UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2013

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

For the transition period from  ____________________________ to

U.S. CHINA MINING GROUP INC.

(Exact name of registrant as specified in its charter)

Nevada (State of Incorporation)   15310 Amberly Drive, Suite 250 Tampa, FL (Address of principal executive offices) 43-1932733 (I.R.S. Employer Identification No.)   33647 (Zip Code)

(813) 514-2873

(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 x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (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 o No x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Number of shares of common stock outstanding as of November 14, 2013: 18,852,582

U.S. CHINA MINING GROUP INC.

INDEX

		Page Number
PART I. Financial Statements		1
Item 1.	Financial Information	1
	Consolidated Balance Sheets as of September 30, 2013 (Unaudited) and December 31, 2012	1
	Consolidated Statements of Operations and Other Comprehensive Loss (Unaudited) – Nine Months and Three Months Ended September 30, 2013 and September 30, 2012	2
	Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended September 30, 2013 and September 30, 2012	3
	Notes to Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
Item 4.	Controls and Procedures	18
PART II. Other Information		19
Item 1.	Legal Proceedings	19
Item 1A.	Risk Factors	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 6.	Exhibits	19

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2013 AND DECEMBER 31, 2012

	2013		2012
	(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash & equivalents	$	32,969,290	$	40,289,757
Other receivables and prepaid expenses		280,793		242,908
Taxes receivable		707,254		631,353
Deposit for coal trading		1,995,485		2,085,585
Inventory		526,897		515,371
Total current assets		36,479,719		43,764,974
NONCURRENT ASSETS
Deposits for mine acquisition		4,879,680		4,772,934
Coal production safety deposit		4,879,636		-
Prepaid mining rights, net		13,957,696		13,675,734
Property and equipment, net		18,725,163		13,422,003
Construction in progress		15,533,926		19,012,421
Deferred tax asset, net		734,828		688,378
Asset retirement cost, net		2,458,201		2,427,456
Total noncurrent assets		61,169,130		53,998,926
TOTAL ASSETS	$	97,648,849	$	97,763,900
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable	$	214,164	$	-
Advance from customers		278,038		82,479
Accrued liabilities and other payables		1,024,466		3,172,259
Taxes payable		4,797,708		3,619,848
Warrant derivative liability		404,698		750,035
Loan payable		4,391,672		-
Advance from shareholder		124,940		2,000
Total current liabilities		11,235,686		7,626,621
NONCURRENT LIABILITIES
Asset retirement obligation, net of deposit for      mine restoration of $1,351,533 in 2013 and $1,306,059 in 2012, respectively		5,143,359		4,860,173
Total noncurrent liabilities		5,143,359		4,860,173
Total liabilities		16,379,045		12,486,794
CONTINGENCIES AND COMMITMENTS
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, 18,852,582 shares issued and           outstanding in 2013 and 2012		18,852		18,852
Additional paid in capital		41,209,815		41,199,601
Statutory reserves		13,627,905		13,479,992
Accumulated other comprehensive income		11,586,593		9,772,780
Retained earnings		14,826,239		20,805,481
Total stockholders' equity		81,269,804		85,277,106
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	97,648,849	$	97,763,900

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

1

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

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS

(UNAUDITED)

 

	NINE MONTHS ENDED SEPTEMBER 30,						THREE MONTHS ENDED SEPTEMBER 30,
	2013			2012			2013			2012
Net sales	$	1,624,111		$	21,598,196		$	556,962		$	1,958,496
Cost of goods sold		1,542,732			15,693,553			580,239			1,544,301
Gross profit (loss)		81,379			5,904,643			(23,277	)		414,195
Operating expenses
Selling		1,116,150			5,269,695			383,351			659,816
General and administrative		4,987,698			6,272,491			1,673,876			1,816,101
Total operating expenses		6,103,848			11,542,186			2,057,227			2,475,917
Loss from operations		(6,022,469	)		(5,637,543	)		(2,080,504	)		(2,061,722	)
Non-operating income (expenses)
Interest income		106,359			120,949			33,610			41,275
Interest expense		(275,600	)		(208,820	)		(150,333	)		(59,089	)
Other expenses		(15,677	)		-			(5,302	)		-
Warrant derivative income (expense)		345,336			(165,338	)		119,688			(137,734	)
Total non-operating income (expenses), net		160,418			(253,209	)		(2,337	)		(155,548	)
Loss before income tax		(5,862,051	)		(5,890,752	)		(2,082,841	)		(2,217,270	)
Income tax expense (benefit)		(30,721	)		624,331			(10,634	)		(93,537	)
Net loss		(5,831,330	)		(6,515,083	)		(2,072,207	)		(2,123,733	)
Other comprehensive item
Foreign currency translation gain (loss)		1,813,814			(540,657	)		401,670			(213,980	)
Comprehensive loss	$	(4,017,516	)	$	(7,055,740	)	$	(1,670,537	)	$	(2,337,713	)
Basic weighted average shares outstanding		18,852,582			18,852,582			18,852,582			18,852,582
Diluted weighted average shares outstanding		19,254,055			19,252,582			19,252,582			19,252,582
Basic net loss per share	$	(0.31	)	$	(0.35	)	$	(0.11	)	$	(0.11	)
Diluted net loss per share*	$	(0.31	)	$	(0.35	)	$	(0.11	)	$	(0.11	)

*Certain preferred stock and stock options were excluded for the calculation of diluted loss per share due to anti-dilutive feature for the nine and three months ended September 30, 2013 and 2012

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

2

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(UNAUDITED)

	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(5,831,330	)	$	(6,515,083	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization		1,198,339			2,417,166
Loss on disposal fixed asset		4,923			-
Changes in fair value of warrant derivative		(345,336	)		165,338
Accretion of interest on asset retirement obligation		188,708			178,445
Stock option compensation		10,215			75,415
Changes in deferred tax		(30,721	)		(203,033	)
(Increase) decrease in assets and liabilities:
Accounts receivable		-			2,303,003
Other receivables, deposits and prepaid expenses		57,918			570
Deposit for coal trading		-			849,945
Inventory		-			(5,402,199	)
Deposit for mine restoration		(16,091	)		(79,151	)
Coal production safety deposit		(4,827,342	)		-
Accounts payable		214,164			-
Advance from customers		191,638			(254,281	)
Accrued liabilities and other payables		(2,002,619	)		(148,764	)
Taxes payable		1,024,092			92,883
Net cash used in operating activities		(10,163,442	)		(6,519,746	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in restricted cash		-			3,000,000
Acquisition of property, plant & equipment		(2,435,955	)		(2,004,988	)
Construction in progress		-			(3,214,325	)
Net cash used in investing activities		(2,435,955	)		(2,219,313	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank loan proceeds (repayment)		4,344,608			(3,000,000	)
Due to shareholder		122,940			-
Net cash provided by (used in) financing activities		4,467,548			(3,000,000	)
EFFECT OF EXCHANGE RATE CHANGE ON CASH & EQUIVALENTS		811,382			(235,071	)
NET DECREASE IN CASH & EQUIVALENTS		(7,320,467	)		(11,974,130	)
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD		40,289,757			44,543,696
CASH & EQUIVALENTS, END OF PERIOD	$	32,969,290		$	32,569,566
Supplemental Cash flow data:
Income tax paid	$	-		$	812,936
Interest paid	$	-		$	30,375

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

3

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER  30, 2013 (UNAUDITED) AND DECEMBER 31, 2012

1.   ORGANIZATION AND DESCRIPTION OF BUSINESS

U.S. China Mining Group, Inc. (“SGZH” or the “Company”) was incorporated in Nevada on June 7, 2001. The Company is engaged in coal production and sales by exploring, assembling, assessing, permitting, developing and mining coal properties in the People’s Republic of China (“PRC” or “China”). After obtaining permits from the Heilongjiang Province National Land and Resources Administration Bureau and the Heilongjiang Coal Production Safety Bureau, we extract coal, and then sell most of the coal on a metric ton (“ton”) basis for cash on delivery. Through the end of March 2008, our business consisted of the operations of our Tong Gong coal mine through our subsidiary, Heilongjiang Tong Gong Mining Co., Ltd. (“Tong Gong”), in northern PRC. The mine is located approximately 175 kilometers southwest of the city of Heihe in the Heilongjiang Province.

On December 31, 2007, we entered into an agreement to acquire two mining companies in the PRC, Heilongjiang Xing An Group Hong Yuan Coal Mining Co., Ltd. (“Hong Yuan”) and Heilongjiang Xing An Group Sheng Yu Mining Co., Ltd. (“Sheng Yu”, and with Hong Yuan collectively referred to as “Xing An” or the “Xing An Companies”). The Xing An Companies operate two coal mines, the Hong Yuan and Sheng Yu mines, located in the city of Mohe in Heilongjiang Province. We completed our acquisition of the Xing An Companies on April 4, 2008, and, as a result, our business now consists of the operations of the Tong Gong coal mine and the two Xing An coal mines.

The consolidated interim financial information as of September 30, 2013 and for the nine and three month periods ended September 30, 2013 and 2012 were prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, which are normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) have not been included. The interim consolidated financial information should be read in conjunction with the Financial Statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, previously filed with the SEC.

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s consolidated financial position as of September 30, 2013, its consolidated results of operations and cash flows for the nine and three month periods ended September 30, 2013 and 2012, as applicable, were made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

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.

Cash and Equivalents

For financial statement purposes, the Company considers all highly liquid investments with an original maturity date of three months or less to be cash equivalents.

Inventory

Inventory consists of coal extracted from the ground that is available for delivery to customers, and 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 including labor, all expenditures directly related to the removal of coal, and amortization of mining rights.

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.”

Asset Retirement Cost and Obligations, Deposit for Mine Restoration

The Company uses   FASB ASC Topic 410, “Asset Retirement and Environmental Obligation”.  As of September 30, 2013 and December 31, 2012, there were no adjustments of the asset retirement obligations.

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 ($0.16) 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, 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. As of September 30, 2013, Xing An had deposited RMB 5,665,950 ($921,592) and Tong Gong had deposited RMB 2,643,280 ($429,941). See additional discussion in Note 14, “Asset Retirement Cost and Obligations.”

Environmental Costs

The PRC has environmental laws and regulations that affect 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.

4

Property and Equipment

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	10-25

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.  

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 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.

When the Company purchases coal from other mining companies, its 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 coal from other mining companies are arranged simultaneously.  Sales of brokered coal are recognized at the time of delivery, which in most cases occurs when the coal is picked up by the customer.

Sales represent the invoiced value of coal, net of value-added tax (“VAT”). All Company coal sold in the PRC is subject to a VAT 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 (“COGS”) consists primarily of amortization of 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 COGS.

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 of RMB 4 ($0.64) per ton for its total production during the period; Xing An is required to pay resource fees at 1% of its total sales.  The Company expenses such costs as General and Administrative (“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 those receivables. The Company concentrates its sales to a few customers.  For the nine and three month periods ended September 30, 2013 and 2012, two customers comprised 100% of the Company’s sales during such periods.  See Note 17 for additional discussion regarding same. The Company conducts periodic reviews of its customers’ financial condition and customer payment practices to minimize collection risk on its receivables.

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. 

Basic and Diluted Earnings (Loss) 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 relevant period. Diluted EPS is computed similar to basic net income (loss) 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 EPS is 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). During the nine and three month periods ended September 30, 2013 and 2012, certain preferred shares and shares for options and warrants were not included in the calculation of diluted EPS as a result of their anti-dilutive feature because both basic and diluted loss per share were equal.

Nine Months Ended September 30,
	2013		2012
Net loss	$	(5,831,330)	$	(6,515,083)
Weighted average shares outstanding – basic		18,852,582		18,852,582
Effect of dilutive securities:
Stock options		1,473		-
Series “A” preferred stock		400,000		400,000
Weighted average shares
Outstanding –  diluted		19,254,055		19,252,582
Loss per share – basic	$	(0.31)	$	(0.35)
Loss per share – diluted	$	(0.31)	$	(0.35)

5

Three Months Ended September 30,
	2013		2012
Net loss	$	(2,072,207)	$	(2,123,733)
Weighted average shares outstanding –  basic		18,852,582		18,852,582
Effect of dilutive securities:
Series “A” preferred stock		400,000		400,000
Weighted average shares
Outstanding –  diluted		19,252,582		19,252,582
Loss per share – basic	$	(0.11)	$	(0.11)
Loss per share – diluted	$	(0.11)	$	(0.11)

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 US 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 non-operating income (expense). There was 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 FASB ASC Topic 220 “Comprehensive Income”. 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 (loss) for the nine and three month periods ended September 30, 2013 and 2012 consisted of net loss and foreign currency translation adjustments.  

New Accounting Pronouncements

In February 2013, the FASB issued ASU 2013-2, Comprehensive Income (ASC Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The new ASU requires entities to disclose in a single location (either on the face of the financial statement that reports net income or in the notes) the impact of reclassifications out of accumulated other comprehensive income (AOCI). For items reclassified out of AOCI and into net income in their entirety, entities must disclose the impact of the reclassification on each affected net income item. For AOCI reclassification items that are not reclassified in their entirety into net income, entities must provide a cross-reference to other required U.S. GAAP disclosures. There is no change in the requirement to present the components of net income and other comprehensive income in either a single continuous statement or two separate consecutive statements.  The ASU does not change the items currently reported in other comprehensive income.

For public entities, the new disclosure requirements are effective for annual reporting periods beginning after December 15, 2012, and interim periods within those years (i.e., the first quarter of 2013 for entities with calendar year-ends). The ASU applies prospectively, and early adoption is permitted. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

As of September 30, 2013, there is no other recently issued accounting standards not yet adopted that would have a material effect on the Company’s consolidated financial statements.

3.   INVENTORY

Inventory, as of September 30, 2013 and December 31, 2012, consisted 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, all expenditures directly related to the removal of coal, and amortization of mining rights and asset retirement cost.

4.   PROPERTY AND EQUIPMENT, NET

Property and equipment consisted of the following at September 30, 2013 and December 31, 2012:

	2013		2012
Building	$	11,746,507	$	5,450,943
Mining structure		13,715,473		13,415,437
Production equipment		4,947,009		4,923,200
Office equipment		58,013		69,682
Vehicles		224,631		222,715
Total		30,691,633		24,081,977
Less: Accumulated depreciation		(11,966,470)		(10,659,974	)
Net	$	18,725,163	$	13,422,003

Depreciation for the nine-month periods ended September 30, 2013 and 2012 was $1,151,400 and $1,209,300, respectively. Depreciation for the three-month periods ended September 30, 2013 and 2012 was $430,800 and $397,400, respectively. 

6

5.  OTHER RECEIVABLES

Other receivables include advances to employees for traveling and other business related expenses and appraisal and consulting fees for certain potential projects of the Company.

6.   PREPAID MINING RIGHTS

Prepaid mining rights are 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 prices set by HPNLARB 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 ($1.27) per ton for 2008 through 2013; the price for Xing An was RMB 9 ($1.43) per ton for 2008 through 2013.  Xing An paid for the mining rights in June 2008. Tong Gong needs to pay the remaining balance of $973,080 by September 30, 2017. For any mining rights granted prior to September 1, 2006, the Company is generally required to pay for the entire amount for 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 10 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 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		PAID
4/1/2005		816,300			PAID
10/15/2005		13,520,700			PAID
3/1/2007		5,444,800			PAID
	9/30/2007			1,500,000*		9/30/2017*
Total		19,781,800		6,149,700

(1)  Grant date is the date  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.

*paid for 733,795 metric tons

The Company’s prepaid mining rights consisted of the following at September 30, 2013 and December 31, 2012:

	2013			2012
Prepaid mining rights	$	28,001,028		$	27,388,485
Less: Amortized portion		(14,043,332	)		(13,712,751	)
Prepaid mining rights, net	$	13,957,696		$	13,675,734

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 prepaid mining right price per ton paid by the Company (RMB 8 ($1.28) per ton).  Amortization was $23,640 and $1,017,334 for the nine month periods ended September 30, 2013 and 2012, respectively. Amortization was $0 and $103,500 for the three month periods ended September 30, 2013 and 2012, respectively.  Tong Gong fully expensed the prepaid mining rights as of September 30, 2013.

As of September 30, 2013 and December 31, 2012, the total quantity of coal the Company is 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 product reserves of SEC Industry Guide 7, which would be 7.83 million tons as of September 30, 2013. The Company paid for 25,165,295 tons at September 30, 2013, and is committed to pay for 766,205 tons of coal at RMB 8 ($1.28) per ton, or $973,080, which must be paid by September 30, 2017. The prepayment of mining rights is accounted for in a manner similar to a royalty agreement as neither the payment terms nor the price per ton is fixed.

7.   COAL PRODUCTION SAFETY DEPOSIT

As of September 30, 2013, the Company made a coal production safety deposit of $4,879,636 as a guarantee related to production safety for Tong Gong as a result of a new government requirement.

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8.     DEPOSIT FOR COAL TRADING

At September 30, 2013 and December 31, 2012, the Company had a refundable deposit of $1,995,485 and $2,085,585, respectively, as an advance for its coal trading business with certain US brokers. In June of 2011, the Company made these refundable advances to coal brokers as deposits for buying coal and other mineral products in the US. The advances will be applied to the purchase price or refunded if no purchase is made. During 2012, the Company did not have any export transactions. The Company reassessed the market situation and the risk involved and started to require the brokers to refund the deposits. During the nine month period ended September 30, 2013, the broker has refunded $90,100 to the Company. On April 13, 2013, the Company’s Chief Executive Officer guaranteed the outstanding amount of the deposits and pledged 1 million shares of the Company’s common stock as partial security in support of the guaranty. On May 15, 2013, the third party that currently holds the deposits, a logistics company in China, agreed to refund the outstanding deposit balance to the Company by the end of 2013.

9.     CONSTRUCTION IN PROGRESS

Construction in progress is the amount paid for the Xing An mines’ maintenance and retrofit project which commenced in 2009.  The maintenance and retrofit project included building a new mining tunnel while maintaining, altering and improving the mining property to accommodate all-year-round mining production in the future. The estimated cost for the retrofit was $20 million and is expected to be completed in 2014.

The Company has incurred $15.53 million for mine retrofit and $19.01 million (consisting of $15.21 million for mine retrofit and 3.82 million for the new building) construction in progress as of September 30, 2013 and December 31, 2012, respectively. The building was completed during the quarter ended June 30, 2013 and transferred to property and equipment.

10.   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 $2,000 (RMB 12,500) per month (See Note 20).  The operating lease requires Xing An to pay certain operating expenses applicable to the leased premises. 

Advance from shareholder

As of September 30, 2013 and December 31, 2012, the Company received advances from a shareholder in the amount of $124,940 and $2,000, respectively, to support the working capital needs of the Company’s US parent entity.  The advances from the shareholder bear no interest, and are payable upon demand.

11.    ACCRUED LIABILITIES AND OTHER PAYABLES

Accrued liabilities and other payables consisted of the following at September 30, 2013 and December 31, 2012: 

	2013		2012
Accrued liabilities	$	97,062	$	158,462
Accrued interest on bank loan		87,833		-
Other payables:
Education and union outlays		159,444		156,156
Refundable deposit from a contractor for Tong Gong’s mining work		325,309		318,193
Transportation infrastructure construction fee		14,444		13,006
Mine security special purpose fee		-		6,175
Coal price adjustment fund		-		6,175
Resource compensation fee		90,276		88,301
Accrued cost for construction of the new building		-		2,242,218
Others		250,098		183,573
Total	$	1,024,466	$	3,172,259

Accrued liabilities were mainly for accrued payroll, consulting and legal and audit expense.  Transportation infrastructure construction fee was a fee for Tong Gong and Xing An levied by the provincial government at RMB 10 ($1.60) per ton based on sales volume. Coal mine security special purpose fee was a fee for Tong Gong levied by the local authority at RMB 10 ($1.60) per ton based on sales volume. Coal price adjustment fund was a fee for Tong Gong levied by the local authority at RMB 10 ($1.60) per ton based on sales volume.  Others mainly consisted of payables for employees’ welfare, social security and personal income tax withholding.  

At September 30, 2013 and December 31, 2012, the Company had a refundable deposit from a contractor for Tong Gong’s mining work for $325,309. The Company outsourced Tong Gong mining work to an independent contractor for three years from October 1, 2009 to September 30, 2012. The Company renewed the service term with this contractor through December 31, 2013. The contractor was required to pay a deposit for mining safety assurance, which will be refunded when the contract expires.

12.   TAXES PAYABLE AND RECEIVABLE

Taxes payable consisted of the following at September 30, 2013 and December 31, 2012:

	2013		2012
Land	$	4,778,627	$	2,670,909
Value added		-		813,478
Resource		8,493		43,962
Others		10,588		91,499
Total	$	4,797,708	$	3,619,848

Taxes receivable consisted of the following at September 30, 2013 and December 31, 2012:

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	2013		2012
Income	$	534,605	$	621,439
Value added		167,172
Others		5,477		9,914
Total	$	707,254	$	631,353

13.    LOAN PAYABLE

On June 4, 2013, the Company obtained a one-year loan of RMB 27,000,000 ($4,391,672) with a maturity date of June 3, 2014 from Heihe Rural Commercial Bank for the payment of the coal safety production deposit.  The interest rate on this loan is the same as the prevailing Heihe Rural Commercial Bank rate for similar type of loans made on the same borrowing date of the Company with the same terms , which is a 6% annual rate with interest payable quarterly.  For the nine and three months ended September 30, 2013, the Company recorded interest expense of $86,892.

14.   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 RMB 1 ($0.16) 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, 2013, Xing An deposited RMB 5,665,950 ($921,592), and Tong Gong deposited RMB 2,643,280 ($429,941).

The Company accounts for Xing An and Tong Gong’s asset retirement obligations in accordance with FASB ASC Topic 410, “Asset Retirement and Environmental Obligations”. 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, 2013 and December 31, 2012 was:

	2013			2012
Asset retirement cost	$	4,842,671		$	4,736,734
Less: Accumulated amortization		(2,384,470)	)		(2,309,278	)
	$	2,458,201		$	2,427,456

Amortization for asset retirement cost for the nine months ended September 30, 2013 and 2012 was $23,290 and $190,500, respectively. Amortization for asset retirement cost for the three months ended September 30, 2013 and 2012 was $7,990 and $23,900, respectively.

Changes in Asset Retirement Obligation for the nine months ended September 30, 2013 and for the year ended December 31, 2012 consisted of the following:

	2013		2012
Balance at beginning of period	$	4,860,173	$	4,689,114
Accretion of interest expense		188,707		238,096
Foreign currency translation gain (loss)		94,479		(67,037)
Ending balance	$	5,143,359	$	4,860,173

15.   DEFERRED TAX ASSET, NET

Deferred tax asset is the difference between the tax and book depreciation 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. Effective May 1, 2011, Tong Gong is required to pay additional safety and maintenance expense at RMB 10 ($1.60) per ton to the local government. The Company records this payment as an expense and also records a deferred tax asset for future tax deduction when the expense is actually incurred. The amount paid to the government can be recovered from the local government under certain circumstances. However, it is not clear whether the Company will be able to recover the amount paid to the government. Accordingly, the payments to government are recorded as an expense.

Deferred tax liability consisted of tax-deductible safety and maintenance expenses of RMB 14.7 ($2.31) per ton for Tong Gong, RMB 14.7 ($2.31) for Xing An until 2011 and increased to RMB 23.7 ($3.73) after 2011 to be incurred in the future for coal produced. It is deductible for tax purposes at a predetermined rate per ton of coal produced per year until April 2011.  For financial reporting purposes, this was recorded as an appropriation of retained earnings. 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 transaction (see Note 18 - Statutory Reserves).  Effective May 1, 2011, per ruling No. 26, issued in 2011 by National Tax Authority Regarding Coal Mine Enterprise Tax Deduction Guidance for Maintenance of Productivity Expenses and Security (M&S), M&S expense can only be deductible under PRC tax law when the expense is incurred. Accordingly, there was no deferred tax liability for M&S expense since then.

Deferred tax asset (liability) consisted of the following at September 30, 2013 and December 31, 2012:

	September 30, 2013		December 31, 2012
Deferred tax asset on amortization of mining rights, amortization of asset retirement cost, depreciation of assets using unit-of-production method; and mine safety and maintenance expenses	$	3,110,680	$	3,012,256
Deferred tax liability on statutory reserves for mine safety and maintenance expenses		(2,375,852)		(2,323,878	)
Net deferred tax asset	$	734,828	$	688,378

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16.   INCOME TAXES

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

US 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 $6.90 million at September 30, 2013, 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, and is subject to a 25% income tax rate.  Xing An is subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.

The following table reconciles the US statutory rates to the Company’s consolidated effective tax rate for the nine months ended September 30, 2013 and 2012:

	2013			2012
US statutory rates (benefit)		(34.0	)%		(34.0	)%
Tax rate difference		8.8	%		7.0	%
Permanent difference – change in FV of Warrants		(2.0	) %		(1.0)	%
Permanent difference – accretion of interest on asset retirement obligation and excess portion of asset retirement cost per US GAAP over amount allowed for deduction per PRC tax		1	%		3.0	%
Valuation allowance on US NOL		25.7	%		35.6	%
Tax expense (benefit) per financial statements		(0.5	)%		10.6	%

The following table reconciles the US statutory rates to the Company’s consolidated effective tax rate for the three months ended September 30, 2013 and 2012:

	2013			2012
US statutory rates (benefit)		(34.0	)%		(34.0	)%
Tax rate difference		8.7	%		7.5	%
Permanent difference – change in FV of Warrants		(2.1	) %		(2.1	)%
Permanent difference – accretion of interest on asset retirement obligation and excess portion of asset retirement cost per US GAAP over amount allowed for deduction per PRC tax		1.0	%		5.0	%
Valuation allowance on US NOL		25.9	%		19.4	%
Tax expense (benefit) per financial statements		(0.	5)%		(4.2)	%

The provisions for income tax for the nine months ended September 30, 2013 and 2012 consisted of the following:

	2013			2012
Income tax expense – current	$	-		$	827,364
Income tax benefit – deferred		(30,721	)		(203,033)	)
Total income tax expense (benefit)	$	(30,721	)	$	624,331

The provisions for income tax for the three months ended September 30, 2013 and 2012 consisted of the following:

	2013			2012
Income tax expense – current	$	-		$	(50,248)
Income tax benefit – deferred		(10,634	)		(43,289)	)
Total income tax expense (benefit)	$	(10,634	)	$	(93,537)

17.   MAJOR CUSTOMERS AND VENDORS

Below is the table indicating the major customers accounting for over 10% of the Company’s total sales for the nine months ended September 30, 2013 and 2012:

Customers	Sales of 2013		Percentage to Total Sales		Sales of 2012		Percentage  to Total Sales
Customer A	$	1,060,277		65%	$	17,316,480		80%
Customer B	$	563,834		35%	$	4,281,716		20%

Below is the table indicating the major customers accounting for over 10% of the Company’s total sales for the three months ended September 30, 2013 and 2012:

Customers	Sales of 2013		Percentage to Total Sales		Sales of 2012		Percentage  to Total Sales
Customer A	$	367,409		66%	$	1,260,634		64%
Customer B	$	189,553		34%	$	697,862		36%

At September 30, 2013 and December 31, 2012, the total receivable balance due from these customers was $0.

There were no major vendors for the Company for the nine and three months ended September 30, 2013 or 2012. 

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18.   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.

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, and ruling No. 16 issued in February 2012, by the PRC Ministry of Finance (“MOF”) regarding “Accrual and Utilization of Coal Production Safety Expense” and “Criterion on Coal Mine Maintenance and Improvement”, and “Accrual and Utilization of Enterprise Safety Production Fee”, respectively, the Company is required to accrue safety and maintenance expenses monthly to the cost of production. The accrual is determined based on management’s best estimates within the unit price range provided by MOF of PRC. Currently, Xing An accrues RMB 15 ($2.40) per ton for safety expense and RMB 8.7 ($1.39) per ton for maintenance for the quantity of coal produced; and Tong Gong accrues RMB 6 ($0.96) per ton for safety expense and RMB 8.7 ($1.39) 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.

According to the ruling No. 1 (2009) of Heilongjiang province and practice requirement of Heihe government, Tong Gong is also required to pay additional safety and maintenance expenses of RMB 10 ($1.60) per ton to the local government. The Company records this payment as an expense. The amount paid to the government can be recovered from the local government under certain circumstances. However, it is not clear whether the Company will be able to recover the amount paid to the government. Accordingly, the payment to government is recorded as an expense.

The statutory reserves were as follows as of September 30, 2013 and December 31, 2012:

	2013		2012
Statutory surplus reserve	$	3,280,498	$	3,257,850
Safety and Maintenance reserve		10,347,407		10,222,142
Total	$	13,627,905	$	13,479,992

19.   SHAREHOLDERS’ EQUITY

MAKE GOOD PROVISION

The make good pledgor, Mr. Guoqing Yue, Chairman of the board of directors of the Company, pledged 500,000 Ordinary Shares owned by the Make Good Pledgor (the “Make-Good Shares”) with a FV at December 31, 2011 of $550,000.  The Make-Good Shares are reserved for the benefit of the Investors, and shall be issued to the Investors if (i) the net revenue of the Company reported for the existing business segments (excluding any future acquisitions) in the Annual Report of the Company on Form 10-K (or such other form appropriate for such purpose as promulgated by the Commission) for 2011, as filed with the Commission (the “2011 Annual Report”), is less than $81,300,000 for 2011 (the “2011 Guaranteed Amount”) or (ii) the net revenue of the Company reported for the existing business segments (excluding any future acquisitions) in the Annual Report of the Company on Form 10-K (or such other form appropriate for such purpose as promulgated by the Commission) for 2012, as filed with the Commission (the “2012 Annual Report”), is less than $102,000,000 for 2012 (the “2012 Guaranteed Amount”), then in either case, the Make Good Escrow Agent (on behalf of the Make Good Pledgor) will, without any further action on the part of the Investors, transfer a number of Make Good Shares (as calculated below) to the Investors on a pro-rata basis (determined by dividing each Investor’s Investment Amount by the aggregate of all Investment Amounts delivered to the Company by the Investors hereunder) for no consideration other than payment of their respective Investment Amount paid to the Company at Closing.  If the net revenue of the Company for the existing business segments (excluding any future acquisitions) for 2011 equals or exceeds the 2011 Guaranteed Amount, then 50% of the Make Good Shares will be released back to the Make Good Pledgor.  The number of Make Good Shares transferable to Investors shall be calculated as follows: 

(i)     For 2011, the number of Make Good Shares transferable to Investors shall be equal to (A) the 2011 Guaranteed Amount less the actual net revenues of the Company for the existing business segments (excluding any future acquisitions) as reflected in the 2011 Annual Report, divided by (B) the 2011 Guaranteed Amount multiplied by the aggregate number of Make Good Shares; and 

(ii)    For 2012, the number of Make Good Shares transferable to Investors shall be equal to (A) the 2012 Guaranteed Amount less the actual net revenues of the Company for the existing business segments (excluding any future acquisitions) as reflected in the 2012 Annual Report, divided by (B) the 2012 Guaranteed Amount  multiplied by the aggregate number of remaining Make Good Shares that have not been released to the Make Good Pledgor or transferred to the Investors.

At December 31, 2011, the Company did not meet the 2011 Guaranteed Amount of $81,300,000; accordingly, 168,000 shares were transferred to investors in August 2012.  At December 31, 2012, the Company did not meet the 2012 Guaranteed Amount of $102,000,000; accordingly, the remaining 332,000 shares will be transferred to investors in 2013. Since the shares will be issued in connection with the equity financing, the FV of the make good shares was debited from and credited to additional paid in capital.

STOCK-BASED COMPENSATION PLAN

On March 11, 2011, the Company granted options to an employee under the Company’s 2009 stock option plan to purchase up to 50,000 shares of the Company’s common stock at $4.50 per share for five 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 9, 2012, the Company granted this employee stock options to purchase up to 50,000 shares of the Company’s common stock at $1.00 per share for five 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.  The options granted on March 9, 2012 have a life of five years, with volatility of 202%, risk free interest rate of 0.9%, and dividend yield of 0%. No estimate of forfeitures was made as the Company has a short history of granting options. Total FV of the 50,000 option granted on March 9, 2012 was $48,831.

On February 24, 2012, the Company granted 20,000 stock options to a director at $1.00 per share with a term of five 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. The options granted on February 24, 2012 have a life of five years, with volatility of 201%, risk free interest rate of 0.89%, and dividend yield of 0%. No estimate of forfeitures was made as the Company has a short history of granting options. Total FV of the 50,000 options granted on February 24, 2012 was $19,518. On February 24, 2013, the Company granted another 20,000 stock options to this director at $0.27 per share with a term of five 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. The options granted on February 24, 2013 have a life of five years, with volatility of 244%, risk free interest rate of 0.78%, and dividend yield of 0%. No estimate of forfeitures was made as the Company has a short history of granting options. Total FV of the 20,000 options granted on February 24, 2013 was $5,366.

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Based on the FV method under FASB ASC Topic 718, the FV 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 FV of each option grant to employees and independent director is recognized as compensation expense over the vesting period of each stock option award.

The following table summarizes activities of these options:

	Number of Shares		Average Exercise Price per Share ($)		Weighted Average Remaining Contractual Term in Years
Outstanding at January 1, 2013		235,000		4.22		2.76
Exercisable at January 1, 2013		200,000		4.78		2.51
Granted		20,000		0.27		5.00
Exercised		-		-		-
Outstanding at September 30, 2013		255,000		3.91		2.19
Exercisable at September 30, 2013		245,000		4.06		2.10

The Company recorded $10,215 and $75,415 of compensation expense for stock options during the nine months ended September 30, 2013 and 2012, respectively. The Company recorded $1,477 and $20,791 of compensation expense for stock options during the three months ended September 30, 2013 and 2012, respectively. There were no options exercised during the nine and three-month periods ended September 30, 2013 and 2012.

WARRANTS ISSUED TO INVESTOR RELATIONS FIRMS

On April 19, 2010, the Company granted warrants to acquire 200,000 shares of the Company’s common stock, at $9.50 per share to an investor relations (“IR”) firm. The warrants have a term of five years. The Company accounted for warrants issued to this IR firm based on ASC 505-50 at each balance sheet date and expense recorded based on the period elapsed at each balance sheet date, which is the date at which the counterparty’s performance is deemed to be completed for the period. The FV of each warrant granted is estimated on the date of the grant using the Black-Scholes option pricing model under ASC 505-30-11 and is recognized as compensation expense over the service term of the IR agreement as it is a better matching of cost with services received. The warrants are classified as equity instruments and are exercisable into a fixed number of common shares. There is no commitment or requirement to change the quantity or terms based on conditions to the counterparty’s performance or market conditions.  These warrants are non-forfeitable. The FV of the warrants was calculated using the following assumptions: estimated life of five years, volatility of 100%, risk free interest rate of 2.76%, and dividend yield of 0%. In January 2011, the Company terminated the IR service agreement with this IR firm, and accordingly, the unrecorded FV of the warrants issued to this IR firm was fully expensed at termination date.

On January 18, 2011, the Company agreed to issue warrants to another IR firm as follows:

For each six-month period, warrants will be issued to purchase 20,000 shares at $6.00 per share.  Warrants to purchase 20,000 shares for the first six months of service were issued by April 18, 2011 (the “Tranche 1 Warrant”) and vested on July 18, 2011 and will expire on July 18, 2014.  Warrants to purchase 20,000 shares for the second six months of service were issued by October 18, 2011 and vested on January 18, 2012 and will expire on January 18, 2015.  Additionally, warrants to purchase 40,000 shares will be issued if the share price trades above $12 and the stock achieves an average daily trading volume (“ADTV”) of 50,000 for 30 days.  This contract has now terminated and, therefore, no more warrants will be issued.  The Company accounted for warrants issued to this IR firm based on ASC 505-50 at each balance sheet date as described above. The warrants are classified as equity instruments and are exercisable into a fixed number of common shares. There is no commitment or requirement to change the quantity or terms based on conditions to the counterparty’s performance or market conditions.  The FV of the warrants for the Tranche I and II Warrant was calculated using the following assumptions: estimated life of five years, volatility of 100%, risk free interest rate of 2.76%, and dividend yield of 0%. The FV of Tranche 1 Warrant that was issued at April 18, 2011 was $36,857. The FV of Tranche II Warrant issued at October 18, 2011 was $8,407.

The following table summarizes activity for the warrants to certain investor relations firms:

	Number of Shares		Average Exercise Price per Share ($)		Weighed Average Remaining Contractual Term in Years
Outstanding at January 1, 2013		240,000		8.92		2.17
Exercisable at January 1, 2013		240,000		8.92		2.17
Granted		-		-		-
Exercised		-		-		-
Outstanding at September 30, 2013		240,000		8.92		1.42
Exercisable at September 30 2013		240,000		8.92		1.42

The Company recorded $0 warrant expense during the nine and three months ended September 30, 2013 and 2012, respectively. 

WARRANTS ISSUED THROUGH PRIVATE PLACEMENT

On January 7, 2011, the Company entered into a Securities Purchase Agreement with investors, pursuant to which the Company sold to the Investors, in a private placement, 3,750,000 Units at $4.00 per Unit. Each Unit was comprised of (i) one share of our common stock, par value $0.001 per share, and (ii) a five-year warrant (the “Investor Warrant”) to purchase 0.5 shares of our Common Stock at $6.80 per share. In connection with the closing of the Private Placement, the Company received $13,650,500 after payment of $1,349,500 of cash commissions to the Placement Agent, and other offering expenses and related costs in connection with the Private Placement. In addition, the Company issued to the Placement Agents five-year warrants to purchase 375,000 shares of our Common Stock, at $6.80 per share.  At September 30, 2013, the remaining term of the warrants was 2.26 years.

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The Investor Warrants can be called by the Company for no consideration at any time after the shares of Common Stock underlying the Investor Warrants are registered for resale under an effective registration statement if the volume-weighted average trading price of the Common Stock for any 20 consecutive trading days equals or exceeds $12.00 per share and if the average trading volume during such 20-day period equals or exceeds 1,200,000.  The Investor Warrants and Agent Warrants may be exercised in cash or pursuant to a cashless exercise; however the Investor Warrants may only be exercised by cashless exercise if the Warrant Shares have not been registered for resale in an effective registration statement within 12 months of their issuance. The exercise price of the Investor Warrants and the Agent Warrants is subject to adjustment for stock splits, stock dividends, recapitalizations and the like. The exercise price is subject to adjustment upon issuance of additional shares or common stock equivalents at a price below the existing exercise price based on a formula defined in the agreement.

The Company accounted for the warrants issued to the investors and placement agents based on the FV method under ASC Topic 505. The FV of the warrants was calculated using the Black Scholes Model and the following assumptions: estimated life of five years, volatility of 100%, risk free interest rate of 2.76%, and dividend yield of 0%. No estimate of forfeitures was made as the Company has a short history of granting options and warrants. The FV of the warrants at grant date was $13,153,426.  Accordingly to FASB ASC 815-40-55, the warrants were classified as a liability on the balance sheet and adjusted to FV at each reporting period as they have a ratchet provision for adjusting the strike price if equity is issued at a later date at a price below the strike price. The Company adjusted the FV of derivative liability to $404,698 and $750,035 for warrants at September 30, 2013 and December 31, 2012, respectively, and recognized a gain of $345,336 and loss of $165,338 during the nine months ended September 30, 2013 and 2012, respectively, and a gain of $119,688 and a loss of $137,734 during the three months ended September 30, 2013 and 2012, respectively.

The following table summarizes activity for the warrants issued in connection with the private placement:

	Number of Shares		Average Exercise Price per Share ($)		Weighed Average Remaining Contractual Term in Years
Outstanding at January 1, 2013		2,250,000		6.80		3.01
Exercisable at January 1, 2013		2,250,000		6.80		3.01
Granted		-		-		-
Exercised		-		-		-
Outstanding at September 30, 2013		2,250,000		6.80		2.26
Exercisable at September 30, 2013		2,250,000		6.80		2.26

20.   OTHER CONTINGENCIES AND COMMITMENTS

The Company’s principal executive office in the PRC is located in the provincial capital of Harbin and is approximately 7,000 square feet.  The Company has no written agreement or formal arrangement pertaining to the use of this office, as it is owned by Mr. Hongwen Li, the Company’s President and Chief Executive Officer, who is making the office available to us rent-free. This office houses the administrative and clerical staff. If necessary, the Company believes it 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 from a principal shareholder under long-term lease agreements with monthly payments of approximately $2,000 (RMB 12,500) expiring July 30, 2015. The operating lease agreements require that the Company pay certain operating expenses applicable to the leased premises.

The Company’s rental expense for the nine months ended September 30, 2013 and 2012 was $60,000 and $60,000, respectively. The Company’s rental expense for the three months ended September 30, 2013 and 2012 was $20,000 and $20,000, respectively.

As of September 30, 2013, the future minimum annual lease payments required under operating leases, are as follows:

October 1, 2013 - September 30, 2014	$	24,000
October 1, 2014 – July 31, 2015		20,000
Total	$	44,000

During the fourth quarter of 2012 and the first quarter of 2013, serious accidents occurred at coal mines in neighboring areas in the Heilongjiang province where our mines are located. Consequently, the provincial mining authority has requested that all of the local coal mines mandatorily cease production for further safety review, in connection with the annual re-inspection, and approval to undertake production again. The coal mines need to meet strict regulatory standards during the inspection and must advance a RMB30 million coal mine safety deposit into a government custodian account before they can be approved for production. The annual inspection usually occurs shortly after the Chinese New Year holiday, but the process was delayed this year until the provincial government announced this new policy in May. Tong Gong passed through the inspection and resumed its production during June, and made a cash payment for the coal mine safety production deposit.  Due to the delay in the inspection and license renewal process and the shutdown and because of shutdowns relating to mine maintenance in the third quarter, Tong Gong was only able to produce coal during one month for each quarter of 2013. Because Xing An does not produce coal during the summer months due to the specific nature of the mines, we do not expect to advance the mine safety deposit at this time. We expect to make the deposit for Xing An and to receive approval for production in time to resume production in the fourth quarter.

21.  ACQUISITION OF COAL MINES

On January 20, 2011, the Company signed an agreement with an owner of a coal mine in Guizhou China. Pursuant to the agreement, the Company advanced a refundable RMB 30 million ($4.7 million, the maximum amount provided under the agreement) to an escrow account to be used for improvements to this mine. In addition, the Company intends to acquire the mine from the individual owner if the owner can complete the necessary restructuring of the mine as appropriate for acquisition and the new mining company after the restructuring has received all government required permits for normal production. If the potential acquisition goes forward, the escrow amount will be treated as partial consideration. If not, the amount will be reimbursed to the Company. During 2011, the owner completed the mine improvement construction and organization restructuring as appropriate for potential acquisition. The renovated mine has been in official test runs since July 2011, and is currently applying for all necessary mining and operating permits. The Company expects to acquire the mine once all the necessary permits are in place. The local mining authority delayed the approval of new permits for new or renovated mines during 2012 as a matter of policy and as a result of unexpected accidents that occurred in the neighboring counties. The Company expects to see progress in this acquisition during 2013 when the local government moves forward in its consolidating plan (where it plans to significantly reduce the number of operating mines by shutting down or discontinuing small mines with poor conditions and/or, safety and environment problems) and resumes the mining permit procedure.

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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 the 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, the Registrant’s management as well as estimates and assumptions made by the 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 the Registrant or the Registrant’s management identify forward-looking statements. Such statements reflect the current view of the 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 the Registrant’s industry, the Registrant’s operations and results of operations, and any businesses that the 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 the Registrant believes that the expectations reflected in the forward-looking statements are reasonable, the 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 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 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 Heilongjiang Tong Gong Kuang Ye You Xian Gong Si (“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 entered into on December 31, 2007, on April 4, 2008, we added two coal mines to our operations when we acquired two mining companies under common ownership in the PRC, Heilongjiang Xing An Group Hong Yuan Coal Mine Co., Ltd. (“Hong Yuan”) and Heilongjiang Xing An Group Sheng Yu Mining Co., Ltd. (“Sheng Yu”), collectively “Xing An”.  In connection with that transaction, the Xing An shareholders received 8 million shares of U.S. China Mining, Inc. “SGZH” common stock and $30 million in cash, which was 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 transaction, the Xing An Shareholders owned 53% of the combined company. Accordingly, for accounting purposes, the transaction was 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 to the Xing An Shareholders in April 2009.

Beginning in 2011, after China’s decade-long efforts to increase coal production and supply on the national level, supply of coal in China began outpacing demand.  Additionally, the government no longer supports or controls prices and allows prices to float, which, given the current excess supply, puts downward pressure on prices.   However, if the price does not rebound, the Company may, however, determine that it is more economically beneficial to not mine the coal or, if mined, to hold the coal in inventory, rather than to undertake sales, until market conditions improve.

During the fourth quarter of 2012 and the first quarter of 2013, serious accidents occurred at coal mines in neighboring areas in the Heilongjiang province where our mines are located. Consequently, the provincial mining authority has requested that all of the local coal mines mandatorily cease production for further safety review, in connection with the annual re-inspection, and approval to undertake production again. The coal mines need to meet strict regulatory standards during the inspection and must advance a RMB30 million coal mine safety deposit into a government custodian account before they can be approved for production. The annual inspection usually occurs shortly after the Chinese New Year holiday, but the process was delayed this year until the provincial government announced this new policy in May. The Tong Gong passed through the inspection and resumed its production during June, and made cash payment for the security deposit through a bank loan financing of RMB 27 million. Due to the delay in the inspection and license renewal process and the shutdown, and because of shutdowns relating to mine maintenance in the third quarter, Tong Gong was only able to produce coal during one month for each of the quarters of 2013. Because Xing An does not produce coal during the summer months due to the specific nature of the mines, we do not expect to advance the mine safety deposit at this time. We expect to make the deposit for Xing An and to receive approval for production in time to resume production in the fourth quarter.

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 were prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”). While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements, we believe the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis. 

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”).

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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.

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.

Revenue Recognition

The Company's revenue recognition policies comply 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. 

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.

RESULTS OF OPERATIONS

Comparison of the nine months ended September 30, 2013 and 2012

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:

	2013					2012
	$		% of Sales			$		% of Sales
Sales		1,624,111		100	%		21,598,196		100	%
Cost of Goods Sold		1,542,732		95	%		15,693,553		73	%
Gross Profit		81,379		5	%		5,904,643		27	%
Operating Expenses		6,103,848		376	%		11,542,186		53	%
Loss from Operations		(6,022,469)		(371	)%		(5,637,543)		(26)	%
Other Income (Expenses), Net		160,418		10	%		(253,209)		(1)	%
Income Tax Expense (Benefit)		(30,721)		(2	)%		624,331		3	%
Net Loss		(5,831,330)		(359)	%		(6,515,083)		(30)	%

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

	Tong Gong Coal Mine
	Salable Production		Brokerage		Sales
	2013	2012	2013	2012	2013	2012
Nine months ended September 30	26,100	101,480	-	110,000	26,100	211,480

	Xing An Coal Mines (Hong Yuan and Sheng Yu)
	Salable Production		Brokerage		Sales
	2013	2012	2013	2012	2013	2012
Nine months ended September 30	-	351,376	-	-	-	185,495

Sales. China’s coal industry saw another turndown in 2013 due to the slow-down of the national economy and the government’s recent efforts to float coal prices and loosen controls on the import and export of coal. The result has been a growing surplus of supply over demand, continuously falling market prices for coal, especially power coal, and higher consumption of imported coal, all of which has a negative impact on local coal business. Our revenues are from sales of coal. During the nine months ended September 30, 2013, we had sales of $1.62 million compared to $21.60 million for 2012, a decrease of 92%. In the nine months ended September 30, 2013, our sales volume decreased from both our Xing An and Tong Gong mines compared to the same period in 2012. The average selling price per ton for the nine months ended September 30, 2013 was $62.23 as compared to $54.41 for 2012. Our sales volume was 26,100 tons for the nine months ended September 30, 2013, compared to 396,975 tons for 2012, a decrease of 93%, resulting primarily from the decrease in our mines’ production, as described below, and the decrease of local demand. The decrease in local demand was attributable to the factors described above and the government’s policies of limiting coal consumption in favor of alternative fuel sources in residential and even for industrial usages, due to worsening air pollution in China, and the negative impacts from customers’ use of more coal imported from neighboring areas in Inner Mongolia at cheaper prices during 2013 as well as logistic difficulties for Xing An and its customers.

Cost of Goods Sold. Cost of goods sold (“COGS”) for the nine months ended September 30, 2013 was $1.54 million, a decrease of $14.15 million or 90%, from $15.69 million for 2012. Our total production for the nine months ended September 30, 2013 was 26,100 tons, compared to 452,856 tons for the corresponding period in 2012, a decrease of 426,756 tons, resulting from the changing geological conditions of Tong Gong mine’s under-shaft with increased rock zone as a result of our having to mine into the deeper areas of the underground mine, which limits the lifting capacity and results in higher extraction costs. We were also impacted by the temporary shutdown of the production of the Tong Gong mine due to government inspection requirements. In addition, Xing An also temporarily ceased production in the nine months ended September 30, 2013 due to the mine retrofit project and the government’s inspection requirements. COGS as a percentage of sales was 95% for the nine months ended September 30, 2013, compared to 73% in 2012. Our average cost per ton was $59.11 in the nine month period ended September 30, 2013, compared to $34.65 for the corresponding period in 2012. This increase was primarily attributable to higher infrastructure, safety and environment standard requirements and overall inflation in China resulting in increased labor, certain materials and energy costs used for the mining and processing. In addition, decreased production/sales volume caused relatively higher depreciation and amortization cost resulting in higher unit cost on average.

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Gross Profit. Gross profit was $81,379 for the nine months ended September 30, 2013 compared to $5.90 million for the comparable period in 2012, a decrease of $5.82 million. Our gross profit as a percentage of sales was 5% and 27% for the nine months ended September 30, 2013 and 2012, respectively. The decrease in gross profit was due to decreased sales and increased percentage of COGS to the sales, as explained in the above section.

Operating Expenses. Operating expenses totaled $6.10 million for the nine months ended September 30, 2013 compared to $11.54 million for 2012, a decrease of $5.44 million or 47%. The decrease was attributable to decreased selling expenses resulting from decreased sales in the nine months ended September 30, 2013, compared to the comparable period of 2012; and decreased G&A expenses resulting from decreased production and business activities.

Other Income (Expenses). Other income totaled $160,418 for the nine months ended September 30, 2013 compared to other expense of $253,209 for 2012. In the nine months ended September 30, 2013, we had interest expense of $275,600 compared to $208,820 in 2012.  We had non-cash non-operating income of $345,336  in the nine months ended September 30, 2013 compared to non-cash non-operating expense of $165,338  in 2012, resulting from the change of fair value of the derivative warrants we issued to approximately 200 investors and agents through the January 2011 Private Placement.

Net Income (Loss). Our net loss for the nine months ended September 30, 2013 was $5.83 million compared to $6.52 million for the corresponding period in 2012, a decrease in the amount of loss of $0.68 million. This was mainly attributed to significantly decreased sales in 2013 but increased other income compared to the comparable period of 2012.

Comparison of the three months ended September 30, 2013 and 2012

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:

	2013					2012
	$		% of Sales			$		% of Sales
Sales		556,962		100	%		1,958,496		100	%
Cost of Goods Sold		580,239		104	%		1,544,301		79	%
Gross Profit (loss)		(23,277)		(4)	%		414,195		21	%
Operating Expenses		2,057,227		369	%		2,475,917		126	%
Loss from Operations		(2,080,504)		(373	)%		(2,061,722)		(105)	%
Other Income (expenses), Net		(2,337)		(0.4)	%		(155,548)		(8)	%
Income Tax Expense (Benefit)		(10,634)		(2	)%		(93,537)		(5)	%
Net Loss		(2,072,207)		(372	)%		(2,123,733)		(108)	%

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

	Tong Gong Coal Mine
	Salable Production		Brokerage		Sales
	2013	2012	2013	2012	2013	2012
Three months ended September 30	8,880	27,469	-	5,000	8,880	32,469

	Xing An Coal Mines (Hong Yuan and Sheng Yu)
	Salable Production		Brokerage		Sales
	2013	2012	2013	2012	2013	2012
Three months ended September 30	-	-	-	-	-	-

Sales.  The slowing-down of the national economy and the government’s recent efforts to float coal prices and loosen controls on the import and export of coal, and higher consumption of imported coal, has resulted in a growing surplus of supply over demand. Our revenues are from sales of coal. During the three months ended September 30, 2013, we had sales of $0.56 million compared to $1.96 million for the comparable period in 2012, a decrease of 72%. In the three months ended September 30, 2013, our sales volume decreased from both our Xing An and Tong Gong mines compared to the same period in 2012. The average selling price per ton for the three months ended September 30, 2013 was $62.72 as compared to $61.07 for the comparable period in 2012. Our sales volume was 8,880 tons for the three months ended September 30, 2013, compared to 32,469 tons for 2012, a decrease of 73%, resulting primarily from the decrease in our mines’ production, as described in below section, and the decrease of local demand as described above.

Cost of Goods Sold. Cost of goods sold (“COGS”) for the three months ended September 30, 2013 was $0.58 million, a decrease of $0.96 million or 62%, from $1.54 million for the comparable period in 2012. Our total production for the three months ended September 30, 2013 was 8,880 tons, compared to 27,469 tons for 2012, a decrease of 18,589 tons, resulting from the changing geological conditions of Tong Gong mine’s under-shaft with increased rock zone as a result of our having to mine into the deeper areas of the underground mine, which limits the lifting capacity and results in higher extraction costs. We were also impacted by the temporary shutdown of the production of the Tong Gong mine due to government inspection requirements. In addition, Xing An also temporarily ceased production in 2013 due to the mine retrofit project and the government’s inspection requirements. COGS as a percentage of sales was 104% for the three months ended September 30, 2013, compared to 79% in 2012, which was mainly due to significantly decreased sales but fixed production and overhead cost. Our average cost per ton was $65.34 in the three months ended September 30, 2013, compared to $47.24 in 2012. This increase was primarily attributable to higher infrastructure, safety and environment standard requirements and overall inflation in China resulting in increased labor, certain materials and energy costs used for the mining and processing.

Gross Profit. Gross profit (loss) was $(23,277) for the three months ended September 30, 2013 compared to $0.41 million for the comparable period in 2012, a decrease of $0.44 million. Our gross profit as a percentage of sales was (4%)  and 21% for the three months ended September 30, 2013 and 2012, respectively. The decrease in gross profit was due to decreased sales and increased percentage of COGS to the sales, as explained in the above section.

Operating Expenses.  Operating expenses totaled $2.06 million for the three months ended September 30, 2013 compared to $2.46 million for 2012, a decrease of $0.42 million or 17%. The decrease was attributable to decreased selling expenses resulting from decreased sales in the three months ended September 30, 2013 compared to the comparable period of 2012; and decreased G&A expenses resulting from decreased production and business activities.

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Other Income (Expenses). Other expense totaled $2,337 for the three months ended September 30, 2013 compared to other expense of $155,548 for 2012. In the three months ended September 30, 2013, we had interest expense of $150,333 compared to $59,089 in 2012.  We had non-cash non-operating income of $119,688 in the three months ended September 30, 2013 compared to non-cash non-operating expense of $137,734  in 2012, resulting from the change of fair value of the derivative warrants we issued to approximately 200 investors and agents through the January 2011 Private Placement.

Net Loss. Our net loss for the three months ended September 30, 2013 was $2.07 million compared to $2.12 million for the comparable period in 2012, a decrease in the amount of loss of $0.05 million. This was mainly attributed to decreased sales but decreased other expenses in the three months ended September 30, 2013 compared to the comparable period in 2012.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Comparison of the nine months ended September 30, 2013 and 2012

As of September 30, 2013, we had cash and equivalents of $32.97 million. Our working capital was $25.24 million. The ratio of current assets to current liabilities was 3.25:1 at September 30, 2013.

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, 2013 and 2012:

	2013		2012
Cash provided by (used in):
Operating Activities	$	(10,163,442)	$	(6,519,746)
Investing Activities	$	(2,435,955)	$	(2,219,313)
Financing Activities	$	4,467,548	$	(3,000,000)

Net cash used in operating activities was $10.16 million for the nine months ended September 30, 2013 compared to net cash used in operating activities of $6.52 million for the comparable period in 2012. In 2013, the increase in cash outflow was primarily due to $4.83 million cash payment for coal production safety deposit and increased cash outflow for accrued liabilities of $2.0 million in the nine months ended September 30, 2013, compared with the same period of 2012, we had cash inflow of $2.30 million from accounts receivable collection and increased payable outstanding, but offset with $5.40 million cash outflow from increase inventory in stock and payment for tax payable.

Net cash used in investing activities was $2.44 million for the nine months ended September 30, 2013 compared to $2.22 million for the comparable period in 2012. In the nine months ended September 30, 2013, we paid $2.44 million for acquisition of property and equipment. In the nine months ended September 30, 2012, we paid $2.0 million for acquisition of property and equipment and $3.21 million for construction in progress, despite the fact that we had $3.0 million cash provided from changes in restricted cash.

Net cash provided by financing activities was $4.47 million in the nine months ended September 30, 2013 as compared to $3.0 million net cash used in the comparable 2012 period. The $4.47 million during the 2013 period consisted of the advance from the Company’s shareholder of $122,940 for the working capital needs of US parent company, and $4.34 million from bank loan for paying the coal production safety deposit. The $3.00 million outflow during the 2012 period was the repayment of a bank loan during the nine months ended September 30, 2012.

Based on our current expectations, we believe our cash and equivalents, and cash to be generated from operations will satisfy our working capital needs and other liquidity requirements associated with our existing operations in 2013. We continue to seek opportunities to expand our existing mining operations and acquire additional coal mining rights and expect to finance such acquisitions through the issuance of 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 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, 2013, 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	$	44,000	$	24,000	$	20,000	$	-	$	-
Deposit for land restoration		2,187,205		-		-		2,187,205
Mining Rights		973,080		973,080		-				-
Total Contractual Obligations:	$	3,204,285	$	997,080	$	20,000	$	2,187,205	$	-

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, other than the warrants for investors and agents we disclosed in Note 17, which 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.

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 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on that evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this quarterly report due to the failures of controls described below.

As required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules as promulgated by the SEC, management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012, using criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

Based on that assessment, management concluded that our internal control over financial reporting was not effective as of September 30, 2013. During the quarter ended June 30, 2012, the Company had to reclassify certain expenditures from operating expenses to capital expenses. Specifically, the Company’s Hong Yuan mining operations incurred significant expenses during the quarter ended June 30, 2012, which were initially classified as operating expenditures. Many of these expenses, however, were classified improperly and should have initially been classified as capital expenditures. The Company has since properly reclassified these expenses as capital expenses.

Although the issues described above occurred in 2012, we are still in the process of implementing certain corrective measures and ensuring that we and our subsidiaries continue to address these weaknesses. As a result of the misclassification of expenditures discussed above, the management determined that there were weaknesses related to the Company’s policies regarding planning, budgeting, approval and control of its capital expenditures. To remediate these weaknesses, the Company adopted necessary policies to address these issues, added experienced accounting staff, emphasized to management the importance of appropriate supervision, communication and training and undertook additional education of its accounting staff with respect to these policies and procedures. Management has also been working more closely with the Company’s subsidiaries to ensure that the Company is committed at all levels to the efforts and measures to remediate the weakness mentioned above.

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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, 2012 and the additional risk factors disclosed in Part II, Item 1A of our Quarterly Report on Form 10-Q as of and for the quarter ended March 31, 2013.

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

We have not sold any equity securities during the period ended September 30, 2013 that were not previously disclosed in our current report Form 8-K.

ITEM 6. EXHIBITS

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. *
101.INS	XBRL Instance Document.*
101.SCH	XBRL Taxonomy Extension Schema Document.*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.*
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.*

* 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 14, 2013	By:	/s/ Hongwen Li
		Hongwen Li
		Chief Executive Officer
Date: November 14, 2013	By:	/s/ Xinyu Peng
		Xinyu Peng
		Chief Financial Officer (principal accounting 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. *
101.INS	XBRL Instance Document.**
101.SCH	XBRL Taxonomy Extension Schema Document.**
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.**
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document**
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.**
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.**

* Filed herewith. **Furnished herewith.

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