UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________

FORM 10-Q

 (Mark One)

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

For the quarterly period ended September 30, 2010

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

For the transition period from ______________ to _______________

Commission File Number 000-53843

U.S. CHINA MINING GROUP INC.

(Exact name of registrant as specified in its charter)

Nevada (State of Incorporation)	43-1932733  (I.R.S. Employer Identification No.)
17890 Castleton Street, Suite 112 City of Industry, California  (Address of principal executive offices)	91748 (Zip Code)

(626) 581-8878

 (Registrant’s telephone number, including area code)

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  o

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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated filer o	Accelerated Filer o
Non-Accelerated Filer o	Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as determined in Rule 12b-2 of the Exchange Act).  Yes ¨   No  x  

APPLICABLE ONLY TO CORPORATE ISSUERS:

Number of shares of common stock outstanding as of September 30, 2010: 14,932,582

U.S. CHINA MINING GROUP INC.

INDEX

		Page Number
PART I. Financial Statements
Item 1.	Financial Information	1
	Consolidated Balance Sheets as of September 30, 2010 (Unaudited)and December 31, 2009	1
	Consolidated Statements Of Income And Other Comprehensive Income (Unaudited) – Three and Nine Months Ended September 30, 2010 and  September 30, 2009	2
	Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended September 30, 2010 and September 30, 2009	3
	Notes to Consolidated Financial Statements – September 30, 2010 (Unaudited) and December 31, 2009	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28
PART II. Other Information
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	[Removed and Reserved]	29
Item 5.	Other Information	29
Item 6.	Exhibits	29
Signatures		31

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

U.S. CHINA MINING GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	As of September 30, 2010		As of December 31, 2009
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash & cash equivalents	$	40,144,805	$	31,260,184
Restricted cash		217,578		213,345
Accounts receivable		107,870		-
Other receivables, deposits and prepayments		27,498		25,359
Inventory		703,457		6,542
Total current assets		41,201,208		31,505,430
NONCURRENT ASSETS
Goodwill		26,180,923		26,180,923
Prepaid mining right, net		16,257,441		16,805,753
Long term prepaid expense		-		13,669
Property and equipment, net		13,026,819		12,014,244
Construction in progress		1,035,077		-
Deferred tax asset, net		260,260		440,339
Asset retirement cost, net		2,902,205		3,025,929
Total noncurrent assets		59,662,725		58,480,857
TOTAL ASSETS	$	100,863,933	$	89,986,287
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable	$	227,502	$	579,307
Unearned revenue		547,234		1,705,981
Accrued liabilities and other payables		1,864,791		974,519
Taxes payable		2,327,147		1,076,240
Advance from shareholder		3,030,338		2,321,360
Total current liabilities		7,997,012		6,657,407
NONCURRENT LIABILITIES
Long-term payable		298,458		82,213
Asset retirement obligation, net of deposit for      mine restoration of $1,150,442 and $980,632, respectively		4,141,682		4,060,461
Total noncurrent liabilities		4,440,140		4,142,674
Total liabilities		12,437,152		10,800,081
CONTINGENCIES AND COMMITMENT
STOCKHOLDERS' EQUITY
Series A Preferred Stock, $0.001 par value,          8,000,000 shares authorized, 400,000 shares           issued and outstanding		400		400
Common stock, $0.001 par value, 100,000,000           shares authorized, 14,932,582 shares issued           and outstanding		14,932		14,932
Additional paid in capital		39,174,138		38,929,284
Statutory reserves		9,675,053		8,988,637
Accumulated other comprehensive income		4,549,615		3,362,044
Retained earnings		35,012,643		27,890,909
Total stockholders' equity		88,426,781		79,186,206
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	100,863,933	$	89,986,287

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

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U.S. CHINA MINING GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME

(UNAUDITED)

	NINE MONTHS ENDED SEPTEMBER 30,						THREE MONTHS ENDED SEPTEMBER 30,
	2010			2009			2010			2009
Net sales	$	40,378,548		$	54,204,888		$	17,854,483		$	9,267,268
Cost of goods sold		23,883,406			20,502,960			10,066,496			4,764,557
Gross profit		16,495,142			33,701,928			7,787,987			4,502,711
Operating expenses
Selling		1,007,364			793,389			441,897			256,350
General and administrative		4,182,993			1,826,959			2,027,323			658,368
Total operating expenses		5,190,357			2,620,348			2,469,220			914,718
Income from operations		11,304,785			31,081,580			5,318,767			3,587,993
Non-operating income (expenses)
Interest income		60,118			24,379			25,273			7,753
Interest expense		(268,360	)		(235,967	)		(93,992	)		(77,546	)
Total non-operating expenses, net		(208,242	)		(211,588	)		(68,719	)		(69,793	)
Income before income tax		11,096,543			30,869,992			5,250,048			3,518,200
Provision for income tax		3,288,394			6,731,036			1,399,908			760,381
Net income		7,808,149			24,138,956			3,850,140			2,757,819
Other comprehensive income
Foreign currency translation gain (loss)		1,187,571			(171,736	)		860,377			(3,273	)
Comprehensive Income	$	8,995,720		$	23,967,220		$	4,710,517		$	2,754,546
Basic weighted average shares outstanding		14,932,582			14,932,582			14,932,582			14,932,582
Diluted weighted average shares outstanding		15,344,113			15,341,847			15,332,582			15,348,469
Basic net earnings per share	$	0.52		$	1.62		$	0.26		$	0.18
Diluted net earnings per share	$	0.51		$	1.57		$	0.25		$	0.18

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

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U.S. CHINA MINING GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	NINE MONTHS ENDED SEPTEMBER 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	7,808,149		$	24,138,956
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		2,128,597			3,705,738
Accretion of interest on asset retirement obligation		153,003			145,293
Imputed interest		115,221			90,312
Stock option compensation		129,633			53,807
Changes in deferred tax		185,503			(117,010	)
(Increase) decrease in current assets:
Accounts receivable		(106,195	)		(122,791	)
Other receivables, deposits and prepayments		11,606			(775,504	)
Inventory		(685,971	)		(316,263	)
Deposit for mine restoration		(148,863	)		(152,703	)
Increase (decrease) in current liabilities:
Accounts payable		(356,309	)		440,563
Unearned revenue		(1,172,608	)		976,444
Accrued liabilities and other payables		1,069,602			(16,824	)
Taxes payable		1,211,386			(5,590,755	)
Net cash provided by operating activities		10,342,754			22,459,263
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in restricted cash		(184	)		(122	)
Acquisition of property, plant & equipment		(1,869,189	)		(110,672	)
Construction in progress		(1,019,017	)		(10,978	)
Net cash used in investing activities		(2,888,390	)		(121,772	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Due to shareholders		708,977			(11,438,325	)
Due from shareholders		-			258,417
Net cash provided by (used in) financing activities		708,977			(11,179,908	)
EFFECT OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS		721,280			18,961
NET INCREASE IN CASH & CASH EQUIVALENTS		8,884,621			11,176,544
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD		31,260,184			16,744,741
CASH & CASH EQUIVALENTS, END OF PERIOD	$	40,144,805		$	27,921,285
Supplemental Cash flow data:
Income tax paid	$	2,283,250		$	12,146,558
Interest paid	$	-		$	-

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

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U.S. CHINA MINING GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009

1.   ORGANIZATION AND DESCRIPTION OF BUSINESS

U.S. China Mining Group, Inc. (“SGZH” or the “Company”) was incorporated in Nevada on June 7, 2001.  As described below, in April 2008 the Company completed a transaction with Xing An (defined below) which was accounted for as a reverse acquisition and the historical financial information contained herein is of Xing An. The Company is engaged in coal production by exploring, assembling, assessing, permitting, developing and mining coal properties in the People’s Republic of China (“PRC”). After obtaining permits from the Heilongjiang National Land and Resources Administration Bureau and Heilongjiang Province Coal Production Safety Bureau, the Company extracts coal from properties it has the right to mine, and sells most of the coal on a per ton basis for cash on delivery, primarily to power plants, cement factories, wholesalers and individuals for home heating.

On September 23, 2004, the Company acquired a 75% interest in Heilongjiang Tong Gong Kuang Ye You Xian Gong Si (“Tong Gong”), which owns the mining rights to a coal mine near Heihe City in Heilongjiang Province for 400,000 shares of its convertible preferred stock which, at the time of issuance, were convertible into 40,000,000 shares of common stock (The conversion ratio was amended to 1:10 on December 19, 2006, such that the 400,000 shares of convertible preferred stock were convertible into 4,000,000 shares of common stock).  Effective January 7, 2008, the conversion ratio for the preferred stock was changed to 1-for-1 as a result of the 10-to-1 reverse stock split of issued and outstanding shares of common stock which was effective on that date. Additionally, Harbin Green Ring Biological Degradation Products Developing Co., Ltd. (“Harbin Green”), which owns the remaining 25% of Tong Gong, assigned and transferred its beneficial interests to the Company. As a result, the Company beneficially owns 100% of Tong Gong.

On December 31, 2007, the Company entered into a Stock Purchase Agreement (the “Agreement”) to acquire two PRC mining companies under common ownership: Heilongjiang Xing An Group Hong Yuan Coal Mine Co., Ltd. (“Hong Yuan”) and Heilongjiang Xing An Group Sheng Yu Mining Co., Ltd. (“Sheng Yu”) and with Hong Yuan sometimes collectively as “Xing An” for  400,000 Series A preferred shares and 6,932,582 common shares valued at the average stock price of SGZH stock two days before and two days after the Agreement date.  This transaction was completed on April 4, 2008, and the Xing An shareholders received 8 million shares of SGZH common stock and $30 million, which was treated as a dividend pursuant to the accounting treatment applied to the transaction.  As a result of the transaction Xing An shareholders then owned 53% of the combined company.  For accounting purposes, the transaction was accounted for as a reverse acquisition of the Company by Xing An.

Because current PRC regulations restrict foreign ownership of any mining-related company to 90% of such company’s equity interest, the Company acquired 90% of the registered capital, representing 90% of the outstanding equity interests, of each of Hong Yuan and Sheng Yu from their owners (the “Xing An Shareholders”). Concurrently with the acquisition, the Xing An Shareholders placed the beneficial interests to the remaining 10% equity interests of Xing An in trust for the benefit of the Company pursuant to a Trust Agreement. Under the terms of the Trust Agreement, all rights attached to the 10% equity interests are to be exercised by the trustee at the direction, and for the sole benefit, of the Company. Transfer of the 10% equity interests to the Company shall occur when permitted under applicable PRC regulations. At such time, if the trust is deemed to violate applicable PRC regulations or can no longer achieve its intended purpose, the trust shall terminate, and the 10% equity interests shall revert back to the Xing An Shareholders.

Hong Yuan was incorporated in Heilongjiang Province on August 18, 2003, under the name Daxinganling Mohe County Hong Yuan Coal Mine Co., Ltd. Sheng Yu was incorporated in Heilongjiang Province on August 18, 2003, under the name Daxinganling Mohe County Sheng Yu Mining Co., Ltd. Each company produces coal for sale to utilities and industrial markets.  Both mines are located in Mohe County, in the most northern regions of China, and are geologically joined.  The Xing An shareholders acquired Hong Yuan on August 19, 2005 and Sheng Yu on May 8, 2005. From January 1, 2005 until these companies were acquired by Xing An shareholders, the mines these companies have mining rights to were not in operation.

On January 7, 2008, the Company amended its Articles of Incorporation to effect a 10-to-1 reverse stock split of its issued and outstanding shares of common stock and a proportional decrease of its authorized number of shares of common stock from 1,000,000,000 to 100,000,000 shares.

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On June 8, 2010, the Company amended its Articles of Incorporation to change its name from Songzai International Holding Group, Inc. to U.S. China Mining Group, Inc. On July 1, 2010, the Company filed a Certificate of Amendment with the Secretary of State of the State of Nevada changing its name to “U.S. China Mining Group, Inc.”

The accompanying unaudited financial statements were prepared by the Company in accordance with accounting principles generally accepted (“GAAP”) in the United States of America (“USA”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with USA GAAP were omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the Company’s 2009 audited financial statements and footnotes. The results for the nine and three months ended September 30, 2010 are not necessarily indicative of the results to be expected for the full year ending December 31, 2010.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the financial statements of SGZH and its subsidiaries, Tong Gong and Xing An. All significant inter-company accounts and transactions were eliminated in consolidation.

Use of Estimates

In preparing financial statements in conformity with USA GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting year. Significant estimates, required by management, include the recoverability of long-lived assets, allowance for doubtful accounts, and the reserve for obsolete and slow-moving inventories. Actual results could differ from those estimates.

Cash and Cash Equivalents

For financial statement purposes, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At September 30, 2010 and December 31, 2009, the Company had restricted cash of $217,578 and $213,345, respectively, in the bank pledged for coal mine safety required by the Heilongjiang Board for Overseeing Safety Production.

Accounts Receivable

The Company’s policy is to maintain reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.

Inventory

Inventory consists of coal extracted from the ground that is available for delivery to customers, as well as extracted coal removed from the ground but not yet processed through a wash plant. Inventory is valued at the lower of average cost or market, cost being determined on a first in, first out method and including labor costs and all expenditures directly related to the removal of coal.

Prepaid Mining Rights

Prepaid mining rights represent the portion of the mining rights for which the Company has previously paid.   Prepaid mining rights are expensed based on actual production volume during the period. See additional discussion in Note 6, “Prepaid Mining Rights.”

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Goodwill

Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“Statement No. 142”), codified in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, goodwill is not amortized but is tested for impairment, annually or when circumstances indicate a possible impairment may exist. Impairment testing is performed at a reporting unit level. An impairment loss generally would be recognized when the carrying amount of the reporting unit exceeds its fair value, with the fair value of the reporting unit determined using discounted cash flow (DCF) analysis. A number of significant assumptions and estimates are involved in the application of the DCF analysis to forecast operating cash flows, including the discount rate, the internal rate of return, and projections of realizations and costs to produce. Management considers historical experience and all available information at the time the fair values of its reporting units are estimated.

On April 4, 2008, the Company completed the acquisition of 90% of Xing An pursuant to the Agreement for price determined by multiplying the number of shares of SGZH outstanding just prior to the transaction (400,000 Series A preferred shares and 6,932,582 common shares) by the average stock price of SGZH stock two days before and two days after the Agreement date. In connection with the transaction, the Xing An shareholders received 8 million shares of SGZH common stock and $30 million, which was treated as a dividend payable and was recorded as a charge to retained earnings.  The total consideration exceeded the fair value of the net assets acquired by $26,180,923 which was recorded as goodwill. As a result of the acquisition, the Xing An Shareholders then owned 53% of the combined company. For accounting purposes, the acquisition of Xing An by SGZH is accounted for as a reverse acquisition of SGZH by Xing An.

Asset Retirement Cost and Obligations, Deposit for Mine Restoration

The Company uses Statement of Financial Accounting Standards (“SFAS”) No. 143, Accounting for Asset Retirement Obligations, codified in FASB ASC Topic 410. This Statement generally requires the Company’s legal obligations associated with the retirement of long-lived assets are recognized at fair value at the time the obligations are incurred. Obligations are incurred when development of a mine commences for underground mines or construction begins for support facilities, refuse areas and slurry ponds. The obligation’s fair value is determined using DCF techniques and is accreted over time to its expected settlement value. Upon initial recognition of a liability, a corresponding amount is capitalized as part of the carrying amount of the related long-lived asset. Amortization of the related asset is calculated on a unit-of-production method by amortizing the total estimated cost over the salable reserves determined under SEC Industry Guide 7, multiplied by the production during the period. The Company reviews its asset retirement obligations at least annually and makes necessary adjustments for permit changes as granted by state authorities and for revisions of estimates of the amount and timing of costs. For ongoing operations, adjustments to the liability result in an adjustment to the corresponding assets.

Xing An voluntarily applied to Daxinganling District Environment Protection Bureau for the asset retirement obligation and is obligated to account for land subsidence, restoration, rehabilitation and environmental protection at a rate of RMB 1 per ton based on total reserves at the end of the useful lives of the mines.

From January 1, 2009, Xing An and Tong Gong were required by the local Environment Protection Bureau and Heilongjiang Province National Land and Resources Administration Bureau (“HPNLRAB’) to deposit RMB 18,886,500 ($2,765,632) and RMB 5,000,000 ($731,090), respectively, within a certain period of time to a bank account held by local mining authority for land subsidence, restoration and rehabilitation when the mine is fully depleted.  At September 30, 2010, Xing An deposited RMB 5,665,950 ($845,525) and Tong Gong deposited RMB 2,043,280 ($304,917). See additional discussion in Note 12, “Asset Retirement Cost and Obligations.”

Environmental Costs

The PRC adopted environmental laws and regulations that affect the operations of the coal mining industry. The outcome of environmental liabilities under proposed or future environmental legislation cannot be reasonably estimated at present, and could be material. Under existing legislation, however, Company management believes there are no probable liabilities that will have a material adverse effect on the financial position of the Company.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation. Costs of mine development, expansion of the capacity of or extending the life of our mine are capitalized and principally amortized using the units-of-production method over the actual tons of coal produced directly benefiting from the capital expenditure. Mobile mining equipment and other fixed assets are stated at cost and depreciated on a straight-line basis over the estimated useful lives of 10 to 15 years. Leasehold improvements are amortized over their estimated useful lives or the term of the lease, whichever is shorter. Major repairs and betterments that significantly extend original useful lives or improve productivity are capitalized and depreciated over the period benefited. Maintenance and repairs are expensed as incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. 

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The estimated useful lives for each category of fixed assets in years are as follows:

Plant and Machinery	10-15
Motor Vehicles	5
Building and Mining Structure	10-20

Mining structure includes the main and auxiliary mine shafts, underground tunnels, and other integrant mining infrastructure.

Depreciation for the mine shafts is provided to write off the cost of the mining structure using the units of production method based on salable reserves determined under SEC Industry Guide 7.

Impairment of Long-Lived Assets

Long-lived assets, which include property and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. Based on its review, the Company believes that, as of September 30, 2010 and December 31, 2009, there were no impairments of its long-lived assets.

Income Taxes

The Company utilizes SFAS No. 109, “Accounting for Income Taxes,” codified in FASB ASC Topic 740, which requires recognition of deferred tax assets and liabilities for expected future tax consequences of events included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”), codified in FASB ASC Topic 740. When tax returns are filed, it is likely that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits are classified as interest expense and penalties are classified in selling, general and administrative expenses in the statements of income. At September 30, 2010 and December 31, 2009, the Company did not take any uncertain positions that would necessitate recording of a tax related liability. 

Revenue Recognition

The Company’s revenue recognition policies are in compliance with SEC Staff Accounting Bulletin (“SAB”) 104 (codified in FASB ASC Topic 605). Coal sales include sales to customers of coal produced at Company operations and coal purchased from other coal mining companies. Sales are recognized when a formal arrangement exists, which is generally represented by a contract between the Company and the buyer; the price is fixed or determinable; title has passed to the buyer, which generally is at the time of delivery; no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as unearned revenue.

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When the Company purchases coal from other mining companies, the customers pick up the coal at those coal mines’ premises or the coal is shipped directly from other coal mining companies. Purchases and shipments of the coal from other mining companies are arranged at the same time.  Sales of brokered coal are recognized at the time of delivery.

Sales represent the invoiced value of coal, net of value-added tax (“VAT”). All of the Company’s coal sold in the PRC is subject to a value-added tax of 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing the finished product. The Company records VAT payable and VAT receivable net of payments in the financial statements. The VAT tax return is filed offsetting the payables against the receivables. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government.

Cost of Goods Sold

Cost of goods sold consists primarily of amortization of the mining rights, direct material, direct labor, depreciation of mining plant items such as the underground tunnel and the major mine well and relatedexpenses, which are directly attributable to the production of coal. Write-down of inventory to lower of cost or market is also recorded in cost of goods sold.

Resource Compensation Fees

In accordance with the relevant regulations, a company engaged in coal production is required to pay a fee to the HPNLRAB for the depletion of coal resources. Tong Gong is required to pay mineral resource fees at a rate of RMB 3 per ton for its total production during the year; Xing An is required to pay resource fees at 1% of its total sales.  The Company expenses such costs as G&A expense when incurred.

Concentration of Credit Risk

Financial instruments that subject the Company to credit risk consist primarily of accounts and other receivables. The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews of its customers’ financial condition and customer payment practices to minimize collection risk on its receivables.

The operations of the Company are located in the PRC.  Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political, economic, and legal environments in the PRC, as well as by the general state of the PRC economy.

The Company has cash on hand and demand deposits in accounts maintained with state-owned banks within the PRC. Cash in state-owned banks is not covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in these bank accounts.

Statement of Cash Flows

In accordance with SFAS No. 95, “Statement of Cash Flows,” (codified in FASB ASC Topic 230), cash flows from the Company’s operations are calculated based upon the local currencies.  As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.  

Basic and Diluted Earnings per Share (EPS)

Basic EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed similar to basic net income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if all the potential common shares, warrants and stock options had been issued and if the additional common shares were dilutive. Diluted earnings per share are based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method for the outstanding options and the if-converted method for the outstanding convertible preferred shares. Under the treasury stock method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Under the if-converted method, convertible outstanding instruments are assumed to be converted into common stock at the beginning of the period (or at the time of issuance, if later). The following tables present a reconciliation of basic and diluted earnings per share:

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	Nine Months Ended September 30,
	2010		2009
Net income	$	7,808,149	$	24,138,956
Weighted average shares  outstanding - basic		14,932,582		14,932,582
Effect of dilutive securities:
Series “A” preferred stock		400,000		400,000
Options issued		11,531		9,265
Weighted average shares
outstanding - diluted		15,344,113		15,341,847
Earnings per share – basic	$	0.52	$	1.62
Earnings per share – diluted	$	0.51	$	1.57

	Three Months Ended September 30,
	2010		2009
Net income	$	3,850,140	$	2,757,819
Weighted average shares  outstanding - basic		14,932,582		14,932,582
Effect of dilutive securities:
Series “A” preferred stock		400,000		400,000
Options issued		-		15,887
Weighted average shares
outstanding - diluted		15,332,582		15,348,469
Earnings per share – basic	$	0.26	$	0.18
Earnings per share – diluted	$	0.25	$	0.18

Fair Value of Financial Instruments

Certain of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities and short-term debt, carrying amounts approximate their fair values due to their short maturities.  ASC Topic 825, “Financial Instruments,” requires disclosure of the fair value of financial instruments held by the Company. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest.

 Fair Value Measurements and Disclosures

ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The three levels are defined as follow:

· Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

· Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

· Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

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As of September 30, 2010 and December 31, 2009, the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at fair value.

Foreign Currency Translation and Comprehensive Income (Loss)

The functional currency of Tong Gong and Xing An is the Renminbi (“RMB”). For financial reporting purposes, RMB were translated into United States Dollars (“USD” or “$”) as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet dates. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period.

Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders’ equity as “Accumulated other comprehensive income”. Gains and losses resulting from foreign currency transactions are included in income. There has been no significant fluctuation in the exchange rate for the conversion of RMB to USD after the balance sheet date.

The fluctuation of exchange rates does not imply free convertibility of RMB to other foreign currencies. All foreign exchange transactions continue to take place either through the People’s Bank of China (“PBOC”) or other banks authorized to buy and sell foreign currencies at the exchange rate quoted by the PBOC.

The Company uses SFAS No. 130 “Reporting Comprehensive Income” (codified in FASB ASC Topic 220). Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. Comprehensive income for the nine and three months ended September 30, 2010 and 2009 consisted of net income and foreign currency translation adjustments.

Stock-Based Compensation

The Company accounts for its stock-based compensation in accordance with SFAS No. 123R, “Share-Based Payment, an Amendment of FASB Statement No. 123” (codified in FASB ASC Topic 718). The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees.

Segment Reporting

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” requires use of the “management approach” model for segment reporting, codified in FASB ASC Topic 280.  The management approachmodel is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance.  Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

SFAS 131, codified in FASB ASC Topic 280, has no effect on the Company’s financial statements as substantially all of its operations are conducted in one industry segment - coal mining.

New Accounting Pronouncements

On July 1, 2009, the Company adopted Accounting Standards Update (“ASU”) No. 2009-01, “Topic 105 - Generally Accepted Accounting Principles - amendments based on Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (“ASU No. 2009-01”).  ASU No. 2009-01 re-defines authoritative GAAP for nongovernmental entities to be only comprised of the FASB Accounting Standards Codification (“Codification”) and, for SEC registrants, guidance issued by the SEC.  The Codification is a reorganization and compilation of all then-existing authoritative GAAP for nongovernmental entities, except for guidance issued by the SEC.  The Codification is amended to effect non-SEC changes to authoritative GAAP.  Adoption of ASU No. 2009-01 only changed the referencing convention of GAAP in Notes to the Consolidated Financial Statements.

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On February 25, 2010, the FASB issued ASU No. 2010-09 Subsequent Events Topic 855 “Amendments to Certain Recognition and Disclosure Requirements,” effective immediately. The amendments in the ASU remove the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of USA GAAP. The FASB believes these amendments remove potential conflicts with the SEC’s literature. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

On March 5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815 “Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the guidance within the derivative literature that exempts certain credit related features from analysis as potential embedded derivatives requiring separate accounting. The ASU specifies that an embedded credit derivative feature related to the transfer of credit risk that is only in the form of subordination of one financial instrument to another is not subject to bifurcation from a host contract under ASC 815-15-25, Derivatives and Hedging — Embedded Derivatives — Recognition. All other embedded credit derivative features should be analyzed to determine whether their economic characteristics and risks are “clearly and closely related” to the economic characteristics and risks of the host contract and whether bifurcation is required. The ASU is effective for the Company on July 1, 2010. Early adoption is permitted. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In April 2010, the FASB codified the consensus reached in Emerging Issues Task Force Issue No. 08-09, “Milestone Method of Revenue Recognition.” FASB ASU No. 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development transactions. FASB ASU No. 2010-17 is effective for fiscal years beginning on or after June 15, 2010, and is effective on a prospective basis for milestones achieved after the adoption date. The Company does not expect this ASU will have a material impact on its financial position or results of operations when it adopts this update on January 1, 2011.

Recently Issued Accounting Pronouncements Not Yet Adopted

As of September 30, 2010, there are no recently issued accounting standards not yet adopted which would have a material effect on the Company’s financial statements.

3.    INVENTORY

Inventory, at September 30, 2010 and December 31, 2009, consisted of coal and materials needed for coal extraction.

4.    PROPERTY AND EQUIPMENT, NET

Property and equipment consisted of the following at September 30, 2010 and December 31, 2009:

	2010		2009
Building	$	5,112,878	$	3,154,697
Mining structure		10,075,432		9,887,888
Production equipment		4,384,551		4,302,937
Office equipment		34,945		33,958
Vehicles		170,847		167,668
		19,778,653		17,547,148
Less: Accumulated depreciation		(6,751,834)		(5,532,904)
	$	13,026,819	$	12,014,244

Depreciation for the nine months ended September 30, 2010 and 2009 was $1,218,930 and $992,000, respectively.  Depreciation for the three months ended September 30, 2010 and 2009 was $420,330 and $324,000, respectively.  

5.   OTHER RECEIVABLES, DEPOSITS AND PREPAYMENTS

Other receivables represented advances to employees for traveling and other business related expenses. Deposits mainly represented deposits to the government for certain mining certificates issued by the specific PRC authorities. Prepayments represented payments made for working supplies and utilities.

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6.   PREPAID MINING RIGHTS

Prepaid mining rights represent the portion of the mining rights for which the Company previously paid. The price is determined by the local mining bureau from which the Company acquired its mining rights, based in part on market price set by the Heilongjiang National Land and Resources Administration Bureau and in part on negotiations with the local mining bureau. The price is established at the time of payment, regardless of when production of the underlying coal occurs. The price for Tong Gong was RMB 8 ($1.17) per ton for 2009 and 2008 and RMB 3.09 ($0.43) per ton for 2005 through 2007; the price for Xing An was RMB 9 ($1.32) per ton for 2009 and 2008, RMB 6 ($0.85) per ton for 2006 and 2007, and RMB 4 ($0.50) per ton for 2005. For any mining rights granted prior to September 1, 2006, the Company is generally required to pay for the entire amount of coal underlying such mining rights within five years from the date such right is granted unless specific good cause exists for extension. Effective September 1, 2006, under the authority of the Heilongjiang Geology and Mineral Exploration Office, the Company has ten years to pay for the coal underlying any mining rights granted on or after such date.

If the Company decides to cease mining at a particular property, and the Company has already extracted all the coal underlying its mining rights, the government will take back that coal mine.  If the Company decides to cease mining but has not extracted all coal it has already paid to extract (i.e. its prepaid mining rights), while the Company will not be entitled to a refund of the corresponding prepaid mining rights from the government, the Company can sell such unused prepaid mining rights to a third party.

The following table illustrates the grant dates of the Company’s mining rights and corresponding payment due dates:

Grant date of mining rights(1)		In Place Resources to which Mining Rights Relate (in metric tons)(2)				Corresponding Due date for the payment of mining rights
Xing An	Tong Gong	Xing An		Tong Gong		Xing An	Tong Gong
	12/30/2004				4,649,700		12/30/2009
4/1/2005			816,300			12/30/2010
10/15/2005			13,520,700			9/30/2010
3/1/2007			5,444,800			3/1/2017
	9/30/2007				1,500,000		9/30/2017
Total			19,781,800		6,149,700

(1)  Grant date is the date that the reserves appraisal report by government authorized mining engineers is filed with Heilongjiang Department of Land and Resources and the Company is approved for the total tons of coal it is legally allowed to extract based on the PRC reserves appraisal report.

(2)  The Company’s mining rights are based on appraisals of in place resources conducted by the appropriate PRC authorities and are expressed as a maximum number of metric tons of coal in each mine which the Company is entitled to extract under related mining rights.

The Company’s prepaid mining rights consisted of the following at September 30, 2010 and December 31, 2009:

	2010				2009
Prepaid mining rights	$	25,689,860		$	25,211,669
Less: Amortized portion		(9,432,419	)		(8,405,916	)
Prepaid mining rights, net	$	16,257,441		$	16,805,753

The Company amortizes the mining rights by using total cost of mining rights (the sum of those for which the Company has paid and those for which the Company is still committed to pay) divided by total salable reserves determined under SEC Industry Guide 7, multiplied by production during the period.  The cost of unpaid mining rights is assumed to be the same as the most current price per ton paid by the Company (RMB 8 ($1.17) per ton).  Amortization expense was approximately $1,026,503 and $2,523,000 for the nine months ended September 30, 2010 and 2009, respectively. Amortization expense was approximately $232,900 and $141,000 for the three months ended September 30, 2010 and 2009, respectively.  

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As of September 30, 2010 and December 31, 2009, the total quantity of coal the Company is legally allowed to extract under the mining rights of Xing An and Tong Gong was 25,931,500 tons (as per above table); however, as noted in the table above, this amount reflects the in place resources on which the mining rights are based and to which those mining rights extend. But these amounts, determined by the appropriate PRC authorities, do not coincide with the definition of proven and probable reserves of SEC Industry Guide 7, which would be 9.38 million tons as of December 31, 2009. The Company paid for 25,165,295 tons at September 30, 2010, and is committed to pay for 766,205 tons of coal at RMB 8 ($1.17) per ton, or $897,589, which must be paid by September 30, 2017. The prepayment of mining rights is accounted for similar to a royalty agreement as neither the payment terms nor the price per ton is fixed.

7. CONSTRUCTION IN PROGRESS

Construction in progress represented the amount paid for Xing An mines’ maintenance and retrofit project which commenced at the end of 2009. The project will take about 12 – 14 months to finish.

8.   RELATED PARTY TRANSACTIONS

Lease from shareholder

Xing An leases its office and certain office equipment under long-term leases from a principal shareholder for approximately $1,800 (RMB 12,500) per month. The operating lease requires Xing An to pay certain operating expenses applicable to the leased premises.

Advance from shareholder

At September 30, 2010 and December 31, 2009, the Company owed a shareholder $3,030,338 and $2,321,360, respectively, for short-term advance as a result of this shareholder paying certain US headquarters’ G&A expenses for the Company. This short-term advance was payable upon demand with no collateral required. Imputed interest expense is charged at 6% on the amount due at the balance sheet date and is included as additional paid-in capital. Total imputed interest included as additional paid-in capital was $115,221 and $90,312 for the nine months ended September 30, 2010 and 2009. Total imputed interest included as additional paid-in capital was $42,707 and $30,657 for the three months ended September 30, 2010 and 2009.

9.   ACCRUED LIABILITIES AND OTHER PAYABLES

Accrued liabilities and other payables consisted of the following at September 30, 2010 and December 31, 2009: 

	2010		2009
Accrued liabilities	$	84,097	$	102,238
Other payables		1,776,441		872,281
Other government levies		4,253		-
Total	$	1,864,791	$	974,519

Accrued liabilities mainly represented accrued payroll, welfare and audit expense. Other payables mainly consisted of payables for education and union outlays, transportation infrastructure construction fee, mine security special purpose fee, coal price adjusting fund, mine shaft maintenance fee, and resource compensation fee. Other government levies represented the anti-flood fee Xing An was required to pay.

10.   TAXES PAYABLE

Taxes payable consisted of the following at September 30, 2010 and December 31, 2009:

	2010		2009
Income tax	$	811,262	$	735,759
Value added tax		1,462,481		323,100
Resource tax		50,521		16,062
Other		2,883		1,319
	$	2,327,147	$	1,076,240

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11.   LONG TERM PAYABLE

Long term payable represented refundable deposit from an independent contractor who is responsible for the mining work at Tong Gong mine site. The Company outsourced Tong Gong mining work for 3 years, and the contractor was required to pay a deposit for mining safety assurance, which will be refunded to this contractor when the contract period expires.

12.  ASSET RETIREMENT COST AND OBLIGATION

Xing An voluntarily applied to Daxinganling District Environment Protection Bureau for asset retirement obligation to get a tax deduction and is obligated to account for land subsidence, restoration, rehabilitation and environmental protection at a rate of RMB 1 ($0.15) per ton for total reserves at the end of the useful lives of the mines.  These activities include reclaiming the pit, sealing portals at underground mines, and reclaiming and vegetating refuse areas.

Effective January 1, 2009, Xing An and Tong Gong were required by the local Environment Protection Bureau and HPNLRNB to deposit RMB 18,886,500 ($2,765,632) and RMB 5,000,000 ($731,090), respectively, within a period of time presently expected to be three to five years to a bank account held by local mining authority for land subsidence, restoration and rehabilitation when the mine is fully depleted.  At September 30, 2010, Xing An deposited RMB 5,665,950 ($845,500), and Tong Gong deposited RMB 2,043,280 ($304,900).

The Company accounts for Xing An and Tong Gong’s asset retirement obligations in accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations” (codified in FASB ASC Topic 410). The Company reviews the asset retirement obligation at least annually and makes necessary adjustments for permitted changes as granted by state authorities and for revisions of estimates of the amount and timing of costs. For ongoing operations, adjustments to the liability result in an adjustment to the corresponding asset.

Asset Retirement Cost at September 30, 2010 and December 31, 2009 was:

	2010			2009
Asset retirement cost	$	4,442,963		$	4,360,262
Less: Accumulated amortization		(1,540,758	)		(1,334,333	)
	$	2,902,205		$	3,025,929

Amortization for asset retirement cost for the nine months ended September 30, 2010 and 2009 was $206,425 and $434,000, respectively. Amortization for asset retirement cost for the three months ended September 30, 2010 and 2009 was $45,325 and $28,000, respectively

Changes in Asset Retirement Obligation for the nine months ended September 30, 2010 and for year ended December 31, 2009 consisted of the following:

	2010		2009
Balance at Beginning of Period	$	4,060,461	$	3,974,356
Asset Retirement Obligation for Tong Gong		-		867,435
Accretion of interest expense		153,003		195,394
Deposit for mine restoration during the period		(148,863)		(980,632	)
Foreign currency translation gain		77,081		3,908
Ending balance	$	4,141,682	$	4,060,461

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13.  DEFERRED TAX ASSET, NET

Deferred tax asset represented differences between the tax and book bases of depreciation expense of mining shafts using unit-of-production method, amortization of mining rights for reserves under SEC Industry Guide 7, and amortization of asset retirement cost.

Deferred tax liability consisted of tax deductible safety and maintenance expenses for coal produced to be incurred in the future. It is deductible for tax purposes at a predetermined rate per ton of coal produced per year.  For financial reporting purposes, this was recorded as an appropriation of retained earnings. As defined under USA GAAP, a liability for safety and maintenance expenses does not exist at the balance sheet date because there is no present obligation to transfer assets or to provide services as a result of any past transaction (see Note 16 – Statutory Reserves).

Deferred tax asset (liability) consisted of the following at September 30, 2010 and December 31, 2009:

	2010			2009
Deferred tax asset for amortization of mining rights, amortization of asset retirement cost  and depreciation of assets using unit-of-production method	$	2,041,169			$	2,017,029
Deferred tax liability for statutory reserves for Mine safety and maintenance expenses		(1,780,907	)			(1,576,690	)
Net deferred tax asset	$	260,262			$	440,339

14.  INCOME TAXES

The Company is subject to income taxes by entity on income from the tax jurisdiction in which each entity is domiciled.

U.S. China Mining Group, Inc., the US parent company was incorporated in Nevada and has net operating losses (“NOL”) for income tax purposes.  The US parent company has NOL carry forwards for income taxes of approximately $3,844,000 at September 30, 2010 which may be available to reduce future years’ taxable income as NOLs can be carried forward up to 20 years from the year the loss is incurred. Management believes the realization of the benefits from these losses is uncertain due to the Company’s limited operating history and continuing losses. Accordingly, a 100% deferred tax asset valuation allowance was provided for the US parent company.

Tong Gong is a Sino-foreign joint venture enterprise formed in the PRC subject to PRC income tax. According to the PRC government local tax bureau, Tong Gong was entitled to full income tax relief for two years commencing January 2005 and 15% for three years from 2007 to 2009.  Effective January 1, 2008, the PRC government implemented new income tax rates with a maximum rate of 25%, under which Tong Gong is subject to a 12.5% income tax rate for 2008 and 2009, and 25% thereafter.  

Effective February 13, 2009, Xing An became a foreign invested enterprise as a result of the reverse acquisition by the Company. Xing An is subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.

Foreign pretax earnings approximated $12,017,000 for the nine months ended September 30, 2010. Pretax earnings of a foreign subsidiary are subject to U.S. taxation when effectively repatriated. The Company provides income taxes on the undistributed earnings of non-U.S. subsidiaries except to the extent that such earnings are indefinitely invested outside the United States. At September 30, 2010, approximately $39,652,000 of accumulated undistributed earnings of non-U.S. subsidiaries was indefinitely invested. At the existing U.S. federal income tax rate, additional taxes of approximately $5,460,000 would have to be provided if such earnings were remitted currently.

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The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the nine months ended September 30, 2010 and 2009:

	2010			2009
US statutory rates		34.0	%		34.0	%
Tax rate difference		(9.7	)%		(9.2	)%
Permanent difference on deferred tax		0.5	%		1.0	%
Change tax rate on deferred tax		2.1	%		-	%
Effect of tax holiday		-	%		(4.8	)%
Valuation allowance on US NOL		2.8	%		0.8	%
Tax per financial statements		29.6	%		21.8	%

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the three months ended September 30, 2010 and 2009:

	2010			2009
US statutory rates		34.0	%		34.0	%
Tax rate difference		(9.5	)%		(9.0	)%
Permanent difference on deferred tax		0.3	%		1.0	%
Change tax rate on deferred tax		-	%		-	%
Effect of tax holiday		-	%		(5.4	)%
Valuation allowance on US NOL		1.9	%		1.0	%
Tax per financial statements		26.7	%		21.6	%

15.  MAJOR CUSTOMERS AND VENDORS

Three customers accounted for 58%, 15% and 14% of the Company’s sales for the nine months ended September 30, 2010 .  Four customers accounted for 30%, 17%, 17% and 11% of the Company’s sales for the nine months ended September 30, 2009. 

Three customers accounted for 66%, 17% and 17% of the Company’s sales for the three months ended September 30, 2010. Four customers accounted for 26%, 22%, 22% and 16% of the Company’s sales for the three months ended September 30, 2009.

At September 30, 2010 and December 31, 2009, the total receivable balance due from these customers was $107,870 and $0, respectively.

There were no major vendors for the Company for the nine and three months ended September 30, 2010 and 2009.

16.  STATUTORY RESERVES

Pursuant to the corporate law of the PRC effective January 1, 2006, the Company is now only required to maintain one statutory reserve by appropriating from its after-tax profit before declaration or payment of dividends. The statutory reserve represents restricted retained earnings.

Surplus reserve fund

The Company is now required to transfer 10% of its net income, as determined under PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the Company’s registered capital.

The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.

Common welfare fund

Common welfare fund is a voluntary fund that the Company can elect to transfer 5% to 10% of its net income, as determined under PRC accounting rules and regulations, to this fund.  The Company did not make any contribution to this fund during the nine and three months ended September 30, 2010 and 2009.

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This fund can only be utilized on capital items for the collective benefit of the Company’s employees, such as construction of dormitories, cafeteria facilities, and other staff welfare facilities. This fund is non-distributable other than upon liquidation.

Non-Surplus reserve fund (Safety and Maintenance)

According to ruling No. 119 (2004) issued May 21, 2004, and amended ruling No. 168 (2005) on April 8, 2005 by the PRC Ministry of Finance regarding “Accrual and Utilization of Coal Production Safety Expense” and “Criterion on Coal Mine Maintenance and Improvement”, the Company is required to accrue safety and maintenance expenses monthly to the cost of production. The amount of the accrual is determined based on management’s best estimates within the unit price range provided by Ministry of Finance of PRC. Currently, Xing An accrues at RMB 8.7 ($1.27) per ton for safety expense and RMB 3 ($0.44) per ton for maintenance for the quantity of coal produced; and Tong Gong accrues at RMB 6 ($0.88) per ton for safety expense and RMB 8.7 ($1.27) per ton for maintenance for the quantity of coal produced. As defined under US GAAP, a liability for safety and maintenance expenses does not exist at the balance sheet date because there is no present obligation to transfer assets or to provide services as a result of any past transactions. Therefore, for financial reporting purposes, this reserve was recorded as an appropriation of retained earnings.

The statutory reserves were as follows as of September 30, 2010 and December 31, 2009:

	2010		2009
Statutory surplus reserve	$	3,166,150	$	3,148,865
Safety and Maintenance reserve		6,508,903		5,839,772
Total statutory reserves	$	9,675,053	$	8,988,637

17.  STOCK-BASED COMPENSATION PLAN

On June 9, 2008, the Company granted options to an employee under the Company’s 2006 stock option plan to purchase up to 55,000 shares of the Company’s common stock at $9.35 per share for 5 years. The options vested and became exercisable immediately upon their issuance. The options were terminated on March 10, 2009 and replaced by same number of options with exercise price of $5.36 per share for 5 years under the Company’s 2009 stock option plan; the replaced options vested and became exercisable immediately upon their issuance.  Based on SFAS 123R (codified in FASB ASC Topic 718), the replaced options were a modification of the original options in substance; the Company compared the fair value of new options to the fair value of the original options based on the factors at the modification date, and concluded no incremental compensation cost needed to be recorded as the fair value of the new options was less than the fair value of the original options.

On March 10, 2009, the Company granted options to an independent director under the Company’s 2009 stock option plan to purchase up to 20,000 shares of the Company’s common stock at $6.30 per share for 5 years. The options vested and became exercisable in two equal installments: the first six months from the option grant date and the second six months thereafter.   On March 3, 2010, the Company granted another 20,000 stock options to this director with exercise price of $9.30 per share and a term of 5 years.  The options vest and become exercisable in two equal installments: the first six months from the option grant date and the second six months thereafter.

Based on the fair value method under SFAS 123R (codified in FASB ASC Topic 718), the fair value of each stock option granted is estimated on the date of the grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model has assumptions for risk free interest rates, dividends, stock volatility and expected life of an option grant. The risk free interest rate is based upon market yields for US Treasury debt securities at a maturity near the term remaining on the option. Dividend rates are based on the Company’s dividend history. The stock volatility factor is based on the historical volatility of the Company’s stock price. The expected life of an option grant is based on management’s estimate as no options have been exercised in the Plan to date. The fair value of each option grant to employees is calculated by the Black-Scholes method and is recognized as compensation expense over the vesting period of each stock option award. For stock options issued, the fair value was estimated at the date of grant using the following range of assumptions:

The options vested upon issuance and have a life of 5 years, with volatility of 100%, risk free interest rate of 3.76%, and dividend yield of 0%. No estimate of forfeitures was made as the Company has a short history of granting options.

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The following table summarizes activities of these options for the nine months ended September 30, 2010:

	Number of Shares			Average Exercise Price per Share			Weighted Average Remaining Contractual Term in Years
Outstanding at January 1, 2009		55,000		$	9.35			4.44
Exercisable at January 1, 2009		55,000
Cancelled		(55,000	)		(9.35	)		(4.44	)
Exercised		-			-			-
Granted		75,000			5.61			5.00
Outstanding at December 31, 2009		75,000			5.61			4.19
Exercisable at December 31, 2009		65,000
Granted		20,000			9.30			5.00
Exercised		-			-			-
Outstanding at September 30, 2010		95,000		$	6.39			3.65
Exercisable at September 30, 2010		85,000

The Company recorded $129,633 and $53,807 of compensation expense for stock options during the nine months ended September 30, 2010 and 2009, respectively.  The company recorded $65,288 and $24,148 of compensation expense for stock options during the three months ended September 30, 2010 and 2009. There were no options exercised during the nine months ended September 30, 2010.

18.  CONTINGENCIES AND COMMITMENTS

The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

The Company’s sales, purchases and expenses are denominated in RMB and all of the Company’s assets and liabilities are also denominated in RMB. The RMB is not freely convertible into foreign currencies under the current law. In China, foreign exchange transactions are required by law to be transacted only by authorized financial institutions. Remittances in currencies other than RMB may require certain supporting documentation in order to effect the remittance.

For mining rights granted to the Company prior to September 1, 2006, the Company is required to pay for all of the coal underlying such mining rights within five years from the date such mining rights are approved by the HNLRAB unless specific good cause exists for extension.  For mining rights granted on or after September 1, 2006, full payment is required within ten years. The Company’s operations may be suspended if it is not able to make full payments within such periods.

The Company leases its principal executive office in the United States, which headquarters some administrative staff and oversees its operations in the PRC. The lease agreement for this office is from September 1, 2008 to August 31, 2011, for annual rent of $57,516, and the Company has the option to renew this lease.

Our principal executive office in the PRC is located in the provincial capital of Harbin and is approximately 7,000 square feet. We have no written agreement or formal arrangement pertaining to the use of this office, as it is owned by Mr. Hongwen Li, our President and Chief Executive Officer, who is making the office available to us rent-free. This office houses our administrative and clerical staff. If necessary, we believe that we would be able to find replacement office space without unreasonable expense or delay.

The Company leases the office for Xing An in Jiagedaqi City and certain office equipment under long-term lease agreements with monthly payments of approximately $1,800 (RMB 12,500) expiring July 30, 2015. The operating lease agreements provide the Company pays certain operating expenses applicable to the leased premises.

The Company’s total rental expense for the nine months ended September 30, 2010 and 2009 was approximately $60,000 and $60,000, respectively.  The Company’s total rental expense for the three months ended September 30, 2010 and 2009 was approximately $20,000 and $20,000, respectively.

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As of September 30, 2010, the future minimum annual lease payments required under operating leases, are as follows by years:

2011	$	74,323
2012		21,600
2013		21,600
2014		21,600
2015		18,000
Total future lease payments	$	157,123

19. ACQUISITION OF LIUJIAQU COAL MINE

On May 19, 2010, the Company  entered into an Asset Purchase Agreement (the "Asset Purchase Agreement") to acquire the Erdos City Dongsheng District Liujiaqu Coal Mine ("Liujiaqu Coal Mine") located in the Inner Mongolia region of the PRC. The transaction of the acquisition of Liujiaqu Coal Mine had not been completed on September 30, 2010. The parties are reviewing the potential impact on the transaction of new municipal policy and requirements of  Erdos City and have not scheduled a date for completion of the transaction.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

Note Regarding Forward-Looking Statements

This quarterly report on Form 10-Q  and other reports filed by Registrant from time to time with the Securities and Exchange Commission (collectively the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, Registrant’s management as well as estimates and assumptions made by Registrant’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or the negative of these terms and similar expressions as they relate to Registrant or Registrant’s management identify forward-looking statements. Such statements reflect the current view of Registrant with respect to future events and are subject to risks, uncertainties, assumptions, and other factors (including the risks contained in the section of this report entitled “Risk Factors”) relating to Registrant’s industry, Registrant’s operations and results of operations, and any businesses that Registrant may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.

Although Registrant believes that the expectations reflected in the forward-looking statements are reasonable, Registrant cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Registrant does not intend to update any of the forward-looking statements to conform these statements to actual results. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations, and prospects.

In this Form 10-Q, references to “we”, “our”, “us”, the “Company”, “SGZH” or the “Registrant” refer to U.S. China Mining  Group, Inc.

OVERVIEW

We are a company engaged in coal production and sales by exploring, assembling, assessing, permitting, developing and mining coal properties in the People’s Republic of China (“PRC”). After obtaining permits from the Heilongjiang Province National Land and Resources Administration Bureau and the Heilongjiang Province Coal Production Safety Bureau, we extract coal from properties to which we have the right to mine capped amounts of coal, and then sell most of the coal on a per metric ton (“ton”) basis for cash on delivery, primarily to power plants, cement factories, wholesalers and individuals for home heating. We do not own the coal mines, but have mining rights to extract a capped amount of coal from a mine as determined by government authorized mining engineers and approved by the Heilongjiang Department of Land and Resources. Through the end of March 2008, our business consisted of the operations of Tong Gong coal mine in northern PRC, located approximately 175 km southwest of the city of Heihe in the Heilongjiang Province.

Pursuant to a stock purchase agreement that we entered into on December 31, 2007, on April 4, 2008, we added two coal mines to our operations when we completed the acquisition of two mining companies under common ownership in the PRC, Hong Yuan and Sheng Yu.  In connection with that transaction, the Xing An shareholders received 8 million shares of SGZH common stock and $30 million in cash, which is treated as a dividend pursuant to the accounting treatment applied to the transaction. The purchase price was determined by multiplying the number of shares of SGZH outstanding just prior to the transaction (400,000 Series A preferred shares and 6,932,582 common shares) valued at the average stock price of SGZH stock two days before and two days after the Agreement date. After the closing of this acquisition transaction, the Xing An Shareholders then owned 53% of the combined company. Accordingly, for accounting purposes, the transaction is accounted for as a reverse acquisition of the Company by Xing An. Xing An operates two coal mines, the Hong Yuan and Sheng Yu mines, located in Mohe City in Heilongjiang Province.

On October 15, 2008, we paid $18 million of the dividend to the Xing An Shareholders in accordance with the terms of the Stock Purchase Agreement. We paid the remaining $12 million of the dividend to the Xing An Shareholders in April 2009.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our management's discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with US GAAP. While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis.

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Basis of Presentations

Our financial statements are prepared in accordance with “US GAAP” and the requirements of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”).

Method of Accounting

We maintain our general ledger and journals with the accrual method of accounting for financial reporting purposes. The financial statements and notes are representations of management. Accounting policies adopted by us conform to US GAAP and have been consistently applied in the presentation of financial statements, which are compiled on the accrual basis of accounting.

Principles of Consolidation 

The accompanying consolidated financial statements include the financial statements of SGZH and its subsidiaries, Tong Gong, and Xing An. All significant inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates

In preparing financial statements in conformity with US GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting year. Significant estimates, required by management, include the recoverability of long-lived assets, allowance for doubtful accounts, and the reserve for obsolete and slow-moving inventories. Actual results could differ from those estimates.

Accounts Receivable

The Company’s policy is to maintain reserves for potential credit losses on accounts receivable.  Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.

Inventory

Inventory consists of coal extracted from the ground that is available for delivery to customers, as well as extracted coal which has been removed from the ground but not yet processed through a wash plant. Coal inventories are valued at the lower of average cost or market, cost being determined on a first in, first out method, and include labor costs and all expenditures directly related to the removal of coal.

Prepaid Mining Rights

Prepaid mining rights represent that portion of the mining rights for which the Company has previously paid. Prepaid mining rights are expensed based on actual production volume during the period.

Goodwill

Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“Statement No. 142”), codified in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, goodwill is not amortized but is tested for impairment annually, or when circumstances indicate a possible impairment may exist. Impairment testing is performed at a reporting unit level. An impairment loss generally would be recognized when the carrying amount of the reporting unit exceeds the fair value, with the fair value of the reporting unit determined using a discounted cash flow (DCF) analysis. A number of significant assumptions and estimates are involved in the application of the DCF analysis to forecast operating cash flows, including the discount rate, the internal rate of return, and projections of realizations and costs to produce. Management considers historical experience and all available information at the time the fair values of its reporting units are estimated.

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Asset Retirement Cost and Obligation

The Company uses Statement of Financial Accounting Standards (“SFAS”) No. 143, Accounting for Asset Retirement Obligations, codified in FASB ASC Topic 410. This Statement generally requires that the Company’s legal obligations associated with the retirement of long-lived assets are recognized at fair value at the time the obligations are incurred. Obligations are incurred at the time development of a mine commences for underground mines or construction begins for support facilities, refuse areas and slurry ponds. The obligation’s fair value is determined using DCF techniques and is accreted over time to its expected settlement value. Upon initial recognition of a liability, a corresponding amount is capitalized as part of the carrying amount of the related long-lived asset. Amortization of the related asset is calculated on a unit-of-production method by amortizing the total estimated cost over the salable reserves determined under SEC Industry Guide 7, multiplied by the production during the period. The Company reviews its asset retirement obligation at least annually and makes necessary adjustments for permit changes as granted by state authorities and for revisions of estimates of the amount and timing of costs. For ongoing operations, adjustments to the liability result in an adjustment to the corresponding asset.

Property, Plant, and Equipment

Property and equipment are stated at cost, less accumulated depreciation. Costs of mine development, expansion of the capacity of or extending the life of our mine are capitalized and principally amortized using the units-of-production method over the actual tons of coal produced directly benefiting from the capital expenditure. Mobile mining equipment and other fixed assets are stated at cost and depreciated on a straight-line basis over the estimated useful lives ranging from 10 to 15 years. Leasehold improvements are amortized over their estimated useful lives or the term of the lease, whichever is shorter. Major repairs and betterments that significantly extend original useful lives or improve productivity are capitalized and depreciated over the period benefited. Maintenance and repairs are generally expensed as incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations.

The estimated useful lives for each category of the property, plant and equipment are as follows:   

Plant and Machinery	10-15 Years
Motor Vehicles	5 Years
Building and Mining Structure	10-20 Years

Mining structure includes the main and auxiliary mine shafts, underground tunnels, and other integrant mining infrastructure. Depreciation for the mine shafts is provided to write off the cost of the mining structure using the units of production method based on the salable reserves determined under SEC Industry Guide 7.

Revenue Recognition

The Company's revenue recognition policies are in compliance with SEC Staff Accounting Bulletin (“SAB”) 104, codified in FASB ASC Topic 605.  Coal sales revenues include sales to customers of coal produced at Company operations and brokered coal sales, where coal is purchased from other coal mining companies and sold at a higher rate to third parties. Sales revenue is recognized when a formal arrangement exists, which is generally represented by a contract between the Company and the buyer; the price is fixed or determinable; title has passed to the buyer, which generally is at the time of delivery; no other significant obligations of the Company exist and collectability is reasonably assured.  Payments received before all of the relevant criteria for revenue recognition are recorded as unearned revenue.

In brokered coal sales, the customers either pick up the coal directly from the other mining premises or the coal is shipped directly from the other coal mining premises. Purchases and shipments of the coal from other mining companies are arranged at the same time. Revenue of brokered coal is recognized at the time of delivery.

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Sales revenue represents the invoiced value of coal, net of value-added tax (“VAT”). All of the Company’s coal   sold in the PRC is subject to a value-added tax of 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing the finished product. The Company records VAT payable and VAT receivable net of payments in the financial statements. The VAT tax return is filed offsetting the payables against the receivables. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government.

Cost of Goods Sold

Cost of goods sold consists primarily of amortization of the mining rights, direct material, direct labor, depreciation of mining preparation plants such as the underground tunnel and the major mine well and relatedexpenses, which are directly attributable to the production of coal. Write-down of inventory to lower of cost or market is also recorded in cost of goods sold.

Foreign Currency Translation and Comprehensive Income (Loss)

The functional currency of Tong Gong and Xing An is the Renminbi (“RMB”). For financial reporting purposes, RMB were translated into United States Dollars (“USD” or “$”) as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period.

Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders’ equity as “Accumulated other comprehensive income”. Gains and losses resulting from foreign currency transactions are included in income. There has been no significant fluctuation in the exchange rate for the conversion of RMB to USD after the balance sheet date.

The fluctuation of exchange rates does not imply free convertibility of RMB to other foreign currencies. All foreign exchange transactions continue to take place either through the People’s Bank of China (“PBOC”) or other banks authorized to buy and sell foreign currencies at the exchange rate quoted by the PBOC.

The Company uses SFAS No. 130 “Reporting Comprehensive Income” (codified in FASB ASC Topic 220). Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders.

Segment Reporting

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" requires use of the “management approach” model for segment reporting, codified in FASB ASC Topic 280.  The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance.  Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

SFAS 131 has no effect on the Company’s financial statements as substantially all of its operations are conducted in one industry segment - coal mining.

Recent Accounting Pronouncements 

On July 1, 2009, the Company adopted Accounting Standards Update (“ASU”) No. 2009-01, “Topic 105 - Generally Accepted Accounting Principles - amendments based on Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (“ASU No. 2009-01”).  ASU No. 2009-01 re-defines authoritative GAAP for nongovernmental entities to be only comprised of the FASB Accounting Standards Codification (“Codification”) and, for SEC registrants, guidance issued by the SEC.  The Codification is a reorganization and compilation of all then-existing authoritative GAAP for nongovernmental entities, except for guidance issued by the SEC.  The Codification is amended to effect non-SEC changes to authoritative GAAP.  Adoption of ASU No. 2009-01 only changed the referencing convention of GAAP in Notes to the Consolidated Financial Statements.

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On February 25, 2010, the FASB issued ASU No. 2010-09 Subsequent Events Topic 855 “Amendments to Certain Recognition and Disclosure Requirements,” effective immediately. The amendments in the ASU remove the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of US GAAP. The FASB believes these amendments remove potential conflicts with the SEC’s literature. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

On March 5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815 “Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the guidance within the derivative literature that exempts certain credit related features from analysis as potential embedded derivatives requiring separate accounting. The ASU specifies that an embedded credit derivative feature related to the transfer of credit risk that is only in the form of subordination of one financial instrument to another is not subject to bifurcation from a host contract under ASC 815-15-25, Derivatives and Hedging — Embedded Derivatives — Recognition. All other embedded credit derivative features should be analyzed to determine whether their economic characteristics and risks are “clearly and closely related” to the economic characteristics and risks of the host contract and whether bifurcation is required. The ASU is effective for the Company on July 1, 2010. Early adoption is permitted. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In April 2010, the FASB codified the consensus reached in Emerging Issues Task Force Issue No. 08-09, “Milestone Method of Revenue Recognition.” FASB ASU No. 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development transactions. FASB ASU No. 2010-17 is effective for fiscal years beginning on or after June 15, 2010, and is effective on a prospective basis for milestones achieved after the adoption date. The Company does not expect this ASU will have a material impact on its financial position or results of operations when it adopts this update on January 1, 2011.

RESULTS OF OPERATIONS

Comparison of the nine months ended September 30, 2010 and 2009

The following table sets forth the results of our operations for the nine months ended September 30 in each of the years indicated as a percentage of net sales:

	2010					2009
		$	% of Sales				$	% of Sales
Sales		40,378,548		100	%		54,204,888		100	%
Cost of Goods Sold		23,883,406		59	%		20,502,960		38	%
Gross Profit		16,495,142		41	%		33,701,928		62	%
Operating Expenses		5,190,357		13	%		2,620,348		5	%
Income from Operations		11,304,785		28	%		31,081,580		57	%
Other Expenses, net		(208,242)		(0.5)	%		(211,588)		(0.4)	%
Income tax		3,288,394		8	%		6,731,036		12	%
Net Income		7,808,149		19	%		24,138,956		45	%

Coal mining production, brokerage and sales at our three mines, in tons, for the periods indicated:

	Tong Gong Coal Mine
	Salable Production (tons)				Brokerage (tons)				Sales (tons)
	2010		2009		2010		2009		2010		2009
Nine months ended September 30,		169,026		350,000		150,000		55,000		319,026		390,229

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	Xing An Coal Mines (Hong Yuan and Sheng Yu)
	Salable Production (tons)				Brokerage (tons)				Sales (tons)
	2010		2009		2010		2009		2010		2009
Nine months ended September 30,		148,818		396,466		413,160		280,000		534,379		676,903

Sales. Our revenues are derived from the sales of coal. During the nine months ended September 30, 2010, we had sales of $40.38 million compared to $54.20 million for the same period of 2009, a decrease of approximately 26%.  The decrease in sales was primarily attributed to decreased production of Tong Gong Mine as a result of changing and rearranging of our annual production plan due to outsourcing the mining work to independent contractors, and decreased production of Xing An Mines as a result of mine maintenance and retrofit projects commenced since the end of fiscal 2009. The Xing An project is expected to take about 12 to 14 months.  We expect to partially resume production in November of 2010 and fully resume production in February of 2011. We expect that these mine improvements will improve efficiencies, lower costs and greatly enhance our growth and profitability once completed. The average selling price per ton for the nine months ended September 30, 2010 was $47.3 as compared to $50.8 for the same period of 2009, a decrease of 7%, resulting from a decrease in average market selling price of coal in the Heilongjiang Province.  Our total sales volume was 853,405 tons for the nine months ended September 30, 2010, compared to 1,067,132 tons for the same period of 2009, a decrease of approximately 20%.

Cost of Goods Sold.  Cost of goods sold for the nine months ended September 30, 2010 was $23.88 million, an increase of $3.38 million or approximately 16%, from $20.50 million for the same period of 2009. Our total production during the nine months ended September 30, 2010 was 317,844 tons, compared to 746,466 tons produced for the same period of 2009, a decrease of 428,622 tons. Cost of goods sold as a percentage of sales increased to approximately 59% for the nine months ended September 30, 2010 from approximately 38% for the same period of 2009. This increase was mainly due to the significant decrease in sales and the increase in the average cost per ton.  Our average cost per ton was $27.99 in the nine months ended September 30, 2010, compared to $19.21 for the same period in 2009.  This increase was primarily attributable to the increased cost per ton as a result of overall price inflation in China related to our outsourcing the mining work, and the non-cash increase in the cost per ton from the amortization of the cost of the prepaid mining rights and the depreciation expense related to our mineshafts, which costs were amortized over the adjusted salable reserves resulting from the reserve appraisal of December 31, 2009. These reserves were appraised as of December 31, 2009 under Industry Guide 7. Utilizing Industry Guide 7 as a guideline resulted in our recording a significantly lower amount of reserve, as compared with the reserve amount that was evaluated under PRC standards, which resulted in an increase in cost of goods sold per ton.  

Gross Profit. Gross profit was $16.50 million for the nine months ended September 30 of 2010 compared to $33.70 million for the same period of 2009, a decrease of $17.21 million.  Our gross profit as a percentage of sales was approximately 41% and 62% in the nine months ended September 30, 2010 and 2009, respectively. The decrease in gross profit margin was mainly attributable to the decreased production and sales volume, decreased average selling price per ton and increased average cost per ton for the reasons described above. 

Operating Expenses.  Operating expenses totaled $5.19 million for the nine months ended September 30, 2010 compared to $2.62 million for the same period of 2009, an increase of $2.57 million or approximately 98%.  This increase was primarily attributable to increased amortization expense for our asset retirement cost, which cost was amortized over the adjusted salable reserves that were appraised as of December 31, 2009 under Industry Guide 7. Utilizing Industry Guide 7 as a guideline resulted in our recording a significantly lower amount of reserve as compared with the reserve amount that was evaluated under PRC standards.  The increase was also attributable to 1) increase in transportation infrastructure construction fee for both Tong Gong and Xing An, which was a new fee levied by the provincial government starting in 2010 and charged at RMB 10 per ton based on sales volume; 2) coal mine security special purpose fee for Tong Gong, a new fee levied by the local authority starting in June of 2010 and charged at RMB 10 per ton based on sales volume; 3) coal price adjusting fund for Tong Gong, a new fee levied by the local authority starting in June of 2010 and charged at RMB 20 per ton based on sales volume; and 4) increased payroll and welfare expenses, and electricity fee as a result of overall price inflation in China.

Net Income. Our net income for the nine months ended September 30, 2010 was $7.81 million compared to net income of $24.14 million for the same period of 2009, a decrease of $16.33 million.  Net income as a percentage of sales decreased from 45% for the nine months ended September 30 of 2009 to 19% for the same period of 2010. This was mainly attributed to the significant decrease in the production and sales volume, increase in average cost per ton of coal, and increased operating expenses as a result of certain new levies required by the provincial and local authorities staring from the second quarter of 2010, all as described above.

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Comparison of the three months ended September 30, 2010 and 2009

The following table sets forth the results of our operations for the three months ended September 30 in each of the years indicated as a percentage of net sales:

	2010					2009
		$	% of Sales				$	% of Sales
Sales		17,854,483		100	%		9,267,268		100	%
Cost of Goods Sold		10,066,496		56	%		4,764,557		51	%
Gross Profit		7,787,987		44	%		4,502,711		49	%
Operating Expenses		2,469,220		14	%		914,718		10	%
Income from Operations		5,318,767		30	%		3,587,993		39	%
Other Expenses, net		(68,719)		0	%		(69,793)		(1)	%
Income tax		1,399,908		8	%		760,381		8	%
Net Income		3,850,140		22	%		2,757,819		30	%

Coal mining production, brokerage and sales at our three mines, in tons, for the periods indicated:

	Tong Gong Coal Mine
	Salable Production (tons)				Brokerage (tons)				Sales (tons)
	2010		2009		2010		2009		2010		2009
Three months ended September 30,		30,810		67,416		100,000		55,000		130,810		107,645

	Xing An Coal Mines (Hong Yuan and Sheng Yu)
	Salable Production (tons)				Brokerage (tons)				Sales (tons)
	2010		2009		2010		2009		2010		2009
Three months ended September 30,		-		-		223,185		100,000		242,984		102,148

Sales. Our revenues are derived from the sales of coal. During the three months ended September 30, 2010, we had sales of $17.85 million compared to $9.27 million for the same period of 2009, an increase of approximately 93%.  The increase in sales was primarily attributed to increased brokerage sales from both Tong Gong and Xing An Mines. The average selling price per ton for the three months ended September 30, 2010 was $47.84 as compared to $44.17 for the same period of 2009, an increase of 8%.  Our total sales volume was 373,794 tons for the three months ended September 30, 2010, compared to 209,793 tons for the same period of 2009, an increase of approximately 78%.

Cost of Goods Sold.  Cost of goods sold for the three months ended September 30, 2010 was $10.07 million, an increase of $5.30 million or approximately 111%, from $4.76 million for the same period of 2009. Our total production during the three months ended September 30, 2010 was 30,810 tons, compared to 67,416 tons produced for the same period of 2009, a decrease of 36,606 tons. Cost of goods sold as a percentage of sales increased to approximately 56% for the three months ended September 30, 2010 from approximately 51% for the same period of 2009. This increase was mainly due to the increase in the average cost per ton.  Our average cost per ton was $26.97 in the three months ended September 30, 2010, compared to $22.71 for the same period in 2009.  This increase was primarily attributable to the increased cost per ton as a result of overall price inflation in China related to our outsourcing the mining work, and the non-cash increase in the cost per ton from the amortization of the cost of the prepaid mining rights and the depreciation expense related to our mineshafts, which costs were amortized over the adjusted salable reserves resulting from the reserve appraisal of December 31, 2009. These reserves were appraised as of December 31, 2009 under Industry Guide 7. Utilizing Industry Guide 7 as a guideline resulted in our recording a significantly lower amount of reserve, as compared with the reserve amount that was evaluated under PRC standards, which resulted in an increase in cost of goods sold per ton.   

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Gross Profit. Gross profit was $7.79 million for the three months ended September 30, 2010 compared to $4.50 million for the same period of 2009, an increase of $3.29 million.  Our gross profit as a percentage of sales was approximately 44% and 49% in the three months ended September 30, 2010 and 2009, respectively. The decrease in gross profit margin was mainly attributable to the increased average cost per ton. 

Operating Expenses.  Operating expenses totaled $2.47 million for the three months ended September 30, 2010 compared to $0.91 million for the same period of 2009, an increase of $1.37 million or approximately 170%.   The increase was attributable to 1) increase in transportation infrastructure construction fee for both Tong Gong and Xing An, which was a new fee levied by the provincial government starting in May, 2010 and charged at RMB 10 per ton based on sales volume; 2) coal mine security special purpose fee for Tong Gong, a new fee levied by the local authority starting in June of 2010 and charged at RMB 10 per ton based on sales volume; 3) coal price adjusting fund for Tong Gong, a new fee levied by the local authority starting in June of 2010 and charged at RMB 20 per ton based on sales volume; and 4) increased payroll and welfare expenses  as a result of overall price inflation in China.

Net Income. Our net income for the three months ended September 30, 2010 was $3.85 million compared to net income of $2.76 million for the same period of 2009, an increase of $1.09 million.  Net income as a percentage of sales decreased from 30% for the three months ended September 30, 2009 to 22% for the same period of 2010. This is mainly attributed to increased average cost per ton of coal, and increased operating expenses as a result of certain new levies required by the provincial and local government starting from the second quarter of 2010, all as described above.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Comparison of the nine months ended September 30, 2010 and 2009

As of September 30, 2010, we had cash and cash equivalents of $40.14 million. Our working capital was approximately $33.20 million. The ratio of current assets to current liabilities was 5.15:1 at September 30, 2010.

The following is a summary of cash provided by or used in each of the indicated types of activities during the nine months ended September 30, 2010 and 2009:

	2010		2009
Cash provided by (used in):
Operating Activities	$	10,342,754	$	22,459,263
Investing Activities	$	(2,888,390)	$	(121,772	)
Financing Activities	$	708,977	$	(11,179,908)

Net cash generated by operating activities was $10.34 million in the nine months ended September 30, 2010 as compared to net cash provided by operating activities of $22.46 million in the same period of 2009.  The decrease in cash inflow during the 2010 period resulted primarily from the decrease in net income in the nine months ended September 30, 2010, and decrease in unearned revenue as a result of less cash deposit received from customers due to decreased sales volume during the nine months ended September 30, 2010.

Net cash used in investing activities was $2.89 million in nine months ended September 30, 2010 as compared to $0.12 million in the same period of 2009. In the nine months ended September 30, 2010, we paid approximately $2.89 million for acquisition of property and construction in progress for the Xing An mines retrofit. The cash used in the same period of 2009 was mainly due to the purchase of mining equipment and construction of an employee training room and shower facility at the Tong Gong mine site.

Net cash provided by financing activities was $0.71 million in the nine months ended September 30, 2010 as compared to $11.18 million used in the same period of 2009. The increase in cash inflow from financing activities for the nine months ended September 30, 2010 was primarily due to an increase in short-term advance from shareholder for paying certain G&A expenses incurred by the US parent company, while in the same period of 2009, we paid $12 million to the selling shareholders of Xing An in connection with the acquisition of Xing An.

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Based on our current expectations, we believe our cash and cash equivalents, and cash generated from operations will satisfy our working capital needs, and other liquidity requirements associated with our existing operations through the remainder of this year. We will continue to seek opportunities to expand our existing mining operations and acquire additional coal mining rights, and we expect to finance such acquisitions through the issuance of debt or equity securities. Failure to obtain such financing could have a material adverse effect on our plans for expansion.

We do not believe inflation has had a negative impact on our results of operations.

Contractual Obligations

We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows.

The following tables summarize our contractual obligations as of September 30, 2010, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

	Payments Due by Period
	Total		Less than 1 year		1-3 Years		3-5 Years		5 Years +
Contractual Obligations:
Operating Leases	$	157,123	$	74,323	$	43,200	$	39,600	$	-
Mining Rights		897,589		-		-		-		897,589
Total Contractual Obligations:	$	1,054,712	$	74,323	$	43,200	$	39,600	$	897,589

Off-Balance Sheet Arrangements

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of September 30, 2010, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective at the reasonable assurance level.

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There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the nine and three months ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 PART II. OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

We are not aware of any material existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our current directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to us.

ITEM 1A. RISK FACTORS

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of our Annual Report on Form

10-K as of and for the year ended December 31, 2009.

ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None. 

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.   [REMOVED AND RESERVED]

None.

ITEM 5.   OTHER INFORMATION

None.

ITEM 6.   EXHIBITS

Exhibit No.                      Description

3.1	Articles of Incorporation dated June 7, 2001. (1)
3.2	Certificate of Amendment to Articles of Incorporation dated October 23, 2003. (2)
3.3	Articles of Exchange among Harbin Yong Heng Ke Ji Fa Zhan You Xian Ze Reng Gong Si and Songzai International Holding Group, Inc.  (3)
3.4	Certificates of Amendments to Articles of Incorporation, dated October 23, 2003. (3)
3.5	Certificate of Amendment to Articles of Incorporation dated July 16, 2004. (1)
3.6	Certificate of Designation, Preference and Rights of Convertible Preferred Stock dated January 9, 2006. (1)

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3.7	Certificate of Change Pursuant to NRS 78.209 as filed with the Secretary of State of Nevada on January 7, 2008. (4)
3.8	Certificate of Amendment to Articles of Incorporation dated July 1, 2010. (5)
31.1	Section 302 Certification by the Corporation’s Chief Executive Officer. (6)
31.2	Section 302 Certification by the Corporation’s Chief Financial Officer. (6)
32.1	Section 906 Certification by the Corporation’s Chief Executive Officer. (6)
32.2	Section 906 Certification by the Corporation’s Chief Financial Officer. (6)

(1)	Incorporated by reference from the Registrant’s Annual Report on Form 10-KSB filed on March 31, 2006.
(2)	Incorporated by reference from the Registrant’s Annual Report on Form 10-K filed on March 30, 2009.
(3)	Incorporated by reference from the Registrant’s Current Report on Form 8-K/A filed on May 14, 2004.
(4)	Incorporated by reference from the Registrant’s Current Report on Form 8-K filed on January 10, 2008.
(5)	Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q filed on August 16, 2010
(6)	Exhibits filed herewith.

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SIGNATURES

Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	U.S. CHINA MINING GROUP, INC. (Registrant)
Date: November 12, 2010	By:	/s/ Hongwen Li
		Hongwen Li
		Chief Executive Officer

Date: November 12, 2010	By:	/s/ Weiwei Li
		Weiwei Li
		Chief Financial Officer

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EXHIBIT INDEX

Exhibit No.                      Description

31.1	Section 302 Certification by the Corporation’s Chief Executive Officer.
31.2	Section 302 Certification by the Corporation’s Chief Financial Officer.
32.1	Section 906 Certification by the Corporation’s Chief Executive Officer.
32.2	Section 906 Certification by the Corporation’s Chief Financial Officer.