we have been able to maintain a zero fatality rate in our PRC operations since 2007 compared with the national average of 0.374 fatalities per million tonnes of coal produced in 2012, according to the State Administration of Work Safety of the PRC. In 2012, we produced approximately 68.7 million tonnes of coal in our PRC operations and did not experience any production accidents that involved serious work injuries or death. We have been continuously reviewing and evaluating our safety control and performance in Australia. With respect to our Australian operations in 2012, our lost time injury frequency rate, measured as the number of lost time injuries per million man-hours worked, was 2.5 for open-pit mines and 13 for underground mines. We had no fatalities in our Australian operations in 2012.

Environmental protection

We are subject to PRC environmental protection laws and regulations which impose fees for the discharge of waste substances and require the payment of fines for serious pollution. PRC regulations also authorize government agencies to close any facility that fails to comply with orders to cease, or bring into compliance with relevant laws and regulations, operations that cause environmental damage. In addition, the operations of Yancoal Australia must comply with relevant Australian environmental protection laws and regulations. In 2012, we incurred expenses related to environmental protection of RMB175.3 million.

Railway Transportation Business

In addition to transporting coal to support our own operations, we also provide railway transportation services to our customers, including the Yankuang Group, for fees. In 2012, we transported 17.5 million tonnes of coal on our railway network, representing a decrease of 0.6 million tonnes, or 3.2%, from 18.1 million tonnes in 2011. We generated sales income of RMB464.1 million from railway transportation services in 2012, representing a decrease of RMB12.8 million, or 2.7%, from RMB476.9 million in 2011.

We own ten steam locomotives, two heavy-duty rail motors and approximately 204 kilometers of railway tracks constructed for coal transportation that connect most of our coal mines with Zouxian Power Plant located in Jining City, Shandong. Our railway network also connects to two major national railways, namely, Beijing-Shanghai Railway and Yanzhou-Shijiugang Railway. Our railway network provides us with substantial control over a major means of transportation for our key product, allowing us to benefit from the synergies from coal production, sales and transportation. As of December 31, 2012, our railway transportation business had 3,626 employees.

We maintain ISO 9001 quality accreditation, ISO 14001 environmental management certification, OHS 18000 occupational safety and health certificate and ISO 10012:2003 management certification for the operation of our railway network.

Coal Chemical Business

Our coal chemical business focuses on the production of methanol, a liquid commodity that can be produced from coal or natural gas. We operate our coal chemical business through Yulin Nenghua and Tianhao Chemicals. In 2012, we produced 572,000 tonnes of methanol and sold 574,000 tonnes of methanol. We generated sales income of RMB1,118.0 million in 2012, representing an increase of RMB58.6 million, or 5.5%, from RMB1,059.3 million in 2011. Yulin Nenghua produced 552,000 tonnes of methanol, and Tianhao Chemicals produced 20,000 tonnes of methanol, in 2012. We are in the process of disposing Tianhao Chemical’s methanol assets. In addition, we are currently constructing a 600,000-tonne methanol project in Ordos City, Inner Mongolia Autonomous Region, which we expect to become operational in the second half of 2013.

Sales and marketing

Our coal chemical sales are made pursuant to sales contracts that we enter into from time to time with customers. We sell our methanol exclusively in China and predominately to chemical producers in northern and eastern China and methanol distributors. We rely on regional highways to deliver our products.

Pricing

The pricing for our methanol product is generally based on negotiation between the contracting parties, taking into consideration prevailing market prices, market conditions and the customer’s creditworthiness.

 

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Production process

Yulin Nenghua. At Yunlin Nenghua’s plant, raw coal is pulverized, cleaned and then fed to a gasifier bed where it reacts with oxygen and steam. The product is synthesized into crude methanol and then purified through distillation.

Materials, water and energy supply

Coal and coke oven waste gas are the primary materials in our methanol production. Production at Yulin Nenghua is reliant on thermal coal, which it currently sources from local coal mines owned by third parties. We plan to source thermal coal internally once our adjoining Yushuwan Coal Mine is registered and commences operations. Yulin Nenghua sources water from a local reservoir.

Quality control

We have implemented a series of quality control measures for our coal chemical operations to ensure product quality and obtained AAA measurement management system, ISO 9001 quality accreditation and ISO 14001 environmental management certification in November 2009. We perform regular inspections and maintenance on our methanol plants.

Safety control

For our coal chemical operations, we have implemented safety control measures in compliance with the People’s Republic of China Production Safety Law, the People’s Republic of China Regulations on the Safe Administration of Dangerous Chemicals and other safety guidelines for chemical manufacturers.

Competition

We compete with domestic methanol manufacturers in Shanxi and Shaanxi Provinces and the Inner Mongolia Autonomous Region. We expect to benefit from economies of scale as Yulin Nenghua’s 600,000-tonne methanol project achieves optimal utilization of its facilities and Ordos Neng Hua’s 600,000-tonne methanol plant commences operations in the second half of 2013.

Seasonality

Our coal chemical operations are not affected by seasonality.

Electric Power and Heat Supply Business

As of the date of this annual report, we owned and operated seven power plants, which generate electricity for internal use and external sales. In 2012, we generated a total of 1,155.2 million KWh of electricity, 856.4 million KWh of which we sold to third parties. We generated sales income of RMB323.6 million in 2012, representing a decrease of RMB4.4 million, or 1.3%, from RMB328.0 million in 2011.

Hua Ju Energy operates coal-fired power plants whose main facilities consist of energy conversion CFB boilers and extraction and condensing steam turbines. The power plants at Hua Ju Energy have an aggregate installed capacity of 144 MW. In 2010, 2011 and 2012, Hua Ju Energy generated 1,090.4 million KWh, 1,028.8 million KWh and 968.2 million KWh, respectively, and sold 469.6 million KWh, 895.5 million KWh and 831.9 million KWh, respectively, to the local power grid company.

The power plants at Yulin Nenghua and Tianhao Chemicals were established with the primary intention to satisfy the power demand of the methanol projects of these two entities; we sell a small amount of electricity to third parties. These plants had an aggregate installed capacity of 84 MW as of the date of this annual report; however, Tianhao Chemicals has stopped generating electricity since January 1, 2012 due to the high cost of fuel, and we are in the process of disposing of the power plant together with Tianhao Chemical’s methanol assets. In 2012, the power plants operated by Yulin Nenghua generated 187.0 million KWh of electricity, of which 24.5 million KWh was sold to third parties.

 

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We commenced the construction of the Zhaolou Coal Mine power plant for Zhaolou Coal Mine in March 2010. The integrated power plant has two phases with a designed capacity of 300 MW for each phase. As of the date of this annual report, phase I was under construction. For further information on the Zhaolou Coal Mine power plants, please see “D. Property, Plant and Equipment — Methanol and Cogeneration Power Plants — Zhaolou Coal Mine Power Plants.”

We commenced heat supply operations, which consist of the production and sale of heat, following our acquisition of Hua Ju Energy in 2009. In 2012, Hua Ju Energy generated 1.4 million steam tonnes of heat energy. Our coal mines consume the substantial majority of heat energy produced by Hua Ju Energy. We sold 0.2 million steam tonnes of heat to third parties and generated sales income of RMB39.9 million in 2012.

Sales and marketing

We consume a major portion of the heat generated by our power plants and, to a lesser extent, sell to the Yankuang Group. In addition to our own use and our sales to the Yankuang Group, we sold 73.5% of the electric power we produced to other end-users through power grids in 2012.

Pricing

The pricing and adjustments for the on-grid tariff and the pricing of our heat products are determined in accordance with regulations set by price administration authorities.

Production process

Yulin Nenghua. We select, break, grind and feed coal to a boiler where the coal is burned to generate steam, which is converted by steam turbines into electricity.

Hua Ju Energy. We recycle by-products of our coal mining operations, such as coal gangue and coal slurry, to generate electricity. Coal gangue and coal slurry are fed to a CFB boiler by means of a conveyer belt and fuel-feeding device where they are burned to generate steam, which is converted by steam turbines into electricity. The power plants of Hua Ju Energy are cogeneration systems that are able to produce heat simultaneously with power generation. Part of the steam produced in power generation is extracted from the steam turbines and provided to our mining operations via a heat supply system.

In the production processes, we filter the exhaust gas that we produce and recycle the cinder for future use.

Materials, water and energy supply

Our power plants are all coal-fired power plants. The power plants of Hua Ju Energy generate electricity by recycling coal gangue and coal slurry. Yulin Nenghua currently sources thermal coal from local coal mines.

Quality control

Hua Ju Energy obtained ISO 9001 quality accreditation and ISO 14001 environmental management certification in November 2003 and has maintained its certification since then. Yulin Nenghua obtained AAA measurement management system, ISO 9001 quality accreditation and ISO 14001 environmental management certification in November 2009.

 

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Safety control

Safety measures for our electric power and heat supply operations were designed to meet the requirement of the Electricity Law and other related laws.

Seasonality

Our electric power operations are not affected by seasonality. Our heat supply operations are affected by seasonality and experience higher demand during winter.

Regulatory Oversight of Our Group

Regulation of the PRC Coal Industry

Mining activities in the PRC are also subject to the MLR. To establish a coal mining enterprise under the Coal Industry Law of the People’s Republic of China, amended in 2011 (the “PRC Coal Industry Law”), the applicant must submit an application to the relevant department in charge of the coal industry. After obtaining approval to establish a coal mining enterprise, the applicant will be granted a mining permit by the MLR. Thereafter, the applicant must obtain a coal production permit before it commences coal production. Coal mining enterprises that have legally obtained coal production licenses will have the right to sell the coal that they produce. To establish a coal trading enterprise, an applicant must apply for a different business license and may engage in coal trading only after it obtains a trading license from the relevant administrative department of industry and commerce.

The Mineral Resources Law of the PRC (the “Mineral Resources Law”) regulates any matters relating to the planning or the exploration, exploitation and mining of mineral resources. According to the Mineral Resources Law, all mineral resources in China, including coal, are owned by the State. Any enterprise planning to engage in the exploration, development and mining of mineral resources must obtain exploration rights and mining rights before commencing the relevant activities. The transfer of exploration and exploitation rights shall be subject to governmental approval pursuant to the PRC Coal Industry Law, the Mineral Resources Law and other relevant regulations.

The following is a summary of the principal laws, regulations, policies and administrative directives to which we are subject.

Pricing Laws

Until 2002, the production and pricing of coal was generally subject to the close control and supervision of the PRC government, which centrally managed the production and pricing of coal. To transition from a planned economy to market economy practices, the PRC government eliminated the state guidelines for coal prices on January 1, 2002 and took other measures intended to establish a pricing mechanism that would reflect market demand. In December 2012, the State Council issued a guideline to further implement the market reform for thermal coal. Pursuant to the guideline, beginning in 2013, the PRC government will discontinue the compulsory thermal coal supply contracts arrangement, which required coal producers to sell thermal coal to power generation enterprises at preferential prices set by the government. In addition, prices of thermal coal will be negotiated between power generation enterprises and coal producers, instead of pursuant to government-guided prices.

Regulation of fees and taxes

The table below sets forth material taxes and fees that are imposed upon coal producers in China, as well as reserves which we are required to set aside.

 

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Item

  

Base

  

Rate

Corporate income tax    Taxable income    25%
VAT    Sales revenue    17%
Business tax    Revenue from service    3% or 5%
City construction tax    Amount of VAT and business tax    7%
Education surcharge    Amount of VAT and business tax    3%
Local education surcharge    Amount of VAT and business tax    2%
Resource tax    Aggregate volume of raw coal sold or used (1)   

RMB3.6 per tonne

(Shandong Province)

 

RMB3.2 per tonne

(Shanxi Province)

Compensation for the depletion of coal resources

   Revenue from coal produced by us    1%
Price adjustment fund    Volume of raw coal produced or sales volume of merchantable coal   

1. Jining City, Shandong Province: RMB8 per tonne based on volume of raw coal produced;

 

2. Heze City, Shandong Province:

 

(1) RMB1.5 per tonne for 20% of the sales volume of clean coal and RMB20 per tonne for 80% of the sales volume of clean coal;

 

(2) RMB1 per tonne for 20% of the sales volume of other types of coal and RMB15 per tonne for 80% of the sales volume of other types of coal.

 

(1) The resource tax applicable to our coal operation in Shandong and Shanxi Provinces is calculated by multiplying the aggregate volume of raw coal sold and raw coal consumed in the production of clean coal by the applicable per tonne resource tax in the respective province.

Coal producers may be fined if they damage the environment, arable land, grasslands or forest areas. Under the Mineral Resources Law, if a mining enterprise’s mining activities result in damage to arable land, grasslands or forest areas, the mining enterprise must return the land to an arable state or plant trees or grass or take other restorative measures. The Mineral Resources Law and other applicable laws and regulations also state that anyone who causes others to suffer loss in terms of production or living standards is liable for the loss and must compensate the affected persons and remedy the situation.

Additionally, all coal producers are subject to PRC environmental protection laws and regulations which currently impose fees for the discharge of waste substances, require the payment of fines for serious pollution and provide for the discretion of the PRC government to close any facility which fails to comply with orders requiring it to cease or cure operations causing environmental damage.

Foreign exchange laws

The Notice of the State Administration of Foreign Exchange on Deciding the External Financing Guarantee Balance Quota of Domestic Banks in 2011 (Hui Fa [2011] No. 30), promulgated by the SAFE on July 27, 2011, provides that the SAFE will conduct a strict review of any application from a domestic enterprise with respect to external financing guarantees. In addition, when domestic banks provide offshore financing guarantees, the SAFE will conduct a strict review of the financing measures with respect to the external financing guarantee. The proceeds of any offshore financing under an offshore financing guarantee must not be repatriated into the PRC, directly or indirectly, either in the form of equity or debt interests, through, including but not limited to, the following methods:

 

   

financing applied towards the repayment of the original loans of the enterprise or other offshore companies which were repatriated into the PRC through equity or debt interests;

 

   

financing directly applied towards the acquisition of the equity of an offshore target company, and the principal assets of the target company are predominantly located in the PRC; or other methods of repatriation recognized by the SAFE.

 

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Import and export laws

According to the Foreign Trade Law, the Cargo Import and Export Ordinance and the Administrative Measures of Coal Export Quota, coal exports prior to 2013 are subject to State control and required governmental approval.

Our company has not been authorized as a PRC coal exporter. Our coal exports are conducted through three export agents, namely China National Coal Industry Import and Export Corporation, China National Minerals Import and Export Company Limited and Shanxi Coal Import and Export Group Company.

Pursuant to the Administrative Measures of Coal Export Quota, the NDRC and the MOC have been responsible for determining China’s national coal export quota and allocating the quota among authorized coal exporters. Upon receiving a quota approval, authorized coal exporters may apply for coal export permits to the relevant authority designated by the MOC. Authorized coal exporters are also required to report their monthly quota usage to the NDRC.

The regulations provided that quotas may be adjusted in the event of:

 

   

a major change in the international market;

 

   

a major change in domestic coal resources;

 

   

an imbalance in the usage of the coal export quota by an authorized coal exporter compared to its allocation of the coal export quota; and

 

   

other circumstances which require an adjustment to the coal export quotas.

The total national quotas approved for coal exports in 2011 and 2012 remained at 38.0 million tonnes. The first 19.0 million tonnes’ national quota for 2013 has been granted to exporters.

According to the Notice of the Customs Tariff Committee of the State Council on Tariff Adjustment on Certain Export Commodities (Notice 2008 No. 56), since August 20, 2008, the provisional tariff rate of coke, coking coal and soft coal has been 40%, 10% and 10%, respectively. However, we do not export any coke, coking coal or soft coal from the PRC and we do not expect changes in export tariffs will affect us.

Domestic trading regulations

Pursuant to the Measures for the Regulation of Coal Operations promulgated by the NDRC on December 27, 2004, the State implemented a system to examine the qualifications of an entity to engage in coal operations, including the wholesale and retail of raw coal and processed coal products and the processing and distribution of coal for civilian use. Before an entity can engage in coal operations, it must obtain a coal operation qualification certificate. A coal production enterprise that deals in coal products produced and processed by a third party is required to obtain a coal operation qualification.

Environmental protection

China has promulgated a series of laws and regulations which establish national and local legal frameworks for environmental protection. These laws and regulations include standards applicable to emission controls, discharges of wastes and pollutants to the environment, generation, handling, storage, transportation, treatment and disposal of waste materials by production facilities, land rehabilitation and reforestation.

The Environmental Protection Law requires any entity operating a facility that produces pollutants or may create a hazard to incorporate environmental protection measures into its operations and to establish an environmental protection responsibility system which includes effective measures to control and properly dispose of waste materials.

 

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According to the Law on Prevention and Control of Water Pollution of the PRC, and the Administrative Regulations on the Levy and Use of Discharge Fees, any new construction projects which directly or indirectly discharge pollutants to water, such as coal mines and coking plants, must conduct an environmental impact assessment. Every new production facility must be equipped with wastewater processing facilities which must be put in use together with the production facilities. Construction projects that discharge pollutants into water shall pay a pollutant discharge fee in accordance with state regulations.

The rehabilitation of mining sites is another priority of the PRC government. Under the Law of Land Administration of the PRC as amended on August 28, 2004, the Regulation on Land Reclamation effected on March 5, 2011 and the Implementation Measures on the Regulation on Land Reclamation effected on March 1, 2013, coal producers must undertake measures to restore a mining site to its original state within a prescribed time frame if their mining activities result in damage to arable land, grassland or forest. The rehabilitated land must meet rehabilitation standards, as required by law from time to time, and may only be subsequently used upon examination and approval by the land authorities.

In addition to the PRC environmental laws and regulations, China is a signatory to the 1992 United Nations Framework Convention on Climate Change and the 1998 Kyoto Protocol, which propose emission targets to reduce greenhouse gas emissions. The Kyoto Protocol came into force in 2005. At present, the Kyoto Protocol has not set any specific emission targets for certain countries, including China.

Mining safety

On June 7, 2005, the State Council promulgated Several Opinions on Promoting the Healthy Development of the Coal Industry, which contains the PRC government’s policies with respect to the development and restructuring of the coal industry. The opinions reiterated the PRC government’s policies with respect to the administration of coal reserves, enhancement of coal mine safety, encouragement of industry consolidation among coal producers, acceleration of the construction of large coal production bases, improvement of mining techniques and equipment for coal production and the organization and regulation of small coal mines.

According to the Measures for Implementing Work Safety Permits in Coal Mine Enterprises issued by the State Administration of Work Safety and the SACMS, a coal mine enterprise without a work safety permit may not engage in coal production activities. Coal mining enterprises and their mines that do not satisfy the safety conditions set forth in this document, or those that violate the provisions of this document, may be punished by fines, warnings, temporary suspension of the work safety permit, mandatory remediation measures, orders to cease production and cancellation of the work safety permit. Coal mine enterprises that remain compliant with the requirements set in these documents may apply for administrative approval to extend the validity period of their Work Safety Permits.

The Special Regulations by the State Council on Preventing Work Safety Related Accidents in Coal Mines were promulgated and entered into effect on September 3, 2005. These regulations specify that coal mine enterprises are responsible for preventing coal mine work safety-related accidents. If a coal mine has not obtained, in accordance with the law, a mining right permit, work safety permit, coal production permit or business license and if the mine manager has not obtained, in accordance with the law, a mine manager qualification certificate and a mine manager safety qualification certificate, the coal mine may not engage in production. Coal mining enterprises should establish a sound system for the detection, elimination, treatment and reporting of latent work safety-related dangers. If a major latent work safety-related danger exists in a coal mine, the enterprise should immediately suspend production and eliminate the latent danger. Coal mining enterprises should provide their personnel working underground and their special operation personnel with safety education and training in accordance with relevant state regulations. The person in charge of a coal mine and the production and operation management personnel should go into mines and act as foremen on a rotating basis in accordance with state regulations, and a file recording their entry into the mine should be maintained.

In addition, the State Administration of Work Safety issued three sets of measures on September 26, 2005: (i) the Measures for Determining Major Latent Work Safety Related Dangers in Coal Mines (for Trial Implementation); (ii) the Implementing Measures for the Detection and Elimination of Latent Dangers in Coal Mines and the Rectification and Closure of Such Mines (for Trial Implementation); and (iii) the Measures for the Supervision and Inspection of Coal Mine Safety Training (for Trial Implementation). On October 31, 2005, the State Administration of Work Safety issued the Guiding Opinions on Persons in Charge of Coal Mines and Production and Operation Management Personnel Going into Mines as Foremen. The State Administration of Work Safety and Ministry of Finance of the PRC jointly issued the Incentive Arrangement for Report on Working Safety on May 2, 2012, which encourages reporting on material accident hazards on working safety systems and other illegal activities.

 

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The State Administration of Work Safety, the State Administration of Coal Mine Safety and the All China Federation of Trade Unions jointly issued the Rules regarding the Working Safety Construction of Coal Mine Working Teams in June 2012, which requires coal mining enterprises to promote working safety target management and improve the salary structure to reflect the combination of working safety, production and profits. In addition, coal mining enterprises are required to improve working environments and labor protection facilities, provide employees with labor protection articles and occupational health examinations, establish occupational health files for employees and provide relevant remuneration for workers engaging in hazardous works.

Coal mining industry and resources integration

Several measures have been enacted by various PRC government and provincial authorities to promote the integration and enhancement of mineral resources to maximize domestic coal production and encourage developmental efficiency.

The General Office of the Shandong Provincial Government issued the Notice to Implement Circular Guo Fa Ban [2006] No. 108 and Notice to Effectively Implement Integration of Mineral Resources (Lu Zheng Ban Fa [2007] No. 37), on June 19, 2007, which further implement Circular Guo Fa Ban [2006] No. 108 and promote the integration of mineral resources in Shandong Province.

In addition, the Shandong Provincial Government issued the Notice to Deepen Integration Works of Mineral Resources (Lu Zheng Ban Fa [2010] No. 1), on January 4, 2010, which requires further promotion of integration of mineral resources, reduces the number of mines and mining approvals, and enhances intensive production in Shandong Province. The State-owned Assets Supervision and Administration Commission of Shandong Province issued the Notice Regarding Document Lu Zheng Ban Fa [2010] No. 1 from the General Office of Provincial Government to Deepen the Integration Work of Integrated Exploitation of Mineral Resources (Lu Guozi Guihua [2010] No. 1) on February 3, 2010, which requires enterprises under provincial administration to review and integrate resources, as well as actively participate in the integration of mineral resources province-wide.

The government authorities of Inner Mongolia issued the Notice of Printing and Distributing the Work Plan of Mergers and Reorganizations of Coal Mining Enterprises in Inner Mongolia Autonomous Region (Nei Zheng Fa [2011] No. 32) on March 15, 2011, which sets forth the guiding principles, integrative approach, applicable policies, regulations and working requirements for coal resources in the region. By the end of 2013, the notice indicates that coal mining enterprises located in Inner Mongolia Autonomous Region must achieve production of 1.2 million tonnes per annum (three million tonnes per annum may apply to certain regions upon certain conditions) or be required to merge with other enterprises. Enterprises with a production capacity of more than five million tonnes of raw coal, among others, or enterprises with at least either one underground coal mine with a singular well production capacity of more than 1.2 million tonnes or an open-pit coal mine with a singular well production capacity of more than three million tonnes, subject to certain operational safety conditions, will be given preference as entities into which other smaller entities may merge.

In addition, the government authorities of Inner Mongolia Autonomous Region issued the Notice of Working Well on the Related Issues Concerning Integration of Coal Resources (Nei Zheng Ban Fa [2011] No. 92) on October 9, 2011, which sets forth supplemental information on the determination of the status of coal mining entities and the scope of coal resources to be integrated in the region.

 

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The National Energy Administration of the PRC issued the amended Coal Mining Industry Policy in February 2013 seeking for comments, which aims to further implement the reform of coal mining enterprises and the market-oriented reform.

These mining industry and resources integration regulations will affect the production capacity and rates of our mines that are located in the particular provinces or regions.

Regulation of the Australian Coal Industry

Our operations in Australia are subject to laws and regulations of general application governing mining and processing, land tenure and use, environmental requirements, including site-specific environmental licenses, permits and statutory authorizations, industrial relations, workplace health and safety, trade and export, competition, access to infrastructure, foreign investment and taxation. These regulations are implemented by various federal, state and local government departments and authorities, including the Department of Resources, Energy and Tourism, the Department of Sustainability, Environment, Water, Population and Communities and the National Native Title Tribunal.

Environmental and planning issues

Our mining operations in Australia are regulated by Australian federal, state and local governments with respect to environmental issues (such as water quality, air quality, dust impact, noise impact) and planning issues (such as approvals to expand existing mines or to develop new mines or to change mining interests). Australian state governments require coal companies to post deposits or give other security on the land which is being used for mining and exploration, with those deposits being returned or security released after satisfactory reclamation is completed.

The particular provisions of the various state and territory environment and planning legal regimes vary depending upon the jurisdiction. Despite variation in details, each state and territory has a system involving broadly at least two major phases, including: (i) obtaining major environment/planning developmental approval addressing planning and significant environmental issues and (ii) obtaining pollution control approvals regarding pollution control issues such as emissions to the atmosphere; emissions in waters; noise impact, impact from blasting; dust impact; and the generation, handling, storage and transportation of waste.

The federal environmental protection regime will apply if matters of national environmental significance are likely to be significantly impacted. If so, federal regulatory approval will be required. Most coal projects require such federal approval.

Occupational health and safety

The combined effect of various state and federal statutes requires an employer to ensure that persons employed in a mine are safe from injury by providing a safe working environment and systems of work; safety machinery; safety equipment, plant and work materials; and appropriate information, instruction, training and supervision.

In recognition of the specialized nature of mining and mining activities, specific occupational health and safety obligations have been mandated under law and legislation that deals specifically with the coal mining industry. Mining employers, owners, directors and managers, persons in control of work places, mine managers, supervisors and employees are all subject to these duties. The Australian federal government is currently conducting a review of health and safety legislation with a view to harmonizing requirements across the country.

 

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It is mandatory for an employer to have insurance coverage with respect to the compensation of injured workers. Similar coverage is in effect throughout Australia which is of a no-fault nature and which provides for benefits up to a prescribed level. The specific benefits vary by jurisdiction, but generally include the payment of weekly compensation to an injured employee, together with payment of medical, hospital and related expenses. The injured employee may have a right to sue his or her employer for further damages if a case of negligence can be established (but on the condition that the injured employee waives his or her right to the insurance coverage).

MRRT

On March 29, 2012, the Australian MRRT became law, effective July 1, 2012. The MRRT is a profits-based tax that is charged at an effective rate of 22.5% on the assessable profits (excess of annual mining revenue over annual mining expenditures with respect to mineral interests, less certain allowances) of, among others, coal mining enterprises. According to the relevant provisions of the MRRT tax laws, our subsidiaries in Australia are required to determine the starting base allowance on their balance sheets. A book value or market value approach can be selected in calculating the starting base and may be amortized over the prescribed useful lives of such assets.

Carbon tax scheme

A number of countries, including Australia have ratified the Kyoto Protocol to the United Nations Framework Convention on Climate Change. The Australian government has devoted efforts in meeting the emissions target for Australia as set forth in the Kyoto Protocol. To this end, the Australian federal government has recently passed laws imposing a tax on the amount of carbon dioxide emissions by enterprises having significant emissions, which may include coal mining enterprises in Australia. In addition, the Australian federal government intends to gradually shift from a carbon tax scheme to a “cap and trade” carbon emissions scheme. The legislation became effective from July 1, 2012.

Foreign investment

There are no specific restrictions on foreign investment in Australia’s coal industry. However, under Australian law and Australia’s foreign investment policy, certain acquisitions require prior approval of the Treasurer of Australia. Generally, these include acquisitions of substantial interests (15% or more) in an Australian business where the value of the business’ total assets is, or the proposal value is, above A$244 million.

Power generation industry

The Electric Power Law and the Electric Power Regulatory Ordinance

The Electric Power Law of the PRC (the “Electric Power Law”) sets out the regulatory framework of the power industry. The Electric Power Law encourages power plant operators to focus on environmental protection and adopt new technology to decrease waste discharge.

In 2005, the State Council promulgated the Electric Power Regulatory Ordinance. The Electric Power Regulatory Ordinance sets forth regulatory requirements for many aspects of the power industry, including, among others, the issuance of electric power business permits, the regulatory inspections of power generators and grid companies and the legal liabilities resulting from violations of the regulatory requirements.

Approvals and licenses for power plants

Applications for all new coal-fired power plants are required to be submitted to the NDRC for approval, as well as to the State Council for significant power plant projects. According to the Provisions on the Administration of Electric Power Business Licenses, applicants are also required to obtain requisite permits, including an Electric Power Business for Power Generation and approvals related to plant site, land use rights, construction and the environment.

 

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Pricing

Since 1996, the Electric Power Law has set forth general principles for determining power tariffs. The Interim Provisions for the Administration of Grid Power Price promulgated by NDRC states that tariffs are to be formulated to provide reasonable compensation for costs and a reasonable return on investment, to share expenses fairly and to promote the construction of power projects. With the exception of grid power prices set by governmental bids or power plants that produce alternative energy, grid power prices of new power plants within the same region should be uniform. The on-grid tariffs for planned output and excess output are subject to a review and approval process involving the NDRC and the provincial price bureaus. In 2004, the NDRC, with the approval of the State Council, issued a policy to link thermal coal and power prices. This policy allows on-grid tariffs to increase if the average price of coal increases by more than 5% within a six-month period.

Safety

In accordance with the Measures for Supervising the Safe Production of Electricity, issued by the SERC, power plants are responsible for maintaining safe operations in accordance with requirements set by the regional grid in which they are located. Power plants are required to report worker fatalities or serious or extraordinary accidents to the SERC and relevant local government authorities.

Coal chemical processing industry

The PRC Coal Industry Law, encourages and supports coal mining enterprises and other enterprises to produce both coal and electricity, coking coal and coal chemicals. In July 2006, the NDRC issued the Notice of Strengthening the Administration of Coal Chemical Processing Industry and Improving the Healthy Development of the Industry (Fa Gai Chan Ye [2011] No. 635), which was aimed at strengthening the coal chemical processing industry through the promotion of transportation safety, risk prevention and management standardization. According to the Enterprise Income Tax Law (the “EIT Law”) and its implementation regulations, enterprises that produce products which are not restricted by the State and satisfy State and industry standards by using resources encouraged by industrial policies of the State are eligible for preferential tax treatment. If an enterprise uses any of the materials that are listed in the Catalogue of Income Tax Preference for Enterprises of Comprehensive Utilization of Resources as a major raw material in its product, 90% of the total income derived from such product will be treated as taxable income under the preferential tax arrangement. Coke oven gas, one of the primary raw materials at one of our methanol production facilities, is one of the materials listed in the catalogue.

 

C. Organizational Structure

As of December 31, 2012, our Company consisted of 20 departments, namely the Secretariat of the Board of Directors, Audit Department of the Board of Directors, Department of Coordination, Department of Human Resources, Financial Department, Planning and Management Department, Information Management Department, Enterprise Development Department, Risk Management Department, General Control Center, Department of Production Technology, Department of Safety Inspection, Electrical Engineering and Power Department, Ventilation and Dust Elimination Department, Geological Survey Department, Office of Community Relationship, Technical Center, Overseas Management Department, Department of Environmental Protection and Energy-saving and Resources Development Department.

 

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The following chart shows our simplified corporate structure as of December 31, 2012:

 

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D. Property, Plant and Equipment

Real Property and Leasehold Property

As of December 31, 2012, the net book value of our property, plant and equipment was RMB 39,503.1 million. The properties for which we own land use rights in China occupy an area of approximately 6.93 million square meters, while the coalfields to which we possess mining rights in Australia occupy an area of approximately 1.8 billion square meters. Under PRC law, land use rights for properties in China are granted for 50 years commencing from the respective grant dates of such land use rights and are freely transferable. In addition, the land ownership rights held by Yancoal Australia are held in perpetuity pursuant to Australian law.

As of the date of this annual report, we have not obtained certain land-use rights and building ownership certificates in China. In addition, we have not completed the registration procedure with relevant real estate administrative authorities with respect to certain properties we lease in China. We do not expect that our rights to use or occupy such properties will be challenged by third parties and as of the date of this annual report, we are not aware of any administrative or legal action with respect to these properties. However, we are prohibited from the transfer, lease, mortgage, or disposal of such properties until we obtain the relevant real estate or building ownership certificates.

Coal Mines and Coal Production Facilities

Nantun, Xinglongzhuang, Baodian, Dongtan, Jining II, Jining III, Beisu and Yangcun Coal Mines are all located in the southwestern part of Shandong Province. Except for Yangcun Coal Mine, all of these mines are connected by our railway network, which directly connect to our customers or the PRC national railway or highway systems. We acquired Jining II Coal Mine in 1998 and Jining III Coal Mine in 2001. We acquired Heze Nenghua, the operator of Tianchi Coal Mine in 2006 and subsequently the mining rights of Zhaolou Coal Mine through Heze Nenghua in 2008. Our wholly owned subsidiary, Ordos Neng Hua, acquired Anyuan Coal Mine in 2010 and acquired the mining rights of Zhuanlongwan coalfield through public bidding in 2011. In addition, Ordos Neng Hua acquired 80% of the equity interest in Inner Mongolia Xintai in 2011, which has operated Wenyu Coal Mine since July 2011.

We acquired Austar Coal Mine in Australia in 2004, and we acquired the entire equity interest in Yancoal Resources (formerly Felix) through Yancoal Australia in 2009, which operates Ashton Coal Mine, Yarrabee Coal Mine and Moolarben Coal Mine. We acquired an additional 30% of the equity interest in the Ashton Coal Mine Joint Venture and disposed of 51% of the equity interest in the Minerva Coal Mine Joint Venture in 2011. As of December 31, 2012, we held 90% of the equity interest in the Ashton Coal Mine Joint Venture. In August 2011, we acquired the entire equity interest of both Syntech Holdings Pty Ltd. and Syntech Holdings II Pty Ltd., which operate the Cameby Downs Coal Mine and have five exploration tenements that can be potentially developed. In September 2011, we acquired the entire equity interest of both Premier Coal, which operates the Premier Coal Mine and Wilga Exploration Area, and Premier Char. In May 2012, we purchased from Yankuang Group and Beisu Company all of the assets and liabilities of Beisu Coal Mine and Yangcun Coal Mine, including mining rights, building ownership certificates, mining and related equipment and other fixed assets. In addition, as a result of its merger with Gloucester in June 2012, Yancoal Australia is the largest listed Australian pure-play coal mining enterprise in terms of saleable coal production in 2011.

As of the date of this annual report, the following material approvals, permits and licenses need to be obtained or renewed for our coal mines or projects in China:

 

   

the permit for our acquisition of Anyuan Coal Mine is pending regulatory review and approval by the Inner Mongolia government authorities. In addition, we are in the process of renewing the working safety permit, mining permit and coal production permit for Anyuan Coal Mine, which we expect to complete by the second half of 2013;

 

   

we obtained the approval from the NDRC to conduct preliminary work on Shilawusu and Zhuanlongwan projects in December 2012 and March 2013, respectively;

 

   

Yingpanhao Project has been included into the NDRC’s twelfth five-year plan for the coal mining industry in March 2012. We are in the process of obtaining permits for our commencement of construction on this project;

 

   

we are in the process of obtaining a mining permit for Wanfu Project;

 

   

we are undergoing transfer procedures for Yangcun and Beisu Coal Mines; and

 

   

we are in the process of renewing the water pollution discharge permit for Jining II and Jining III Coal Mines.

In addition to the above, a number of material Australian regulatory approvals, permits and licenses are pending, outstanding, have not been applied for as yet or have expired, including:

 

   

surface mining leases for the development of proposed additional stages of the Moolarben Coal Mine, as well as agreements with affected landholders (including a competitor of Yancoal Australia), which are still in process; and

 

   

we have obtained the planning approval for the proposed additional “South East Open Cut” project of the Ashton Coal Mine from the Planning Institution of Australia. We expect to have the hearing for the Environmental Impact Assessment in the second half of 2013.

We operate substantially all of our mines either directly or through our subsidiaries and we have contracted the mining operations at Anyuan, Wenyu and Cameby Downs Coal Mines and Duralie open-pit mine at Gloucester Coal Mine to third party contractors.

 

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The map below shows the location of Nantun, Xinglongzhuang, Baodian, Dongtan, Jining II, Jining III Coal Mines and our railway system:

 

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The map below shows the location of Tianchi Coal Mine:

 

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The map below shows the location of Zhaolou Coal Mine:

 

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The map below shows the location of Anyuan and Wenyu Coal Mines:

 

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The map below shows the location of Beisu Coal Mine:

 

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The map below shows the location of Yangcun Coal Mine:

 

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The map below shows the location of Austar, Yarrabee, Ashton and Moolarben Coal Mines as well as developmental-stage projects Athena, Harrybrandt, Wilpeena and Wilga.

 

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The map below shows the location of Cameby Downs Coal Mine:

 

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The map below shows the location of Premier Coal Mine:

 

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The map below shows the location of Gloucester, Donaldson and Middlemount Coal Mines and Monash Project:

 

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The Six Coal Mines

The following table sets forth information about Nantun, Xinglongzhuang, Baodian, Dongtan, Jining II, Jining III Coal Mines, which are directly owned and operated by the Company:

 

    Nantun   Xinglong-
zhuang
  Baodian   Dongtan   Jining II   Jining III   Total

Background data:

             

Commencement of construction

  1966   1975   1977   1979   1989   1993   N/A

Commencement of commercial production

  1973   1981   1986   1989   1997   2000   N/A

Coalfield area (square kilometers)

  35.2   59.81   36.4   60.0   87.1   105.1   383.61

Reserve data:(1)

(millions tonnes as of December 31, 2012)

             

Total in-place proven and probable reserves(1)

  108.05   304.08   269.85   436.94   400.53   209.98   1.729.43

Mining recovery rate(2)(%)

  81.20   81.26   80.45   84.09   79.51   80.46   N/A

Coal preparation plant recovery rate (%)(3)

  74.31   86.82   72.51   46.99   72.71   62.65   65.37

Depth of mine (meters underground)

  397.0   429.2   474.7   710.0   593.0   556.0   N/A

Average thickness of main coal seam (meters)

  10.43   8.3   8.8   8.4   6.8   6.2   N/A

Type of coal

  thermal coal   thermal coal   thermal coal   thermal coal   thermal coal   thermal coal   N/A

Leased/owned

  owned   owned   owned   owned   owned   owned   N/A

Assigned/unassigned(4)

  assigned   assigned   assigned   assigned   assigned   assigned   N/A

Average calorific value (Kcal/kg)

  5290   5484   5507   5249   5158   5227   N/A

Sulfur content (%)

  0.91   0.51   0.55   0.53   0.56   0.59   N/A

Production data: (million tonnes)

             

Designed raw coal production capacity

  2.4   3.0   3.0   4.0   4.0   5.0   21.4

Designed washing capacity

  1.8   3.0   3.0   4.0   3.0   5.0   19.8

Raw coal production

             

1997-2005

  37.9   56.1   50.2   62.5   35.3   37.5   279.5

2006

  3.9   7.2   5.6   8.0   4.0   6.8   35.5

2007

  3.9   6.8   5.8   7.6   3.4   5.3   32.8

2008

  3.5   6.6   6.0   7.0   3.9   6.1   33.1

2009

  3.8   6.6   5.7   7.5   3.6   6.2   33.4

2010

  3.6   6.8   6.1   7.4   4.2   6.2   34.3

2011

  3.3   6.8   6.1   7.3   4.4   6.0   34.0

2012

  3.2   7.0   6.1   7.6   3.7   5.5   33.1

Cumulative raw coal production as of December 31, 2012

  63.1   103.9   91.6   114.9   62.5   79.7   515.7

 

 

(1) The proven and probable reserves of the above coal mines are based on the report dated February 6, 1998 prepared by International Mining Consultants Limited, a UK-based company, in accordance with the standards in Industry Guide 7.

Under Industry Guide 7, “proven reserves” are reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes, grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established. “Probable reserves” are reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling, and measurement are further apart or are otherwise less adequately spaced. The degree of assurance of “probable reserves,” although lower than that for proven reserves, is high enough to assume continuity between points of observation.

 

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The total proven and probable reserves as of the end of a year are derived by deducting the proven and probable reserves consumed in the coal production in the same year from the proven and probable reserves as of the end of the immediately preceding year.

 

(2) The mining recovery rate is the rate of the amount of coal recovered from a determined amount of proven and probable reserves, which is calculated by dividing the actual volume of coal recovered in a year by the volume of proven and probable reserves mined and consumed in the same year.
(3) “Coal preparation plant recovery rate” refers to the wash plant recovery rate of raw coal used during the production of our coal products.
(4) “Assigned” refers to coal reserves which have been committed to a particular mining complex (mine shafts, mining equipment, and plant facilities), and all coal which has been leased by the company to others. “Unassigned” refer to coal reserves which have not been committed, and which would require new mine shafts, mining equipment or plant facilities before operations could begin on the property.

Nantun Coal Mine

Nantun is located in the southern portion of our coalfield, with a coalfield area of approximately 35.2 square kilometers. Nantun began commercial production in 1973 with a designed annual raw coal production capacity of 2.4 million tonnes of coal. The main coal seam of Nantun is divided into four leaves. The thickness of the upper leaf averages 5.35 and 3.21 meters and the thickness of the lower leaf averages 0.89 and 1.03 meters. As of December 31, 2012, the total in-place proven and probable reserves on the main coal layer were approximately 108.05 million tonnes.

We primarily use the fully mechanized sublevel caving mining method to extract coal. As of December 31, 2012, Nantun produced coal from three work faces. Nantun’s coal preparation plant produces mainly No. 2 Clean Coal and employs movable-sieve jig machines and jig machines. Most of the equipment used in the Nantun coal preparation plant was manufactured in the PRC.

Xinglongzhuang Coal Mine

Xinglongzhuang is located in the northern portion of our coalfield, with coalfield area of approximately 59.8 square kilometers. Xinglongzhuang began commercial production in 1986 with a designed annual raw coal production capacity of 3.0 million tonnes. The main coal seam of Xinglongzhuang is concentrated in one leaf with an average thickness of 8.3 meters. As of December 31, 2012, the total in-place proven and probable reserves on the main coal layer were approximately 304.08 million tonnes.

We primarily use the fully mechanized sublevel caving method to extract coal from the coal seam of Xinglongzhuang Coal Mine. At this coal mine, we produced coal from two work faces as of December 31, 2012. The Xinglongzhuang coal preparation plant produces No. 1 and No. 2 Clean Coal and lump coal. The majority of the equipment in the Xinglongzhuang coal preparation plant, including its jig machines and movable-sieve jig machines, was manufactured in the PRC while a small portion of the equipment was imported.

Baodian Coal Mine

Baodian is located in the central western portion of our coalfield, with coalfield area of approximately 36.4 square kilometers. Baodian began commercial production in 1986 with a designed annual raw coal production capacity of 3.0 million tonnes. Certain sections of the main coal seam of Baodian are concentrated in one leaf, with an average thickness of 8.81 meters. The remaining sections are divided into two leaves with an average thickness of 5.74 meters for the upper leaf and 3.38 meters for the lower leaf. As of December 31, 2012, the total in-place proven and probable reserves on the main coal layer were approximately 269.85 million tonnes.

We primarily use the fully mechanized sublevel caving method to extract coal. At this coal mine, we maintained two work faces as of December 31, 2012. The Baodian coal preparation plant produces No. 2 Clean Coal and lump coal. The majority of equipment in the Baodian coal preparation plant, including its slanted wheel, cyclones and jig machines, was manufactured in the PRC.

Dongtan Coal Mine

Dongtan is located in the central eastern portion of our coalfield, with coalfield area of approximately 60.0 square kilometers. Dongtan began commercial production in 1989 with a designed annual raw coal production capacity of 4.0 million tonnes. Certain sections of the main coal seam consist of one layer with an average thickness of 8.41 meters, and the remaining sections are divided into two layers, with an average thickness of 5.38 meters for the upper layer and 3.22 meters for the lower layer. As of December 31, 2012, the main coal layer held approximately 436.94 million tonnes of in-place proven and probable reserves.

We primarily use the fully mechanized sublevel caving method to extract coal. At this mine, we maintained two work faces as of December 31, 2012. The Dongtan coal preparation plant produces No. 2 and No. 3 Clean Coal and lump coal. The principal pieces of equipment in the Dongtan coal preparation plant, including its slanted wheel, cyclones and jig machines, were manufactured in the PRC.

 

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Jining II Coal Mine

Jining II is located in the northern portion of the Jining coalfield, with coalfield area of approximately 87.1 square kilometers. Jining II began commercial production in 1997 with a designed annual raw coal production capacity of 4.0 million tonnes. Certain sections of the main coal seam of Jining II are concentrated in one layer, with an average thickness of 6.78 meters. The remaining sections are divided into two layers, with an average thickness of 2.1 meters for the upper leaf and an average thickness of 4.68 meters for the lower leaf. As of December 31, 2012, the total in-place proven and probable reserves on the main coal layer were approximately 400.53 million tonnes.

We primarily use the fully mechanized sublevel caving method to extract coal. At this coal mine, we produced coal from two work faces as of December 31, 2012. The main equipment used in Jining II are movable-sieve jig machines and jig machines, most of which were manufactured in the PRC. The principal product of the coal preparation plant of Jining II is No. 2 Clean Coal.

Jining III Coal Mine

Jining III is located in the southern portion of the Jining coalfield and covers an area of 105.0 square kilometers. Jining III has a designed annual raw coal production capacity of 5 million tonnes. Certain sections of the main coal seam of Jining III are concentrated in one layer, with an average thickness of 6.2 meters. The remaining sections are divided into two layers, with an average thickness of 1.21 meters for the upper leaf and an average thickness of 4.9 meters for the lower leaf. As of December 31, 2012, the total in-place proven and probable reserves on the main coal layer were approximately 209.98 million tonnes.

We primarily used the fully mechanized sublevel caving method to extract coal from three work faces in Jining III Coal Mine as of December 31, 2012. The main pieces of equipment used in Jining III are slanted wheel, cyclones and movable-sieve jig machines, which were manufactured in the PRC. The principal products of the coal preparation plant of Jining III are No. 2 and No. 3 Clean Coal. In 2010, Jining III made technical improvements which provided it with washing capacity.

Beisu and Yangcun Coal Mines

The following table sets forth information about Beisu and Yangcun Coal Mines, which are directly owned and operated by the Company:

 

     Beisu   Yangcun   Total

Background data:

      

Commencement of construction

   1972   1981   N/A

Commencement of commercial production

   1976   1988   N/A

Coalfield area (square kilometers)

   29.3   27.46   75.38

Reserve data:

(as of December 31, 2012)

      

Mining recovery rate (%)(1)

   87.7%   83.3%   N/A

Coal preparation plant recovery rate (%)(2)

   N/A   N/A   N/A

Depth of mine (meters underground)

   269.7   318.8   N/A

Average thickness of main coal seam (meters)

   1.89   10.53   N/A

Type of coal

   thermal coal   thermal coal   N/A

Leased/owned

   owned   owned   N/A

Assigned/unassigned(3)

   assigned   assigned   N/A

Average calorific value (Kcal/kg)

   5,302   5,215   N/A

Sulfur content (%)

   3.55   1.29   N/A

Production data: (million tonnes)

      

Designed raw coal production capacity

   1.0   1.15   2.15

Designed coal preparation input washing capacity

   —     —     —  

Raw coal production

      

2011

   —     —     —  

2012

   1.0   1.1   2.1

Cumulative raw coal production as of December 31, 2012

   1.0   1.1   2.1

 

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(1) The mining recovery rate is the rate of the amount of coal recovered from a determined amount of proven and probable reserves, which is calculated by dividing the actual volume of coal recovered in a year by the volume of proven and probable reserves mined and consumed in the same year.
(2) “Coal preparation plant recovery rate” refers to the wash plant recovery rate of raw coal used during the production of our coal products.
(3) “Assigned” reserves refer to coal reserves which have been committed to a particular mining complex (mine shafts, mining equipment and plant facilities), and all coal which has been leased by the company to others. “Unassigned” reserves refers to coal reserves which have not been committed, and which would require new mine shafts, mining equipment, or plant facilities before operations could begin on the property.

Beisu Coal Mine

Beisu Coal Mine is located in the south portion of our coalfield, and covers an area of approximately 29.3 square kilometers. We acquired the entire assets of Beisu Coal Mine in May 2012.

Beisu Coal Mine commenced operations in 1976 with a designed annual raw coal production capacity of 0.75 million tonnes. The annual raw coal production capacity has been increased to 1.0 million tonnes since 2006. The main coal seam of Beisu is divided into two thin-seam leaves. The thickness of the upper leaf averages 0.9 meters and the thickness of the lower leaf averages 0.99 meters. We primarily used the thin coal seam blasting method and the fully mechanized system to extract coal from three work faces in Beisu Coal Mine as of December 31, 2012. Beisu Coal Mine primarily produces thermal coal. Beisu Coal Mine has a coal preparation plant. The main equipment used in the coal preparation plant is a waste discharge system, which was manufactured in China.

Yangcun Coal Mine

Yangcun Coal Mine is located in the north portion of our coalfield, and covers an area of approximately 27.46 square kilometers. We acquired the entire assets of Yangcun Coal Mine in May 2012.

Yangcun Coal Mine commenced operations in 1988 with a designed annual raw coal production capacity of 0.6 million tonnes. The annual raw coal production capacity has been increased to 1.15 million tonnes since 2006. The main coal seam of Yangcun is divided into three leaves. The thickness of the upper leaf averages 8.34 meters and the thickness of the lower leaves average 1.17 and 1.02 meters. We primarily used the fully mechanized sublevel caving method to extract coal from the upper leaf and the fully mechanized system to extract coal from the lower leaves. As of December 31, 2012, Yangcun Coal Mine has three work faces. Yangcun Coal Mine primarily produces thermal coal. Yangcun Coal Mine does not have any coal preparation plant.

 

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Coal Mines operated by Shanxi Nenghua and Heze Nenghua

The following table sets forth information about Tianchi Coal Mine and Zhaolou Coal Mine in China that are operated by Shanxi Nenghua and Heze Nenghua:

 

     Tianchi    Zhaolou    Total

Background data:

        

Commencement of construction(1)

   2004    2009    N/A

Commencement of commercial production(1)

   2004    2009    N/A

Coalfield area (square kilometers)

   18.7    143.4    162.1

Reserve data:

(millions tonnes as of December 31, 2012)

        

Recoverable reserves(2)

   25.7    102.2    127.9

Mining recovery rate(3)(%)

   80.4    87.4    N/A

Coal preparation plant recovery rate (%)(4)

   N/A    46.08    N/A

Depth of mine (meters underground)

   225    905    N/A

Average thickness of main coal seam (meters)

   4.6    5.2    N/A

Type of coal

   thermal coal    1/3 coking coal    N/A

Leased/owned

   owned    owned    N/A

Assigned/unassigned(4)

   assigned    assigned    N/A

Average calorific value (Kcal/kg)

   4,803    5,806    N/A

Sulfur content (%)

   1.09    0.87    N/A

Production data: (million tonnes)

        

Designed raw coal production capacity

   1.2    3.0    4.2

Designed coal preparation input washing capacity

   —      3.0    3.0

Raw coal production

        

2006

   0.1    —      0.1

2007

   1.2    —      1.2

2008

   1.1    —      1.1

2009

   1.0    0.04    1.04

2010

   1.5    1.6    3.1

2011

   1.2    3.0    4.2

2012

   1.4    2.7    4.1

Cumulative raw coal production as of December 31, 2012

   7.5    7.3    14.8

 

 

(1) With respect to the Tianchi Coal Mine, the “commencement of construction” refers to capacity expansion and technology upgrade undertaken after our 2006 acquisition; the “commencement of commercial production” refers to the resumption of production after completion of the foregoing expansion and upgrade.
(2) The recoverable reserves of the above coal mines are based on the report prepared by Minarco Asia Pacific Pty Limited in May 2006 in accordance with the standards in the JORC Code.

“Recoverable reserves” generally refer to proved and probable reserves under the JORC Code as revised in 2004,. “Proved reserves” are the economically mineable part of a measured coal resource and “probable reserves” are the economically mineable part of an indicated, and in some circumstances, measured coal resource. Both “proved reserves” and “probable reserves” incorporate mining dilution and allow for mining losses and are based on an appropriate level of mine planning, mine design and scheduling.

(3) The mining recovery rate is the rate of the amount of coal recovered from a determined amount of proven and probable reserves, which is calculated by dividing the actual volume of coal recovered in a year by the volume of proven and probable reserves mined and consumed in the same year.
(4) “Coal preparation plant recovery rate” refers to the wash plant recovery rate of raw coal used during the production of our coal products.
(5) “Assigned” refer to coal reserves which have been committed to a particular mining complex (mine shafts, mining equipment and plant facilities), and all coal which has been leased by the company to others. “Unassigned” refers to coal reserves which has not been committed, and which would require new mine shafts, mining equipment, or plant facilities before operations could begin on the property.

 

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Tianchi Coal Mine

Tianchi Coal Mine is an underground mine located in Heshun County of Shanxi, with an area of approximately 18.7 square kilometers. Tianchi Coal Mine commenced commercial production in 2006 and the designed production capacity was increased to 1.2 million tonnes per annum in the same year. Tianchi Coal Mine is operated by inclined shaft development and primarily produces thermal coal. The average thickness of the target coal seam is 4.6 meters. As of December 31, 2012, the total recoverable reserves of Tianchi Coal Mine were approximately 25.7 million tonnes.

We primarily used the longwall caving mining method to extract coal from one work face at Tianchi Coal Mine as of December 31, 2012. The primary piece of equipment in this system is a slanted wheel, which was manufactured in China. The operations at Tianchi Coal Mine are powered by electricity from local power grids. We ship coal products from the Tianchi Coal Mine to Hebei and surrounding areas on the Yangshe Railway and the national railway network, as well as the highway network.

Zhaolou Coal Mine

Zhaolou Coal Mine is an underground longwall mine located in the central portion of Juye Coal Field in Shandong. Zhaolou Coal Mine covers an area of approximately 143.4 square kilometers, and is accessible by roadway and railway.

Zhaolou Coal Mine commenced commercial production in December 2009 and has a designed annual raw coal production capacity of 3.0 million tonnes. Zhaolou Coal Mine produces 1/3 coking coal. The average thickness of the main coal seam of Zhaolou Coal Mine is 5.2 meters. The total recoverable reserves of Zhaolou Coal Mine were approximately 102.2 million tonnes as of December 31, 2012, which was net of coal preparation and plant recovery losses.

We primarily used the longwall caving mining method to extract coal from the two work faces at Zhaolou Coal Mine as of December 31, 2012. The coal preparation plant at Zhaolou Coal Mine commenced commercial production in September 2009. The main equipment used in the coal preparation plant was a slanted wheel, cyclone machines and TBS separators, which were mainly produced in China. The main product of Zhaolou’s coal preparation plant is No. 2 Clean Coal. The operations at Zhaolou Coal Mine are powered by electricity from local power grids. We ship coal products to Shandong and Hebei Provinces and surrounding areas by truck.

 

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Coal Mines operated by Ordos Neng Hua

The following table sets forth information about Anyuan Coal Mine and Wenyu Coal Mine in China that are operated by Ordos Neng Hua:

 

     Anyuan    Wenyu    Total

Background data:

        

Commencement of construction

   —      1996    N/A

Commencement of commercial production

   2004    1997    N/A

Coalfield area (square kilometers)

   9.26    9.36    75.38

Reserve data:

(as of December 31, 2012)

        

Mining recovery rate (%)(1)

   88.4    88.7    N/A

Coal preparation plant recovery rate (%)(2)

   N/A    N/A    N/A

Depth of mine (meters underground)

   68    59    N/A

Average thickness of main coal seam (meters)

   2.8    3.9    N/A

Type of coal

   thermal coal    thermal coal    N/A

Leased/owned

   owned    owned    N/A

Assigned/unassigned(3)

   assigned    assigned    N/A

Average calorific value (Kcal/kg)

   5,309    2,237    N/A

Sulfur content (%)

   0.32    0.75    N/A

Production data: (million tonnes)

        

Designed raw coal production capacity

   1.2    3.0    6.35

Designed coal preparation input washing capacity

   —      —      —  

Raw coal production

        

2011

   2.3    2.1    4.4

2012

   2.3    4.6    6.9

Cumulative raw coal production as of December 31, 2012

   4.6    6.7    11.3

 

 

(1) The mining recovery rate is the rate of the amount of coal recovered from a determined amount of proven and probable reserves, which is calculated by dividing the actual volume of coal recovered in a year by the volume of proven and probable reserves mined and consumed in the same year.
(2) “Coal preparation plant recovery rate” refers to the wash plant recovery rate of raw coal used during the production of our coal products.
(3) “Assigned” reserves refer to coal reserves which have been committed to a particular mining complex (mine shafts, mining equipment and plant facilities), and all coal which has been leased by the company to others. “Unassigned” reserves refers to coal reserves which have not been committed, and which would require new mine shafts, mining equipment, or plant facilities before operations could begin on the property.

Anyuan Coal Mine

Through Ordos Neng Hua, we wholly control Anyuan Coal Mine, which is located in Yijinhuoluoqi of Ordos City in Inner Mongolia Autonomous Region, and covers an area of approximately 9.3 square kilometers. Ordos Neng Hua commenced commercial production in 2011.

In 2011, we increased the annual production capacity of Anyuan Coal Mine from the designed annual production capacity of 600,000 tonnes to 1.2 million tonnes through reconstruction and expansion. Anyuan Coal Mine primarily produces thermal coal. The average thickness of the main coal seam of Anyuan Coal Mine is 2.8 meters. We principally extracted coal from one work face at Anyuan Coal Mine as of December 31, 2012. Anyuan Coal Mine has a coal separation system. Anyuan Coal Mine is located in close proximity to railway and road transportation. The provincial highway and Baoshen railway are located approximately six kilometers to the west of the coalfield.

 

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Wenyu Coal Mine

Through our subsidiary, Inner Mongolia Xintai, we operate Wenyu Coal Mine, which is located in Ordos City in Inner Mongolia Autonomous Region, and covers an area of approximately 9.36 square kilometers.

The original designed annual raw coal production capacity of Wenyu Coal Mine was 1.1 million tonnes. We completed production capacity expansion from 1.1 million tonnes to 3.0 million tonnes upon approvals from the relevant administrative authority and commenced commercial production in 2011. The average thickness of the main seam of Wenyu Coal Mine is 4.0 meters. The type of coal is thermal coal. We principally extracted coal from two work faces at Wenyu Coal Mine as of December 31, 2012. Wenyu Coal Mine has a simplified coal separation system. Wenyu Coal Mine is located in close proximity to Baofu road, Anyuan Coal Mine and railway transportation.

Coal Mines operated by Yancoal Australia

The following table sets forth information about our operational coal mines in Australia, which are directly or indirectly held by Yancoal Australia:

 

    Austar   Yarrabee   Ashton   Moolarben   Gloucester
Mine
  Donaldson
Mine
  Middlemount(6)   Total

Background data:

               

Commencement of construction(1)

  1998   1981   2003   2009   1998   2001   2009   N/A

Commencement of commercial production(1)

  2000   1982   2004   2010   1999   2001   2011   N/A

Coalfield area(2) (square kilometers)

  63   62.7   19.2   17.4   20.5   42.3   27.7   252.8

Reserve data:

(millions of tonnes as of December 31, 2012)

               

Recoverable reserves(3)

  49.7   61.4   74.0   300.9   69.4   148.3   96.0   799.7

Depth of mine (4) (meters underground)

  300-700   N/A   190-280   N/A   N/A   50-150   N/A   N/A

Type of coal

  semi-hard

coking coal

  PCI

coal

  semi-soft
coking coal
  thermal coal   semi-hard

coking coal

  semi-soft
coking coal
  Coking coal

PCI coal

  N/A

Leased/owned

  owned   owned   owned   owned   owned   owned   owned   N/A

Assigned/unassigned (5)

  assigned   assigned   assigned   assigned   assigned   assigned   assigned   N/A

Average calorific value (Kcal/kg)

  6196   7300   7100   6650   7550   8200   7300   N/A

Sulfur content (%)

  1.75   0.7   0.65   0.5   1.05   0.90   0.5   N/A

Production data: (million tonnes)

               

Designed raw coal production capacity

  3.6   3.0   5.2   16.0   3.8   3.0   5.25   34.6

Designed coal preparation input washing capacity

  3.3   2.4   6.5   16.0   3.8   3.0   5.25   30.0

Raw coal production

               

2006

  0.4   —     —     —     —     —     —     0.4

2007

  1.6   —     —     —     —     —     —     1.6

2008

  1.9   —     —     —     —     —     —     1.9

2009

  1.9   —     —     —     —     —     —     1.9

2010

  1.7   2.3   2.7   3.9   —     —     —     10.6

2011

  1.9   3.1   1.7   5.6   —     —     —     12.3

2012

  1.7   3.2   2.3   7.2   1.8   2.0   —     18.2

Cumulative raw coal production as of December 31, 2012

  11.1   8.6   6.7   16.7   1.8   2.0   —     46.9

 

 

(1) The Austar Coal Mine was closed in 2003 as the result of an underground fire. We acquired Austar Coal Mine in 2004 and implemented a production expansion and technology upgrade in 2005. Austar Coal Mine resumed part of its operations in October 2006. Each of the Ashton Coal Mine and Moolarben Coal Mine has an open-pit coal mine and an underground coal mine. The “commencement of commercial production” indicates the time when the open-pit mines, the earlier of the two types of mines, commenced commercial production.
(2) The coalfield area refers to the area of current leased land for mining, excluding the area on which we own prospecting rights. The coalfield area of Harry-Brandt refers to the area on which we own prospecting rights.
(3) The recoverable reserves of the above coal mines are based on the report prepared by the competent persons appointed by Yancoal Australia or Yancoal Resources and other companies which have been acquired by Yancoal Australia and such reserves refer to total proved and probable reserves that were prepared in accordance with the standards in the JORC Code.

 

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(4) Ashton Coal Mine has both open-pit and underground coal mines. The depth of mine indicates the depth of the underground mines.
(5) “Assigned” refers to coal reserves which have been committed to a particular mining complex (mine shafts, mining equipment and plant facilities), and all coal which has been leased by the company to others. “Unassigned” refers to coal reserves which have not been committed, and which would require new mine shafts, mining equipment, or plant facilities before operations could begin on the property.
(6) As Middlemount Coal Mine is owned and operated by a joint venture jointly controlled by Yancoal Australia and a third party, its production data and financial performance will not be consolidated in to our reports.

Austar Coal Mine

Austar Coal Mine is an underground mine located in Hunter Valley, New South Wales, Australia and is accessible by railway. Austar Coal Mine covers an area of 63.0 square kilometers. Austar Coal Mine was constructed in 1998 and commenced commercial production in 2000.

In 2003, an underground fire occurred at Austar Coal Mine when it was still owned by Southland Coal Pty Limited, resulting in the closure of the mine. On December 24, 2004, we acquired the entire interest in the Austar Coal Mine for approximately A$32.0 million from Southland Coal Pty Limited, an independent third party. After we invested approximately A$230.3 million in the reconstruction, capacity expansion and technology upgrade of Austar Coal Mine in 2005, which included funding for equipment and machinery, the mine resumed commercial production of semi-hard coking coal in October 2006.

The average thickness of the main coal seam of Austar Coal Mine is 6.5 meters. As of December 31, 2012, the mine’s JORC-compliant reserves were approximately 49.7 million tonnes. As of the same date, the mine’s marketable coal reserves, representing beneficiated or otherwise enhanced coal products where modifications resulting from mining, dilution and processing have been considered, were approximately 39.6 million tonnes.

We principally use the fully mechanized longwall top coal caving mining method to extract coal from the underground mine. The main equipment used in the coal handling preparation plant consists of coal crushing equipment, cyclones and other associated equipment which were generally manufactured in Australia. The operations at Austar Coal Mine are powered by electricity from local power grids. We transport coal products from Austar Coal Mine to Newcastle Port via railway.

Yarrabee Coal Mine

Yarrabee Coal Mine is an open-pit mine located in Bowen Basin, Queensland, Australia and is accessible by railway to the Gladstone Port. Yarrabee Coal Mine covers an area of 62.7 square kilometers. The construction of Yarrabee Coal Mine started in 1981 and commercial production commenced in 1982.

Through Yancoal Resources, Yancoal Australia wholly owns Yarrabee Coal Mine. Currently, the designed annual capacity of Yarrabee Coal Mine is approximately 3.2 million tonnes. Yarrabee Coal Mine mainly produces low volatility PCI coal.

The thickness of the main coal seam of Yarrabee Coal Mine ranges from 3.2 to 4 meters. As of December 31, 2012, the mine’s JORC-compliant reserves were approximately 61.4 million tonnes. As of the same date, the mine’s marketable coal reserves were approximately 49.4 million tonnes. We utilize conventional truck shovel and open-pit mining methods to extract coal at Yarrabee Coal Mine.

Yarrabee Coal Mine has a coal preparation plant. The main pieces of equipment used in the coal preparation plant are heavy medium cyclone machines and floating separation machines, which were generally manufactured in Australia. The operations at Yarrabee Coal Mine are powered by electricity from local power grids. We transport coal products from Yarrabee Coal Mine to Gladstone Port via railway.

Ashton Coal Mine

Ashton Coal Mine consists of an underground mine and an open-pit mine located in Hunter Valley, New South Wales, Australia and is accessible by railway to Newcastle Port. Ashton Coal Mine covers an area of approximately 19.2 square kilometers. The construction of the open-pit and underground mines of Ashton Coal Mine started in 2003 and commercial production commenced in 2004.

The designed annual capacity of Ashton Coal Mine is approximately 5.2 million tonnes of coal. Ashton Coal Mine mainly produces semi-soft coking coal.

The thickness of the main coal seams of the open-pit mine and the underground mine of Ashton Coal Mine ranges from 2.14 to 2.26 meters and 1.7 to 2.4 meters, respectively. As of December 31, 2012, the mine’s JORC-compliant reserves were approximately 74.0 million tonnes. As of the same date, the mine’s marketable coal reserves were approximately 44.5 million tonnes, according to our internal estimates. We principally use longwall operations to extract coal from the underground coal seam and use conventional truck shovel mining methods at the open-pit mine of Ashton Coal Mine.

 

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The main pieces of equipment used in the coal preparation plant of Ashton Coal Mine are heavy-medium cyclone machines and floating separation machines, which were generally manufactured in Australia. The operations at Ashton Coal Mine are powered by electricity from local power grids. We transport coal products from Ashton Coal Mine to Newcastle Port via railway.

Moolarben Coal Mine

Moolarben Coal Mine consists of an open-pit mine and an underground development project and is located near Mudgee in central western New South Wales. It is connected by railway to Newcastle Port. Moolarben Coal Mine covers an area of 17.4 square kilometers. Construction of the open-pit mine commenced in 2009 with commercial production starting in mid-2010. The construction of the underground mine at Moolarben is expected to commence in the second half of 2013.

Yancoal Australia holds 80% of the equity interest in Moolarben Coal Mine through its subsidiary, Moolarben Coal Mines Pty Limited. The designed annual capacity of Moolarben Coal Mine is approximately 17.0 million tonnes, of which the annual capacity of the underground mine is expected to be approximately 4.0 million tonnes and the annual capacity of the open-pit mine is approximately 13.0 million tonnes. Moolarben Coal Mine produces thermal coal.

The average thickness of the main coal seam of the open-pit mine of Moolarben Coal Mine is 5.5 to 11.66 meters. As of December 31, 2012, the mine’s JORC-compliant reserves were approximately 300.9 million tonnes. As of the same date, the mine’s marketable coal reserves were approximately 225.0 million tonnes. We use conventional truck shovel mining methods in the open-pit mine and expect to use longwall machines to extract coal in the underground mine project.

Moolarben Coal Mine has a coal handling preparation plant with a capacity of approximately 1,800 TPH, and utilizes conventional equipment including medium-heavy cyclones and flotation cells which are primarily manufactured in Australia. The operations at Moolarben Coal Mine are powered by electricity from local power grids. We transport thermal coal products from Moolarben Coal Mine to Newcastle Port via railway.

Gloucester Coal Mine

Gloucester Coal Mine is located in Gloucester basin in New South Wales, Australia and covers an area of 20.5 square kilometres. Gloucester Coal Mine is approximately 100 kilometers away from Newcastle Port. The construction of Gloucester Coal Mine started in 1998 and commercial production commenced in 1999.

Gloucester Coal Mine consists of two open-pit mines, Duralie and Stratford, which has an aggregate annual designed production capacity of 3.8 million tonnes and an aggregate annual designed preparation capacity of 3.8 million tonnes. As of December 31, 2012, Gloucester Coal Mine’s JORC-compliant reserves were approximately 69.4 million tonnes. As of the same date, the mine’s marketable coal reserves were approximately 40.0 million tonnes.

Duralie open-pit mine and Stratford open-pit mine own one coal preparation plan with an annual designed preparation capacity of 1.8 million tonnes, which was increased to 4.3 million tonnes in June 2011. We transport our coal products from Gloucester Coal Mine via railway.

Donaldson Coal Mine

Donaldson Coal Mine is located in Newcastle coal field in New South Wales, Australia and covers an area of 42.3 square kilometres. Donaldson Coal Mine is approximately 25 kilometers away from Newcastle Port. The construction of Donaldson Coal Mine started in 2001 and commercial production commenced in the same year.

Donaldson Coal Mine consists of one open-pit coal mine, Donaldson open-pit mine and two underground coal mines, Abel and Tasman underground mines, which has an aggregate annual designed production capacity of 3.0 million tonnes. As of December 31, 2012, Donaldson Coal Mine’s JORC-compliant reserves were approximately 148.3 million tonnes. As of the same date, the mine’s marketable coal reserves were approximately 90.5 million tonnes.

Our coal products at Donaldson Coal Mine are prepared by a coal preparation plant owned and operated by a third party with coal preparation capacity of 3.0 million tonnes per year. We transport our coal products from Donaldson Coal Mine via railway.

Middlemount Coal Mine

Middlemount Coal Mine is located at Bowen Basin in Queensland, Australia and covers an area of 27.7 square kilometres. The mine is approximately 300 kilometres away from Abbot Point port. The construction of Middlemount Coal Mine started in 2009 and commercial production commenced in 2011. Through Yancoal Australia, we own approximately 50% of the equity interest in the joint venture owns and operates Middlemount Coal Mine.

 

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As of December 31, 2012, Middlemount Coal Mine’s JORC-compliant reserves were approximately 96 million tonnes. As of the same date, the mine’s marketable coal reserves were approximately 69.1 million tonnes. The mine has an annual designed production capacity of 5.4 million tonnes. We use conventional open-pit mining methods to extract coal at Middlemount open-pit mine Middlemount Coal Mine primarily produces coking coal and PCI coal. Middlemount Coal Mine has a coal preparation plant with an annual capacity of 5.25 million tonnes. The main pieces of equipment used in the coal preparation plant are screw machines with flotation devices. We transport our coal products from Middlemount Coal Mine via railway.

Coal Mines operated by Yancoal International

The following table sets forth information about our operational coal mines in Australia, which are directly or indirectly held by Yancoal International (Holding):

 

     Cameby Downs    Premier    Total

Background data:

        

Commencement of construction

   2009    1996    N/A

Commencement of commercial production

   2010    1996    N/A

Coalfield area(1) (square kilometers)

   27.2    141.8    169.0

Reserve data:

(millions of tonnes as of December 31, 2012)

        

Recoverable reserves(2)

   434.0    156.2    590.2

Depth of mine (meters underground)

   N/A    N/A    N/A

Type of coal

   thermal coal    thermal coal    N/A

Leased/owned

   owned    owned    N/A

Assigned/unassigned(3)

   assigned    assigned    N/A

Average calorific value (Kcal/kg)

   6000    4776    N/A

Sulfur content (%)

   0.47    0.6    N/A

Production data: (million tonnes)

        

Designed raw coal production capacity

   1.80    5.0    6.8

Designed coal preparation input washing capacity

   1.8    N/A    1.8

Raw coal production

        

2011

   0.8    —      0.8

2012

   1.9    4.2    6.1

Cumulative raw coal production as of December 31, 2012

   2.7    4.2    6.9

 

 

(1) The coalfield area refers to the area of current leased land for mining, excluding the area on which we own prospecting rights. The coalfield area of Harry-Brandt refers to the area on which we own prospecting rights.
(2) The recoverable reserves of the above coal mines are based on the report prepared by the competent persons appointed by Yancoal Australia or Yancoal Resources and other companies which have been acquired by Yancoal Australia and such reserves refer to total proved and probable reserves that were prepared in accordance with the standards in the JORC Code.
(3) “Assigned” refers to coal reserves which have been committed to a particular mining complex (mine shafts, mining equipment and plant facilities), and all coal which has been leased by the company to others. “Unassigned” refers to coal reserves which have not been committed, and which would require new mine shafts, mining equipment, or plant facilities before operations could begin on the property.

Cameby Downs Coal Mine

Cameby Downs Coal Mine consists of an open-pit mine located near Chinchilla in Southwest Queensland. The mine covers an area of approximately 27.2 square kilometers. The construction of the mine commenced in 2009 and commercial production started in late 2010. Yancoal Australia owns 100% of Cameby Downs Coal Mine. Cameby Downs Mine produces thermal coal and the average thickness of Cameby Downs Coal Mine was 4 meters. As of December 31, 2012, Cameby Downs Coal Mine had JORC-compliant reserves of approximately 434.0 million tonnes. As of the same date, the mine’s marketable coal reserves were approximately 277.0 million tonnes.

 

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The phase one stage of Cameby Downs Coal Mine has raw coal annual production capacity of 1.8 million tonnes and product capacity of approximately 1.4 million tonnes product coal. We intend to increase annual raw coal annual production capacity to approximately 16 million tonnes and annual commercial coal production capacity to approximately 11.4 million tonnes subject to positive feasibility studies and obtaining port allocation through the construction of the phase II at Cameby Downs Coal Mine in the future.

Cameby Downs Coal Mine has a coal handling preparation plant with an annual capacity of approximately 220 TPH, and utilizes medium-heavy cyclones and flotation cells which are primarily manufactured in Australia. The operations at the mine are powered by electricity from the local power grid. We transport coal products from Cameby Downs Coal Mine to Brisbane Port via railway.

Premier Coal Mine

Premier Coal Mine, located in Perth, is an open-pit coal mine covering an area of approximately 141.8 square kilometers. The construction of the mine began in 1996 and commercial production commenced in the same year. Yancoal International (Holding) indirectly wholly owns Premier Coal Mine. The annual production capacity of Premier Coal Mine is approximately 5.0 million tonnes. Premier Coal Mine primarily produces low ash and low sulfur sub-bituminous coal. As of December 31, 2012, Premier Coal Mine had JORC-compliant reserves of approximately 1.562 million tonnes. We utilize conventional truck shovel open-pit mining methods to mine the coal from a number of seams at the mine. The coal mined at Premier Coal Mine is crushed and sold without washing. As a result, the mine’s marketable coal were approximately 156.2 million tonnes as of December 31, 2012, the same amount as its JORC-compliant reserves.

The operations at Premier Coal Mine are powered by electricity from local power grids. We entered into a long-term coal sales agreement with Verve Energy, a power generator owned by the Western Australian Government. We transport coal products from Premier Coal Mine by conveyors to power stations and by railway to other customers in Australia.

Mining and Exploration Rights

Nantun, Xinglongzhuang, Baodian, Dongtan and Jining II

According to the approvals from the State-owned Asset Supervision Department and the Coal Industry Supervision Department obtained at the establishment of the Company, and the Mining Agreement entered into between the Yankuang Group and us in 1997 and its supplemental agreement, we undertook to make ten annual payments of approximately RMB13.0 million to the Yankuang Group commencing in 1997, as compensation for the depletion of coal resources at the Nantun, Xinglongzhuang, Baodian, Dongtan and Jining II coal mines. We fulfilled this obligation in 2007 after we made the final installment payment and we are not obligated to make further payment under this arrangement.

In September 2006, the State Council approved the Implementation Plan for the Compensation System Reform Testing in Relation to Deepening Coal Resources, jointly promulgated by the Ministry of Finance of the PRC, Ministry of Land and Resources of the PRC and the NDRC (the “Implementation Plan”). According to the Implementation Plan, enterprises that obtain mining rights as a result of state-funded exploration must pay mining right fees based on the valuation of its reserves. Our operations in Shandong Province are subject to this mining right fee. On August 3, 2012, Jining Municipal Land and Resources Bureau issued the Notice of payment for mining rights by Yanzhou Coal Mining Company Limited [JiGuotuzi(2012) No. 212], pursuant to which we are required to pay a consideration of RMB2,476.78 million for the mining rights of Nantun, Xinglongzhuang, Baodian, Dongtan and Jining II coal mines, RMB495.4 million of which was paid before the due date of September 30, 2012. The consideration was determined based on the assessment report for the consideration of mining rights of these five coal mines issued by independent third parties appointed by Jining Municipal Land and Resources Bureau and filed with Shandong Provincial Department of Land and Resources. For the year ended December 31, 2012, we paid mining rights compensation fees of approximately RMB495.4 million. We are required to pay an additional RMB396.3 million in 2013.

 

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Jining III Coal Mine

Pursuant to the Jining III Coal Mine Acquisition Agreement dated August 4, 2000 that we entered into with the Yankuang Group, the consideration for the mining right of Jining III Coal Mine was approximately RMB132.5 million, which was to be paid to the Yankuang Group in ten equal interest-free annual installments commencing in 2001. We fully paid the consideration for the mining rights of Jining III Coal Mine in 2010.

Austar Coal Mine

We obtained an exploration license for Austar Coal Mine from the New South Wales Department of Primary Industries in 2005. Pursuant to the underlying Asset Sale Agreement, we paid A$32.0 million to the receivers of Gympie Gold for the mine after we obtained the exploration license to the new exploration site adjacent to the Austar Coal Mine in 2006.

Tianchi Coal Mine

We acquired Shanxi Nenghua for RMB748.3 million, of which RMB136.6 million was consideration for the mining rights of Tianchi Coal Mine.

Zhaolou Coal Mine

We purchased the mining rights of Zhaolou Coal Mine for a consideration of RMB747.3 million in 2008.

Anyuan Coal Mine

We acquired the entire equity interest in Anyuan Coal Mine for a consideration of approximately RMB143.5 million in November 2010. The fair market value of the mining rights for Anyuan Coal Mine was approximately RMB131.3 million as of October 31, 2010. As of the date of this annual report, we were in the process of obtaining of the approval, permit and registration of the acquisition of Anyuan Coal Mine, and have confirmed with the relevant mining authorities that our approval, permit and registration of Anyuan Coal Mine is pending regulatory review. Despite the outstanding approvals and lack of mining license, we have received confirmation from the relevant mining authorities to continue our coal mining operations at Anyuan Coal Mine. Until we receive such approvals, we are prohibited from transferring or disposing of this mine. As of the date of this annual report, we are not aware of any pending administrative action, fines or penalties for the continued operation of Anyuan Coal Mine.

Wenyu Coal Mine

In July 2011, Ordos Neng Hua acquired 80% of the equity interest in Inner Mongolia Xintai, which operates Wenyu Coal Mine, for a consideration of RMB2,801.6 million.

Zhuanlongwan Coalfield

Ordos Neng Hua won the bid for the mining rights of Zhuanlongwan coalfield of Dongsheng Coal Field in Inner Mongolia Autonomous Region for a consideration of RMB7,878.7 million on January 28, 2011. As of the date of this annual report, Ordos Neng Hua had paid the total consideration of RMB5,538.7 million and had RMB2,340.0 million pending. We obtained the approval from NDRC for the preliminary work of Zhuanlongwan Project in March 2013, and the approval, production permit and registration of the mining rights to Zhuanlongwan Project are still in progress.

 

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Yangcun and Beisu Coal Mine

We acquired the entire assets of Beisu and Yangcun Coal Mines from Yancoal Group and Beisu Company in 2012 for a consideration of RMB824.1 million. According to an evaluation report issued by an independent evaluator, the fair market value of the mining rights of Beisu Coal Mine and Yangcun Coal Mine was RMB139.5 million and RMB343.2 million as of August 31, 2011.

Coal Mines Owned by Yancoal Resources

We acquired the entire equity interest in Felix, a wholly owned subsidiary of Yancoal Australia, for A$3,333 million in 2009. The fair market value of our attributable reserves and attributable resources was A$2,845.2 million as of December 23, 2009. The acquisition included all mining rights to the coal mines owned by Felix (now Yancoal Resources), environment protection licenses, exploration licenses and mining leases.

Yancoal Resources sold 51% of the equity interest in Minerva Coal Joint Venture to Sojitz Coal Resources Pty Ltd, an independent third party on December 30, 2010. The value of the equity interest sold by Yancoal Resources was estimated to be between approximately A$188.0 million to A$201.0 million, according to an evaluation report issued by an independent evaluator dated September 9, 2010.

In 2011, through Yancoal Resources, Yancoal Australia acquired 30% of the equity interest in the Ashton Coal Mine Joint Venture originally held by Austral-Asia Coal Holdings Pty Ltd., a wholly owned subsidiary of Singapore IMC Group, for a consideration of US$250 million. According to an evaluation report issued by an independent evaluator dated January 20, 2012, 30% of the equity interest Ashton Coal Mine Joint Venture was valued at approximately A$230.0 million. The remaining 10% interest is held by ICRA Ashton Pty Ltd., a wholly owned subsidiary of Itochu Coal Resources Australia Pty Ltd.

Cameby Downs Coal Mine

We acquired Cameby Downs Coal Mine and Syntech’s exploration tenements through the acquisition of the entire equity interest in Syntech Resources Pty Ltd. and Syntech Holdings II Pty Ltd., for a consideration of A$208.4 million on August 1, 2011. In addition to the Cameby Downs Coal Mine, Syntech Resources Pty Ltd. and Syntech Holdings II Pty Ltd. also have five exploration tenements that might be potentially developed. According to an evaluation report issued by an independent evaluator dated February 14, 2012, the fair market value of the reserves, resources and mining rights of the five exploration tenements was A$65.8 million as of August 1, 2011. Currently, the Syntech project is the phase I of Cameby Downs Coal Mine operation.

Premier Coal Mine and Wilga Exploration Area

We acquired the Premier Coal Mine and the Wilga Exploration Area through the acquisition of Premier Coal Limited (then called Wesfarmers Premier Coal Limited) and Premier Char Ltd. (then called Wesfarmers Char Pty Ltd.), for a consideration of A$313.5 million in September 2011. The fair market value of the reserves, resources and mining rights of the coal mines owned by Premier Coal Limited was A$49.9 million as of December 31, 2011, according to an evaluation report issued by an independent evaluator.

Coal Mines Owned by Gloucester

Yancoal Australia completed its merger with Gloucester in June 2012. According to an evaluation report issued by an independent evaluator, the fair market value of the reserves, resources and mining rights of the coal mines owned by Gloucester was A$1,216.9 million as of June 30, 2012.

Potash Mineral Exploration Permits in Canada

We acquired 11 potash mineral exploration permits from Devonian Potash Inc. and eight potash mineral exploration permits from North Atlantic Potash Inc. for a total consideration of US$260 million in September 2011. The 19 potash mineral exploration permits cover an aggregate area of approximately 5,363.84 square kilometers in Saskatchewan, Canada. According to the preliminary exploration report, we expect that the permitted area may have abundant potash resources. We intend to conduct further in-depth exploration work to produce formal estimates of potash resources in compliance with internationally recognized reporting standards.

 

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Railway Assets

We own and operate a railway transportation network that connects our coal mines in Shandong to the national railway system and Zouxian Power Plant in Jining City of Shandong. As of the date of this annual report, our railway network spans a total length of approximately 204 kilometers. Our railway network provides us with substantial control over a major means of transportation for our key product, allowing us to benefit from the synergies from coal production, sales and transportation.

Methanol and Cogeneration Power Plants

Yulin Nenghua. Yulin Nenghua, located in Yunlin City of Shanxi, operates a 600,000-tonne methanol plant and a supporting power plant. The primary pieces of equipment at the methanol plant include boilers, steam turbines, air compressors and booster set, GEA air-cooler exchangers, gasifiers and gasification compressors, synthetic compressors, a methanol synthetic gas-cooled reactor, a methanol synthetic water-cooled reactor and propylene refrigeration compressors. Yulin Nenghua also operates a supporting power plant with an installed capacity of 60 MW for its methanol production.

Tianhao Chemicals. Tianhao Chemicals, located in Xiaoyi City of Shanxi, operates a 100,000-tonne methanol plant and a supporting power plant. The primary pieces of equipment at the methanol plant include low pressure wet type spiral gas cabinets, coke oven gas compressors, reformers and converters. At the 2012 first extraordinary general meeting of Tianhao Chemicals, the shareholders approved public sale of the methanol assets. According to Shandong Zhongxin Assets Appraisal Co., Ltd., the valuation of Tianhao Chemicals’ assets was RMB268 million as of April 30, 2012. The transaction is currently under the selling procedure on the Shandong Property Right Exchange Center. Tianhao Chemicals also operates a supporting power plant with an installed capacity of 24 MW for its methanol production.

Hua Ju Energy. Hua Ju Energy is headquartered in Zoucheng City, Shandong. Hua Ju Energy owns and operates six cogeneration power plants, each of which is able to supply electric power and heat to our coal mines in its proximity. The power plants consist of the Nantun power plant, Xinglongzhuang power plant, Baodian power plant, Dongtan power plant, Jining II power plant and Jidongxincun power plant. The aggregate installed capacity of these six power plants is 144 MW and the annual power generation capacity and heat supply capacity are 1.0 to 1.1 billion KWh and 1.0 to 1.2 million steam tonnes, respectively. The main pieces of equipment used at Hua Ju Energy include energy conversion CFB boilers and extraction and condensing steam turbines.

Zhaolou Coal Mine Power Plants. Zhaolou Coal Mine power plants are intended to be integrated power plants for Zhaolou Coal Mine, located in Heze City of Shandong. The power plants are being constructed in two phases with designed capacity of 300 MW for each phase. We commenced construction of phase I of the power plants which utilize a power generator of 300 MW and a circulating fluidized-bed boiler with capacity of 1,025 tonnes per hour in March 2010. The main pieces of equipment used at Zhaolou Coal Mine power plants include extraction and condensing steam turbines, water hydrogen generators and CFB boilers.

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

There are no unresolved staff comments from the Securities and Exchange Commission.

 

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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion and analysis should be read in conjunction with the information set forth in our consolidated financial statements, together with the related notes, included in this annual report.

 

A. Operating Results

During the period covered by this annual report, our five business segments consist of our:

 

   

coal business;

 

   

railway transportation business;

 

   

coal chemical business;

 

   

electric power business; and

 

   

heat supply business.

Overview

Coal Business

We are one of the primary coal producers in China and Australia. We primarily engage in the mining, washing, processing and distribution of coal through railway transportation. We offer a wide variety of coal products including thermal coal, semi-hard coking coal, semi-soft coking coal, PCI coal and mixed coal products which are sold to power plants, metallurgical mills, chemical manufacturers and fuel trading companies in China and multiple other countries, including Japan, South Korea and Australia. Since 2004, we have expanded our operations to include railway transportation, production of coal chemicals, the generation of electricity and heat and the potash exploration business.

Our invoiced amount of coal sold includes returns, discounts, sales-related taxes, port fees and other fees and, in certain cases, transportation costs payable by customers. Gross sales, or sales income as used elsewhere in this annual report, of coal equals the invoiced amount of coal sold less returns and discounts. In 2012, we produced approximately 67.8 million tonnes of raw coal and sold approximately 94.1 million tonnes of coal, which included approximately 32.2 million tonnes of coal that was purchased externally from third parties for trading. In 2010, 2011 and 2012 our sales income of coal was approximately RMB32,590.9 million, RMB45,181.2 million and RMB56,200.6 million, respectively, which represented approximately 96.0%, 96.0% and 96.7%, respectively, of our total sales income. Domestic sales income of coal accounted for 83.9%, 80.7% and 82.9% and overseas sales income of coal accounted for 16.1%, 19.3% and 17.1% of our total sales income of coal during 2010, 2011 and 2012, respectively.

Railway Transportation Business

We own a railway network spanning over 200 kilometers, which we use primarily to transport coal, as well as other goods upon the request of our railway transportation customers. To facilitate our production and sales of coal, we provide railway transportation services to our coal customers and the Yankuang Group. The annual transport volume on our railway network has remained steady in recent years. In 2012, we transported a total of approximately 17.5 million tonnes of goods on our railway network, compared to approximately 18.1 million tonnes in 2011 and approximately 19.7 million tonnes in 2010.

We derive income from our railway transportation services through the delivery of (i) coal purchased from us on an ex-mine basis, an arrangement where customers separately bear the cost of transporting the coal they purchase to a designated location, and (ii) goods other than coal that we deliver on behalf of customers who engage us exclusively for our railway transportation services. In 2012, income from our railway transportation services totaled approximately RMB464.1 million.

Coal Chemical Business

Our coal chemical operations consist primarily of the production and sale of methanol. Prior to April 2012, we had two subsidiaries engaged in methanol operations: Yulin Nenghua and Shanxi Nenghua. Shanxi Nenghua ceased production in April 2012 due to a shortage in supply of raw materials. Yulin Nenghua’s methanol plant, which has a production capacity of 600,000 tonnes per annum, commenced commercial operations in August 2009. In 2010, Yulin Nenghua produced 311,000 tonnes and sold 319,000 tonnes of methanol (including inventory from the prior year), generating sales income of approximately RMB523.5 million. In 2011, Yulin Nenghua and Shanxi Nenghua (through its wholly owned subsidiary Tianhao Chemicals) produced a total of approximately 532,000 tonnes and sold 529,000 tonnes of methanol, generating sales income of approximately RMB1,059.3 million. In 2012, Yulin Nenghua and Shanxi Nenghua produced a total of approximately 572,000 tonnes and sold 574,000 tonnes of methanol, generating sales income of approximately RMB1,118.0 million. In addition, Ordos Neng Hua is constructing a 600,000-tonne methanol project in Ordos City in the Inner Mongolia Autonomous Region which will have a production capacity of 600,000 tonnes per annum, which we expect to become operational in the second half of 2013.

 

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Electric Power Business

We own and operate seven power plants, with total net installed capacity of 218 MW, which generate electric power primarily for internal use and, to a lesser extent, external sales. The six cogeneration power plants operated by Hua Ju Energy are able to generate both electric power and heat. We ceased production at the power plant operated by Shanxi Nenghua on January 1, 2012 due to high fuel costs. We are in the process of disposing this power plant together with Tianhao Chemical’s methanol assets. In 2012, we generated a total of approximately 1,155.2 million kWh of electricity and sold approximately 856.4 million kWh of electricity, generating approximately RMB323.6 million in revenue.

Heat Supply Business

In 2012, we produced approximately 1.4 million steam tonnes of heat and sold approximately 230,000 steam tonnes of heat, generating sales revenue of approximately RMB39.9 million.

Factors Affecting Our Results of Operations

Our results of operations and financial condition are affected by a number of factors, many of which are beyond our control, including those set forth below:

Conditions and regulations affecting the coal mining industry

Our coal mining operations in the PRC are subject to various PRC laws and regulations, including developmental, environmental and health and safety laws and regulations, and various national and local policies, which could facilitate our acquisition activities and the overall growth of our business and operations, industry consolidation could result in larger coal mining enterprises that compete against us.

Our mining operations in Australia are regulated by Australian federal and state governments with respect to environmental issues such as water quality, air quality, dust impact, noise impact, planning issues (such as approvals to expand existing mines, develop new mines or change mining methods), and health and safety issues. Future changes to, and our continuing compliance with, these regulations may have a material effect on our business and results of operations. See “Item 3. Key Information — D. Risk Factors — Risks Relating to Our Business and Industry – Our coal operations are extensively regulated by the PRC and Australian government, and government regulations may limit our activities and adversely affect our business, results of operations and financial condition.”

Demand for coal

Given the nature of our operations, the demand for coal will continue to have a significant effect on our results of operations. Global coal demand correlates strongly with the global economy and, as such, any downturn or prolonged depression of economic activity may have an adverse effect on demand for coal. Coal demand is also affected by a variety of factors beyond our control, such as the availability and prices of alternative energy sources to coal, international shipping costs and costs of conducting coal mining operations.

 

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Acquisition and expansion

Our business expansion plans are primarily dependent on successfully acquiring companies that can grow or diversify our existing operations. Recently, our acquisitions have included equity interests in coal mines in Australia and potash mineral exploration permits in Canada. Our coal reserves, future production capacity and, consequently, our revenues and results of operations, will depend on the success of acquired mining operations. Our business and results of operations could be affected if we are unable to successfully integrate our acquisitions or achieve anticipated additional revenue and earnings.

Exchange rate fluctuations

Assets, liabilities and the fair value of financial instruments and balances that we incur, create or acquire in the process of our international operations and which are denominated in currencies other than RMB, or in currencies other than the functional currencies of the relevant business units, may fluctuate substantially depending on changes in currency exchange rates. See “Item 3. Key Information — D. Risk Factors — Risks Relating to Our Business and Industry – Our business, results of operations and financial condition depend in part on our ability to continue acquiring or developing suitable coal reserves” and “Item 11. Quantitative and Qualitative Disclosures of Market Risk – Foreign Currency Exchange Rate Risk.”

Product mix

Our products, which include thermal coal, semi-hard coking coal, semi-soft coking coal, PCI coal and 1/3 coking coal, generally have different prices and gross margins. For example, our No. 1 clean coal has historically had a higher gross margin than our other products and, as such, an increased proportion of sales income generated from No. 1 clean coal would result in higher gross profits. Conversely, if the sales volume of lower gross margin coal products, such as thermal coal, increased in comparison to higher margin coal products, then we would have lower gross profits despite an increase in sales volume. In addition, the future launch of new products will also affect our product mix and, consequently, our revenues, gross margins and results of operations.

Production capacity

Our results of operations and future growth prospects are affected by our coal production capacity. Our production capacity and production volume may be affected by the macroeconomy and customer demand. Our production capacity and volume will also depend on our ability to obtain necessary capital and required approvals and permits, as well as production capacity, customer demand and general economic factors. We will continue to focus on increasing our production capacity by developing our existing projects and domestic and international acquisitions. Increasing our production capacity also increases costs, expenses and capital expenditures.

Coal prices

The selling prices of our coal products are influenced by price fluctuations in the PRC domestic market and the global market. In addition, potential reduction in the production in high cost coal producing regions are expected to provide support for coal price going forward. In the long run, coal prices are expected to increase as a result of growing demand for coal to fuel industrialization and urbanization and steady production increase due to higher royalties and environmental and social related costs.

 

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Cost of sales

Our results of operations are affected by our cost of sales, which mainly comprises wages and employee benefits, purchases of coal from third parties for trading purposes, materials, land subsidence, restoration, rehabilitation and environmental costs, depreciation and amortization expenses and business tax and surcharges associated with our coal business and railway transportation business. Key factors impacting these costs include variations in production volume, the cost of power, fuel and labor, the application of advanced mining technologies, changes in railway fees and port fees, and contractual terms of our coal products.

Transportation volume and cost

We primarily use railways and highways and, to a lesser extent, domestic and international shipping lanes, to transport coal. We primarily rely on the national railway system in the PRC and railway systems operated by third parties in Australia to transport our coal. In addition, we also utilize our private railway network to transport other goods upon the request of our railway transportation customers. We also transport coal on the national railway system to ports, from which we ship coal to our customers. Railway, waterway and roadway transportation costs are charged by carriers who deliver our coal products to our customers. Our revenue and results of operations may be affected by fluctuations in the transportation volume and capacity of national and state railway systems and of our own railway assets, as well as fluctuations in the costs associated with transporting coal to our customers.

Coal resources and reserves

Coal resources and reserves data is a key element in our decision-making process. All coal reserves data are estimates, which are revised when additional information becomes available (for example, when additional coal mines commence operations or when actual coal production or extraction commences). If the amount or quality of coal mined differs from the reserve estimates, we may have to further process or wash the coal mined in order to produce coal of a saleable quality. See “Item 3. Key Information — D. Risk Factors — Risks Relating to Our Business and Industry — The coal reserve data in this annual report are only estimates, which may differ materially from actual reserve amounts.”

Results of Operations

The following table sets forth our income statement and the percentage of each line item to our total revenue for the periods indicated:

 

     2010     2011     2012  
     RMB
(million)
    %     RMB
(million)
    %     RMB
(million)
    %  

Total revenue

     33,944.3        100.0        47,065.8        100.0        58,146.2        100.0   

Gross sales of coal

     32,590.9        96.0        45,181.2        96.0        56,200.6        96.7   

Railway transportation service income

     513.3        1.5        476.9        1.0        464.1        0.8   

Gross sales of electric power

     185.6        0.5        328.0        0.7        323.6        0.6   

Gross sales of methanol

     629.3        1.9        1,059.3        2.3        1,118.0        1.9   

Gross sale of heat supply

     25.2        0.1        20.5        0.0        39.9        0.1   

Transportation costs of coal

     (1,160.5     (3.4     (1,248.3     (2.7     (2,104.2     (3.6

Cost of sales and service provided

     (16,801.3     (49.5     (25,725.3     (54.7     (41,961.5     (72.2

Cost of electric power

     (195.5     (0.6     (362.5     (0.8     (330.8     (0.6

Cost of methanol

     (716.8     (2.1     (930.2     (2.0     (911.2     (1.6

Cost of heat supply

     (12.5     0.0        (13.8     0.0        (25.1     0.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     15,057.6        44.4        18,785.8        39.9        12,813.3        22.0   

Selling, general and administrative expenses

     (5,093.4     (15.0     (6,570.2     (13.9     (7,987.6     (13.7

Share of profit of associates

     8.9        0.0        68.9        0.1        142.0        0.2   

Share of loss of jointly controlled entities

     (0.5     0.0        —          0.0        (103.2     0.2   

Other income

     3,108.1        9.2        1,075.8        2.3        2,930.4        5.0   

Interest expense

     (603.3     (1.8     (839.3     (1.8     (1,448.7     (2.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit before income taxes

     12,477.3        36.8        12,521.0        26.6        6,346.2        10.9   

Income taxes

     (3,171.0     (9.3     (3,545.4     (7.5     (123.9     (0.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit for the year

     9,306.3        27.4        8,975.6        19.1        6,222.2        10.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Attributable to:

            

Equity holders of the Company

     9,281.4        27.3        8,928.1        19.0        6,219.0        10.7   

Non-controlling interests

     24.9        0.1        47.5        0.1        3.3        0.0   

 

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Year Ended December 31, 2012 Compared with Year Ended December 31, 2011

Total revenue

Our total revenue in 2012 increased by RMB11,080.4 million, or 23.5%, from RMB47,065.8 million to approximately RMB58,146.2 million. Our gross sales of coal, which accounted for 96.7% of our total revenue in 2012, increased by RMB11,019.4 million, or 24.4%, to RMB56,200.6 million in 2012. This reflected an increase in coal sales volume of 29.9 million tonnes, or 46.5%, primarily due to an increase in the sales volume of externally purchased coal, an increase in the sales volume of coal in Australia and an increase in the sales volume of coal by Ordos Nenghua, partially offset by a decrease in the average selling price of our coal products by RMB108.4 per tonne, or 15.3%, from RMB707.7 per tonne in 2011 to RMB599.3 per tonne in 2012, as the result of the weak demand for coal caused by the global economic slowdown.

In 2012, the transportation volume of our railway assets was approximately 17.5 million tonnes, representing a decrease of approximately 0.6 million tonnes, or 3.2%, compared to 2011. Our railway transportation services income (income from transported volume settled on the basis of ex-mine prices and special purpose railway transportation fees borne by customers) decreased by RMB12.8 million, or 2.7%, from approximately RMB476.9 million in 2011 to approximately RMB464.1 million in 2012. Our gross sales of electric power decreased by RMB4.4 million, or 1.3%, from approximately RMB328.0 million 2011 to RMB323.6 million in 2012. This decrease was due to decreased power generation and sales of electric power in 2012, in part due to the high cost of fuel as a result of which we shut down power generation operations at Shanxi Nenghua beginning January 1, 2012. Our gross sales of methanol increased by RMB58.7 million, or 5.5%, from approximately RMB1,059.3 million in 2011 to approximately RMB1,118.0 million in 2012. This increase was primarily due to the increased production and sales volumes by Yulin Nenghua. Our gross sales of heat supply increased by RMB19.4 million, or 94.6%, from approximately RMB20.5 million in 2011 to approximately RMB39.9 million in 2012. This increase was primarily due to our provision of heat supply to more customers for a longer duration as compared with 2011.

Transportation costs of coal

Transportation costs of coal primarily consist of railway, waterway and roadway transportation costs charged by carriers that deliver our coal products to our customers. Our coal transportation costs increased by RMB855.9 million, or 68.6%, from approximately RMB1,248.3 million in 2011 to approximately RMB2,104.2 million in 2012, primarily due to the increase in the sales volume of coal. Coal transportation costs in 2012 consisted of transportation costs of approximately RMB281.8 million for coal sold in the PRC and approximately RMB1,822.4 million for coal sold outside of the PRC.

Cost of sales and services provided

Our cost of sales and railway transportation services consists of the costs of our coal business and railway transportation business, which primarily consist of wages and employee benefits, purchases of coal from third parties for trading purposes, materials, land subsidence, restoration, rehabilitation and environmental costs, depreciation and amortization expenses and business tax and surcharges. Our cost of sales and services provided increased by RMB16,236.2 million, or 63.1%, from approximately RMB25,725.3 million in 2011 to approximately RMB41,961.5 million in 2012, primarily due to an increase of approximately RMB11,974.0 million in the cost of traded coal as a result of the increase in the volumes of coal we purchased from third parties for trading purposes, as well as an increase of approximately RMB1,435.9 million wages and employee benefits as a result of an increase in employee headcount.

 

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Cost of electric power

Our cost of electric power operations primarily consists of raw material and labor costs incurred to generate electric power. Our cost of electric power decreased by RMB31.7 million, or 8.7%, from approximately RMB362.5 million in 2011 to approximately RMB330.8 million in 2012, primarily due to decreased power generation at the power plants operated by Hua Ju Energy and Yulin Nenghua, as well as the closure of Shanxi Nenghua’s power plant due to high fuel costs.

Cost of methanol

Our cost of methanol primarily consists of raw materials, labor costs, depreciation and other manufacturing overhead. Our cost of methanol decreased by RMB19.0 million, or 2.0%, from approximately RMB930.2 million in 2011 to approximately RMB911.2 million in 2012 primarily because the methanol project at Shanxi Nenghua ceased production due to a shortage of raw materials in April 2012.

Cost of heat supply

Our cost of heat supply primarily consists of raw materials and labor in our heat supply business. Our cost of heat supply increased by RMB11.3 million, or 81.9%, from approximately RMB13.8 million in 2011 to approximately RMB25.1 million in 2012, primarily due to an increase of 60,000 steam tonne in heat supply sold.

Selling, general and administrative expenses

Our selling, general and administrative expenses increased by RMB1,417.4 million, or 21.6%, from approximately RMB6,570.2 million in 2011 to approximately RMB7,987.6 million 2012, primarily due to increases in impairment losses on intangible assets, goodwill and inventories of approximately RMB575.7 million, and RMB214.1 million in distribution charges.

Share of income of associates

Our share of income from associates increased by RMB73.0 million, or 106.0%, from approximately RMB68.9 million in 2011 to RMB142.0 million in 2012, due to an increase in our income of RMB82.6 million from Huadian Zouxian Power Generation Company Limited (“Huandian Zouxian”).

Other income

Our other income increased significantly by RMB1,854.7 million, or 172.4%, from approximately RMB1,075.8 million in 2011 to approximately RMB2,930.4 million in 2012. This increase was primarily due to a gain in bargain purchase in the sum of RMB1,269.3 million arising from our acquisition of Gloucester, resulting from a decrease in the market capitalization and market price of the consideration shares, as well as an increase of RMB364.6 million in bank deposit interest and exchange gains of RMB195.6 million from Yancoal Australia.

Interest expenses

Our interest expenses increased by RMB609.4 million, or 72.6%, from approximately RMB839.3 million in 2011 to RMB1,448.7 million in 2012, mainly due to the issuance of corporate bonds in the amount of US$1.0 billion and an increase in bank loans in 2012.

 

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Profit before income tax

As a result of the foregoing, our profit before income taxes decreased by approximately RMB6,174.8 million, or 49.3%, from approximately RMB12,521.0 million in 2011 to RMB6,346.2 million in 2012.

Income tax expenses

Our income tax decreased by RMB3,421.4 million, or 96.5%, from approximately RMB3,545.4 million in 2011to approximately RMB123.9 million in 2012, primarily due to a decrease in current income tax expenses of RMB1,725.2 million and a decrease in the income tax expenses in our Australian subsidiaries of RMB1,085.2 million caused by an increase in its deferred tax assets related to the implementation of MRRT.

Profit for the year

As a result, our profit for the year decreased by RMB2,753.4 million, or 30.7%, from approximately RMB8,975.6 million in 2011 to approximately RMB6,222.2 million in 2012. The profit attributable to equity holders of the Company decreased by RMB2.709.1 million, or 30.3%, from RMB8,928.1 million in 2011 to approximately RMB6,219.0 million in 2012.

Year Ended December 31, 2011 Compared with Year Ended December 31, 2010

Total revenue

Our total revenue increased RMB13,121.5 million, or 38.7%, from approximately RMB33,944.3 million in 2010 to approximately RMB47,065.8 million in 2011. Our gross sales of coal, which accounted for 96.0% of our total revenue in 2011, increased by RMB12,590.3 million, or 38.6%, to approximately RMB45,181.2 million in 2011. The increase in gross sales of coal was primarily due to changes in our product mix, increased domestic and global demand and an increase in our average selling price. In 2011, our average selling price of coal products increased approximately RMB44.2 per tonne to RMB707.7 per tonne, a 6.7% increase from 2010. Our sales volume of coal products increased 29.5% from approximately 49.6 million tonnes in 2010 to 64.3 million tonnes in 2011.

In 2011, the transportation volume of our railway assets was approximately 18.1 million tonnes, representing a decrease of approximately 1.7 million tonnes, or 8%, from 2010, primarily due to lower demand by customers for goods to be transported on our railways. Accordingly, our railway transportation services income (income from transported volume settled on the basis of ex-mine prices and special purpose railway transportation fees borne by customers) decreased by RMB36.4 million, or 7.1%, from approximately RMB513.4 million in 2010 to approximately RMB476.9 million in 2011.

Our gross sales of methanol increased by approximately RMB430.0 million, or 68.3%, from RMB629.3 million in 2010 to approximately RMB1,059.3 million in 2011. The increase in gross sales of methanol was mainly attributable to an increase in sales volumes of methanol. Our gross sales of electric power increased by approximately RMB142.4 million, or 76.8%, from approximately RMB185.6 million in 2010 to approximately RMB328.0 million in 2011. Our gross sales of heat supply decreased by RMB4.8 million, or 18.9%, from approximately RMB25.2 million in 2010 to approximately RMB20.5 million in 2011, due primarily to increased consumption of heat supply by our own coal mines.

Transportation costs of coal

Our coal transportation costs increased by RMB87.8 million, or 7.6%, from approximately RMB1,160.5 million in 2010, to approximately RMB1,248.3 million in 2011, which included transportation costs for our coal sold in the PRC of approximately RMB311.7 million and for coal sold outside the PRC of approximately RMB936.6 million. This increase was primarily due to our acquisition of Yancoal Resources and the related increase in sales volumes.

 

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Cost of sales and services provided

Our total cost of sales and services provided increased by RMB8,924.0 million, or 53.1%, from RMB16,801.3 million in 2010 to approximately RMB25,725.3 million in 2011, primarily due to increased sales volumes of coal. The increased sales volumes resulted in an increase of RMB5,593.3 million in purchases of coal from third parties for trading purposes, an increase of RMB1,151.1 million in wages and employee benefits and an increase of RMB523.5 million in costs for materials. The increase was also due to a RMB366.9 million increase in annual fees and amortization of mining rights, an increase of RMB297.3 million increase in electricity costs and an RMB808.8 million in other costs of sales and services.

Cost of electric power

Our cost of electric power increased by RMB166.9 million from approximately RMB195.5 million in 2010, to approximately RMB362.5 million in 2011, primarily due to an increase in electric power sold, as Hua Ju Energy sold the excess power it generated. Hua Ju Energy sold approximately 895.5 million kWh of electric power in 2011 compared to 468.6 million kWh of electric power in 2010.

Cost of methanol

Our production costs increased from approximately RMB716.8 million in 2010 to approximately RMB930.2 million in 2011, primarily due to an increase in the volume of methanol sold from approximately 376,000 tonnes in 2010 to 529,000 tonnes in 2011 reflecting increased customer demand.

Cost of heat supply

Our cost of heat supply increased by RMB1.3 million, from approximately RMB12.5 million in 2010 to approximately RMB13.8 million in 2011, primarily due to increases in coal prices and wages, as well as a slight increase in production volume from 1.27 million steam tonnes to 1.28 million steam tonnes.

Selling, general and administrative expenses

Our selling, general and administrative expenses increased by RMB1,476.8 million, or 29.0%, from approximately RMB5,093.4 million in 2010 to approximately RMB6,570.2 million in 2011. This increase in primarily attributable to increased selling, general and administrative expenses for Yancoal Australia primarily reflecting increased sales volumes. The increase was also due to increased selling, general and administrative expenses for Ordos Neng Hua, primarily reflecting increased sales volumes and expanded operations. In addition, the increase also reflected a RMB184.4 million increase in impairment loss on Tianhao Chemicals’ property, plant and equipment.

Share of income of associates

Our share of income from associates, increased by RMB60.1 million, or 677.2%, from RMB8.9 million in 2010 to approximately RMB68.9 million in 2011, primarily due to increases in investment income of RMB19.0 million and RMB41.0 million from Huadian Zouxian and Yankuang Finance, respectively.

Other income

Our other income decreased by RMB2,032.3 million, or 65.4%, from approximately RMB3,108.1 million in 2010 to approximately RMB1,075.8 million in 2011, primarily due to a decrease in foreign exchange gains of RMB2,146.9 million. The decrease in foreign exchange gains was due primarily to Yancoal Australia’s decrease in foreign exchange gains from RMB2,688.2 million in 2010 to RMB504.4 million in 2011 relating to its foreign exchange hedging contracts to manage foreign currency risk arising from its expected revenue in foreign currencies. The decrease was partially offset by an increase of RMB170.5 million in interest income, due primarily to an increase in bank deposits as compared to the prior year.

 

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Interest expenses

Our interest expenses increased by RMB236.0 million, from approximately RMB603.3 million in 2010 to approximately RMB839.3 million in 2011, primarily due to an increase in our bank borrowings and financing costs in connection with the acquisition of mining rights of Zhuanlongwan Project.

Profit before income tax

As a result of the foregoing, our profit before income taxes increased by approximately RMB43.7 million, or 0.4%, from approximately RMB12,477.3 million in 2010 to approximately RMB12,521.0 million in 2011.

Income tax expenses

Our income tax expenses increased by RMB374.3 million, or 11.8%, from approximately RMB3,171.0 million in 2010, to approximately RMB3,545.4 million in 2011, primarily due to an increase in our taxable income.

Profit for the year

As a result, our profit for the year decreased by RMB330.7 million, or 3.6%, from approximately RMB9,306.3 million in 2010 to approximately RMB8,975.6 million in 2011. The profit attributable to equity holders of the Company decreased by RMB353.3 million, or 3.8%, from approximately RMB9,281.4 million in 2010 to approximately RMB8,928.1 million in 2011.

Segment Information

The following table sets forth a breakdown of our total consolidated gross revenues for each of the years indicated and the percentage contribution of each segment to our total gross revenues:

 

     2010     2011     2012  
     RMB     %     RMB     %     RMB     %  
     (in millions, except for percentages)  

Mining revenue

     32,930.3        97.0        45,468.5        96.6        56,419.8        97.0   

Coal railway transportation revenue

     549.3        1.6        528.6        1.1        496.6        0.9   

Methanol, electricity and heat supply revenue

     1,295.3        3.8        1,664.1        3.5        1,765.9        3.0   

Unallocated and eliminations

     (830.7     (2.4     (595.3     (1.3     (536.2     (0.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross revenue

     33,944.3        100.0        47,065.8        100.0        58,146.2        100.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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We are mainly engaged in the mining, washing, processing and railway distribution of coal. For the year ended December 31, 2012, we derived our revenue mainly derived from coal sales in the PRC.

 

B. Liquidity and Capital Resources

Our principal sources of liquidity in 2012 were proceeds from bank borrowings, the RMB-denominated corporate bonds we issued in 2012 (the “RMB Bond Offering”) and the US$-denominated corporate bonds we issued in 2012 (the “US$ Bond Offering”) and the cash generated from our operating activities. In 2012, we primarily utilized cash to pay our operating expenses, purchase of property, machinery and equipment, finance acquisitions and pay dividends to Shareholders.

Our primary sources of cash in 2010 and 2011 were cash flows from operating activities and bank borrowings. We used cash primarily to finance working capital, fund payments of interest and principal due on our indebtedness, finance acquisitions and fund capital expenditures and the growth and expansion of our facilities and operations.

Taking into account our cash and cash equivalents on hand, our available credit facilities, cash generated from our future operations and the proceeds from our RMB Bond Offering and US$ Bond Offering, we believe we have sufficient working capital to meet our financial requirements for at least the next 12 months from the date of this annual report. As of December 31, 2012, we had cash and cash equivalents of approximately RMB12,717.4 million.

We conduct our operations directly and through our operating subsidiaries, some of which we do not wholly own, are joint ventures or are public companies. Therefore, we may not be able in all circumstances to allocate our free cash flow as we would like among our subsidiaries. In addition, PRC law restricts the ability of our subsidiaries to transfer funds to us in the form of cash dividends, loans or advances. PRC regulations currently permit payment of dividends by PRC companies only out of accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, under current PRC laws, regulations and accounting standards, each subsidiary is required to allocate at least 10% of its after-tax profit based on PRC accounting standards to its statutory common reserve fund each year until the cumulative amount of these reserves reaches 50% of its registered capital. These reserves are not distributable as cash dividends. As of December 31, 2012, the required deductions attributable to these statutory common reserve funds amounted to approximately RMB4,975.4 million.

Furthermore, under SAFE regulations, Renminbi is not convertible into foreign currencies for capital account items, such as loans, repatriation of investments and investments outside of China, unless the prior SAFE approval is obtained and prior registration with the SAFE is made. These restrictions have not historically had, and are not expected in the future to have, a material impact on our ability to meet our financial requirements.

Cash Flows

The following table sets forth a summary of our cash flows for the periods indicated:

 

     Year Ended December 31,  
     2010     2011     2012  
     (RMB’000)  

Net cash from operating activities

     5,399.8        17,977.3        6,503.6   

Net cash used in investing activities

     (5,884.4     (25,611.0     (3,187.4

Net cash from (used in) financing activities

     (1,360.5     9,441.0        1,145.1   

Net increase/ (decrease) in cash and cash equivalents

     (1,845.1     1,807.3        4,461.4   

Cash and cash equivalents as of end of year

 &