NOTE 14 - GOLD LEASE TRANSACTIONS

The Company leased gold as a way to fuel its growth and will return the same amount of gold to CCB, SPD Bank and CITIC Bank at the end of the respective lease agreements. Under these gold lease arrangements, each of CCB, SPD Bank and CITIC Bank retains beneficial ownership of the gold leased to the Company and treats it as if the gold is placed on consignment to the Company. All three banks have their own representatives on the Company’s premises to monitor on a daily basis the use and security of the gold leased to the Company. Accordingly, the Company records these gold lease transactions as operating leases because the Company does not have ownership nor has it assumed the risk of loss for the leased gold.

Gold lease transactions with China Construction Bank’s Wuhan Jiang’an Branch (“CCB”)

On December 20, 2012, Wuhan Kingold entered into a gold lease agreement with China Construction Bank’s Wuhan Jiang’an Branch (“CCB”) that became effective in January 2013, originally terminated on October 26, 2013 and extended to September 25, 2015 (the “Gold Lease Agreement”). Gold leased under the Gold Lease Agreement bears interest at a rate of approximately 6% per annum and is calculated based on the actual weight of gold leased (in grams), the price of gold (yuan/gram) at the time of delivery, and number of days the gold was leased.

During 2014, the Company leased total of 1,515 kilograms of gold, which amounted to RMB 317.7 million (approximately $60.5 million) and returned 880 kilograms of gold, which amounted to RMB 218.2 million (approximately $35.2 million) back to CCB upon lease maturity. The remaining amount not yet returned to the Bank is due in various months in 2015 and 2016.

During the first quarter of 2015, the Company renewed three gold lease agreements with CCB and leased an aggregate of 880 kilograms of gold from CCB, valued at RMB 218.2 million (approximately $35.2 million). The leases have initial terms of one year and provide an interest rate of 6% per annum.

During the third quarter of 2015, the Company renewed two gold lease agreements with CCB and leased an aggregate of 535 kilograms of gold from CCB, valued at RMB 124.6 million (approximately $19.6 million). The leases have initial terms of one year and provide an interest rate of 6% per annum.

At September 30, 2015, about 1,515 kilograms of leased gold were still outstanding and not yet returned to CCB, which amounted to approximately $58 million. Such leased gold is due in various months from December 2015 through August 2016.

Gold lease transactions with Shanghai Pudong Development Bank (“SPD Bank”)

On January 1, 2013, Wuhan Kingold entered into a gold lease framework agreement (the “Framework Agreement”) with SPD Bank, with initial term of 12 months and such Framework Agreement has been subsequently extended to April 2016. From January 2013 to April 2015, the Company entered into separate lease agreements with SPD Bank with interest rates of 3.2% to 7.5% per annum. Lease payments to SPD are due quarterly, and are calculated based on the stated annual rate, the actual weight of gold leased (in grams), the fair market price of gold at the time of delivery, and the actual number of days the gold was leased.

During 2014, the Company leased a total of 2,380 kilograms of gold, which amounted to RMB 644.9 million (approximately $104.9 million) and also returned 1,465 kilograms of gold, which amounted to RMB 410.3 million (approximately $66.8 million) back to SPD Bank upon lease maturity. The remaining amount not yet returned to the Bank is due in various months through 2015.

On April 10, 2015, the Company entered into a gold lease agreement with SPD Bank to lease additional 197 kilograms of gold (valued at approximately RMB 46.98 million or approximately $7.7 million). The lease has initial term of one year and provides an interest rate of 3.2% per annum. The Company is required to deposit cash into an account at SPD Bank equal to RMB 50 million (approximately $8 million).

In the third quarter of 2015, the Company leased an aggregate of 720 kilograms of gold from SPD Bank, valued at RMB 168.2 million (approximately $26.5 million). The leases have initial terms of one year and provide an interest rate of 2.8% to 6% per annum.

At September 30, 2015, about 1,202 kilograms of leased gold were outstanding and not yet returned to SPD Bank, which amounted to approximately $45 million. Such leased gold is due in various months from October 2015 through August 2016.

Gold lease transaction with CITIC Bank

On August 28, 2013, Wuhan Kingold entered into a gold lease framework agreement with the Wuhan branch of CITIC Bank which has been subsequently extended to February 2016. The lease has an initial term of approximately 12 months, and provides for an interest rate of 5.6% to 6% per annum. Lease payments to CITIC Bank are due at the end of the leasing period. Under the gold lease agreement with CITIC Bank, the Company is required to pledge certain restricted cash into an account at CITIC as collateral.

During 2014, the Company leased a total of 1,300 kilograms of gold, which amounted to RMB 336.6 million (approximately $54.8 million), and returned 650 kilograms of gold, which amounted to RMB 169.7 million (approximately $27.6 million), back to CITIC Bank upon lease maturity. The remaining amount not yet returned to the Bank is due in various months through 2015.

On March 5, 2015, the Company entered into a gold lease agreement with CITTC Bank to lease an additional 150 kilograms of gold (valued at approximately RMB 36.8 million or approximately $6.0 million). The lease has an initial term of one month and provides an interest rate of 6% per annum. The Company is required to deposit cash into an account at CITTC Bank equal to RMB 8.0 million (approximately $1.3 million).

At September 30, 2015, about 500 kilograms of leased gold were outstanding and not yet returned to CITIC Bank, which amounted to approximately $19 million. Such leased gold is due in various months from November 2015 through February 2016.

As of September 30, 2015 and December 31, 2014, 3,217 kilograms and 3,080 kilograms of leased gold, at the approximate amounts of $121.2 million and $125.8 million, respectively, will be returned within fiscal year 2015 and 2016. Interest expense for the leased gold for the nine months ended September 30, 2015 and 2014 was $5.6 million and $5.2 million, respectively, which was included in the cost of sales. For the three months ended September 30, 2015 and 2014, interest expense was $1.9 million and $1.8 million, respectively, which was included in the cost of sales.