20-F 1 d20f_2006ar.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

_______________

FORM 20-F

[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-15264

logo
(Exact name of Registrant as specified in its charter)

ALUMINUM CORPORATION OF CHINA LIMITED
(Translation of Registrant's name into English)

People's Republic of China
(Jurisdiction of incorporation or organization)

_______________

No. 62 North Xizhimen Street, Hai Dian District, Beijing, People's Republic of China (100082)
(Address of Principal Executive Offices)

_______________

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

Title of each Class
American Depositary Shares, each representing 25 H Shares
Class H Ordinary Shares*

Name of Each Exchange on which Registered
New York Stock Exchange, Inc.

* Not for trading, but only in connection with the registration of American Depositary Shares on the New York Stock Exchange, Inc. The Ordinary H Shares are also listed and traded on The Stock Exchange of Hong Kong Limited.

Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)

 


 

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of December 31, 2006:

Domestic Shares, par value RMB1.00 per share

7,705,910,185

 

 

H Shares, par value RMB1.00 per share

3,943,965,968

 

 

(including 406,067,500H Shares in the form of American Depository Shares)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [X] No [ ]

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Security Exchange Act of 1934.

Yes [ ] No [X]

Note-Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 [ ] Item 18 [X]

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes [ ] No [X]

 


 

TABLE OF CONTENTS

 

Pages

 

 

Forward-Looking Statements

i

 

Certain Terms and Conventions

ii

 

 

 

PART I

Item 1.

Identity of Directors, Senior Management and Advisors

1

 

Item 2.

Offer Statistics and Expected Timetable

2

 

Item 3.

Key Information

2

 

Item 4.

Information on the Company

14

 

Item 5.

Operating and Financial Review and Prospects

47

 

Item 6.

Directors, Senior Management and Employees

71

 

Item 7.

Major Shareholders and Related Party Transactions

83

 

Item 8.

Financial Information

91

 

Item 9.

The Offer and Listing

93

 

Item 10.

Additional Information

94

 

Item 11.

Quantitative and Qualitative Disclosures about Market Risk

124

 

Item 12.

Description of Securities Other than Equity Securities

127

 

 

 

 

PART II

Item 13.

Defaults, Dividend Arrearages and Delinquencies

127

 

Item 14

Material Modifications to the Rights of Security Holders and Use of Proceeds

127

 

Item 15

Controls and Procedures

127

 

Item 16

[Reserved]

128

 

Item 16A

Audit Committee Financial Expert

128

 

Item 16B

Code of Ethics

128

 

Item 16C

Principal Accountant Fees and Services

129

 

Item 16D

Exemption from the Listing Standards for Audit Committees

129

 

Item 16E

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

130

 

 

 

 


 

PART III

Item 17.

Financial Statements

130

 

Item 18.

Financial Statements

130

 

Item 19.

Exhibits

130

 

 

 

 


 

FORWARD-LOOKING STATEMENTS

 

Certain information contained in this annual report, which does not relate to historical financial information may be deemed to constitute forward-looking statements. The words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," "believe" or similar expressions are intended to identify "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, or the Exchange Act. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and those presently anticipated or projected. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. These forward-looking statements include, without limitation, statements relating to:

 

*

future prices and demand for our products;

 

 

*

future PRC tariff levels for alumina and primary aluminum;

 

 

*

sales of our products;

 

 

*

the amount and nature of, and potential for, future development;

 

 

*

production, consumption and demand forecasts of bauxite, alumina and primary aluminum;

 

 

*

expansion, consolidation or other trends in the primary aluminum industry;

 

 

*

the effectiveness of our cost-saving measures;

 

 

*

future expansion plans and capital expenditures;

 

 

*

expected production capacity increases;

 

 

*

competition;

 

 

*

changes in legislation, regulations and policies;

 

 

*

estimates of proven and probable bauxite reserves;

 

 

*

our research and development plans; and

 

 

*

our dividend policy.

 

 

These statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in particular circumstances. However, whether actual results and developments will meet our expectations and predictions depends on a number of risks and uncertainties, which could

 

- i -

 


 

cause actual results to differ materially from our expectations. These risks are more fully described in the section entitled "Item 3. Key Information - Risk Factors".

 

Consequently, all of the forward-looking statements made in this annual report are qualified by these cautionary statements. We cannot assure you that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected effect on us or our business or operations.

 

Unless otherwise indicated, statistical and market trend information, as well as statements related to market position and competitive data, are based on our internal statistics and/or estimates gathered from our own research and/or various publicly available sources.

 

CERTAIN TERMS AND CONVENTIONS

 

Translations of amounts in this annual report from Renminbi into U.S. dollars and vice versa have been made at the rate of RMB7.8041 to US$1.00, which was the noon buying rate in the New York City for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York on December 29, 2006. You should not construe these translations as representations that the Renminbi amounts actually represent U.S. dollar amounts or could be converted into U.S. dollars at that rate or at all. See "Item 3. Key Information - Exchange Rate Information" for information regarding the noon buying rates from January 1, 2002 through May 31, 2007.

 

We publish our financial statements in Renminbi.

 

Various amounts and percentages set out in this document have been rounded and, accordingly, are not the exact figures and may not total.

 

Unless the context otherwise requires, references in this annual report to:

 

"A Share" are to the domestic ordinary shares, with a nominal value of RMB1.00 each;

 

"Alcoa" are to Alcoa International (Asia) Ltd., a company incorporated under the laws of Hong Kong;

 

"alumina-to-silica ratio" are to the ratio of alumina to silica by weight found in bauxite;

 

"aluminum fabrication" are to the process of taking primary aluminum and converting it into plates, strips, bars, tubes, etc. which can be further converted into consumer or other end products;

 

"bauxite" are to mineral ores whose composition is principally alumina;

 

"Bayer process" are to a refining process employed to extract alumina from ground bauxite with a strong solution of caustic soda at an elevated temperature;

 

"brownfield development" are to development projects at existing plants or facilities;

 

"CCB" are to China Construction Bank, a PRC state-owned bank established pursuant to PRC government approval;

 

"Chalco," "the Company", "the Group", "our company," "we," "our" and "us" are to Aluminum Corporation of China Limited and its subsidiaries and, where appropriate, to its predecessors;

 

"China" and the "PRC" are to the People's Republic of China, excluding for purposes of this annual report, Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan;

 

"China Cinda" are to China Cinda Asset Management Corporation, a PRC state-owned financial enterprise established pursuant to PRC government approval;

 

"China Development Bank" are to a PRC state-owned bank established pursuant to PRC government approval;

 

- ii -

 


 

"Chinalco" and the "ultimate holding company" are to our controlling shareholder, Aluminum Corporation of China and its subsidiaries (other than Chalco and its subsidiaries) and, where appropriate, to its predecessors;

 

"China Orient" are to China Orient Asset Management Corporation, a PRC state-owned financial enterprise established pursuant to PRC government approval;

 

"diasporite" are to a mineral of bauxite deposits with the chemical composition of Al(2)O(3) * H(2)O;

 

"Exchange Act" are to The Securities Exchange Act of 1934, as amended;

 

"fabricating ingots" are to the primary aluminum or aluminum alloy ingots that may be used directly in the aluminum fabrication process;

 

"Fushun Aluminum" are to Fushun Aluminum Company Limited, our subsidiary that is established under PRC law;

 

"Gansu Hualu" are to Gansu Hualu Aluminum Company Limited, our subsidiary that is established under PRC law;

 

"gibbsitic" are to a mineral of bauxite deposits with the chemical composition of Al(2)O(3) * 3H(2)O;

 

"greenfield investment" are to investment projects to construct new plants or facilities;

 

"Guangxi Investment" are to Guangxi Investment (Group) Co., Ltd. formerly known as Guangxi Development and Investment Co., Ltd., a PRC state-owned enterprise established in the PRC and one of our promoters and shareholders;

 

"Guizhou Development" are to Guizhou Provincial Materials Development and Investment Corporation, a PRC state-owned enterprise established in the PRC and one of our promoters and shareholders;

 

"HK$" and "HK dollars" are to Hong Kong dollars, the lawful currency of the Hong Kong Special Administrative Region of the PRC;

 

"H Shares" are to overseas listed foreign shares of par value RMB1.00 each, which are listed on the Hong Kong Stock Exchange and subscribed for and traded in HK dollars;

 

"Hong Kong Stock Exchange" are to The Stock Exchange of Hong Kong Limited;

 

"hybrid Bayer-sintering process" are to the refining process developed in China which involves the application of the Bayer process and the sintering process in combination to extract alumina from bauxite more efficiently;

 

"ingots" and "remelt ingots" are to the international standard primary metal products from an aluminum smelter. Remelt ingots are the aluminum ingots generally remelted before being cast into alloyed products or used for aluminum fabrication;

 

"Jiaozuo Wanfang" are to Jiaozuo Wanfang Aluminum Company Limited, our associated company that is established under PRC law, in which we hold 29% of its equity interest;

 

"kA" are to kiloamperes, a unit for measuring the strength of an electric current, with one kiloampere equal to 1,000 amperes;

 

"kWh" are to kilowatt hours, a unit of electrical power, meaning one kilowatt of power for one hour;

 

"Lanzhou Aluminum" are to Lanzhou Aluminum Corporation Limited, previously our associated company that was a joint stock limited company established under the PRC law, whose A Shares were traded on the Shanghai Stock Exchange. After our A Share issuance on April 30, 2007, it became our wholly-owned subsidiary;

 

- iii -

 


 

"Listing Rules" are to the Rules Governing the Listing of Securities on the Hong Kong Stock Exchange (as amended from time to time);

 

"NYSE" are to New York Stock Exchange;

 

"ore-dressing Bayer process" are to a refining process we developed which involves the treatment of bauxite in order to increase its alumina-to-silica ratio so as to allow the Bayer process to then be applied;

 

"provinces" are to provinces and to provincial-level autonomous regions and municipalities in China, excluding Hong Kong Special Administrative Region, Macao Special Administrative Region, and Taiwan, which are directly under the supervision of the central PRC government;

 

"refining" are to the chemical process required to produce alumina from bauxite;

 

"RMB" are to Renminbi, the lawful currency of the PRC;

 

"NDRC" are to China National Development and Reform Commission;

 

"SASAC" are to State-owned Assets Supervision and Administration Commission of the State Council;

 

"Shandong Aluminum" are to Shandong Aluminum Industry Co., Limited, previously our majority owned subsidiary that is established under PRC law, whose A shares were traded on the Shanghai Stock Exchange. After our A Share issuance on April 30, 2007, it has become our wholly-owned subsidiary;

 

"Shandong Huayu" are to Shandong Huayu Aluminum and Power Company Limited, our subsidiary that is established under PRC law;

 

"Shanxi Huasheng" are to Shanxi Huasheng Aluminum Company Limited, our subsidiary that is established under PRC law;

 

"Shanxi Huaze" are to Shanxi Huaze Aluminum and Power Co., Limited, our subsidiary that is established under PRC law;

 

"sintering process" are to a refining process employed to extract alumina from ground bauxite by mixing with supplemental materials and burning in a coal fired kiln;

 

"smelting" are to the electrolytic process required to produce molten aluminum from alumina;

 

"tonne" are to the metric ton, a unit of weight, with one metric ton equal to 1,000 kilograms or 2,204.6 pounds;

 

"US$" are to U.S. dollars, the lawful currency of the United States of America;

 

"WTO" are to World Trade Organization; and

 

"Zunyi Aluminum" are to Zunyi Aluminum Company Limited, our subsidiary that is established under PRC law.

 

PART I

 

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

 

 

Not applicable.

 

- 1 -

 


 

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

 

 

Not applicable.

 

ITEM 3.

KEY INFORMATION

 

 

SELECTED FINANCIAL DATA

 

Historical Financial Information

 

The following tables present our summary income statement data and cash flow data for the years ended December 31, 2002, 2003, 2004, 2005 and 2006; and the summary balance sheet data as of December 31, 2002, 2003, 2004, 2005 and 2006. The summary balance sheet data as of December 31, 2005 and 2006 and income statement and cash flow data for the years ended December 31, 2004, 2005 and 2006 have been derived from, and should be read in conjunction with, the audited financial statements included elsewhere in this report. The summary balance sheet data as of December 31, 2002 and 2003 and income statement and cash flow data for the years ended December 31, 2002 and 2003 have been derived from our historical financial statements as of and for such dates, which are not included in this annual report. We have changed certain of our accounting policies following the adoption of the new/revised Hong Kong Financial Reporting Standards ("HKFRS" or "HKGAAP"), effective for accounting periods commencing on or after January 1, 2005. As a result, we have reclassified/restated certain income statement and balance sheet data for the years ended December 31, 2002, 2003 and 2004 as required in accordance with the relevant requirements. Unless otherwise indicated, the financial statements are prepared and presented in accordance with accounting principles generally accepted in Hong Kong. For a reconciliation of our net income and equity under HK GAAP to generally accepted accounting principles in the United States, also known as "U.S. GAAP", see Note 35 to our audited consolidated financial statements. For more information, please see "Item 5 - Operating and Financial Review and Prospects - U.S. GAAP Reconciliation".

 

 

Years Ended December 31,

 


 

2002

2003

2004

2005

2006

2006

 







 

RMB

RMB

RMB

RMB

RMB

US$(4)

 

(restated(1))

(restated(1))

(restated(1))

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except per share and per ADS data)

 

 

- 2 -

 


 

INCOME STATEMENT DATA:

 

 

 

 

 

 

 

 

 

 

 

 

 

HK GAAP

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue(2)

17,273,542

23,799,474

32,959,343

37,826,486

61,896,265

7,931,250

Cost of sales(2)

13,828,477

16,972,503

22,095,880

25,542,555

41,894,313

5,368,244

 







 

 

 

 

 

 

 

Gross profit(2)

3,445,065

6,826,971

10,863,463

12,283,931

20,001,952

2,563,006

Other (income) and other (gains)/losses, net(2)

(54,286)

(9,246)

(47,656)

(120,720)

(564,619)

(72,349)

Selling and distribution expenses(3)

501,829

549,432

672,311

720,497

958,133

122,773

General and administrative expenses(3)

733,803

1,047,461

1,196,123

1,489,537

2,092,669

268,151

Research and development expenses

131,941

173,359

132,635

113,381

113,529

14,547

 







 

 

 

 

 

 

 

Operating profit

2,131,778

5,065,965

8,910,050

10,081,236

17,402,240

2,229,884

Finance costs

476,100

439,897

109,948

366,908

715,717

91,710

 







 

 

 

 

 

 

 

Operating profit after finance costs

1,655,678

4,626,068

8,800,102

9,714,328

16,686,523

2,138,174

 

 

 

 

 

 

 

- 3 -

 


 

Share of (losses)/profits of jointly controlled entities

(254)

1,193

(3,953)

372

(11,419)

(1,463)

Share of profits of associates

-

-

-

26,947

105,141

13,472

 







 

 

 

 

 

 

 

Profit before income tax expenses

1,655,424

4,627,261

8,796,149

9,741,647

16,780,245

2,150,183

Income tax expense

190,921

920,159

2,161,086

2,495,213

4,393,561

562,981

 







 

 

 

 

 

 

 

Profit for the year

1,464,503

3,707,102

6,635,063

7,246,434

12,386,684

1,587,202

 







 

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

 

Equity holders of the Company

1,417,681

3,549,732

6,391,523

7,022,422

11,744,676

1,504,937

Minority interest

46,822

157,370

243,540

224,012

642,008

82,265

 







 

 

 

 

 

 

 

 

1,464,503

3,707,102

6,635,063

7,246,434

12,386,684

1,587,202

 







 

 

 

 

 

 

 

Dividends

472,496

1,060,788

1,944,778

2,364,673

3,672,137

470,539

Basic and diluted net earnings per share

0.13

0.34

0.58

0.64

1.03

0.13

 

 

 

 

 

 

 

- 4 -

 


 

Basic and diluted net earnings per ADS (5)

3.34

8.46

14.47

15.89

25.67

3.29

 

 

 

 

 

 

 

U.S. GAAP

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

2,434,333

5,368,520

9,214,004

10,360,542

17,456,596

2,236,849

Net income

1,493,582

3,797,175

6,622,916

7,229,167

11,726,471

1,502,604

Basic and diluted net earnings per share

0.14

0.36

0.60

0.65

1.03

0.13

Basic and diluted net earnings per ADS (5)

3.50

9.04

15.00

16.36

25.63

3.29

 

 

 

 

 

 

 

Segment Operating Profit (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

HK GAAP

 

 

 

 

 

 

 

 

 

 

 

 

 

Alumina

1,388,712

5,099,164

9,333,353

10,312,306

13,341,914

1,709,603

Primary aluminum

1,143,658

434,862

(43,875)

231,940

4,476,108

573,559

Corporate and other services

(57,933)

(78,337)

(76,906)

(48,438)

(54,493)

(6,983)

Unallocated

(311,729)

(359,443)

(281,431)

(306,604)

(198,780)

(25,471)

Inter-segment elimination

(30,930)

(30,281)

(21,091)

(107,968)

(162,509)

(20,824)

 







 

 

 

 

 

 

 

Total operating profit

2,131,778

5,065,965

8,910,050

10,081,236

17,402,240

2,229,884

 

 

 

 

 

 

 

- 5 -

 


 

 







 

 

 

 

 

 

 

 

Years Ended December 31,

 


 

2002

2003

2004

2005

2006

2006

 

RMB

RMB

RMB

RMB

RMB

US$(4)

 

(restated(1))

(restated(1))

(restated(1))

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

BALANCE SHEET DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

HK GAAP

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

2,342,254

2,596,440

6,223,763

7,597,727

12,802,775

1,640,519

Total current assets

8,557,975

8,638,566

14,356,588

16,962,670

25,727,910

3,296,717

Total non-current assets

23,691,565

26,768,304

35,201,481

42,047,209

52,276,406

6,698,582

 







 

 

 

 

 

 

 

Total assets

32,249,540

35,406,870

49,558,069

59,009,879

78,004,316

9,995,299

 







 

 

 

 

 

 

 

- 6 -

 


 

Total short-term loans (including current portion of long-term loans)

5,103,274

4,617,130

4,522,568

3,732,978

5,112,858

655,150

Short-term bonds

-

-

-

1,970,840

4,985,111

638,781

Total long-term loans (excluding current portion of long-term loans)

4,949,298

5,412,628

7,391,663

9,690,493

8,480,736

1,086,703

Equity attributable to the shareholders

15,769,314

18,985,410

27,566,795

32,644,439

44,224,734

5,666,859

 

 

 

 

 

 

 

U.S. GAAP

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

29,770,888

33,244,024

47,260,826

55,525,980

76,062,665

9,746,507

Total long-term loans (excluding current portion of long-term loans)

4,949,298

5,412,628

7,391,663

9,690,493

8,480,736

1,086,703

Shareholders' equity

13,170,960

16,634,499

25,436,606

30,720,995

42,283,083

5,418,059

Number of shares

10,495,863

10,499,900

11,040,835

11,049,876

11,649,876

11,649,876

 

 

 

 

 

 

 

 

Years Ended December 31,

 


 

2002

2003

2004

2005

2006

2006

 

RMB

RMB

RMB

RMB

RMB

US$(4)

 

 

 

 

 

 

 

- 7 -

 


 

 

(restated(1))

(restated(1))

(restated(1))

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

Other Financial Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

HK GAAP

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash generated from

 

 

 

 

 

 

operating activities

2,671,759

6,002,506

8,265,203

8,590,208

13,223,960

1,694,489

 

 

 

 

 

 

 

Net cash used in investing activities

(3,780,812)

(5,395,259)

(9,055,830)

(8,821,208)

(10,244,226)

(1,312,672)

 

 

 

 

 

 

 

Net cash generated from (used in)

 

 

 

 

 

 

financing activities

(868,513)

(306,892)

4,417,950

1,604,964

(774,686)

(99,267)

 

 

 

 

 

 

 

Capital expenditure

 

 

 

 

 

 

Alumina

3,357,576

4,013,419

5,398,997

5,369,606

3,554,884

455,515

Primary aluminum

865,360

1,635,826

5,257,407

2,793,892

4,324,238

554,098

Corporate and other services

49,304

47,259

76,841

124,811

122,214

15,660

Unallocated

29,930

33,030

208,411

129,623

692,986

88,798

Total capital expenditure

4,302,170

5,729,534

10,941,656

8,417,932

8,694,322

1,114,071

 

 

 

 

 

 

 

----------------------------------------------------

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Restatement of the financial information for the years ended December 31, 2002, 2003, and 2004 has been made pursuant to the adoption of the new/revised standards and interpretation of HKFRS on January 1, 2005.

 

 

(2)

Total other revenues of RMB554 million, RMB460 million, RMB646 million and RMB716 million, and related cost of sales of RMB530 million, RMB467 million, RMB593 million and RMB720

 

 

- 8 -

 


 

 

million were previously classified as "other (income) and other (gains)/losses, net" for the years ended December 31, 2002, 2003, 2004 and 2005, respectively. They were separately presented as part of the total revenue and cost of sales, respectively, in the consolidated income statements for the year ended December 31, 2006, and related prior year amounts have been reclassified to conform to the current year classification.

 

 

(3)

Marketing and advertising expenses were previously classified as "general and administrative expenses" for the year ended December 31, 2002, 2003, 2004 and 2005. Total marketing and advertising expense of RMB10 million, RMB19 million, RMB25 million and RMB34 million for the year ended December 31, 2002, 2003, 2004 and 2005, respectively, were reclassified to "selling and distribution expenses" to conform to the current year clarification.

 

 

(4)

Translated solely for the convenience of the reader into U.S. dollars at the noon buying rate prevailing on December 29, 2006 of US$1.00 to RMB7.8041.

 

 

(5)

Effective in October 2006, the Company's American Depository Shares (the "ADSs") ratio has been changed from 1 ADS representing 100 H Shares to 1 ADS representing 25 H Shares. Basic and diluted net earnings per ADS for the years ended December 31, 2002, 2003, 2004 and 2005 have been restated.

 

 

Exchange Rate Information

 

The following table sets forth, for the periods indicated, the noon buying rate in New York for cable transfers payable in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York in Renminbi per U.S. dollar:

 

 

Noon Buying Rate

 


Period

Period End

Average(1)

High

Low






 

(expressed in RMB per US$)

 

 

2002

8.2800

8.2772

8.2800

8.2699

2003

8.2767

8.2771

8.2800

8.2765

2004

8.2765

8.2768

8.2773

8.2764

2005

8.0702

8.1826

8.2765

8.0702

2006

7.8041

7.9579

8.0702

7.8041

    December

7.8041

7.8219

7.8350

7.8041

2007

 

 

 

 

    January

7.7714

7.7876

7.8127

7.7705

    February

7.7410

7.7502

7.7632

7.7410

 

 

 

 

 

- 9 -

 


 

    March

7.7232

7.7369

7.7454

7.7232

    April

7.7090

7.7247

7.7345

7.7090

    May

7.6516

7.6773

7.7065

7.6463

 

 

 

 

 

(1)

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

 

 

RISK FACTORS

 

We are subject to various changing business, competitive, economic, political and social conditions in China as well as factors relating to the alumina and aluminum industry. These changing conditions and factors entail certain risks, which are described below:

 

*

We price our alumina and primary aluminum products by reference to international and domestic market prices, import cost of alumina, and changes in supply and demand in the domestic market. Each of these factors may fluctuate beyond our control. Historically, the international market prices for alumina and primary aluminum products have been volatile. Because most of our costs are fixed and we may not be able to respond quickly to any sudden decrease in alumina or primary aluminum prices, any significant fluctuation in international market prices could materially adversely affect our business, financial condition and operating performance.

 

 

*

Our plans to upgrade and expand our alumina and primary aluminum plants and to improve and upgrade our internal control and management system will require capital expenditures of approximately RMB16,600 million in 2007. See "Item 4. Information on the Company - Property, Plants and Equipment - Our Expansion and Profit Improvement Plan". We may also need further funding for debt servicing, working capital, investments, potential acquisitions and joint ventures and other corporate requirements. We cannot assure you that cash generated from our operations will be sufficient to fund these development plans, or that our actual capital expenditures and investments will not significantly exceed our current planned amounts. If either of these conditions arises, we may have to seek external financing to satisfy our capital needs. Our ability to obtain external financing at reasonable costs is subject to a variety of uncertainties. Failure to obtain sufficient external funds for our development plans could adversely affect our business, financial condition and operating performance.

 

 

*

Our planned expansion, cost reduction and technical improvement projects could be delayed or adversely affected by, among other things, failures to receive regulatory approvals, difficulties in obtaining sufficient financing, technical difficulties, or human or other resource constraints. Moreover, the costs involved in these projects may exceed those originally contemplated. Costs savings and other economic benefits expected from these projects may not materialize as a result of any such project delays, cost overruns or changes in market circumstances. Failure to obtain intended economic benefits from these projects could adversely affect our business, financial condition and operating performances.

 

 

*

Our business has grown rapidly. Our ability to manage growth and the increased scale of our operations effectively will require us to continue to implement and improve our operational, financial and management systems, continue to develop the management skills of our managers, and continue to train, motivate and manage our employees. Failure to manage our growth and expanded operations effectively could adversely affect our operating performance.

 

 

 

In addition, we are in the process of conducting feasibility studies to establish an overseas joint venture company with Companhia Vale do Rio Doce, or CVRD, to produce alumina in Brazil. We have also participated in the bidding for bauxite mining projects in Australia and have been

 

 

- 10 -

 


 

 

selected as the preferred developer. Further, we entered into the memorandum of understanding with the Vietnam National Coal-Mineral Industries Group, or "VINACOAL" regarding the proposed establishment of joint venture companies to engage in the development of local bauxite resources. We have made various preliminary preparations for the bauxite exploring project in Guinea. Due to the increase of energy prices in the global market and uncertainty of future market conditions, as well as our unfamiliarity with local laws and regulations, we could encounter unforeseen problems. We cannot assure you that our overseas expansion or investments will be successful or that we will not suffer foreign exchange losses in connection with our overseas investments.

 

 

*

We face competition from both domestic and international primary aluminum producers. Our principal competitors in the primary aluminum business are domestic smelters, some of which are expanding their production capacity. These smelters pose competitive challenges to our primary aluminum operations in production costs, product quality and price. We also face increasing competition from international primary aluminum suppliers as China continues to open up its aluminum industry to international trade. As a result of China's accession to the WTO on December 11, 2001, competition from international suppliers of alumina may increase as tariff and non-tariff barriers for imported alumina are significantly reduced. The standard tariff on imports of alumina into China has been reduced from 18% as of December 31, 2001 to its current level of 3% as of November 1, 2006. Intensified competition may result in reductions in our prices or sales volume and may have a material adverse effect on our financial condition and operating performance. If we are not successful in reducing our costs, or if we are unable to maintain or increase our current share of China's primary aluminum market, our financial condition and profitability could be materially and adversely affected.

 

 

*

We rely heavily on coal as our energy and fuel source required during our production process. As we significantly increase our production capacities, coal required for our production substantially increases accordingly. If our coal suppliers are not able to supply the amount of coal required for our production due to general short supply of coal or any other reason, we may be forced to reduce production output or suspend operation of our production in which case our financial condition and results of operation may be materially adversely affected.

 

 

*

Bauxite is the most important raw material for alumina production. We obtain our bauxite from three major sources, including our own mines, jointly operated mines, and other suppliers. See "Item 4. Information on the Company - Business Overview - Business Operations - Alumina - Raw Materials - Bauxite". Each of these sourcing methods could affect the security or cost of supply. If we are unable to obtain a steady supply of key raw materials externally and internally at a competitive price, our operating performance may be adversely affected.

 

 

*

The smelting of primary aluminum employs an electrolytic reduction process that requires a large and continuous supply of electricity. Interruptions of electricity supply can result in lengthy production shutdowns, increased costs associated with restarting production and waste of production in progress. In extreme cases, interruptions of electricity supply can also cause damage to or destruction of the equipment and facilities. If this occurs, our operations may be adversely affected.

 

 

*

Electricity cost is the principal production cost component of our primary aluminum production. All of our smelters benefit from various policies that allow them to purchase electricity at reduced prices. However, despite such preferential treatment, our electricity prices are expected to continue to be higher than those of major international primary aluminum producers. Our electricity costs have increased due to severe shortage of electric power in recent years. In 2005, the electricity shortage led to an increase of average electricity price, whereas such situation was gradually relieved in 2006. If any other preferential treatment policies are cancelled by the PRC government or not renewed upon expiration, or if electricity prices or charges were to increase for any reason, the resulting increase in our unit production cost for primary aluminum would have an adverse effect on our operating margin, financial condition and operating performance if we are unable to increase the selling prices of our products correspondingly.

 

 

- 11 -

 


 

*

Our alumina products are mainly delivered by rail or truck, and our primary aluminum products are transported to our customers mostly by rail. If we are unable to make on-time delivery due to transportation problems, or if the costs of transportation continue to rise, our operating performance will be significantly affected.

 

 

*

A main objective of our research and development projects is to develop new methods and new processes to improve the efficiency of refining alumina from bauxite that has relatively low alumina-to-silica ratios. There is a potential decline in China's supply of bauxite with high alumina-to-silica ratios. Therefore, failure to achieve technological improvements or to implement such improvements in commercial applications could impede our efforts to reduce unit production costs and to compete with major international producers.

 

 

*

The bauxite reserve data on which we base our production, revenue and expenditure plans are estimates we have developed internally and may be inaccurate. There are numerous uncertainties inherent in estimating quantities of reserves, including many factors beyond our control. If these estimates are inaccurate or indicated tonnages are not recovered, our business, financial condition and operating performance could be materially and adversely affected.

 

 

*

We rely on short-term borrowings as part of our financing needs. If we fail to achieve timely rollover, extension or refinancing of our short-term debt, we may be unable to meet our obligations in connection with debt service, accounts payable and/or other liabilities when they become due and payable. In addition, we may be exposed to changes in interest rates. If interest rates increase substantially, our results of operations could be adversely affected.

 

 

*

Our primary sources of funding are cash generated by operating activities , short-term and long-term bank borrowings, proceeds from shares offerings and proceeds from short-term bond offerings. In 2006, we required our customers to make prepayments or deposits for purchases of alumina. The total amount of prepayments and deposits was approximately RMB425.7 million as of December 31, 2006. We have relied on prepayments and deposits received from customers as a source of our liquidity. In the event that demand for alumina declines, we may not be able to require such prepayments and deposits from customers, in which case this source of liquidity would not be available to us.

 

 

*

Chinalco, a state-owned enterprise, as of December 31, 2006 owned 39.59% of our issued share capital and is our largest shareholder. Upon the A Share issuance on April 30, 2007, China Orient transferred all of its equity interest in us, being 4.67% or 602,246,135 shares, to Chinalco, and thus Chinalco owned 40.46% of our issued share capital. The interests of Chinalco may conflict or even compete with our interests and the interests of our public shareholder. Chinalco may take actions that favor the interests of its subsidiaries, associates and other related entities over our interests and the interests of our public shareholders. In addition, Chinalco and some of its subsidiaries and associates provide a range of services to us, including engineering and construction services, social services, land and property leasing and supply of raw and supplemental material. Some of the services Chinalco provides to us, such as educational and medical care services for our employees, would be difficult to obtain from other sources. Our cost of operations could increase if Chinalco were unable to perform its agreement to provide such services to us.

 

 

*

Chinalco has substantial financial obligations relating to the businesses, operations and personnel that it retained in the reorganization. While Chinalco generates significant operating revenue and receives government support, it may also rely on dividends received from us as a means of funding these obligations. Subject to the relevant provisions of the PRC Company Law and our articles of association, Chinalco may seek to influence the amount of dividends we pay out in order to satisfy its cash flow requirements. Any resulting increase in our dividend payout would reduce funds available for reinvestment in our businesses.

 

 

*

Our alumina and primary aluminum production operations are subject to environmental protection laws and regulations in China, which impose such penalties as waste discharge fees, fines or closure of non-compliant plants. Each of our alumina and primary aluminum production plants has

 

 

- 12 -

 


 

 

implemented a system to control its emissions and to oversee compliance with PRC environmental regulations. However, the PRC government has taken steps, and may take additional steps, towards more rigorous enforcement of applicable laws, and/or adoption of more stringent environmental standards. If the PRC national or local authorities enact additional regulations or enforce existing or new regulations in a more rigorous manner, we may be required to make additional environmental expenditures, which could have an adverse impact on our financial condition.

 

 

*

We may experience major accidents in the course of our operations, which may cause significant property damage and personal injuries. Significant industry-related accidents and natural disasters may cause interruptions to various parts of our operations, or could result in property or environmental damage, increase in operating expenses or loss of revenue. The occurrence of such accidents and the resulting consequences may not be covered adequately, or at all, by the insurance policies we carry. In accordance with customary practice in China, we do not carry any business interruption insurance or third party liability insurance for personal injury or environmental damage arising from accidents on our property or relating to our operations other than our automobiles. Losses or payments incurred may have a material adverse effect on our operating performance if such losses or payments are not fully insured.

 

 

*

We are also subject to a number of risks relating to the PRC, including the following:

 

 

 

*

The central and local PRC governments continue to exercise a substantial degree of control and influence over the aluminum industry in China and shape the structure and characteristics of the industry by means of policies in respect of major project approvals, preferential treatments such as tax incentives, electricity pricing, and safety, environmental and quality control. If the PRC government changes its current policies or the interpretation of those policies that are currently beneficial to us, we may, to some extent, face pressure on profit margins and significant constraints on our ability to expand our business operations or to maximize our profitability.

 

 

 

 

*

Under current PRC regulatory requirements, the construction of new alumina refineries, the expansions of primary aluminum plants and mining projects in excess of RMB500 million require PRC government approval. If any of our important projects required for our growth or cost reduction are not approved, or not approved on a timely basis, our financial condition and operating performances could be adversely affected.

 

 

 

 

*

Substantially all of our business, assets and operations are located in China. The economy of China differs from the economies of most developed countries in many respects. The economy of China has been transitioning from a planned economy to a market-oriented economy. Although in recent years the PRC government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry by imposing industrial policies. It also exercises significant control over China's economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Some of these measures benefit the overall economy of China, but may have a negative effect on us.

 

 

 

 

*

Since 1994, the conversion of Renminbi into foreign currencies, including Hong Kong and U.S. dollars, has been based on rates set by the People's Bank of China, or PBOC, which are set daily based on the previous day's PRC interbank foreign exchange market rate and current exchange rates on the world financial markets. On July 21, 2005, PBOC announced a reform of its exchange rate system and revalued the Renminbi. Under the reform, Renminbi is allowed to trade against a basket of foreign currencies. Any further appreciation of Renminbi in the future will increase the cost of our export sales, reduce the Renminbi equivalent value

 

 

 

- 13 -

 


 

 

 

of our account receivables denominated in foreign currencies and could adversely affect our financial condition and results of operations. On the other hand, any devaluation of Renminbi may adversely affect the value of, and dividends payable on, our H Shares and ADSs in foreign currencies since we receive our revenue and denominate our profits in Renminbi. Our financial condition and operating performance may also be affected by changes in the value of certain currencies other than Renminbi in which our earnings and obligations are denominated. In particular, a devaluation of the Renminbi could increase the portion of our cash flow required to satisfy our foreign currency-denominated obligations.

 

 

 

 

*

Since 1979, many new laws and regulations covering general economic matters have been promulgated in China. Despite this activity to develop the legal system, China's system of laws is not yet complete. Even where adequate law exists in China, enforcement of existing laws or contracts based on existing law may be uncertain and sporadic, and it may be difficult to obtain swift and equitable enforcement or to obtain enforcement of a judgment by a court of another jurisdiction. The relative inexperience of China's judiciary in many cases creates additional uncertainty as to the outcome of any litigation. In addition, interpretation of statutes and regulations may be subject to government policies reflecting domestic political changes.

 

 

 

See also "Item 4. Information on the Company - Business Overview", "Item 5. Operating and Financial Review and Prospects", "Item 7. Major Shareholders and Related Party Transactions - Related Party Transactions", "Item 8. Financial Information" and "Item 11. Quantitative and Qualitative Disclosures about Market Risks".

 

ITEM 4.

INFORMATION ON THE COMPANY

 

 

HISTORY AND DEVELOPMENT OF THE COMPANY

 

Overview

 

We were incorporated as a joint stock limited company under PRC laws on September 10, 2001. Our scope of business includes bauxite mining, the production of alumina, primary aluminum and ancillary products, and provision of engineering and construction services. Pursuant to a reorganization agreement effective as of July 1, 2001 among Chinalco, Guangxi Investment, Guizhou Development and us, as well as a mining rights agreement between Chinalco and us, substantially all of Chinalco's alumina and primary aluminum production operations, operations of the Research Institute, as well as mining operations and mining rights of bauxite mines and other related assets and liabilities were transferred to us upon our formation.

 

We are currently the largest producer of alumina and primary aluminum in terms of production and sales volume in China, one of the fastest growing major aluminum markets in the world. Alumina and primary aluminum are our principal products. Alumina is refined from bauxite through a chemical process and is the key raw material for producing primary aluminum, which in turn is a widely used metal and the key raw material for aluminum fabrication. In addition to alumina and primary aluminum, we also produce and sell a comparatively small amount of alumina chemical products, including alumina hydrate and alumina-based industrial chemical products, carbon products, including principally carbon anodes and cathodes, and gallium.

 

We produced approximately 8,830,000 tonnes of alumina, representing a year-on-year increase of 23%, and approximately 1,100,000 tonnes of alumina chemical products in 2006, representing a year-on-year increase of 17%. Our total alumina products represent approximately 50.1% of all alumina products consumed in China during that year, making us the second largest producer of alumina in the world. The intra-company utilization ratio of alumina was increased to approximately 40% for 2006 from approximately 26% for 2005.

 

- 14 -

 


 

Our alumina production has increased rapidly in the past few years. >From 2002 to 2006, our annual alumina production grew from 5,410,000 tonnes to 9,520,000 tonnes.

 

Our primary aluminum production of 1,930,000 tonnes in 2006 accounted for approximately 22.3% of China's domestic primary aluminum production for 2006. From 2002 to 2006, our annual primary aluminum production grew from 750,000 tonnes to 1,930,000 tonnes.

 

Our key operating assets include one bauxite branch, four integrated alumina and primary aluminum production plants, another two alumina refineries and nine primary aluminum smelters, including Jiaozuo Wanfang, which is our 29% owned associated company, in addition to the integrated production plants and one research institute, which also produces a small amount of products on a pilot run basis. Most of our refineries are located in reasonable proximity to abundant bauxite reserves and, as of December 31, 2006, had annual production capacities ranging from 800,000 to 2,217,000 tonnes. Our primary aluminum smelters had annual production capacities ranging from 56,000 to 403,700 tonnes as of December 31, 2006. According to the China Non-ferrous Metals Industry Association, our smelters in Qinghai and Guizhou are the third largest and the fifth largest smelters in China, respectively, in terms of production capacity. Since December 31, 2004, all of our production facilities have been granted ISO9001:2000, OHSAS 18001:1999 and GB/T 28001-2001 accreditations.

 

Our recent domestic development

 

We entered into a number of acquisition and joint venture agreements with partners in China and overseas to further increase our alumina and primary aluminum production capacities. On December 6, 2005, we entered into a joint venture agreement with Shanxi Guanlv Co., Ltd. to establish a joint venture company, Shanxi Huasheng Aluminum Company Ltd. The joint venture company started operation in March 2006, with a designed annual production capacity of primary aluminum of approximately 220,000 tonnes. The joint venture company has a registered capital of RMB1,000 million, and we hold a 51% equity interest in it.

 

On February 17, 2006, our Qingdao Branch was established under the PRC law in Qingdao, with secondary aluminum alloy as its major product. Our Qingdao Branch is designing an aluminum alloy production line with an annual capacity of 120,000 tonnes. The project is expected to be completed at the end of 2007 and investment in the project is expected to be RMB850 million.

 

In March 2006, we entered into a share transfer agreement with Liaoning Fushun Aluminum Plant to acquire the 100% equity interest held by it in Liaoning Fushun Aluminum Co., Ltd., or Fushun Aluminum, with an designed annual production capacity of 140,000 tonnes for a consideration of RMB500 million. Fushun Aluminum's primary business is the production of primary aluminum and carbon products.

 

In April, 2006, we entered into a joint venture agreement with Guizhou Wujiang Hydropower Development Co., Ltd. to establish a joint venture company, Chalco Zunyi Alumina Co., Ltd. We hold a 67% equity interest in the joint venture company. The joint venture company is expected to have a designed annual production capacity of alumina of approximately 800,000 tonnes and is expected to commence operation in June 2009. The joint venture company is expected to have a total investment of RMB4,250.0 million and a registered capital of RMB1,400.0 million.

 

On May 19, 2006, we entered into a Sale and Purchase Agreement with Jiaozuo Wanfang Group to acquire 29% of the issued share capital, or 139,251,064 State-owned legal person shares held by Jiaozuo Wanfang Group in the issued share capital of Jiaozuo Wanfang. Jiaozuo Wanfang has a designed annual production capacity of 272,000 tonnes of primary aluminum. Jiaozuo Wanfang is a joint stock limited company established in the PRC, the shares of which are listed on the Shenzhen Stock Exchange of the PRC. The total consideration paid by us for the acquisition of Jiaozuo Wanfang is RMB247.0 million. We are the largest shareholder of Jiaozuo Wanfang.

 

In June 2006, we entered into a share purchase agreement with Guizhou Wujiang Hydropower Development Co., Ltd. and other eight companies who were the shareholders of Zunyi Aluminum to purchase part of the equity interest from Guizhou Wujiang Hydropower Development Co., Ltd. and all the equity interest from the other eight companies. We have completed our purchase and hold 61.3% of the equity interest of Zunyi Aluminum. Zunyi Aluminum has a designed annual production capacity of aluminum of 110,000 tonnes.

 

- 15 -

 


 

In July 2006, we entered into a share transfer agreement with Shandong Huasheng Jiangquan Group to acquire a 55% equity interest in Shandong Huayu, a subsidiary of Shandong Huasheng Jiangquan Group. Shandong Huayu has a designed annual production capacity of 100,000 tonnes of primary aluminum, and also has other supporting facilities and two 135MW coal-fired generators.

 

On July 7, 2006, our Chongqing Branch was established under the PRC law in Chongqing, mainly to produce alumina products. Chongqing Branch is constructing an alumina project with annual capacity of 800,000 tonnes, which is expected to be completed in June 2009. The total investment amounts to RMB4,700 million.

 

In August 2006, we entered into a share transfer agreement with Baiyin Nonferrous Metal (Group) Co., Ltd., or Baiyin Nonferrous, and Baiyin Ibis Aluminum Co., Ltd., or Baiyin Ibis. Baiyin Nonferrous contributed 127,000 tonnes of primary aluminum smelting and supporting facilities owned by Baiyin Ibis as capital contribution and held a 49% equity interest in Gansu Hualu, a subsidiary of Baiyin Ibis, and we held 51% equity interest in Gansu Hualu. The joint venture company will have a designed annual production capacity of 127,000 tonnes of primary aluminum.

 

In addition, on May 29, 2006, we entered into a letter of intent with Guangyuan city government and Sichuan Guangyuan Venus Aluminum Co., Ltd. ("Guangyuan Venus Aluminum") to promote the joint operation of aluminum and electricity. We will hold 26% in the equity interest of Guangyuan Venus Aluminum, which has a designed annual production capacity of 120,000 tonnes of primary aluminum. Negotiation on the terms of the agreements is proceeding.

 

The following sets forth those of our plants acquired in 2006 that are either currently in operation or under construction:

 

Plants in operation

Major products

 

 

Shanxi Huasheng

Primary aluminum products

Fushun Aluminum

Primary aluminum products

Zunyi Aluminum

Primary aluminum products

Shandong Huayu

Primary aluminum products

Gansu Hualu

Primary aluminum products

Jiaozuo Wanfang

Primary aluminum products

 

 

Plants under construction

Major products

Chalco Zunyi Alumina

Alumina products

Qingdao Secondary Aluminum Alloy Branch

Aluminum alloy products

Chongqing Branch

Alumina products

 

 

Our recent overseas development

 

To secure our bauxite supply, we continued to participate in overseas development projects in 2006. We entered into a non-binding Framework Agreement with CVRD on May 24, 2005. Since then, we have been discussing and negotiating the contents of the feasibility study and the product market of the joint venture with CVRD. See "-Business Overview - Production Facilities - Alumina". We submitted a letter of intent to bid for the development of bauxite resources in Aurukun, Australia to the Queensland government in October 2005. We further submitted a non-binding preliminary development proposal to the Queensland government in January 2006. On September 15, 2006, we were selected as the preferred developer of the Aurukun project. On March 23, 2007, we signed the Aurukun project development agreement with the Queensland Government. We expect to enter into an agreement with the indigenous communities within the second quarter of 2007, and then to obtain the mining rights development license for the Aurukun bauxite project. From then on, the feasibility study is expected to commence. See "-Business Overview - Raw Materials - Alumina".

 

- 16 -

 


 

Since 2006, we have made various preliminary preparations for a bauxite exploration project in Guinea, including field investigations by a team of experts, preparation of the authorized and registered area for bauxite exploration, design proposals for the overall exploration planning arrangement, and formally submissions of the exploration plan to the Ministry of Mines of Guinea. Currently, the exploration has commenced.

 

In addition, we participated in a mining project under cooperation between the PRC and Vietnam governments to exploit bauxite resources in Dak Nong province in Vietnam. In December 2005, we entered into a non-binding memorandum of understanding with VINACOAL regarding the proposed establishment of joint venture companies to explore bauxite resources in Dak Nong province in Vietnam. In 2006, through close cooperation with Vietnam National Coal Corporation, we made a number of preliminary preparations relating to the project, which included completing the plant site investigation and ore washing tests, as well as finalizing the amendments to the preliminary feasibility study, which has been submitted to the Vietnam government. On November 16, 2006, the parties entered into a cooperation agreement regarding the Dak Nong Project. Currently, we are waiting for the Vietnam government's approval on the feasibility study report of the project. See "-Business Overview - Production Facilities - Alumina".

 

Our capital expenditures in 2004, 2005 and 2006 were RMB10,941.6 million, RMB8,417.9 million and RMB8,694.3 million, respectively. We currently expect our capital expenditures to be approximately RMB16,600 million in 2007. For details of our capital expenditures and our future plan, please see "-Our Expansion and Profit Improvement Plan" and "Item 5 -Operating and Financial Review and Prospects - Capital Expenditures".

 

Our principal executive office is currently located at No. 62 North Xizhimen Street, Hai Dian District, Beijing, 100082, People's Republic of China. Our contact telephone number is (86)10 8229 8103. Our website is www.chalco.com.cn. Information on our website does not constitute part of this annual report.

 

Strategic Investor

 

We and Alcoa agreed in 2001 to develop a long-term strategic relationship. The key components of this relationship involve an investment in our company and the formation of a joint venture company, Guangxi Pingguo JV, to own and operate our Pingguo facilities. To establish this strategic relationship, we and Alcoa entered into:

 

*

a strategic investor subscription agreement, dated November 5, 2001, or Subscription Agreement, pursuant to which Alcoa agreed to purchase our shares in our initial global share offering in December 2001 at the initial public offering price of an amount of shares that would constitute 8.0% of our outstanding share capital immediately following the global offering; and

 

 

*

a memorandum of understanding, or the MOU, dated November 12, 2001, which sets forth the basis on which we propose to form the Guangxi Pingguo JV to own and operate the alumina and primary aluminum production facilities at our Guangxi plant.

 

 

The primary aspects of our strategic relationship with Alcoa are described below.

 

Investment in Our Company

 

Holding 6.86% of our issued share capital, Alcoa maintains a strategic stake in our shares and is entitled to appoint one director to our board of directors, to participate in any future projects we may contemplate undertaking with a foreign partner in bauxite mining, alumina refining or primary aluminum smelting in China, and to establish a second equity joint venture with us so long as we and Alcoa agree that the initial joint venture company at the Guangxi plant represents a successful beginning to our strategic relationship.

 

In addition, Alcoa has given us the right of first refusal to participate in any future projects Alcoa may contemplate undertaking with a domestic partner in the PRC in bauxite mining, alumina refining or primary aluminum smelting.

 

Joint Venture at Our Guangxi Plant

 

- 17 -

 


 

The MOU sets forth the basis on which we and Alcoa intend to form a limited liability equity joint venture company as equal 50% shareholders of our Guangxi plant for the purpose of mining bauxite, refining alumina and smelting aluminum. The term of the Guangxi Pingguo JV is proposed to be 50 years.

 

In April 2004, we received a notification from the NDRC regarding their approval on March 29, 2004 of the establishment of the Guangxi Pingguo JV. For further information, see "Item 4. Information of the Company - Our Facilities - Guangxi Plant".

 

According to the MOU, the board of directors of the Guangxi Pingguo JV will consist of six directors, of which we will appoint three and Alcoa will appoint the other three. The chairman of the board of directors is to be elected from among the directors that we appoint. The vice-chairman is to be elected from among the directors appointed by Alcoa. The day-to-day management of the Guangxi Pingguo JV will be the responsibility of a general manager nominated by Alcoa and appointed by the board of directors of the Guangxi Pingguo JV.

 

Pursuant to the Subscription Agreement, as amended, if the final joint venture agreement for the Guangxi Pingguo JV is not executed within eight months from the closing of our global offering or if all necessary relevant PRC government approvals for the Guangxi Pingguo JV are not obtained within twelve months from the closing of our global offering due to the failure of a party to abide by the terms of the MOU, the defaulting party would be obliged to pay US$7.5 million (equivalent to RMB62.1 million) to the other party as compensation and the restrictions on Alcoa's ability to sell our shares will terminate. We continue to work closely and actively with Alcoa to seek the opportunity of establishing a joint venture. As of December 31, 2006, we have not made any claim against Alcoa nor has Alcoa made any claim against us for compensation under the Subscription Agreement, as amended.

 

Our Initial Public Offering

 

In December 2001, we completed our global initial public offering in which 2,749,889,968 H Shares were listed on the Hong Kong Stock Exchange (stock code 02600) and 409,646,400 H Shares in the form of ADSs were sold in the United States and listed on the NYSE under the symbol "ACH".

 

Our H Shares Placement in 2004

 

On January 6, 2004, we placed 549,976,000 additional H Shares, each with a par value of RMB1.00, to certain independent professional and institutional investors who are non-U.S. persons outside the United States pursuant to Regulation S of the U.S. Securities Act of 1933 at a price of HK$5.658 per H share. The net proceeds amounted to RMB3,251.0 million. As of December 31, 2006, RMB3,118 million from our H Share placement was used for capital expenditures.

 

Our Recent H Shares Placement

 

We placed 644,100,000 H Shares in the share capital of our Company at a price of HK$7.25 per H Share on May 9, 2006. The net proceeds from the placement of the 600,000,000 new H Shares of our Company were HK$4,248 million (equivalent to RMB4,391 million). We will use the net proceeds arising from the Placement for possible acquisitions of domestic primary aluminum projects and for general working capital purposes.

 

The Placing shares were listed on the Hong Kong Stock Exchange on May 19, 2006. As of December 31, 2006, RMB1,104.0 million of our net proceeds from our H Share placement was used for capital expenditures.

 

The A Shares Offering

 

As approved by the shareholders at a Special General Meeting held on February 27, 2007, we issued no more than 1,500,000,000 domestically listed Renminbi-denominated ordinary shares by way of share exchange with all the shareholders of Shandong Aluminum and Lanzhou Aluminum other than us, including the third party or parties (if any) who provide cash alternatives to the shareholders of Shandong Aluminum and Lanzhou Aluminum. Because the proceeds from our A Share issuance was used to acquire Shandong Aluminum and Lanzhou Aluminum, we did not raise any fund by the issuance.

 

- 18 -

 


 

The dealings of the A Shares on the Shanghai Stock Exchange commenced on April 30, 2007. We initially offered 1,236,731,739 A Shares at the price of RMB 6.60 for each share. Our total share capital increased to 12,886,607,892 shares, comprising 7,794,564,567 restricted A Shares, 1,148,077,357 unrestricted A Shares and 3,943,965,968 H Shares. Chinalco's equity interest in us decreased from 39.59% to 35.79% as a result of the A Share issuance. At the same time, China Orient transferred all of its equity interest in us to Chinalco, and ceased to be our shareholder. Chinalco's equity interest in us increased to 40.46% as a result of the transfer.

 

Our Short-term Bonds Offering

 

In May and December 2006, we issued domestic short-term bonds in the total principal amount of RMB3 billion and RMB2 billion, respectively, at a par value of RMB100 each for net proceeds of approximately RMB2,988 million and approximately RMB1,925 million, respectively. These bonds bear interest at the rates of 3.13% and 3.44%, respectively, and have a maturity period of one year.

 

In March 2007, we obtained Board approval to issue short-term bonds in the principal amount of not more than RMB5 billion and with a maturity period of one year, which was then approved by our shareholders at the annual general meeting held on May 18, 2007. On June 15, 2007, we issued domestic short-term bonds in the total principal amount of RMB3 billion at coupon interest rate of 3.55%. The net proceeds of the short-term bonds issuance will be principally used as our working capital.

 

Our Long-term Bonds Offering

 

A resolution relating to the issue of long-term corporate bonds by us in a principal amount not exceeding RMB5 billion was approved at our Special General Meeting held on February 27, 2007. On March 19, 2007, we received the requisite approvals and on June 13, 2007, we issued long-term corporate bonds in the principal amount of RMB2 billion. The bonds have a ten-year fixed rate with an annual rate of 4.50%. The proceeds raised from the bonds issuance will be used mainly for renovation or expansion projects of alumina and aluminum.

 

BUSINESS OVERVIEW

 

Our Principal Products

 

We manage our operations according to our two principal business segments. Our alumina segment includes the production and sale of our alumina-related products, namely, alumina and alumina chemical products, including alumina hydrate, alumina-based industrial chemical products and gallium. Our primary aluminum segment includes the production and sale of our primary aluminum-related products, namely, primary aluminum (including both ingots and other primary aluminum products) and carbon products. External sales of our alumina and primary aluminum segments accounted for approximately 44.3% and 54.5%, respectively, of our total revenue in 2006. Alumina is refined from bauxite through a chemical process and is the key raw material for producing primary aluminum, which in turn is a key raw material for aluminum fabrication.

 

Our alumina segment products consist primarily of alumina, which accounted for approximately 92.75% of our total alumina segment output based on total production volume in 2006. Other alumina segment products consist primarily of alumina chemical products, including alumina hydrate, alumina-based industrial chemical products and gallium. Alumina chemical products are used in the production of chemical, pharmaceutical, ceramic and construction materials. In the process of refining bauxite into alumina, we also produce small amounts of gallium, which is a related product and a high-value rare metal with special uses in the electronics and telecommunications industries.

 

Our most important primary aluminum product is ingots, which accounted for approximately 89.12% of our total primary aluminum output in 2006. Our standard ingots are 20-kilogram remelt ingots used for general aluminum fabrication primarily for the auto, construction, power and consumer goods industries. Other than ingots, we also produce a small amount of high value-added and high-margin primary aluminum, such as electrical aluminum and aluminum alloys used for special industrial applications. In 2006, we continued to adjust our product mix to increase the production of high value-added primary aluminum, such as increasing

 

- 19 -

 


 

the production of aluminum alloys by approximately 89.0% compared to 2005, to realize the higher margin of such products. Our primary aluminum plants produce carbon products (principally carbon anodes and cathodes) used in smelting operations.

 

The carbon we produce supplies substantially all of the carbon products required for our smelters. We also sell some of our carbon products to external smelters.

 

Since 2003, we have started to recycle scrap materials for our primary aluminum production. In 2006, our Shandong Plant used recycled materials to produce approximately 47,000 tonnes primary aluminum products. At present, only our Shandong Plant has the capability to produce primary aluminum products from recycled materials.

 

Our Production Capacity

 

The following table sets forth the production capacity of alumina and primary aluminum for each of our plants as of December 31, 2006:

 

 

Production Capacity

 

as of December 31, 2006

 


Plant

Alumina

Primary Aluminum

 



 

(in thousand tonnes) (1)

 

 

Guangxi plant

850.0

139.5

Zhongzhou plant

1,570.0

-

Qinghai plant

-

367.0

Shanxi plant

2,217.0

-

Guizhou plant

800.0

403.7

Henan plant

2,050.0

56.0

Shandong plant

1,500.0

75.0

Shanxi Huaze

-

280.0

Lanzhou Aluminum(2)

-

160.0

Shanxi Huasheng

-

220.0

Fushun Aluminum

-

140.0

Jiaozuo Wanfang(3)

-

272.0

Zunyi Aluminum

-

110.0

Shandong Huayu

-

100.0

 

 

 

- 20 -

 


 

Gansu Hualu

-

140.0

Research Institute

20.0

18.0

 



 

 

 

Total

9,007.0

2,481.2

 



 

 

 

(1)

Our production capacity takes into account designed capacity and subsequent modifications. Designed capacity is based on various assumptions including down time for ordinary maintenance and repairs and assumptions as to ore grade of bauxite used.

 

 

(2)

As of December 31, 2006, Lanzhou Aluminum was our associated company owned as to 28% of its equity interest and its results of operations were not consolidated into our financial statements. Production capacity presented above represents 100% of Lanzhou Aluminum's smelting capacity. See Notes 11(b) and 19(a) to our audited consolidated financial statements. After the A Shares issuance on April 30, 2007, Lanzhou Aluminum became our wholly-owned subsidiary.

 

 

(3)

Jiaozuo Wanfang is our associated company owned as to 29% of its equity interest. Its results of operations are not consolidated into our financial statements. Production capacity presented above represents 100% of Jiaozuo Wanfang's smelting capacity. See Note 11(b) to our audited consolidated financial statements.

 

 

The following table sets forth, for the periods indicated, information relating to our production volumes of the alumina segment and primary aluminum segment products:

 

 

Years Ended December 31,

 


Production Volume by Product

2004

2005

2006

 




 

(in thousand tonnes, except Gallium)

 

 

Alumina segment

 

 

 

Alumina

6,351.0

7,181.0

8,830.0

Alumina chemical products

469.0

937.0

1,100.0

Gallium (in tonnes)

23.0

22.2

25.5

Primary aluminum segment

 

 

 

Primary aluminum (1)(2)(3)

770.0

1,051.6

1,930.0

Carbon

623.0

672.0

1,060.0

 

 

 

 

- 21 -

 


 

-----------------------------------------------

 

 

 

 

 

 

 

(1)

Including ingots and other primary aluminum products.

 

 

(2)

As of December 31, 2006, Lanzhou Aluminum was our associated company owned as to 28% of its equity interest whose results of operations were not consolidated into our financial statements. Production volumes for 2006 presented above included 172,000 tonnes which represent 100% of Lanzhou Aluminum's production volumes. See Notes 11(b) and 19(a) to our audited consolidated financial statements.

 

 

(3)

Jiaozuo Wanfang is our associated company owned as to 29% of its equity interest. Its results of operations are not consolidated into our financial statements. Production volumes for 2006 presented above include the 148,000 tonnes that represent 100% of Jiaozuo Wanfang's production volumes. See Note 11(b) to our audited consolidated financial statements.

 

 

Production Process

 

Alumina

 

Alumina is produced from bauxite, an aluminum-bearing ore, by a chemical refining process. The production process to be used for producing alumina is determined by the mineral composition of the bauxite used. The production process generally includes the sintering process, the Bayer process, the hybrid Bayer-sintering process or the ore-dressing Bayer process. Most of the bauxite found in China is diasporite bauxite of a particular mineralogy, with high alumina content but relatively higher silica content, resulting in low alumina-to-silica ratios. The Bayer process cannot efficiently refine such bauxite unless the alumina-to-silica ratio of the bauxite is raised sufficiently prior to refining. Refining low alumina-to-silica ratio bauxite generally requires the use of either the sintering process or the hybrid Bayer-sintering process that we have developed and improved to enable the efficient processing of diasporite bauxite generally found in China.

 

Primary Aluminum

 

Alumina is converted into primary aluminum through a smelting process using electrolytic reduction. This electrolytic process takes place in a reduction cell, or "pot", a steel shell lined with carbon cathodes and refractory materials. Powerful electric currents are passed through the pot to produce molten aluminum. The molten aluminum is transferred to holding furnaces and then poured directly into moulds to produce foundry ingots or further refined to form fabricating ingots. Most of the primary aluminum we produce is in the form of ingots.

 

The two methods commonly used to produce primary aluminum are the "pre-bake" reduction process and the "soderberg" reduction process. Most modern aluminum production facilities adopt the pre-bake reduction. As of December 31, 2006, all of our primary aluminum capacity used pre-bake anode reduction pot-lines. In the pre-bake reduction process, the anodes are pre-formed in a separate facility where the pollutants can be contained. The cells themselves are enclosed with removable panels, so that the waste gases produced can be extracted using large exhaust fans. These gases are then treated and purified to reduce emissions of dust and fluoride to acceptable levels.

 

Production Facilities

 

Alumina

 

We operate six main alumina production facilities. Four of these six refinery plants are integrated with primary aluminum smelting operations. Our total designed annual production capacity for alumina products was approximately 9,007,000 tonnes as of December 31, 2006. In 2006, our actual production of alumina products was approximately 8,830,000 tonnes of alumina and approximately 1,100,000 tonnes of alumina chemical products. In 2006, we supplied approximately 3,570,000 tonnes to our own smelters, and sold the

 

- 22 -

 


 

rest to other domestic smelters. All of our alumina chemical products in the alumina segment we produced in 2006 were sold externally, either domestically or exported for chemical, pharmaceutical and other uses.

 

The following table sets forth the designed annual production capacity, alumina production output, alumina chemical products production output and the utilization rate of each of our alumina refineries and our Research Institute as of December 31, 2006.

 

 

As of December 31, 2006

 

 

 

 

Alumina

 

 

 

Designed

 

Chemical

 

 

 

Annual

Alumina

Products

 

 

 

Production

Production

Production

Utilization

 Production

 

Capacity (1)

Output

Output

Rate (2) (%)

Process

 

(in thousand tonnes, except percentages)

 


 

Shanxi plant

2,217.0

2,173.6

18.4

99.0

Hybrid Bayer-sintering

Henan plant(3)

2,050.0

2,163.8

208.5

113.5

Hybrid Bayer-sintering

Shandong plant

1,500.0

927.1

635.0

85.6

Sintering

Guizhou plant(3)

800.0

1,016.1

12.2

128.0

Hybrid Bayer-sintering

Zhongzhou plant(3)

1,570.0

1,624.5

154.6

110.0

Sintering and Bayer

Guangxi plant(3)

850.0

919.9

35.6

110.9

Bayer

Research Institute(4)

20.0

-

34.3

113.0

Bayer

 





 

 

 

 

 

 

 

Total

9,007.0

8,825.0

1,098.6

105.7

 

 





 

 

 

 

 

 

 

(1)

Our production capacity takes into account designed capacity and subsequent modifications. Capacity is based on various assumptions, including down time for ordinary maintenance and repairs and assumptions as to ore grade of bauxite used.

 

 

(2)

The capacity utilization rate is derived from the summation of (i) the production output of alumina chemical products multiplied by a quotient based on alumina content in these alumina chemical products and (ii) the production output of alumina divided by production capacity of a particular plant. Rates greater than 100% reflect the higher productivity obtained through the use of higher-grade bauxite than originally contemplated in capacity calculations.

 

 

(3)

Due to the technology upgrading of each refinery, our production capacity now exceeds our designed production capacity.

 

 

(4)

The alumina chemical products production facilities of our Research Institute are test facilities for research and development purposes. These products are sold commercially, and such sales are included in our total revenue.

 

 

Overseas investment

 

To secure future bauxite and alumina supply, we have participated in several overseas projects in Brazil, Australia Guinea and Vietnam. On May 24, 2004, we entered into a non-binding Framework Agreement

 

- 23 -

 


 

with CVRD, a corporation duly organized and existing under the laws of the Federative Republic of Brazil, for the establishment of a joint venture company, ABC Refinery, producing alumina in Brazil. We further entered into the first and second Amendment to the Framework Agreement in November 2004 and January 2005, respectively, to set forth the details and schedule of ABC Project.

 

It is intended that ABC Refinery will be owned by the joint venture company and shall be established as a first class alumina refinery with high competitiveness globally. The intended alumina capacity of the initial phase of ABC Refinery will be 1,800,000 tonnes per year, and may reach a final capacity of 7,200,000 tonnes per year through phased expansions. The proposed development of the ABC Refinery will involve a series of related transactions involving mining, transportation, shipping and port developments. Since 2006, we have been discussing and negotiating the contents of the feasibility study and the product market of the joint venture with CVRD.

 

We participated in a mining project under cooperation by the PRC and Vietnam governments to exploit bauxite resources in Dak Nong province in Vietnam. In December 2005, we entered into a non-binding memorandum of understanding with VINACOAL regarding the proposed establishment of joint venture companies to explore the bauxite resources in Dak Nong province in Vietnam. In 2006, through close cooperation with Vietnam National Coal Corporation, we made a number of preliminary preparations relating to the project, which included completing the plant site investigation and ore washing testings, as well as finalizing the amendments to the preliminary feasibility study, which has been submitted. In November 2006, the parties entered into a cooperation agreement regarding the Dak Nong Project. The alumina production capacity in the initial phase of such project is expected to be 1,900,000 tonnes per annum. Currently, we are waiting for the Vietnam government's approval on the feasibility study report of the project.

 

We submitted a letter of intent to bid for the development of bauxite resources in Aurukun, Australia to the Queensland government in October 2005. We further submitted a non-binding preliminary development proposal to the Queensland government in January 2006. On September 15, 2006, we were selected as the preferred developer of the Aurukun project. We are the first PRC enterprise ever to obtain large-scale bauxite resources in a western developed country by virtue of its own comprehensive capabilities in technologies, management and investment. On March 23, 2007, we signed the Aurukun project development agreement with the Queensland Government. The alumina production capacity of such project is 2,100,000 tonnes per annum. We expect to enter into an agreement with the indigenous communities within the second quarter of 2007, and then to obtain the mining rights development license for Aurukun bauxite project. From then on, the feasibility study is expected to commence.

 

Since 2006, we have made various preliminary preparations for the bauxite exploring project in Guinea, including field investigation by expert team, preparing the bauxite registered area exploration, design proposal for proposing the overall planning exploration arrangement, and formally submitting the exploration plan to the Ministry of Mines of Guinea. Currently, related work has been commenced.

 

Primary Aluminum

 

We operate thirteen major primary aluminum production facilities located in eight provinces in China. Four of these thirteen smelter plants are integrated with alumina refining operations and are self-sufficient with respect to alumina supply. In addition, our Research Institute also operates a test plant that produces primary aluminum in connection with its research and development.

 

Six of the thirteen primary aluminum production facilities, namely Shanxi Huasheng, Fushun, Shandong Huayu, Zunyi, Gansu Hualu and Jiaozuo Wanfang, were acquired by us in 2006. These six smelters have a designed annual production capacity of approximately 220,000 tonnes, 140,000 tonnes, 100,000 tonnes, 110,000 tonnes, 127,000 tonnes and 272,000 tonnes, respectively, and the total production capacity is 969,000 tonnes.

 

The total production capacity for primary aluminum production of all thirteen of our smelters, including four integrated alumina and primary aluminum production plants, Lanzhou Aluminum and Jiaozuo Wanfang, and our Research Institute in 2006 was 2,481,200 tonnes. In 2006, we, including Lanzhou Aluminum and

 

- 24 -

 


 

Jiaozuo Wanfang, produced approximately 1,930,000 tonnes of primary aluminum. Lanzhou Aluminum and Jiaozuo Wanfang, however, as of December 31, 2006, were our associated companies owned respectively as to 28% and 29% of their equity interest. The results of operations of Lanzhou Aluminum and Jiaozuo Wanfang are not consolidated into our audited financial statements. See Note 11(b) to our audited consolidated financial statements.

 

The following table sets forth the designed annual production capacity, output of aluminum products, the utilization rate and the smelting equipment used in each of our aluminum smelters and our Research Institute as of December 31, 2006:

 

 

As of December 31, 2006

 

 

Production

Aluminum

Utilization

 

Plant

Capacity(1)

Output

Rate (2) (%)

Smelting Equipment

 

(in thousand tonnes, except percentages)

 


 

Qinghai plant

367.0

382.2

104.1

60 kA pre-bake

Guizhou plant

403.7

362.7

89.8

160 kA & 186kA pre-bake

Guangxi plant

139.5

136.2

97.6

160kA &320kA pre-bake

Shandong plant

75.0

125.7

167.6

85kA pre-bake

Henan plant

56.0

41.3

73.8

85kA pre-bake

Shanxi Huaze

280.0

270.2

96.5

300kA pre-bake

Lanzhou Aluminum(3)

160.0

172.0

107.5

200kA & 75kA pre-bake

Shanxi Huasheng(4)

220.0

114.9

52.2

300 kA pre-bake

Fushun Aluminum(4)

140.0

100.0

71.4

200 kA pre-bake

Jiaozuo Wanfang(4) (5)

272.0

68.4

25.1

280 kA pre-bake

Zunyi Aluminum(4)

110.0

42.6

38.7

200 kA pre-bake

Shandong Huayu(4)

100.0

54.3

54.3

240 kA pre-bake

Gansu Hualu(4)

140.0

34.6

24.7

160 kA & 210kA pre-bake

Research Institute (6)

18.0

17.2

95.5

140 kA & 280kA pre-bake

 




 

 

 

 

 

 

Total

2,481.2

1,922.3

77.5

 

 




 

 

 

 

 

 

(1)

Production capacity takes into account designed capacity, subsequent modifications and down time for ordinary maintenance and repairs. Our production capacity includes new projects completed in 2006.

 

 

(2)

The capacity utilization rate is determined by dividing the production output of a particular plant by that plant's production capacity.

 

 

(3)

As of December 31, 2006, Lanzhou Aluminum was our associated company owned as to 28% of its equity interest. The results of operations of Lanzhou Aluminum were not consolidated into our audited financial statements. See Note 11(b) and Note 19(a) to our audited consolidated financial statements.

 

 

(4)

We acquired Shandong Huasheng, Fushun Aluminum, Shandong Huayu, Zunyi Aluminum, Gansu Hualu and Jiaozuo Wanfang in 2006. The aluminum production capacities of these smelters were

 

 

- 25 -

 


 

 

their total designed annual production capacity. The aluminum outputs were calculated from the date of their acquisition.

 

 

(5)

As of December 31, 2006, Jiaozuo Wanfang was our associated company owned as to 29% of its equity interest. The results of operations of Jiaozuo Wanfang were not consolidated into our audited financial statements. See Note 11(b) to our audited consolidated financial statements. As we exercise significant influence over Jiaozuo Wanfang, 100% of its designed annual production capacity and its production volume are included in the table above.

 

 

(6)

The primary aluminum production facilities of our Research Institute are experimental facilities for research and development purposes. Primary aluminum produced at the smelter is sold commercially, and such sales are included in our total revenue.

 

 

Raw Materials

 

Alumina

 

Bauxite is the principal raw material for the production of alumina. On average, our refineries consume approximately 1.8 tonnes of bauxite to produce one tonne of alumina. We used approximately 13,600,000 tonnes, 15,800,000 tonnes and 18,760,000 tonnes of bauxite in our alumina production in 2004, 2005 and 2006, respectively. In 2006, bauxite cost represented approximately 23%, as compared to 21.3% in 2005 of our per unit alumina production costs.

 

Supply. The predominant use of bauxite is for alumina production. We are the largest alumina producer in China and expect to remain so for the foreseeable future. Therefore, we intend to use our dominant market position to obtain bauxite on favorable terms. Except for our Shandong Plant, all of our refineries are located in the four provinces where over 90% of China's potentially mineable bauxite has been found. We generally source our bauxite from mines close to our refineries to save transportation costs. We procure our bauxite supply principally from three sources:

 

*

our own bauxite mining operations;

 

 

*

jointly operated mines; and

 

 

*

purchases from other suppliers, which principally include small independent mines and, to a lesser extent, imports.

 

 

We purchase bauxite from a number of suppliers. We are not dependent on any single supplier or small group of suppliers for our bauxite requirements. We endeavor to explore new bauxite reserves and streamline our bauxite procurement system to support the growth of our alumina production. In 2006, the Chongqing Nanchuan mine became our newly owned mine under the charge of our Chongqing branch. In addition, the Yangcheng Nanpo jointly operated mine was newly added to our Shanxi branch in 2006. In 2006, the production of our owned mines and jointly operated mines was 8,825,600 tonnes, an increase of 29% as compared to 2005.

 

The following table sets forth, for the periods indicated, the proportion of our bauxite requirements supplied by our three sources:

 

 

Years Ended December 31,

 

2004

2005

2006

 

 

Percentage of

 

Percentage of

 

Percentage of

 

Total

our total

Total

Our Total

Total

our Total

 

Bauxite Supply

Bauxite Supply

Bauxite Supply

Bauxite Supply

Bauxite Supply

Bauxite Supply

 

 

(%)

 

(%)

 

(%)

 

 

 

 

 

 

 

- 26 -

 


 

 

(in thousand

(in thousand

(in thousand

 

tonnes)

tonnes)

tonnes)


 

Our owned mines

2,237.3

16.4

2,988.1

18.9

4,115.3

21.4

Jointly operated mines

2,501.3

18.4

3,854.8

24.4

4,710.3

24.6

Other suppliers

8,889.4

65.2

8,949.6

56.7

10,343.4

54.0

 







 

 

 

 

 

 

 

Total

13,628.0

100%

15,792.5

100%

19,169.0

100%

 







 

 

 

 

 

 

 

The total designed annual production capacity of our own mines was 5.17 million tonnes, and the total bauxite production in 2006 is 4.12 million tonnes.

 

Owned Mines. We currently have eleven open-pit mines. As of December 31, 2006, these mines had approximately 204.84 million tonnes of aggregate proven and probable bauxite reserves as such terms are defined by the SEC. This amount of bauxite reserves would be sufficient to sustain our mining operations in excess of 30 years assuming an annual mining output of 5,000,000 tonnes. As none of our mines produce bauxite for external sales, we are assured of full access to the bauxite produced by our own mines. In 2006, we sourced approximately 21.4% of our bauxite from mines that we own and operate.

 

The respective terms of the mining rights permits are the shorter of the estimated working life of the mine and 30 years beginning 2001. In addition to mining rights permits, in order to operate these mines, we are required to have land use rights over the land relating to these mines. We lease land use rights relating to all these mines from Chinalco pursuant to a land use rights leasing agreement that we entered into upon our formation. Chinalco's land use rights relating to over 90% of our mining properties are for 50-year terms beginning on July 1, 2001. The remaining land use rights relating to the mines we own and operate are for shorter terms, some as short as eight years. All of our land use rights leases end on the expiry date of the mining rights or the end of the actual mine life, whichever is earlier. Both the land use rights and their leases are renewable.

 

Jointly Operated Mines. We currently jointly operate 17 bauxite mines. Jointly operated mines are generally operated pursuant to long-term contractual arrangements in which we typically contribute resources such as funding, equipment, labor and management, and the other parties contribute land and/or mining rights and certain personnel resources. The other parties are also typically responsible for obtaining all relevant certificates or approvals in respect of the lands. Generally, we are able to control the mining operations of our jointly operated mines, including determination of production schedules as well as the amounts and grades of bauxite produced. As of December 31, 2006, we have obtained mining rights certificates for all of our 17 jointly operated mines.

 

Jointly operated mines are typically smaller than our own mines but larger than the small independent mines in terms of reserves and production scales. Our 17 jointly operated mines had approximately 28.98 million tonnes in the aggregate of proven and probable bauxite reserves as such terms are defined by the SEC. Security of supply from jointly operated mines is contingent upon the extension or renewal of the joint operation arrangements and mining rights upon their expiration. Accordingly, we view our jointly operated mines, as a group, to be a stable, long-term source of our bauxite supply, although the particular mines comprising this group are likely to change. Jointly operated mines supplied 24.6% of our bauxite needs in 2006.

 

Other Suppliers. In addition to our own mines and our jointly operated mines, we also source bauxite from other suppliers. A majority of other suppliers are small independent mines. However, we also secure a small

 

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portion of bauxite from overseas. Bauxite secured from other suppliers accounted for 54.0% of our total bauxite supply in 2006.

 

*

Small Independent Mines. We purchase bauxite directly from small independent mines or through local distributors that procure bauxite from these mines. Small independent mines are not affiliated with us and generally have annual bauxite production capacities not exceeding 200,000 tonnes. These mines have historically been our important source of bauxite. The average price of bauxite from small independent mines increased by 3.5% from 2005 to 2006.

 

 

*

In addition, we also source a small portion of bauxite from other overseas suppliers.

 

 

Bauxite Procurement. A mineral resource department in our headquarters is responsible for the control and coordination of the supply of our bauxite. To determine how our bauxite requirement will be allocated among our principal sources each year, we first estimate our total bauxite needs for the year. Based on market conditions, production costs and other factors, we decide on the amount of bauxite that we wish to source from our own mines, and allocate the remaining requirements among the jointly operated mines and other suppliers. Given the increasing price of bauxite supplied by external independent mines resulting from high market demand, our management or operational control of our own mines and jointly operated mines generally allows us to adjust the procurement levels from these sources during the course of the year to accommodate market conditions.

 

Alumina-to-Silica Ratio. The production method for alumina refining is determined by the mineral composition of the bauxite, as measured by reference to its alumina-to-silica ratio. Most of the bauxite reserves in China are diasporic with low alumina-to-silica ratios. Based on our current technology, an efficient application of the Bayer process requires bauxite with an alumina-to-silica ratio of 10:1 or higher, while the sintering process can refine bauxite with an alumina-to-silica ratio as low as 4:1. The average alumina-to-silica ratio of the proven and probable reserves of our own mines is from 6.5:1 to 7:1.

 

Prices. There is neither governmental regulation of bauxite prices nor an official trading market for bauxite in China. We negotiate and agree on bauxite prices with our suppliers, based on ore quality, mining costs, market conditions, transportation costs and various governmental taxes or levies, including a resource tax imposed by local governments. Because we procure bauxite from three different sources, our total bauxite cost is influenced by the following factors:

 

*

the cost of our own mining operations;

 

 

*

the terms of our operational arrangements with respect to our jointly operated mines; and

 

 

*

the market conditions relating to purchases from small independent mines.

 

 

Primary Aluminum

 

An average of approximately 2.0 tonnes of alumina and 14,500 kWh of electricity were required to produce one tonne of primary aluminum. Alumina and electricity, the two principal ingredients in the smelting process in terms of volume and cost, accounted for approximately 47% and 30%, respectively, of our unit primary aluminum production costs in 2006. We also require carbon anodes, carbon cathodes and sodium fluoride in the smelting process.

 

Alumina is the main raw material in the production of primary aluminum. Our Shandong, Henan, Guizhou and Guangxi smelters have historically sourced all or substantially all of the alumina they required from their respective integrated refineries. All our plants which do not have alumina refining operations on site have obtained alumina internally from our own alumina refineries. Due to mergers and consolidation, there were 34 primary aluminum smelters with an annual production volume not less than 100,000 tonnes in the PRC as of December 31, 2006. The average production volume of the 34 primary aluminum smelters is approximately 106,000 tonnes. With the development of the primary aluminum industry, our competitiveness has been enhanced. As of December 31, 2006, the total amount of alumina consumed by our smelters is 3,570,000 tonnes.

 

Supplemental Materials, Electricity and Fuel

 

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Alumina

 

Electricity, coal, alkali (caustic soda or soda ash) and heavy oil are the other principal items required for our alumina production. We established a supplies department in our headquarters to control and coordinate the budgeting and procurement for all major items required for our production. In addition, to raise the efficiency of materials flow, a distribution center was set up at each production facility. However, our efforts in improving the efficiency of material supplies by the procurement system were to a certain extent offset by the significantly increased prices for coal and fuel due to their short supply in 2006.

 

Electricity. Electricity is one of the principal forms of energy used in our refining process. Electricity represented approximately 7% of our unit alumina production cost in 2006.

 

To the extent that power produced by the joint operation facility is insufficient to meet a refinery's total power requirements, we purchase the shortfall from regional power grids at government-mandated rates pursuant to power supply agreements. Power prices in China can vary, sometimes substantially, from one region to another, based on power production costs in the region as well as the consuming community's ability to pay. Accordingly, power costs for our various plants differ. Most of our electricity supply agreements are one to three year renewable contracts with regional power grids.

 

Coal. Large quantities of coal are used as a reducing agent and as fuel to produce steam and gas in the alumina refining process. The coal we consumed directly in the alumina refining process in 2006 represented 7% of our unit alumina production costs. Additional amounts of coal were used to produce steam and electricity in connection with refining for the same periods.

 

To secure our coal supply, we entered into a joint venture agreement with Jiaozuo Coal (Group) Co., Ltd., or Jiaozuo Coal, on April 12, 2004 to establish a joint venture company in Henan Province to operate coal mines and manage coal processing business on May 15, 2004. We contributed 30% of the total registered capital in the amount of RMB45.0 million by way of cash and Jiaozuo Coal contributed 70% of the total registered capital in the amount of RMB105.0 million by way of cash and revaluated coal mining rights in respect of Zhaogu mine. Zhaogu mine is currently under construction and the construction is expected to be completed by the end of 2008. According to the joint venture agreement, we are entitled to all of the slack coal produced by the joint venture company.

 

Alkali. Alkali is used as a supplemental material in alumina refining. The sintering process and the hybrid Bayer-sintering process require soda ash while caustic soda is used in the Bayer process. We purchase all of our alkali from outside suppliers. Alkali accounted for 7% of our unit alumina production cost in 2006.

 

Heavy Oil. Heavy oil is used as fuel in the calcination of aluminum hydroxide to make alumina. Most of our refineries use heavy oil. Heavy oil represented approximately 4% of our unit alumina production cost in 2006.

 

There is no governmental regulation of the prices of heavy oil, alkali or coal. The prices are set at market rates or through negotiations. We have not experienced difficulty in obtaining these materials in sufficient quantity and at an acceptable price.

 

Deliveries of raw materials and supplemental materials are generally made on a monthly basis. Our raw material suppliers arrange for railway transportation of these raw materials by submitting to local bureaus of the Ministry of Railways their annual and monthly transportation plans. These local bureaus then arrange for appropriate rail transportation to transport such raw materials or fuel to our refineries.

 

Primary Aluminum

 

Electricity. Smelting primary aluminum requires a substantial, continuous supply of electricity. Therefore, the availability and price of electricity are key considerations in our primary aluminum production operations. Costs of electricity have increased period by period in the recent years due to severe shortage of electric power in China. In 2006, electricity prices increased due to the government adjustment. Accordingly, our electricity purchase price increased 2.9% compared to 2005. We rely on electricity from the power grids for our smelter operations. We purchase electricity from regional power grids. Prices for electricity supplied by the power grids under power supply contracts are set by the government based on the power generation

 

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cost in the region and the consumers' ability to pay. Industrial users within each region are generally subject to a common electricity tariff schedule, but rates vary, sometimes substantially, across regions. Each regional power grid serves a region comprising several provinces. The regional power grids generally rely on multiple power sources to generate electricity, with coal and hydro power being the two most common sources. We believe that the different types of power sources do not imply different degrees of reliability of supply, and that our power supply from the grids is generally not reliant upon any particular generation facility supplying the grid.

 

Electricity purchased from different power grids is subject to different tariff levels. All of our production facilities currently enjoy preferential discount electricity prices granted by local government authorities. Our smelters' average electricity cost was RMB0.348/kWh in 2006. Our electricity costs per tonne of primary aluminum for 2006 represented 30% of our unit primary aluminum production costs. A major challenge to our strategy of enhancing the competitiveness of our primary aluminum operations is the high price of electricity in China. In 2006, the total electricity used in the smelting operations at our primary aluminum production facilities was 27.8 billion kWh.

 

Carbon Products. Carbon anodes and cathodes are key elements of the smelting process. As of December 31, 2006, carbon anodes represented 9.98% of our unit primary aluminum production costs. Each of our smelters produces carbon products other than carbon cathodes, such as carbon anodes. Only our Guizhou plant has a carbon cathode production facility, which supplies all of our smelters with the carbon cathodes required and sells any excess domestically to outside smelters.

 

Suppliers

 

We rely on our suppliers for the supply of raw materials including bauxite, coal, heavy oil and alkali. The amount of raw materials provided by our five largest suppliers for alumina products and primary aluminum products accounted for 7% and 21%, respectively, of our total cost of raw materials for 2006. Raw materials provided by our largest supplier accounted for 3% and 7%, of our total cost of raw materials for alumina and primary aluminum, respectively, in 2006. All payments to our suppliers are in Renminbi.

 

Sales and Marketing

 

We coordinate our major sales and marketing activities at our corporate headquarters. We set uniform prices for our alumina sales and set minimum prices in each region where our primary aluminum is sold. We have consolidated the networks of our branch offices to eliminate overlapping of administrative support and to reduce sales costs. In response to increasingly intensified competition, we established Shandong Alumina Chemicals Sales Department to centralize the sales of our alumina chemical products. Our subsidiaries have also played an important role in improving our after-sales services and enhancing our influence in the marketplace.

 

In 2003, as part of our centralized management program, we required all sales of alumina and primary aluminum to be settled upon delivery. However, due to the increased number of the subsidiaries acquired by us, our net trade receivables increased from RMB179.2 million as of December 31, 2005 to RMB358.6 million as of December 31, 2006. Since 2004, we have required our customers to make prepayments and deposits for purchases of alumina. The total amount of deposits and prepayments received was RMB425.7 million as of December 31, 2006. We expect to continue this policy so long as market demand remains strong.

 

Alumina

 

We sell a portion of the alumina we produce to our own primary aluminum smelters and a majority of our alumina output to external customers. In 2006, we used approximately 3.57 million of approximately 8.83 million tonnes of our total alumina output internally, which represented approximately 40% of our total alumina production. The volume of internal sales includes the alumina we sold to our associated companies, namely Lanzhou Aluminum, which became our wholly-owned subsidiary after the A Share issuance on April 30, 2007, and Jiaozuo Wanfang. We sold approximately 5.26 million tonnes of alumina externally in 2006. All of our output of alumina chemical products is sold externally.

 

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Sales

 

We coordinate sales of alumina at our corporate headquarters. In the fourth quarter of each year, we organize a national alumina sales conference with our domestic primary aluminum smelter customers in order to match our supply with their requirements for the following year. Based on our production capacity for the coming year, we first reserve the amount of alumina needed for primary aluminum production by our smelters before we determine the amount available for sale to other primary aluminum smelters. Next, we allocate our alumina to smelters with whom we have long-standing relationships and that have good credit and a good payment history. We consider other smelters only if we have remaining alumina to allocate. Approximately 95% of our sales of alumina are made through these annual conferences.

 

Based on the sales allocations we make at the annual conference, we and our customers typically enter into one-year sales agreements that set forth their total allocation and sales schedules. At the time of entering into these one-year sales agreements, prices are left open and determined at or near the time of delivery at the then prevailing market price. We apply uniform prices to alumina sales regardless of where the alumina is produced. If a customer does not accept our price near the time of delivery, it may refuse to take delivery despite the one-year agreement. We began selling a portion of our alumina pursuant to long-term sales contracts in 2001. Since January 1, 2004, we have gradually entered into three-year or five-year sales contracts for alumina. The external sales volume under these long-term sales contracts accounts for approximately 54% of the total sales volume in 2006. Under these contracts, the sales volume is fixed, and the price is linked to an index of three-month futures price of primary aluminum quoted at the Shanghai Futures Exchange.

 

Customers

 

We sell our alumina to smelters throughout China. Sales to our five largest external customers accounted for 17.7%, 12.9% and 13% of our total external alumina revenue for 2004, 2005 and 2006, respectively. Sales to our largest customer accounted for 4.3%, 3.6% and 4%, respectively, of our total external alumina revenue for the same periods. All of these major customers in the last three years were domestic smelters.

 

Pricing

 

We sell our alumina products by way of spot sales or under long-term contracts. Pricing for our alumina products is determined by the nature of the sale as described below.

 

Spot sales. We set, and adjust as necessary, uniform sales prices for alumina produced by any of our refineries. In 2006, The highest and lowest spot price of domestic alumina was RMB6,500 per tonne and RMB2,300 per tonne, respectively. The annual average selling price of our alumina was RMB4,107 per tonne, representing a year-on-year increase of 7.4%. We set uniform prices for all our external sales of alumina by reference to import costs of alumina, the market supply and demand conditions, as well as our short-term and mid-term projections. Our pricing generally takes into account:

 

*

free-on-board Australia prices for alumina exports into China;

 

 

*

international transportation costs;

 

 

*

the applicable standard PRC import tariff;

 

 

*

value-added tax at 17%;

 

 

*

import related fees; and

 

 

*

domestic demand and supply conditions.

 

 

Long-term contracts sales. Internationally, the customary practice for alumina pricing under long-term contracts is by reference to the LME prices for primary aluminum. Since 2001, we have entered into a number of domestic long-term alumina sales contracts with three-year terms, under which the sales price is set as a percentage of the three-month primary aluminum prices on the Shanghai Futures Exchange. As a result, fluctuations of primary aluminum prices on the Shanghai Futures Exchange can affect our alumina

 

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prices under these long-term contracts, and such effects may increase as we increase the proportion of alumina sales under long-term contracts.

 

Primary Aluminum

 

Substantially all of our primary aluminum products are sold externally. In 2006, we sold approximately 1,930,000 tonnes of primary aluminum, including the sales made by Lanzhou Aluminum and Jiaozuo Wanfang, with the average price of RMB20,548 per tonne, representing a year-on-year increase of 23.1%.

 

Sales

 

We sell our primary aluminum through two channels:

 

*

Contract sales. Most of our primary aluminum sales are made pursuant to contracts entered into directly with our established customers. These may be long-term or short-term contracts, and a smelter plant may make deliveries directly or through a branch office.

 

 

*

Sales on the Shanghai Futures Exchange. As part of our effort to manage market risk, we sell a portion of our primary aluminum products on the Shanghai Futures Exchange through futures contracts of one to six month terms to hedge against a potential decline in primary aluminum prices.

 

 

We hold annual regional primary aluminum sales conferences in the fourth quarter of each year to coordinate the production and sales for the following year. We centrally control our product futures sales on the Shanghai Futures Exchange.

 

To improve the efficiency of our distribution, we divide our China market into several regions as follows:

 

*

southern China (including Guangdong and Fujian Provinces);

 

 

*

eastern China (including Jiangsu and Zhejiang Provinces and Shanghai City);

 

 

*

southwestern China (including Sichuan Province and Chongqing City);

 

 

*

the Beijing-Tianjin-Tanggu area; and

 

 

*

northeastern China (including Heilongjiang Province).

 

 

Customers

 

Apart from a small amount of export sales, we sell all of our primary aluminum products to domestic customers. The Chinese market is our core market for primary aluminum, and we expect it to remain so for the foreseeable future. Domestic customers of our primary aluminum products principally consist of:

 

*

domestic aluminum fabricators that use our primary aluminum as raw material for further processing; and

 

 

*

aluminum distributors that resell our primary aluminum products to domestic aluminum fabricators or other purchasers.

 

 

Our five largest customers combined accounted for approximately 17.5%, 21.1% and 9% of our total primary aluminum revenue for 2004, 2005 and 2006, respectively. Our largest customer accounted for approximately 6.6%, 9.8% and 3% of our total primary aluminum turnover during the same periods.

 

Our export operations consist of ordinary sales of our products to international customers and export sales of primary aluminum. All export sales of our primary aluminum are sold at negotiated prices. However, with effect from November 1, 2006, exports of primary aluminum are subject to a 15% export tax, and no export tax refund is available. Due to the small quantity of our exportation, the export tax does not have substantial effect on us.

 

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Pricing

 

We establish pricing guidelines for domestic sales of our own primary aluminum products, taking into account three main factors:

 

*

the primary aluminum spot prices on the Shanghai Futures Exchange;

 

 

*

our production costs and profit margins; and

 

 

*

market supply and demand conditions.

 

 

As part of our sales integration and centralization efforts, we set minimum prices with respect to each region in China where our primary aluminum is sold. These minimum prices are expressed by reference to the Shanghai Futures Exchange spot price for primary aluminum, not including transportation. The minimum prices may differ from region to region, but all of our primary aluminum sold into a region, regardless of the plant or warehouse from which it originates or is shipped, is sold at or above the minimum price applicable to that region. Those of our smelter plants filling particular orders are principally involved in discussions with the customer as to the pricing and delivery arrangements for specific transactions. They are required to comply with the minimum pricing guidelines unless prior approval from headquarters has been obtained. In general, we supply each region with products from our nearest smelters to minimize transportation costs as much as possible.

 

Alumina Chemical Products and Gallium

 

Alumina chemical products and gallium are intermediate products of, or otherwise related to, our alumina production. Our production levels for these products are based on market demand for them. We sell all of our alumina chemical products and gallium externally, mostly domestically but some internationally. Prices for our alumina chemical products and gallium are set according to market demand or by agreement with our customers.

 

Delivery

 

Alumina

 

Delivery of alumina is made from our refineries by rail or truck. Our sales price is normally exclusive of transportation costs. For long-distance delivery, we have spur lines connecting our plants to the national railway routes. We are responsible for the maintenance of these spur lines. The price of shipping on the national railway system is fixed by the government.

 

Primary Aluminum

 

Our primary aluminum products are transported to our customers mostly by rail. In view of the substantial distances that separate our smelter plants from southern and eastern China where most of the aluminum fabrication plants are concentrated, we have subsidiaries (often with warehousing capacity leased from third parties) in major cities in eastern and southern China to facilitate deliveries and coordination.

 

Our Facilities

 

Our core facilities include sixteen production plants and our Research Institute. Set forth below is a plant-by-plant description of our facilities. Our production operations are organized and managed according to our two business segments, alumina and primary aluminum. See "Item 4 - History and Development of the Company-Overview" for details of the plants under construction.

 

Guangxi Plant

 

The Guangxi plant commenced operations in 1994 and is located in the Guangxi Zhuang Autonomous Region in southwestern China, an area rich in bauxite resources. The Guangxi plant is our newest alumina and primary aluminum plant, and is equipped with imported production facilities and technology.

 

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Our Guangxi plant is situated within 17 kilometers of our own mines that contain large, easily exploitable high alumina-to-silica ratio bauxite reserves. The Guangxi plant is our only refinery that uses the Bayer method exclusively. With imported European technology and production equipment, our Guangxi refinery features a high level of automation and energy efficiency. Since its inception, we have increased the Guangxi plant's original designed production capacity by removing production bottlenecks and capacity expansions. As of December 31, 2006, the plant's production capacity reached 850,000 tonnes of alumina per annum. Most of its alumina output is used in the primary aluminum smelter at our Guangxi plant and the remainder is sold to external smelters. The third-period construction of Guangxi Alumina, with a production capacity of 800,000 tonnes, commenced in March 2006 and is expected to be completed in the third quarter of 2008.

 

Our Guangxi plant also uses advanced 160 kA and 320 kA pre-bake reduction pot-lines, which we developed, for its primary aluminum production. As of December 31, 2006, the plant's production capacity reached 139,500 tonnes of primary aluminum per annum. All primary aluminum it produces is sold externally.

 

Guizhou Plant

 

Our primary aluminum production facilities in Guizhou Province, which possesses integrated alumina and primary aluminum production facilities, commenced operations in 1966.

 

Our Guizhou alumina refinery commenced operations in 1978 and is as advanced as any facility of its kind in China, as many of its key technologies and equipment are imported. It uses the hybrid Bayer-sintering process for its alumina production and relies on our own mines and outside suppliers for bauxite supply. Bauxite from our own nearby mines is delivered to the refinery by cable cars and by train. The plant's alumina output is mostly used in the primary aluminum production at the same plant and the remainder sold to external smelters. As of December 31, 2006, the plant's production capacity reached 800,000 tonnes of alumina per annum. Recently, Guizhou plant has undertaken an environmental protection management project which is expected to be completed at the end of 2007. Upon the completion of this project, the alumina production capacity of Guizhou plant is expected to increase by 400,000 tonnes. The primary aluminum facilities at our Guizhou plant consist of large-scale pre-bake reduction pot-lines, ranging from 160 kA to 186 kA. As a result of technological innovations and overhauls since its inception, our Guizhou smelter plant is among the most technologically advanced smelters in China. In 2006, the production capacity of primary aluminum of our Guizhou plant was 403,700 tonnes. The production volume of out Guizhou plant was 363,000 tonnes in 2006, ranking it the fifth largest primary aluminum plant in China in terms of production capacity.

 

The Guizhou plant also contains a modern carbon production facility. In addition to producing carbon anodes, it is the only facility we operate that produces carbon cathodes. As such, it supplies all of the carbon cathodes required by our seven plants and our Research Institute. Its carbon cathodes are also sold externally throughout China.

 

Henan Plant

 

Our Henan plant is located in Zhengzhou, Henan Province, a province rich in bauxite resources. Its alumina and primary aluminum production commenced operations in 1966 and 1967, respectively. The Henan plant was the first refinery in China to develop the hybrid Bayer-sintering process. We commenced operations of a new alumina production line from February 2004 using the ore-dressing Bayer process that we developed in recent years to refine low alumina-to-silica ratio bauxite. Since its inception, the Henan plant's production facilities have undergone substantial technological upgrades, based on equipment imported from Germany and Denmark. The refinery has also benefited from its access to high alumina-to-silica ratio bauxite from our own mines and through local market purchases. Its alumina output is first used to satisfy its primary aluminum production, and the remainder is sold to our other smelters and external customers. The designed annual production capacity of alumina of our Henan plant was 2,050,000 tonnes in 2006.

 

We upgraded a portion of the primary aluminum facilities at this plant, which now utilizes 85 kA pre-bake reduction pot-lines. Its carbon plant produces high quality carbon products for external sales in China as well

 

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as for export, after meeting the needs of our various smelting operations. As of December 31, 2006, the plant's production capacity reached 56,000 tonnes of primary aluminum per annum.

 

Shandong Plant

 

The Shandong plant commenced operations in 1954 and has the capacity to produce both alumina and primary aluminum. Its refinery was China's first production facility for alumina. Both the refinery and smelter are owned and operated by Shandong Aluminum, which became our wholly-owned subsidiary after the A Share issuance on April 30, 2007. The plant produces the majority of its alumina through the sintering process, but has a small production line to produce alumina through the Bayer process using imported bauxite. During 2002, the Bayer production line was converted into an ore-dressing sintering operation. The Shandong plant purchases the majority of its bauxite requirements from small independent mines in Henan and Shanxi Provinces. Its alumina output is first used to satisfy its primary aluminum production, and the remainder is sold to our other smelters and external customers. As of December 31, 2006, after using the hybrid Bayer-sintering process, the annual capacity of alumina increased from 1,050,000 tonnes to 1,500,000 tonnes.

 

In addition to alumina, our Shandong plant also produces substantial amounts of alumina chemical products. It is the largest and most technologically advanced alumina chemical products production facility, and produces the most varieties of these products in China. Alumina chemical products produced by our Shandong plant are used in the jewelry, ceramics and other industries. Its alumina chemicals products are sold both domestically and internationally.

 

Our Shandong plant's primary aluminum operations have undergone technological and equipment upgrades, with the majority of its original equipment having been replaced by more advanced equipment. As of December 31, 2006, the plant's production capacity reached 75,000 tonnes of primary aluminum per annum.

 

Qinghai Plant

 

Located in Qinghai Province, our Qinghai plant is a stand-alone primary aluminum production facility and is also China's second largest smelter in terms of production capacity. This plant commenced operations in 1987 and is one of the most technologically advanced primary aluminum smelters in China. It operates 160 kA automated pre-bake anode reduction pot-lines that were developed domestically. It benefits from relatively low electricity costs in Qinghai Province resulting from substantial hydroelectric power stations in the region. Historically, the plant has relied on our Shanxi, Shandong, Henan and Zhongzhou plants for its alumina supply. Because of its relatively remote location, the plant incurs higher transportation costs for both raw materials and its primary aluminum products. The Qinghai plant's designed annual production capacity of primary aluminum was 367,000 tonnes in 2006. Its production volume was 382,000 tonnes in 2006, ranking it the third largest primary aluminum smelter in China in terms of production capacity.

 

Shanxi Plant

 

The Shanxi plant commenced operations in 1987 and is located in Shanxi Province, a province with rich bauxite deposits in China. Our Shanxi plant is a stand-alone alumina plant and is currently China's largest alumina plant in terms of production capacity.

 

The Shanxi plant's production facilities are primarily imported and are more technologically advanced compared with other domestic alumina refineries. The plant relies on bauxite from our own mines as well as external suppliers. In close proximity to large coal mines and substantial water resources, the plant currently has the largest power cogeneration capacity of all of our alumina plants. The total alumina production capacity of our Shanxi plant reached 2,217,000 tonnes in 2006.

 

Zhongzhou Plant

 

Situated in Henan Province, our Zhongzhou plant is a stand-alone alumina plant, located near bauxite, coal and water supplies. The plant commenced operations in 1993 and is equipped with imported and self-developed technology and has undergone various improvements and upgrades, including improved sintering technology. We purchase bauxite supplies from Henan and Shanxi Provinces. In 2006, following the completion of a project involving the upgrade of the sintering process, as well as a project involving alumina

 

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concentration with added bauxite after digestion of the ore-dressing Bayer process, the plant's production capacity reached 1,570,000 tonnes of alumina per annum.

 

Bauxite Branch

 

Our bauxite branch is situated in Henan province and was established in February 2005. After its establishment, our self-owned mining facilities from the Henan plant and Zhongzhou plant were incorporated into the bauxite branch. The main business of our bauxite branch is the exploration, exploitation and sale of bauxite and lime.

 

Lanzhou Aluminum

 

Lanzhou Aluminum is situated in Lanzhou city in Gansu Province and is a stand-alone primary aluminum plant. Lanzhou Aluminum Plant was established in 1999, whose shares were listed on Shanghai Stock Exchange in 2000. In January 2005, we entered into an agreement with Lanzhou Aluminum Plant to acquire 151,851,442 shares, or 28% of the total issued share capital in Lanzhou Aluminum. The acquisition was completed in March 2005 and Lanzhou Aluminum became our associated company whose results of operations are not consolidated into our financial statements as of December 31, 2006. After A Shares issuance on April 30, 2007, Lanzhou Aluminum became our wholly-owned subsidiary and its shares ceased to be traded on the Shanghai Stock Exchange See "Item 4 - History and Development of the Company - The A Shares Offering". Lanzhou Aluminum owns a primary aluminum smelting plant with a designed annual production capacity of approximately 160,000 tonnes. Lanzhou Aluminum also owns an alumina-based material processing plant with a designed annual production capacity of 50,000 tonnes. A new primary aluminum project with production capacity of 2,800,000 tonnes is expected to be completed by the end of 2007.

 

Jiaozuo Wanfang

 

Jiaozuo Wanfang is situated in Jiaozuo city in Henan Province and is a stand-alone primary aluminum plant. Jiaozuo Wanfang Plant was established in 1993, whose shares were listed on the Shenzhen Stock Exchange in 1996. In May, 2006, we entered into a Sale and Purchase Agreement with Jiaozuo Wanfang Group to acquire 29% of the issued share capital, or 139,251,064 State-owned legal person shares held by Jiaozuo Wanfang Group in the issued share capital of Jiaozuo Wanfang Aluminum Manufacturing Co., Ltd. ("Jiaozuo Wanfang"), and thus became its largest shareholder. Jiaozuo Wanfang has a designed annual production capacity of 272,000 tonnes of primary aluminum. A new primary aluminum project with production capacity of 1,400,000 tonnes is expected to be completed by the end of 2007.

 

Shanxi Huaze

 

Shanxi Huaze is situated in Shanxi Province. On March 30, 2003, we established a joint venture company, Shanxi Huaze Aluminum & Power Co., Ltd., with Shanxi Zhangze Electricity Company Limited to commence the construction of a primary aluminum production facility with a designed annual production capacity of 280,000 tonnes, carbon anodes facilities and two 300 MW coal-fired generators. The construction was substantially completed at the end of 2006. For more information, see "- Property, Plant and Equipment - Our Expansion and Profit Improvement Plan - Shanxi Huaze Smelter".

 

Shanxi Huasheng

 

Shanxi Huasheng Aluminum is situated in Shanxi Province. On December 6, 2005, we entered into a joint venture agreement with Shanxi Guanlv Co., Ltd. to establish a joint venture company, Shanxi Huasheng Aluminum Company Ltd. The joint venture company commenced operations in March 2006, with a designed annual production capacity of primary aluminum of approximately 220,000 tonnes. The joint venture company has a total investment of RMB2,379.4 million and a registered capital of RMB1,000 million, of which we committed RMB510 million and hold a 51% equity interest in Shanxi Huasheng.

 

Zunyi Aluminum

 

Zunyi Aluminum is situated in Guizhou Province. In June 2006, we entered into a share purchase agreement with Guizhou Wujiang Hydropower Development Co., Ltd. and eight other companies, which are the

 

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shareholders of Zunyi Aluminum, to purchase part of the equity interest from Guizhou Wujiang Hydropower Development Co and all the equity interest held by the other eight companies. We have completed our purchase and currently hold a 61.3% equity interest in Zunyi Aluminum. Zunyi Aluminum, has a designed annual production capacity of 110,000 tonnes of primary aluminum.

 

Fushun Aluminum

 

Fushun Aluminum is situated in Liaoning Province, and is a stand-alone primary aluminum plant which has an annual production capacity of 140,000 tonnes. In March 2006, we entered into a share transfer agreement with Liaoning Fushun Aluminum Plant to acquire the 100% equity interests in Fushun Aluminum for a consideration of RMB500 million. Fushun Aluminum's primary business is the production of primary aluminum and carbon products. A new primary aluminum project with a production capacity of 1,000,000 tonnes is expected to be completed by the end of 2007.

 

Shandong Huayu

 

Shandong Huayu is situated in Shandong Province, and is a stand-alone primary aluminum plant. In July 2006, we entered into a share transfer agreement with Shandong Huasheng Jiangquan Group to acquire a 55% equity interest of Shandong Huayu, a subsidiary of Shandong Huasheng Jiangquan Group. Shandong Huayu has a designed annual production capacity of 100,000 tonnes of primary aluminum, and also has other supporting facilities and two 135MW coal-fired generators.

 

Gansu Hualu

 

Gansu Hualu is situated in Gansu Province, and is a stand-alone primary aluminum plant. In August 2006, we entered into a share transfer agreement with Baiyin Nonferrous Metal (Group) Co., Ltd. ("Baiyin Nonferrous"), and Baiyin Ibis Aluminum Co., Ltd. ("Baiyin Ibis"). Baiyin Nonferrous contributed 127,000 tonnes of primary aluminum smelting and supporting facilities owned by Baiyin Ibis as capital contribution and holds a 49% equity interest in Gansu Hualu, a subsidiary of Baiyin Ibis, and we hold a 51% equity interest in Gansu Hualu. The joint venture will have a designed annual production capacity of 127,000 tonnes of primary aluminum.

 

Research Institute

 

Established in August 1965 and located in Zhengzhou, Henan Province, the Research Institute specializes in aluminum smelting-related research and development. It is the only research institute in China dedicated to light metals research, and has played a key role in bringing about technological innovations in China's aluminum industry. The Research Institute is central to our research and development efforts. The Research Institute operates test facilities, which produce alumina chemical products and primary aluminum. It also provides research and development services to third parties on a contractual basis. Approved by the Ministry of Science and Technology of the PRC in December 2003, Research Institute established National Research Center of Aluminum Refinery Technologies and Engineering.

 

Research Institute's significant achievements in 2006 include:

 

*

Developing the technology of (i) desilication of low-grade bauxite; (ii) improving the seed decomposition ratio; (iii) improving the anode quality; and (iv) harmless disposal of the inner liner of the spent potliner;

 

 

*

Implementing and commercializing production technology to increase the production volume for the enhancement of the efficiency of alumina production;

 

 

*

Commercializing the technology to lower the energy consumption during the smelting process and developing new technology and equipment for smelting; and

 

 

*

Obtaining significant breakthrough in the development of anti-flotation technology for China's medium- and low-grade diasporite bauxite.

 

 

Competition

 

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Alumina

 

As the largest producer of alumina in China and the dominant supplier of alumina to the Chinese market, we believe that we will not face significant competition from domestic alumina producers in the immediate future for the following reasons:

 

*

a new producer would need access to a substantial and stable supply of bauxite;

 

 

*

we are experienced in alumina production and our production technologies are specifically adapted to the particular chemical composition of bauxite found in China;

 

 

*

we have strong capacity in technology research and hold certain self-owned technologies and patents;

 

 

*

we have a large number of professionals who have extensive experience in production and management of this area;

 

 

*

we are supported by the state policy.

 

 

The rapid growth of the aluminum industry has caused demand to exceed supply for alumina in China. In 2006, the domestic alumina production in China was approximately 13,700,000 tonnes, representing a year-on-year increase of 61%, while the national demand in China reached approximately 19,000,000 tonnes, representing a year-on-year increase of 14.4%. In 2006, approximately 6,910,000 tonnes of alumina was imported into China, a 1.6% decrease compared to 2005. In 2006, our alumina production represented approximately 50% of total national consumption.

 

We believe that we have competitive advantages over our foreign competitors in the China alumina market. As a local supplier situated in close proximity to our customers, we do not incur international transportation and import-related costs and enjoy stable long-term relationships with our customers in a vast and growing market. Our competitive advantages may be reduced if international suppliers of alumina can offer alumina in China at prices below ours. As a result of China's accession to the WTO on December 11, 2001, competition from international suppliers of alumina may increase as tariff and non-tariff barriers for imported alumina are significantly reduced. The standard tariff on imports of alumina into China has been reduced from 18% as of December 31, 2001 to its current level of 3% as of November 1, 2006.

 

Primary Aluminum

 

Domestic Competition

 

Over 90% of our primary aluminum revenue is derived from sales in China. Our competition includes other domestic smelters and international producers that sell primary aluminum into China. In 2006, our primary aluminum production represented approximately 22.3% of total national consumption.

 

There are approximately 100 primary aluminum smelting companies operating in China, which sell substantially all of their products in China. We are the largest integrated alumina and primary aluminum producer in China, and our Guizhou and Qinghai plants operate two of the five largest smelters in China. Our smelters as a total accounted for 20.6% of the domestic primary aluminum production for 2006. Currently, only fourteen smelters in China (including Chalco) have annual production capacities of 200,000 tonnes or more. Most smelters have smaller production capacities. It is the PRC government's industrial policy to consolidate the Chinese primary aluminum industry into an industry that consists of larger, less polluting and more efficient producers. Accordingly, the larger smelters are being granted favorable treatment, including priority in the allocation of raw materials and electricity supplies and prices. These preferential treatments, especially discounts in electricity prices, give large domestic smelters a stronger competitive advantage over small domestic smelters. In addition, since January 1, 2005, the PRC government has prohibited domestic aluminum smelters whose annual production capacity lower than 100,000 tonnes from directly importing alumina to China. We are among a few companies in the PRC that are currently qualified to directly import alumina for our primary aluminum production. As imported alumina will usually be cost-effective, we believe our competitiveness is enhanced as a result.

 

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We face competition from other large domestic smelters. We have several advantages over such competitors, including:

 

*

Scale of production. With thirteen primary aluminum facilities, we can achieve significant economies of scale. In addition, our scale of production enables us to achieve high production volumes in order to fill large customer orders and maintain a large customer base. Through our national distribution network, we are able to make timely deliveries to customers from our local warehouses.

 

 

*

Technology. We believe we employ more sophisticated and efficient technology than most of our domestic competitors. Our Guangxi, Guizhou and Qinghai plants are among the most technologically advanced primary aluminum smelting facilities in China. In addition, our technological support and research and development capabilities are superior to other domestic smelters.

 

 

*

Vertical integration. As the largest integrated alumina and primary aluminum producer in China, we are able to supply alumina internally to our 13 primary aluminum plants. As a result, we save on transportation, warehousing and related costs. In addition, because we operate our own alumina refineries, we are able to assure a stable supply of alumina for our primary aluminum smelting operations. Since 2006, we captured the marketing opportunity and expanded our primary aluminum business by merger and acquisition, and we acquired six primary aluminum plants in 2006, which largely improved our own utilization rate of the alumina we produced and thus strengthened our risk control ability.

 

 

*

Quality. The quality of our primary aluminum compares favorably with the primary aluminum produced by most of our domestic competitors. The primary aluminum produced by most of our smelters has satisfied the quality standards of the London Metal Exchange, or LME, and we are registered for trading on the LME.

 

 

International Competition

 

The current tariff rate for primary aluminum imports is 5%. China had a net export of approximately 549,000 tonnes of primary aluminum in 2006. Competition from international suppliers of alumina and primary aluminum is expected to increase. Such competitors are likely to be large, efficient international companies, which generally have lower production costs than we do. Some competitors may also consider establishing joint venture companies with local producers in China to gain access to the resources in China and to lower transportation costs. However, other PRC governmental policies directed at fostering the growth of larger domestic smelters are likely to be retained, and the PRC government encourage the large domestic smelters to seek the overseas projects.

 

Research and Development

 

Our research and development efforts over the years have helped to expand our production capacity and reduce our unit production costs. We have successfully commercialized our previous research and development results in various technologies. In 2006, we accomplished the development and industrial applications of three key technologies and promoted the applications of eight industrialization projects. We further strengthened the intellectual property management and protection by filing a total of 204 patent applications during the year.

 

As of December 31, 2006, we owned 607 patents. The major registered patents relate primarily to technologies and know-how, equipment and new products. Once registered, a patent in China for a new invention is valid for 20 years and for a new function or a new design is valid for 10 years from the date of the patent application.

 

As of December 31, 2006, we owned 26 trademarks, which are used to identify our businesses and products. The trademarks have a term of 10 years. We have entered into a Trademarks License Agreement with Chinalco for the non-exclusive use by Chinalco of two of our trademarks relating to aluminum fabrication.

 

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Although the PRC has been promulgating and amending its patent, trademark, and license laws to comply with various international agreements, its laws are still evolving. In its current form, Chinese intellectual property law differs from United States intellectual property law in significant ways. For instance, the State Intellectual Property Office of the PRC may grant a compulsory license on a patent if it is unable to obtain a license from the patent owner for reasonable terms and within a reasonable time frame. Chinese patent law also provides immunity from damages for an entity that uses or sells a patented product without knowing that it was made or sold without the patentee's permission so long as it proves that the infringing product was obtained from a legitimate source. United States patent law does not offer such provisions. Chinese law also awards patents on a first-to-file system as opposed to the United States' first-to-invent system. Chinese trademark law is similarly based on a first-to-register system as opposed to the United States' first-to-use system.

 

Moreover, the PRC government and its courts have limited experience in enforcing its intellectual property laws. The current PRC patent and trademark laws have only been in effect for approximately 20 years. Courts in China have not reached the same level of experience in enforcing and interpreting intellectual property laws as have the courts in the United States. However, the PRC government has created administrative bureaus to resolve administrative and judicial matters relating to patent and trademark infringement disputes. These administrative bureaus also have the power to order an infringing party to stop and desist from such violations.

 

We do not regard any single patent, license, or trademark to be material to our sales and operations as a whole. We have no material patents, licenses, or trademarks the duration of which cannot, in the judgment of our management, be extended as necessary. We are neither involved in any material intellectual property disputes against us nor are we pursuing any material intellectual property rights against any party.

 

Environmental Protection

 

We are subject to PRC national environmental laws and regulations as well as environmental regulations promulgated by the local governments where we operate. These include regulations on waste discharge, land repair, emissions disposal and mining control. For example, national regulations promulgated by the PRC government set discharge standards for emissions into the air and water. National environmental protection enforcement authorities also promulgate discharge fees for various waste substances. These schedules usually provide for discharge fee increases for each incremental increase of the amount of discharge up to a specified level set by the PRC government or the local government. For any discharge exceeding the specified level, the relevant PRC government agencies may order any of our facilities to rectify certain behavior causing environmental damage, and subject to PRC government approval, the local government has the authority to order any of our facilities to close for failure to comply with existing regulations.

 

Our bauxite mining operations are subject to relevant environmental laws and regulations promulgated by national and local governments, including regulations on waste discharge, land repair, emission management and mining control.

 

The pollutants discharged from our alumina refining process include red mud, waste water and waste emission of gases and dust. Our primary aluminum production process generates fluorides, pitch fume and dust. It is illegal for such waste to be released into the atmosphere without first being processed. Once processed, the amount of pollutants that can be released is subject to national or local discharge limits.

 

Each of our alumina refineries and primary aluminum smelters has its own waste treatment facilities on site or has developed other methods to dispose of the industrial waste. In 2006, our Shandong plant, Henan plant, Shanxi plant, Zhongzhou plant, Guangxi plant, Qinghai plant and Lanzhou Aluminum received awards from local governments for their outstanding performances in environment protection.

 

Our total expenditures for environmental protection was RMB52.4 million, RMB69.8 million and RMB105.5 million for the years ended December 31, 2004, 2005 and 2006, respectively. We have been granted ISO14001:1996 accreditations issued by The International Certification Network on December 31, 2004. We believe that our operations are substantially in compliance with currently applicable national and provincial environmental regulations.

 

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Insurance

 

We currently maintain insurance coverage on our property, plant and equipment, our transportation vehicles and various assets that we consider to be subject to significant operating risks.

 

We paid a total of RMB37.1 million, RMB46.5 million and RMB54.5 million in insurance premiums in 2004, 2005 and 2006, respectively.

 

We are covered under the injury and accidental death insurance provided by the local government labor departments and do not purchase separate insurance policies from commercial insurers with respect to such risks.

 

Consistent with what we believe to be the customary practice in China, we generally do not carry any third party liability insurance to cover claims in respect of personal injury, environmental damage arising from accidents on our property or relating to our operations (other than our automobiles) or business interruption insurance. More extensive insurance is either unavailable in China or would impose a cost on our operations that would reduce our competitiveness with other producers.

 

Seasonality

 

Our business is not seasonal.

 

Regulatory Overview

 

Producers of alumina and primary aluminum are subject to national industrial policies and relevant laws and regulations in areas of environmental protection, import and export, land use, foreign investment regulation and taxation. We are also subject to regulations relating to activities such as mining.

 

We are principally subject to governmental supervision and regulation by two agencies of the PRC government:

 

*

the NDRC, which sets and implements the major policies concerning China's economic and social development policies, approves investments exceeding certain capital expenditure amounts, including approval of Sino-foreign joint venture projects, coordinates economic development of state-owned enterprises and oversees their reform, and formulates industrial policies and investment guidelines for all industries including the aluminum industry; and

 

 

*

the Ministry of Land and Resources, which has the authority to grant land use licenses and mining right permits.

 

 

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

 

Requirements for New Entrants and Other Capital Investments

 

The constructions of new alumina refineries and new primary aluminum smelters require prior approval by the NDRC, the important projects among which shall be approved by the State Council. Any nonferrous metals projects and rare earths mining projects in which the amount of total investment exceeds RMB5,000 million shall be approved by the NDRC and filed with the State Council for record. All other projects shall be filed with the local competent investment authorities for record disregarding the scale of such projects. Moreover, in order to obtain governmental approval for its establishment, a new alumina refinery must have an annual production capacity of at least 500,000 tonnes if it uses the sintering process, 400,000 tonnes if it uses the hybrid Bayer-sintering process or 300,000 tonnes if it uses the Bayer process. All legal and regulatory requirements for new projects and other capital investments in the alumina and aluminum industries apply equally to us. Accordingly, we are required to obtain all necessary governmental approvals for our capital expenditure plans.

 

Any capital markets financing activities, for example, to finance a capital project, are subject to approval by securities regulatory authorities and other relevant authorities in China, regardless of whether the funds are

 

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raised in China or on the international capital markets. An issuer of equity securities or equity-linked securities in the PRC must obtain prior approval from the CSRC. For the issuance of equity or equity-linked overseas securities, the issuer is also required to obtain approval from the NDRC. Offerings of debt, such as debentures, are subject to approval from the People's Bank of China, as well as the NDRC. For all international financing activities through bank borrowing or issuance of debt, the issuer must obtain prior approval from the State Administration of Foreign Exchange and register with it after the completion of the transaction.

 

Foreign investment in the production of alumina and primary aluminum is encouraged by the PRC government subject to various conditions. Wholly foreign-owned companies may conduct bauxite mining operations in the western region of China, but bauxite mining activities in other regions of China may only be conducted jointly with PRC entities in the form of a joint venture.

 

Pricing

 

The PRC government does not impose any limitations with respect to the pricing of alumina, primary aluminum and related products. Thus, alumina and primary aluminum producers are free to set prices for their products. All the raw materials, supplemental materials and other supplies that we purchase are based on market prices, except for electricity, the price of which is described below. Freight transportation on the national railway system is subject to government mandated pricing.

 

Electricity Supply and Price

 

The State Power Supervision Commission is responsible for the supervision and administration of the power industry in China. The NDRC and local governments regulate electricity pricing. Electricity suppliers may not change their electricity prices without governmental authorization.

 

The Electric Power Law and related rules and regulations govern electricity supply and distribution. Currently, China's state-owned power companies, through their respective local subsidiaries, operate all the regional power grids in China from which we obtain most of our electricity requirements.

 

Regulations Concerning Imports and Exports of Alumina and Primary Aluminum

 

Imports of alumina into China are subject to import tariffs. The current standard tariff rate for alumina is 3%. Imports of primary aluminum into China are also subject to import tariffs currently at the rate of 5%. The export tax for primary aluminum is increased to 15% since November 1, 2006. In addition, the alumina business of processing with imported materials has been abandoned by the PRC government with effect from August 22, 2006.

 

Environmental Protection Laws and Regulations

 

The State Environmental Protection Administration of China is responsible for uniform supervision and control of environmental protection in China. It formulates national environmental quality and discharge standards and monitors China's environmental system. Environmental protection bureaus at the county level or above are responsible for environmental protection within their areas of jurisdiction.

 

Environmental regulations require companies to file an environmental impact report with the relevant environmental bureau for approval before undertaking the construction of a new production facility or any major expansion or renovation of an existing production facility. New facilities built pursuant to this approval are not permitted to operate until the relevant environmental bureau has performed an inspection and is satisfied that the facilities are in compliance with environmental standards.

 

The Environmental Protection Law requires any facility that produces pollutants or other hazards to incorporate environmental protection measures in its operations and establish an environmental protection responsibility system. Such system includes adoption of effective measures to control and properly dispose of waste gases, waste water, waste residue, dust or other waste materials. Any entity that discharges pollution must register with the relevant environmental protection authority.

 

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Remedial measures for breaches of the Environmental Protection Law include a warning, payment of damages or imposition of a fine. Any entity undertaking a construction project that fails to install pollution prevention and control facilities in compliance with environmental standards for a construction project may be ordered to suspend production or operations and may be fined. Criminal liability may be imposed for a material violation of environmental laws and regulations that causes loss of property or personal injuries or death.

 

Mineral Resources Laws and Regulations

 

All mineral resources in China are owned by the State under the current Mineral Resources Law. Exploration, exploitation and mining operations must comply with the relevant provisions of the Mineral Resources Law and are under the supervision of the Ministry of Land and Resources. Exploration and exploitation of mineral resources are also subject to examination and approval by the Ministry of Land and Resources and relevant local authorities. Upon approval, a mining permit is issued by the relevant administrative authorities, which are responsible for supervision and inspection of mining exploitation in their jurisdiction. Annual reports are required to be filed by the holders of mining rights with the relevant administrative authorities.

 

The PRC government permits mine operators of collectively owned mines to exploit mineral resources in designated areas and individuals to mine scattered mineral resources. Such mine operators and individuals are subject to government regulation. Mining activities by individuals are restricted. Individuals are not permitted to exploit mineral reserves allocated for exploitation by a mining enterprise or company or protected reserves. Indiscriminate mining that damages mineral resources is prohibited.

 

If mining activities result in damage to arable land, grassland or afforested area, the mining operator must take measures to return the land to an arable state within the prescribed time frame. Any entity or individual which fails to fulfill its remediation obligations may be fined and denied application for land use rights for new land by the relevant land and natural resources authorities.

 

It is unlawful for an entity or individual to conduct mining operations in areas designated for other legal mining operators. A mining operator whose exploitation causes harm to others in terms of production or in terms of living standards is liable for compensation and is required to take necessary remedial measures. When a mine is closed, a mine closure report and information concerning the mining facilities, hidden dangers, remediation and environmental protection must be submitted for examination and approval in accordance with the relevant law.

 

The mineral products illegally extracted and the income derived from such activities may be confiscated and may result in fines, revocation of the mining permit and, in serious circumstances, criminal liability.

 

Tax Laws and Regulation

 

In March 2007, the PRC government promulgated the Corporate Income Tax Law which will be effective from January 1, 2008. The Corporate Income Tax Law will impose a single income tax rate of 25% for both domestic and foreign invested enterprise. The existing Tax Law of the People's Republic of China for Enterprises with Foreign Investment and Foreign Enterprises (the "FIE and FE tax laws") and Provisional Regulations of the PRC on Enterprise Income Tax (collectively referred to as the "existing tax laws" will be abolished simultaneously. Currently, the Company and its subsidiaries applied the tax rates under existing tax laws. The Corporate Income Tax Law has provided for a 5-year transitional period for those entities that applied FIE and PE tax laws in previous years. As of May 31, 2007, there are still no detailed implementation rulings released.

 

ORGANIZATIONAL STRUCTURE

 

We are organized as a joint stock limited company under PRC law. As of May 31, 2007, Chinalco, China Cinda, China Construction Bank, China Development Bank, Guangxi Investment, Guizhou Development, Lanzhou Aluminum, Lanzhou Economy and Information Consulting Company and our public shareholders (not including Alcoa) own 40.46%, 6.99%, 5.51%, 4.31%, 1.53%, 1.00%, 0.62%, 0.01% and 32.65%, respectively, of our issued share capital. Alcoa owns approximately 6.86% of our issued share capital.

 

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Shandong Aluminum, a significant subsidiary incorporated in the PRC and located in Shandong Province, in which we held a 71.4% interest, is a joint stock limited company established under PRC law. Its A shares were traded on the Shanghai Stock Exchange. After A Share issuance on April 30, 2007, we hold 100% of its equity interest, and its A shares were delisted from the Shanghai Stock Exchange.

 

Lanzhou Aluminum, previously our associate company in which we held a 28% equity interest. After the A Shares issuance on April 30, 2007, it became our wholly-owned subsidiary, and its A shares were delisted from the Shanghai Stock Exchange.

 

In 2006, we acquired the following six primary aluminum plants:

 

Shanxi Huasheng, a subsidiary incorporated in the PRC and located in Shanxi Province, in which we hold a 51.0% interest.

 

Fushun Aluminum, a wholly-owned subsidiary incorporated in the PRC and located in Liaoning Province.

 

Shandong Huayu, a subsidiary incorporated in the PRC and located in Shandong Province, in which we hold a 55.0% interest.

 

Zunyi Aluminum, a subsidiary incorporated in the PRC and located in Guizhou Province, in which we hold a 61.3% interest, is a joint stock limited company established under PRC law.

 

Gansu Hualu, a subsidiary incorporated in the PRC and located in Gansu Province, in which we hold a 51.0% interest.

 

Jiaozuo Wanfang, our associate company incorporated in the PRC and located in the Henan Province, in which we hold a 29% interest, is a joint stock limited company established under the PRC law. Its A shares were listed on the Shenzhen Stock Exchange.

 

PROPERTY, PLANT AND EQUIPMENT

 

Land

 

Chinalco leases to us 454 pieces or parcels of land, which are located in six provinces, covering an aggregate area of approximately 59.64 million square meters for the purposes of all aspects of our operations and businesses. The leased land consists of:

 

*

439 pieces of allocated land with an area of approximately 59.26 million square meters, for which Chinalco has obtained authorization from the relevant administrative authorities to manage and lease the land use rights; and

 

 

*

16 pieces of land with an area of approximately 371,284.6 square meters for which Chinalco has paid the land premiums and has been granted the land use rights certificates.

 

 

 

The land is leased for the following terms:

 

 

*

allocated land: 50 years commencing from July 1, 2001 (except for land use rights of mines operated by us, the leased term for each shall end on the expiry date of the mining rights or at the end of the actual mine life, whichever is earlier); and

 

 

*

granted land: until expiry of the relevant land use right permits.

 

 

In view of the recent increases in rent of office premises in Beijing, we, at the request of China Aluminum Development Co., Ltd. have agreed to make a prepayment of the annual rent and property management fees of the premises, of which the Company is the tenant, for the remaining two years of the tenancy. The total prepayment amounted to RMB145,314,782 and was paid to China Aluminum Development Co., Ltd. in October 2006. China Aluminum Development Co., Ltd. is the landlord of the Premises and is a connected person of the Company.

 

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Due to the adjustment of land tax in Zhongzhou Plant and Shanxi Plant, and at the request of Chinalco, we bore the increase in land tax of approximately RMB45.18 million of these two branch factories of the Company. The relevant land use rights were leased to the Company pursuant to the Land Use Right Leasing Agreement between our Company and Chinalco dated November 5, 2001.

 

Buildings

 

Our principal executive offices, which we lease from Chinalco, are located at No. 62 North Xizhimen Street, Hai Dian District, Beijing, People's Republic of China, 100082.

 

Pursuant to the reorganization, Chinalco transferred to us, among other operating assets, ownership of the buildings and properties for the operation of our core businesses, with Chinalco retaining the remaining buildings and properties for Chinalco's remaining operations. The buildings transferred to us comprise 4,631 buildings with an aggregate gross area of approximately 4.2 million square meters.

 

The buildings transferred to us pursuant to the reorganization, which are located on land leased from Chinalco, may be sold or transferred only with the consent of Chinalco and in accordance with applicable land transfer procedures. Chinalco has undertaken to provide its consent and the necessary assistance to affect land grant procedures to ensure that our buildings can be legally transferred or sold.

 

We and Chinalco also lease to each other a number of other buildings and properties for ancillary uses, which comprise mainly buildings for offices, dormitory, canteen and storage purposes. We lease 59 buildings to Chinalco, with an aggregate gross area of approximately 62,819 square meters. Chinalco leases 100 buildings to us, with an aggregate gross area of approximately 265,388 square meters. The leased terms of all these buildings are 20 years commencing from July 1, 2001. Chinalco has obtained proper land and building title certificates for all of the buildings it leases to us by the end of 2004. We also leased from China Aluminum Development Co., Ltd., a wholly-owned subsidiary of Chinalco, 30,160.81 square meters of office space for a term of three years commencing from March 28, 2005 for a consideration of RMB61.46 million per annum. See "Item 7 - Major Shareholders and Related Party Transactions - Related Party Transactions - Tenancy Agreement".

 

For environmental issues in relation to the utilization of our assets, please refer to "Item 4. Environmental Protection".

 

Our Expansion

 

Our capital expansion plan for 2007 requires a total of RMB16,600 million in capital expenditures for technology upgrading and several acquisition projects to increase our annual production capacity. In 2007, our annual production capacity of alumina and primary aluminum are expected to increase 930,000 tonnes and 508,000 tonnes, respectively (not including acquisition project). For more information, see "Item 5. Operating and Financial Review and Prospectus - Capital Expenditure Plan".

 

The following table shows the expected aggregate effects of our expansion and improvement plans for our alumina and primary aluminum production facilities for 2007:

 

 

 

Production

Expected Production

 

Planned Capital

Capacity as of

Capacity as of

 

Investment for 2007

  December 31, 2006

December 31, 2007

 




 

 

 

 

 

(RMB in millions)

(in thousand tonnes)

 

 

 

Alumina

10,100

9,007

9,937

Primary aluminum

6,500

2,481(1)

2,989(1)

 

 

 

 

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(1)

Includes 16,600 tonnes of production capacity and 428,000 tonnes of expected production capacity of Lanzhou Aluminum, which was our associated company owned as to 28% of its equity as of December 31, 2006, and 272,000 tonnes of production capacity and 412,000 tonnes of expected production capacity of Jiaozuo Wanfang, which is our associated company owned as to 29% of its equity interest. Production capacity presented above represents 100% of Lanzhou Aluminum and Jiaozuo Wanfang's smelting capacity. The results of operations of Lanzhou Aluminum and Jiaozuo Wanfang are not consolidated into our financial statements. See Note 11(b) to our audited consolidated financial statements.

 

 

Capital expenditures are expected to further expand our alumina and primary aluminum production capacities to further enhance synergies arising from economy of scale, vertical integration and reduction of our unit production cost.

 

During 2006, we entered into six primary aluminum cooperation agreements which led to an increase of 969,000 tonnes of production capacity of primary aluminum, and one letter of intent which led to an increase of 120,000 tonnes of production capacity of primary aluminum.

 

1.

Jiaozuo Wanfang. On May 19, 2006, we entered into a Sale and Purchase Agreement with Jiaozuo Wanfang Group to acquire 29% of the issued share capital, or 139,251,064 State-owned legal person shares held by Jiaozuo Wanfang Group in the issued share capital of Jiaozuo Wanfang, which has a designed annual production capacity of 272,000 tonnes of primary aluminum. The operation output was 70,000 tonnes from the date of the acquisition to the end of 2006.

 

 

2

Shanxi Huasheng. On December 6, 2005, we entered into a joint venture agreement with Shanxi Guanlv Co., Ltd. to establish a joint venture company, Shanxi Huasheng Aluminum Company Ltd, in which we hold a 51% equity interest. Our total commitment under the agreement amounts to RMB510 million. The joint venture company commenced operations in March 2006, with a designed annual production capacity of primary aluminum of approximately 220,000 tonnes. The production output of Shanxi Huasheng was 115,000 tonnes from the date of the acquisition to the end of 2006.

 

 

3

Zunyi Aluminum. In June 2006, we entered into a share purchase agreement with Guizhou Wujiang Hydropower Development Co., Ltd. and eight other companies who are the shareholders of Zunyi Aluminum to purchase part of the equity interest from Guizhou Wujiang Hydropower Development Co., Ltd. and all the equity interest from the other eight companies. We have completed our purchase and hold 61.3% of the equity interest in Zunyi Aluminum. Zunyi Aluminum had a designed annual production capacity of aluminum of 110,000 tonnes. The production output of aluminum was 43,000 tonnes from the date of the acquisition to December 31, 2006.

 

 

4

Fushun Aluminum. In March 2006, we entered into a share transfer agreement with Liaoning Fushun Aluminum Plant to acquire the 100% equity interest held by it in Fushun Aluminum, with a designed annual production capacity of 140,000 tonnes. The production output of Fushun Aluminum was 100,000 tonnes from the date of the acquisition to the end of 2006.

 

 

5

Shandong Huayu. In July 2006, we entered into a share transfer agreement with Shandong Huasheng Jiangquan Group to acquire a 55% equity interest in Shandong Huayu, a subsidiary of Shandong Huasheng Jiangquan Group. Shandong Huayu has a designed annual production capacity of 100,000 tonnes of primary aluminum, and also has other supporting facilities and two 135MW coal-fired generators. The production output of Shandong Huayu was 45,000 tonnes from the date of the acquisition to the end of 2006.

 

 

6

Gansu Hualu. In August 2006, we entered into a share transfer agreement with Baiyin Nonferrous Metal (Group) Co., Ltd., or Baiyin Nonferrous, and Baiyin Ibis Aluminum Co., Ltd., or Baiyin Ibis. Under the agreement, Baiyin Nonferrous is to contribute 127,000 tonnes of primary aluminum smelting and supporting facilities owned by Baiyin Ibis as capital contribution and hold

 

 

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a 49% equity interest in Gansu Hualu, a subsidiary of Baiyin Ibis, and we are to hold a 51% equity interest in Gansu Hualu. The joint venture will have a designed annual production capacity of 127,000 tonnes of primary aluminum. The production output of Gansu Hualu was 46,000 tonnes from the date of the acquisition to the end of 2006.

 

 

7

Guangyuan Venus Aluminum. On May 29, 2006, we entered into a letter of intent with Guangyuan city government and Sichuan Guangyuan Venus Aluminum to promote the joint operation of aluminum and electricity. Under the letter of intent, we are to hold 26% of the equity interest of Guangyuan Venus Aluminum, which has a designed annual production capacity of 120,000 tonnes of primary aluminum.

 

 

In the area of alumina production, Zhongzhou plant had an increased production capacity of 210,000 tonnes following the completion of a project involving the upgrade of the sintering process as well as a project involving alumina concentration with added bauxite after digestion of the ore-dressing Bayer process. Shandong plant has an increased production capacity of 450,000 tonnes following the completion of a project involving the upgrade of the sintering process as well as a project involving expansion of the Bayer technology.

 

In 2007, we will continue the expansion and restructuring of our primary aluminum and alumina projects, the majority of which are included as follows:

 

*

Lanzhou Aluminum project. Upon the completion of this project, the primary aluminum production capacity will be 280,000 tonnes.

 

 

*

Fushun Aluminum restructuring project. Upon the completion of this project, the primary aluminum production capacity will be increased by 100,000 tonnes.

 

 

*

Jiaozuo Wanfang second-phase project of aluminum alloy. Upon the completion of this project, the primary aluminum production capacity will be increased by 140,000 tonnes.

 

 

*

Guangxi Alumina third-phase project of 800,000 tonnes. Such project is expected to be completed in the third quarter of 2008.

 

 

*

Chongqing and Zunyi Alumina projects of 800,000 tonnes each. Both of the projects are expected to be completed in June 2009.

 

 

*

Qingdao secondary aluminum alloy project. Such project is expected to be completed at the end of 2007.

 

 

*

Guangxi Huayin primary aluminum project of 1,600,000 tonnes. Such project is expected to be completed at the end of 2007.

 

 

We intend to fund these capital expenditures through a combination of internal funds derived from our own operations, the proceeds from the placement of H Shares and bank financing.

 

The preceding paragraphs provide a summary of our current capital expenditure plans for our major projects. These plans have been developed based on facts currently known to us, assumptions we believe to be reasonable and our estimates of market and other conditions. They may change as circumstances change, and may be modified as our business plans evolve. Other than as required by law, we do not undertake any obligation to publish updates of our plans or their implementation status.

 

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

 

The following discussion and analysis should be read in conjunction with our audited financial statements, and selected historical financial data, in each case together with the accompanying notes, included elsewhere in this annual report. This section contains certain expressions such as "expect", "anticipate", "believe", "seek", "estimate", "intends", "should", "may" or other terms or phrases which are forward-looking statements involving risks and uncertainties. See "Item 3 Key Information Risk Factors". Forward-looking

 

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statements are not guarantees of our future performance or results and our actual results could materially differ from those disclosed in the forward-looking statements.

 

We have changed certain of our accounting policies following the adoption of HKFRS effective for accounting periods commencing on or after January 1, 2005. As a result, we have reclassified/restated certain income statement and balance sheet data for the years ended December 31, 2002, 2003 and 2004. Our audited financial statements are prepared in accordance with HKFRS which differs in certain material respects from U.S. GAAP. Note 35 to our audited consolidated financial statements provides a reconciliation of our financial statements to U.S. GAAP in accordance with Item 18 of Form 20-F.

 

The Reorganization

 

Prior to the reorganization conducted in preparation for the global offering, we did not exist as a separate legal entity. Our operations were conducted by Chinalco and its predecessors. As part of the reorganization, Chinalco transferred to us assets and liabilities related to seven alumina and primary aluminum production plants and our Research Institute. Because Chinalco controlled these operations prior to the reorganization and still controls us, accordingly, in those financial statements, the assets and liabilities transferred to us have been stated at historical amounts and the results of our operations have been presented as if our operations had already been transferred to us from Chinalco. In addition, those financial statements also reflect the assets, liabilities, revenue and expenses of operations retained by Chinalco in the reorganization, including one bauxite mine, two limestone quarries and a carbon plant, which were directly related to our alumina and primary aluminum operations. Because of the asset reorganization and the related carve-out accounting, those financial statements reflect various historical payments as distributions to Chinalco that are not expected to be indicative of future practices or results.

 

Since July 1, 2001, our financial statements as included in this annual report have been prepared using the purchase accounting method having given effect to our incorporation and the reorganization. Accordingly, the assets and liabilities transferred to us have been restated at fair value and the assets, liabilities, revenue and expenses of operation retained by Chinalco are not reflected. Since July 1, 2001, all transactions have been recorded at government guidance price, market price or at contractual price (cost plus a margin).

 

Critical Accounting Policies

 

We have identified a number of accounting policies below as critical to our business operations and the understanding of our results of operations. Some of our accounting policies require our management to make significant judgments relating to estimates and assumptions about the effects of circumstances to reported amounts in our financial statements. We have established procedures and processes to facilitate the making of such judgments in the preparation of our financial statements. See Note 2 to our audited consolidated financial statements for the impact of such accounting policies and any associated risks relating to these policies on our results of operations. Our management has identified areas of uncertainty and the variables most important in making the necessary estimates. Management has used the best information available but actual performance may differ from our management's estimates and future changes in key variables could change future reported amounts in our financial statements.

 

Property, Plant and Equipment

 

The carrying amounts of long-lived assets are reviewed whenever events or changes in circumstances indicate that the book value of the assets may not be recoverable. An impairment exists when the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is measured at the higher of net selling price or value in use, calculated based on discounted future pre-tax cash flows related to the asset or the cash generating unit to which the assets belong. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows from other assets or group of assets. Estimates of future cash flows include the cash inflows from continuing use of the asset and cash outflows to prepare the asset for use that can be directly attributed, or allocated on a reasonable and consistent basis, to the asset. If applicable, estimates also include net cash flows to be received (or paid) for the disposal of the asset at the end of its useful life. We determine the estimated useful lives of our property, plants and equipment based on the historical experience of the actual useful lives of property, plant and equipment of similar nature and functions. Management will increase the depreciation

 

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charge where useful lives are less than previously estimated lives, and will write-off or write-down technically obsolete or non-strategic assets that have been abandoned or sold. Management made a number of significant assumptions and estimates in the application of the discounted future cash flow model to forecast operating cash flows, including business prospects, market conditions, selling prices and sales volume of products, costs of production and funding sources. If there is an indication of impairment, the carrying value of such assets is written down to its recoverable amount. Results in actual transactions could differ from those estimates used to evaluate the impairment of such long-lived assets.

 

Goodwill

 

Goodwill represents the excess of purchase consideration over the fair values ascribed to the separable net assets of entities acquired. Until December 31, 2004, under HK GAAP, goodwill resulting from acquisitions under purchase accounting was recognized as an intangible asset and amortized on a straight-line basis over its estimated useful economic life of not more than 20 years. In accordance with the provisions of HKFRS 3 effective from January 1, 2005, the Company has ceased amortization of goodwill. Separately recognized goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating that are expected to benefit from the business combination in which the goodwill arose. Impairment losses on goodwill are not reversed. Under U.S. GAAP, annual amortization of this amount ceased effective from January 1, 2002. Goodwill is subject to annual impairment testing and is written down if carrying value exceeds fair value. Management made a number of significant assumptions and estimates in the application of the discounted future cash flow model to forecast operating cash flows, including business prospects, market conditions, selling prices and sales volumes of products, costs of production and funding sources. Management considers both past data and all currently available information at the time the valuations of its businesses are performed. Results in actual transactions could differ from those estimates used to evaluate the impairment of goodwill.

 

Income tax

 

We are subject to enterprise income tax liabilities in the local jurisdictions within the PRC in which we operate. Due to uncertainties relating to the enforcement and interpretation of PRC tax laws as well as the lack of confirmation by the local tax authorities, our management have made certain estimates and judgments based on current PRC tax laws, regulations and other related policies in determining whether a provision of enterprise income taxes should be made or the amount of provision which should be made. If the management's estimates or judgments differ from the interpretation or enforcement by the central or local tax authorities, the income tax provision may vary in future periods.

 

Net realizable value of inventories

 

Net realizable value of inventories is the estimated selling price in the ordinary course of business, less estimated costs of completion and selling expenses. In calculating the net realizable value of inventories, management must make a number of significant estimates of the selling price of inventories and related transaction costs in the ordinary course of business based on market conditions and the historical experience of manufacturing and selling products of similar nature, which are reviewed on each balance sheet date. Management's estimates of the selling price of inventories and related transaction costs in the ordinary course of business may differ from the actual selling price of inventories and related transaction costs in the ordinary course of business.

 

Provisions for Accounts and Other Receivables

 

Provision is made against accounts and other receivables when future collections are considered doubtful. In assessing the timing and amounts for these provisions, management must make a number of significant assumptions and estimates in the application of aging and specific identification analysis using past history and collections' experience, market conditions, potential events and circumstances affecting future collections and the credit status of specific customers, which are reviewed on each balance sheet date. Management's assessment of future collections of receivables may differ from the timing and amounts of the actual collections in future periods.

 

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U.S. GAAP Reconciliation

 

Our financial statements are prepared in accordance with HKFRS, which differs in various material respects from U.S. GAAP. See Note 35 to our audited consolidated financial statements. The summary of differences involve management's estimates and assumptions which may affect the reported amounts of assets and liabilities, the disclosure regarding contingent assets and liabilities and revenues and expenses.

 

New/Revised Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards

 

The Hong Kong Institute of Certified Public Accountants, or HKICPA, has issued a number of new/revised Hong Kong Financial Reporting Standards, or HKFRS, which are effective for accounting periods beginning on or after January 1, 2005. We have adopted these new/revised HKFRS in the financial statements for the years ended December 31, 2005 and 2006 and reclassified/restated certain income statement data in accordance with the relevant requirements for the years ended December 31, 2002, 2003 and 2004.

 

Overview

 

We are the largest producer of alumina and one of the largest producers of primary aluminum in China. We are also the second largest producer of alumina in the world in terms of production volume for the year ended December 31, 2006. We are engaged primarily in alumina refining and primary aluminum smelting operations. We report our financial results according to the following business segments:

 

*

Alumina segment, which consists of mining and purchasing bauxite and other raw materials, refining bauxite into alumina, and selling alumina both internally to our primary aluminum smelters and externally to customers outside of our Company. To a lesser extent, this segment also includes the production and sale of alumina chemical products and gallium.

 

 

*

Primary aluminum segment, which consists of procuring alumina and other raw materials (including recycled aluminum), supplemental materials and electricity, smelting alumina to produce primary aluminum, and selling substantially all our primary aluminum products to external customers. To a lesser extent, this segment includes production and sales of carbon products.

 

 

*

Corporate and other services segment, which includes our headquarters' operations, research conducted by our research institutes and provision of our research and development services to third parties.

 

 

Factors Affecting Our Operating Performances

 

Our operating performances and the period-to-period comparability of our financial results are affected by a number of external factors. Our financial statements may not be indicative of our future earnings, cash flows or financial position for numerous reasons including those described below.

 

Alumina Prices

 

We sell our alumina products by way of spot sales or under long-term contracts. Pricing for our alumina products is determined by the nature of the sale as described below.

 

Spot sales. We set uniform prices for all our external sales of alumina by reference to import costs of alumina, the market supply and demand conditions as well as our short-term and mid-term projections. Our pricing generally takes into account:

 

*

free-on-board Australia prices for alumina exports into China;

 

 

*

international transportation costs;

 

 

*

the applicable standard PRC import tariff;

 

 

*

value-added tax at 17%;

 

 

- 50 -

 


 

*

import related fees; and

 

 

*

domestic demand and supply conditions.

 

 

The international market price for alumina fluctuates from time to time, and such fluctuation affects the price of our alumina, which tracks changes in the international market prices. In 2006, the market price of alumina made a historic record. The highest spot price of alumina in the international market supplied to China reached US$650 per tonne in June 2006. Affected by the rapid expansion in the PRC's new alumina production capacity and output, the international spot price began to weaken from August and bottomed at approximately US$200 per tonne in November, representing a significant decrease of 69.0% from the peak. The annual average price of alumina reached US$445 per tonne, still representing a year-on-year increase of 20.3%. The highest and lowest spot price of domestic alumina was RMB6,500 per tonne and RMB2,300 per tonne respectively. The yearly average selling price of our alumina was RMB4,107 per tonne, representing a year-on-year increase of 7.4%. The global output of alumina for 2006 was approximately 68.58 million tonnes, representing a year-on-year increase of 12.0%. The global alumina consumption continued its fast momentum to approximately 66.40 million tonnes, representing a year-on-year increase of 6.4%. Due to the significant expansion of the PRC's new alumina production capacity, domestic supply of alumina in 2006 increased, thereby relieving procurement pressure of the international spot market. Domestic output of alumina reached approximately 13.70 million tonnes, representing a stable growth of 61.0% over 2005, while its demand reached approximately 19 million tonnes, representing a further year-on-year increase of 14.3%. In 2006, the imported alumina amounted to approximately 6.91 million tonnes, representing a year-on-year decrease of 1.6%.

 

Long-term contracts sales. Internationally, the customary practice for alumina pricing under long-term contracts is by reference to the LME prices for primary aluminum. Since 2001, we have entered into a number of domestic long-term alumina sales contracts with three-year terms, under which the sales price is set as a percentage of the three-month primary aluminum prices on the Shanghai Futures Exchange. As a result, fluctuations of primary aluminum prices on the Shanghai Futures Exchange can affect our alumina prices under these long-term contracts, and such effects may increase as we increase the proportion of alumina sales under long-term contracts. We sold approximately 2,840,000 tonnes of alumina under long-term contracts in 2006.

 

Primary Aluminum Prices

 

Like most primary aluminum producers in China, we price our primary aluminum products by reference to Shanghai Futures Exchange spot prices. The Shanghai Futures Exchange primary aluminum spot prices generally reflect LME primary aluminum spot prices, plus an amount on account of international transportation, import tariffs, value-added tax and other import-related costs. Thus, fluctuations in the Shanghai Futures Exchange (and, by extension, the LME) spot prices affect our operating performances. Primary aluminum prices on the Shanghai Futures Exchange and LME tend to be cyclical and volatile. The following table sets out the average three-month primary aluminum futures price on LME and the Shanghai Futures Exchange in 2004, 2005 and 2006.

 

 

2004

2005

2006

 




 

 

 

 

 

(U.S. Dollar per tonne)

 

 

LME

1,723.0

1,900.0

2,591.0

Shanghai Futures Exchange

1,695.0

1,782.0

2,207.0

 

 

 

 

Year 2006 saw a steady and rapid economic growth in the US, Europe, Japan and other western economies.

 

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As driven by the continual growth of funds, consumption demand and energy shortage, the international aluminum price has stayed at a high level. In 2006, the lowest price of three-month primary aluminum futures on LME was approximately US$2,220 per tonne, the highest price was US$3,310 per tonne and the average price was US$2,591 per tonne, a year-on-year increase of 36.4%. In the PRC, despite the further increasing of aluminum export tax to 15% on November 1, 2006, the aluminum price in the PRC market maintained at a high level due to the hiking aluminum price in the international market and the booming aluminum consumption from the robust PRC national economy. The highest, lowest and average price of three-month aluminum futures on the Shanghai Futures Exchange ("SHFE") was RMB24,520 per tonne, RMB18,130 per tonne and RMB20,136 per tonne, respectively.

 

The global output of primary aluminum for 2006 was approximately 33.97 million tonnes, representing a year-on-year increase of 6.4%. The PRC's primary aluminum output continued a rapid growth to approximately 9.35 million tonnes, representing an increase of 19.7% over 2005. The global aluminum consumption was 34.33 million tonnes, representing an increase of 7.7% over 2005. The rapid growth of the PRC's economy boosted the fast growth of aluminum consumption in a wide range of industries including construction, transportation, packaging, aviation and aerospace. Accordingly, domestic aluminum consumption for 2006 was approximately 8.67 million tonnes, representing an increase of 22.6% over 2005.

 

Electricity Prices

 

The smelting of primary aluminum requires a substantial and continuous supply of electricity. Therefore, the availability and price of electricity are key considerations in our primary aluminum production operations. Interruptions of electricity supply can result in lengthy production shutdowns, increased costs associated with restarting production and waste of production in progress. In extreme cases, interruptions of electricity supply can also cause damage to or destruction of the equipment and facilities. We encountered severe shortages of electric power supply between 2004 and 2005 and shortages were gradually relieved in 2006. The electricity accounted for approximately 30% of our unit primary aluminum production costs in 2006, a slight decrease compared to 2005. Currently, all of our production facilities enjoy preferential electricity prices granted by local government authorities.

 

Debt and Financing Costs

 

Our financing costs consist predominantly of interest expenses on our borrowings. The majority of our debt has been incurred to fund our capital expenditures. Interest rates on loans related to capital expenditures and working capital set by banks generally follow guidelines issued by the People's Bank of China. The People's Bank of China increased interest rates for commercial loans chargeable by state-owned banks in 2005 and 2006, which correspondingly increased our interest expense on our floating rate loans during these periods.

 

Consolidated Operating Performances

 

The following table sets forth, for the periods indicated, certain income and expense items as a percentage of our revenue from our consolidated statements of income:

 

 

Years Ended December 31,

 


 

2004

2005

2006

 

(restated(1) )

 

 

 




 

 

 

 

Revenue

100.0%

100.0%

100%

Cost of sales

67.0

67.5

67.7

 




 

 

 

 

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Gross profit

33.0

32.5

32.3

Other (income) and other (gains)/losses, net

0.1

0.3

0.9

Selling and distribution expenses

2.0

1.9

1.5

General and administrative expenses

3.7

3.9

3.4

Research and development expenses

0.4

0.3

0.2

 




 

 

 

 

Operating profit

27.0

26.7

28.1

Finance costs

0.3

1.0

1.1

 




 

 

 

 

Operating profit after finance costs

26.7

25.7

27.0

 




 

 

 

 

(1)

Restatement of the financial information for the year ended December 31, 2004 has been made pursuant to the adoption of the new/revised standards and interpretation of HKFRSs on January 1, 2005.

 

 

Sales to Chinalco and its subsidiaries, jointly-controlled entities and other related parties accounted for approximately 10.2% and 9.1% of consolidated revenue for the two years ended December 31, 2005 and 2006, respectively. For information on related party transactions, see "Item 7 - Major Shareholders and Related Party Transactions - Related Party Transactions" and Note 34 to our audited consolidated financial statements.

 

Year Ended December 31, 2006 Compared with Year Ended December 31, 2005

 

Results of Operations

 

Our net profit attributable to our equity holders amounted to RMB11,745 million for the year ended December 31, 2006, representing a year-on-year increase of RMB4,723 million and an increase by 67.26% from the previous year's net profit attributable to our equity holders of RMB7,022 million.

 

Revenue

 

Our total revenue increased by RMB24,070 million from RMB37,826 million for the year 2005 to RMB61,896 million for the year 2006, representing an increase of 63.63%. The increase was primarily due to the increase in sales volume and selling prices of our principal products, alumina and primary aluminum. Our external sales volume of primary aluminum reached 1,823,100 tonnes, representing an increase of 918,100 tonnes or 101.44% from 905,000 tonnes of 2005. The growth was primarily attributable to the increase of production volume of primary aluminum resulting from commencement of production of the

 

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aluminum production line of Guizhou branch and the aluminum project of Shanxi-Huaze, acquisition and establishment of subsidiaries, improvement and technological renovation of other production lines and the increase in trade sales. The increase of sales volume of primary aluminum contributed to an increase of RMB13,213 million in sales.

 

The external sales volume of alumina increased from 6,420,400 tonnes in 2005 (inclusive of trade volumes of 1,055,400 tonnes) to 6,799,400 tonnes in 2006 (inclusive of trade volumes of 1,183,700 tonnes), representing an increase of 379,000 tonnes or 5.9%. The increase was mainly attributable to the increase in output from the overall operation of the 800,000 tonnes alumina phase III production line in Shanxi, and the 700,000 tonnes alumina production line in Henan during 2006. The increase of the external sales volume of alumina contributed to an increase of RMB1,266 million in revenue.

 

In 2006, due to the effect of the increase in the market price of primary aluminum, our average external selling price of primary aluminum products reached RMB17,492 per tonne (excluding tax, hereinafter), representing an increase of RMB3,100 per tonne or 21.5% from RMB14,392 per tonne in 2005, which contributed to an increase of RMB5,652 million in revenue.

 

In 2006, our average external selling price of alumina products reached RMB3,609 per tonne, representing an increase of RMB268 per tonne (or 8.02%) from RMB3,341 per tonne in 2005, which contributed to an increase of RMB1,830 million in revenue.

 

In 2006, the sales of alumina chemicals and other products increased by approximately RMB2 billion from 2005.

 

Cost of Sales

 

Our total cost of sales increased by RMB16,351 million or 64.00% from RMB25,543 million in 2005 to RMB41,894 million in 2006. The increase was mainly attributable to the growth in external sales volume and the increased unit cost of sales of alumina.

 

Selling and Distribution Expenses

 

Our selling and distribution expenses increased by RMB238 million from RMB720 million in 2005 to RMB958 million in 2006, representing an increase of 33.05%, which was primarily attributable to the increase in transportation fee, loading fee and packing fee due to the growth of sales volume of primary aluminum.

 

General and Administrative Expenses

 

General and administrative expenses increased by RMB603 million from RMB1,490 million in 2005 to RMB2,093 million in 2006, representing an increase of 40.46%. The increase was mainly attributable to the increase in expenses of approximately RMB344 million as a result of acquisitions and the establishment of subsidiaries. The related tax charges other than income tax imposed by the PRC tax authorities increased by RMB215 million due to the expanded business generating taxable transactions. The continued efforts to strengthen our internal control system and information system increased the expenses by approximately RMB44 million.

 

Research and Development Expenses

 

Our expenditure for research and development slightly increased by RMB1 million from RMB113 million in 2005 to RMB114 million in 2006.

 

Other (Income) and Other (Gains)/Losses, Net

 

Net other income in 2006 was RMB565 million, an increase of RMB444 million or 366.94% from a gain of RMB121 million in 2005. This was attributable to the fact that we hedged some of the primary aluminum contracts in the futures market, resulting in an increase of RMB81 million in other income. The increase of RMB236 million was mainly due to the recognition of excess of interest in the net fair value of net assets acquired over cost of acquisitions of businesses completed during the year.

 

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Operating Profit

 

As a result of the foregoing, our operating profit increased by RMB7,321 million from RMB10,081 million in 2005 to RMB17,402 million in 2006, representing an increase of 72.62%. Our operating profit as a percentage of sales of goods was 26.65% in 2005 and 28.11% in 2006.

 

Finance Costs

 

Our finance costs increased by RMB349 million or 95% from RMB367 million in 2005 to RMB716 million in 2006. The increase was primarily attributable to the fact that interest expense began to be recorded on borrowings related to the following projects upon commencement of production: Shanxi Huaze's aluminum smelting and power project, Shanxi alumina project of 800,000 tonnes and Henan alumina project of 700,000 tonnes. This led to an increase of RMB243 million in interest expenses, and finance costs of RMB158 million contributed by the entities acquired during the year and exchange losses.

 

Income Tax Expense

 

Our income tax expense increased by RMB1,899 million or 76.11% from RMB2,495 million in 2005 to RMB4,394 million in 2006. The increase was mainly attributable to our increased profit. In 2006, our average tax rate was 26.18%, which was slightly higher than the average tax rate of 25.61% in 2005. Our income tax rate is lower than the statutory tax rate of 33.0%. This is mainly because of the preferential tax rate of 15% for our three branches in Guizhou, Guangxi and Qinghai and Zunyi Aluminum Company Limited, an acquired subsidiary, all of which are located in the western region of the PRC.

 

Minority Interest

 

Minority interest increased by RMB418 million from RMB224 million in 2005 to RMB642 million in 2006, primarily due to the increase in the minority interest as a result of the acquisition of subsidiaries and establishment of joint ventures, and the increase in profits of our subsidiaries.

 

Net Profit for the Year Attributable to Equity Holders of the Company

 

As a result of the foregoing, our net profit attributable to equity holders of the Company increased by RMB4,723 million, an increase of 67.26% from RMB7,022 million in 2005 to RMB11,745 million in 2006.

 

Year Ended December 31, 2005 Compared with Year Ended December 31, 2004

 

Revenue

 

Revenue from sales of alumina and primary aluminum increased by 14.9% from RMB32,313.1 million for the year ended December 31, 2004 to RMB37,110.3 million for the year ended December 31, 2005, representing an increase of RMB4,797.2 million. The increase was primarily due to the increase in selling prices of our alumina and primary aluminum, and a growth in external sales volume of such products. Other revenues after deduction of related expenses increased by 10.8% from RMB646.2 million for the year ended December 31, 2004 to RMB716.1 million for the year ended December 31, 2005, representing an increase of RMB69.9 million. The increase was primarily due to the provision of transportation, machinery processing and production design services.

 

For 2005, our average external selling price for alumina reached RMB3,268.3 per tonne (tax excluded, similarly hereinafter), representing an increase of RMB38.7 per tonne or 1.2% from RMB3,229.7 per tonne for the previous year. Our average external selling price for primary aluminum reached RMB14,264.0 per tonne, representing an increase of RMB507.7 per tonne or 3.7% from RMB13,756.3 per tonne for the previous year. Our external sales volume of alumina increased by 10.2% from 4,900,000 tonnes for the year ended December 31, 2004 to 5,400,000 tonnes for the year ended December 31, 2005 due to commencement of operations of our alumina production facilities in Shanxi, Henan and Zhongzhou in 2005. Our external sales volume of primary aluminum increased by 19.0% from 760,600 tonnes for the year ended December 31, 2004 to 905,000 tonnes for the year ended December 31, 2005, of which approximately 67,600 tonnes was attributable to the technological upgrade of our Qinghai smelter, approximately 33,800 tonnes was

 

- 55 -

 


 

attributable to the commencement of operation of Shanxi Huaze and approximately 43,000 tonnes was attributable to the technological upgrade of our existing primary aluminum production facilities.

 

Cost of Sales

 

Our total cost of sales increased by 15.6% from RMB22,095.9 million in 2004 to RMB25,542.6 million in 2005. The increase was mainly attributable to a growth in external sales volume of alumina and primary aluminum, which contributed to 10.2% of the increase in cost of sales, as well as increases in raw material and fuel prices.

 

Selling and Distribution Expenses

 

Our selling and distribution expenses increased by RMB48.2 million from RMB672.3 million in 2004 to RMB720.5 million in 2005, or 7.2%. The increase was primarily attributable to the increase in transportation and loading expenses resulted from the increase in external sales volume of primary aluminum.

 

General and Administrative Expenses

 

General and administrative expenses increased by 24.5% from RMB1,196.1 million in 2004 to RMB1,489.5 million in 2005. The increase was mainly due to (i) an increase of RMB128.0 million resulting from start-up costs due to the commencement of operations of Shanxi Huaze and newly established branch offices; (ii) an increase of RMB56.0 million in tax expenses other than income tax corresponding with our business expansion; (iii) an increase of RMB45.0 million in rental for new office space; (iv) an increase of RMB34.0 million in establishment of internal control system and installation of enterprise resource planning system; and (v) an increase of RMB10.0 million in insurance premiums on coverage of new production facilities.

 

Research and Development Expenses

 

Our research and development expenses decreased by 14.5% from RMB132.6 million in 2004 to RMB113.4 million in 2005. The decrease was due to the decrease in expenses occurred in the research and development projects carried out in 2005.

 

Other (Income) and Other (Gains)/Losses, Net

 

Net other income increased from RMB47.7 million in 2004 to RMB120.7 million in 2005 due to the gain of RMB5.8 million in 2005 made by our subsidiary, China Aluminum International Trading Co., Ltd., from futures contracts of primary aluminum compared to a loss of RMB25.5 million in 2004.

 

Operating Profit

 

Our operating profit increased by 13.1% from RMB8,910.1 million in 2004 to RMB10,081.2 million in 2005. Our operating profit as a percentage of revenue decreased from 27.6% in 2004 to 27.2% in 2005.

 

Finance Costs

 

Our finance costs increased by RMB257.0 million, or 233.8%, from RMB109.9 million in 2004 to RMB366.9 million in 2005. The increase of RMB257.0 million was a result of RMB283.0 million of interest expense incurred by increased borrowings for newly commenced projects, which was partially offset by RMB26.0 million of foreign exchange gains derived from foreign currency loans due to Renminbi appreciation. In particular, the increase of RMB189.0 million was attributable to the increase in long-term borrowings, RMB41.0 million was attributable to the increase in interest rates and RMB28.0 million was attributable to finance cost incurred to fund newly commenced projects and interest payable on our short-term bonds. The increase in interest expense was partially offset by the decrease of interest expense resulting from repayment of certain short-term borrowings.

 

Income Tax Expense

 

Our income tax expense increased from RMB2,161.1 million in 2004 to RMB2,495.2 million in 2005, which was mainly attributable to our increased profit before tax. Our effective income tax rate was 25.6% in 2005, which was lower than the statutory tax rate of 33.0%. This was mainly because our three branches situated in

 

- 56 -

 


 

Guizhou Province, Guangxi Zhuang Autonomous Region and Qinghai Province in the western region of the PRC were entitled to a preferential income tax rate of 15.0% in connection with the national policy to develop the western region. In addition, some of our plants benefit from tax credits in connection with the investment in the equipment made in China. Such tax credit resulted in tax reduction of approximately RMB73.9 million in 2005. See Note 28(c) to our audited financial statements.

 

Minority Interest

 

Minority interest decreased from RMB243.5 million in 2004 to RMB224.0 million in 2005 primarily as a result of the loss of RMB42 million incurred by Shanxi Huaze during its start-up operation period to achieve expected production standard.

 

Net profit for the Year Attributable to the Equity Holders of the Company

 

As a result of the foregoing, our net income attributable to the equity holders of the Company for 2005 increased by 9.9% from RMB6,391.5 million in 2004 to RMB7,022.4 million in 2005.

 

Discussion of Segment Operations

 

We account for our operations on a segmental basis, that is, separately accounting for the alumina and primary aluminum segments as well as the corporate and other services segment. Unless otherwise indicated, also included in these segments are other revenues derived from such activities as supplying electricity, gas, heat and water to affiliates, selling scrap and other materials, and providing services including transportation and research and development to third parties. Interest income and dividends from unlisted securities investments, included in other revenues, are not attributed to any segments. For additional data and information relating to our business segments and segment presentation, see Note 20 to our audited consolidated financial statements.

 

The following table sets forth (i) revenue by segment for the periods indicated, and (ii) the contribution of external sales and inter-segment sales for 2006 as a percentage of revenue for such period, both before and after elimination of inter-segment sales.

 

 

 

After

 

 

Elimination of

 

 

Inter-segment

 

Before Elimination of Inter-segment Sales

Sales

 



 

Years Ended December 31,

 

2004

2005

2006

2006

2006

 






 

RMB

RMB

RMB

%

%

 






 

 

(in millions)

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

Alumina:

 

 

 

 

 

 

 

 

 

 

 

External sales

20,497.5

22,853.8

27,008.7

37.7

44.3

 

 

 

 

 

 

- 57 -

 


 

Inter-segment sales

4,226.2

5,191.7

10,603.4

14.8

-

 




 

 

 

 

 

 

 

 

Total

24,723.7

28,045.5

37,612.1

 

 

 




 

 

 

 

 

 

 

 

Primary aluminum:

 

 

 

 

 

 

 

 

 

 

 

External sales

11,720.4

14,128.5

33,256.8

46.4

54.5

 

 

 

 

 

 

Corporate and other services:

 

 

 

 

 

 

 

 

 

 

 

External sales

95.1

128.0

749.6

1.1

1.2

 




 

 

 

 

 

 

 

 

Total Revenue before inter-segment eliminations

36,539.2

42,302.0

71,618.5

100

 

Eliminations of inter-segment sales

(4,226.2)

(5,191.7)

(10,603.4)

 

 

 




 

 

 

 

 

 

 

 

Consolidated total sales

32,313.0

37,110.3

61,015.1

 

100

 




 

 

 

 

 

 

 

 

The following table sets forth, for the periods indicated, revenue, costs of sales, other costs net of other revenues and other income, and operating income (loss) by segment before and after elimination of inter-segment transactions.

 

 

Years Ended December 31,

 


 

2004

2005

2006

 

 

 

 

- 58 -

 


 

 




 

RMB

RMB

RMB

 




 

(in millions)

 

 

Alumina:

 

 

 

 

 

 

 

Sales

24,723.7

28,045.5

37,612.1

Total operating expenses

(15,390.3)

(17,733.3)

(24,270.2)

 




 

 

 

 

Operating profit

9,333.4

10,312.2

13,341.9

 

 

 

 

Primary aluminum:

 

 

 

 

 

 

 

Sales

11,720.4

14,128.5

33,256.8

Total operating expenses

(11,764.3)

(13,896.6)

(28,780.7)

 




 

 

 

 

Operating profit (loss)

(43.9)

231.9

4,476.1

 

 

 

 

Corporate and other services:

 

 

 

 

 

 

 

Sales

95.2

128.0

749.7

Total operating expenses

(172.1)

(176.5)

(804.2)

 




 

 

 

 

Operating loss

(76.9)

(48.5)

(54.5)

 

 

 

 

Segment operating income before unallocated operating loss and inter-segment elimination

9,212.6

10,495.6

17,763.5

 

 

 

 

- 59 -

 


 

Unallocated operating loss

(281.4)

(306.4)

(198.8)

Inter-segment elimination

(21.1)

(108.0)

(162.5)

 




 

 

 

 

Total operating income

8,910.1

10,081.2

17,402.2

 




 

 

 

 

Year Ended December 31, 2006 Compared with Year Ended December 31, 2005

 

Alumina Segment

 

Revenue. Our total revenue of the alumina segment increased by RMB9,566 million, representing an increase of 34.1% from RMB28,046 million in 2005 to RM37,612 million in 2006.

 

Revenue from the external sales of alumina segment in 2006 increased by RMB4,155 million or 18.18% from RMB22,854 million in 2005 to RMB27,009 million in 2006, mainly due to the increase in external sales volume and selling price of our alumina.

 

Revenue from the sales of alumina to our smelters rose by RMB5,411 million from RMB5,192 million in 2005 to RMB10,603 million in 2006, primarily due to the increased total demand of alumina for production as a result of the increased output of our aluminum.

 

Cost of sales. The total alumina segment cost of sales in 2006 increased from RMB17,733.0 million in 2005 to RMB24,270.0 million in 2006, representing a year-on-year increase of 36.9%, primarily due to an increase in sales volume of alumina and an increase in unit costs in 2006.

 

Operating Profit. Our total operating profit of alumina segment increased by RMB3,030 million, or 29.38% from RMB10,312 million in 2005 to RMB13,342 million in 2006.

 

Primary Aluminum Segment

 

Revenue. Our total revenue for the primary aluminum segment increased by RMB19,129 million or 135.39% from RMB14,128 million in 2005 to RMB33,257 million in 2006, mainly due to the increase of the Group's primary aluminum sales volume and selling price.

 

Cost of Sales. The total primary aluminum segment cost of sales in 2006 increased from RMB13,897.0 million in 2005 to RMB28,781.0 million in 2006, representing a year-on-year increase of 107.1%, primarily due to an increase in sales volume of primary aluminum and an increase in unit costs in 2006.

 

Operating Profit. The primary aluminum segment recorded an operating profit of RMB4,476 million in 2006, representing an increase of RMB4,244 million as compared with RMB232 million in 2005.

 

Corporate and Other Services Segment

 

Our corporate and other services segment reflected the expenses of our headquarters, research and development services and product sales of our research institute to external customers. This segment recorded an increase in operating loss from RMB48.44 million in 2005 to a loss of RMB54.49 million in 2006.

 

Year Ended December 31, 2005 Compared with Year Ended December 31, 2004

 

- 60 -

 


 

Alumina Segment

 

Revenue. Our total revenue of the alumina segment increased by RMB3,321.8 million to RMB28,045.5 million in 2005, a 13.4% increase from RMB24,723.7 million in 2004.

 

We sold alumina products to our smelters and to other domestic smelters. Revenue from the external sales of alumina in 2005 rose by RMB2,356.3 million, or 11.5% mainly due to an increase in selling price and external sales volume of alumina. The average external selling price of alumina in 2005 increased to RMB3,268.3 per tonne from RMB3,229.7 per tonne in 2004, mainly due to strong domestic demand for alumina. The external sales volume of alumina increased by 10.2% to 5,400,000 tonnes in 2005 from 4,900,000 tonnes in 2004, mainly attributable to the increased demand and our increased production capacity of alumina by 1,900,000 tonnes in 2005 compared to 2004.

 

Revenue from the sales of alumina to our smelters in 2005 rose by RMB965.5 million, or 22.9%, from 2004, primarily due to our increased production capacity of primary aluminum which required additional alumina as input to satisfy our expanded primary aluminum production capacities.

 

Cost of sales. The total alumina segment cost of sales in 2005 increased by RMB2,165.4 million, or 15.1%, from RMB14,386.8 million in 2004 to RMB16,552.2 million in 2005, primarily due to an increase in sales volume of alumina and an increase in raw material costs and fuel and power costs in 2005, which was partially offset by optimization of production process resulting from technological upgrade and increased production capacities.

 

Operating Profit. Total operating profit for the alumina segment increased by 10.5% from RMB9,333.4 million in 2004 to RMB10,312.2 million in 2005 primarily due to increased sales volume of alumina in 2005, partially offset by increased unit production cost.

 

Primary Aluminum Segment

 

Revenue. We sold a total of 760,600 tonnes and 905,000 tonnes of the primary aluminum products we produced in 2004 and 2005, respectively. Our total turnover for the primary aluminum segment increased by RMB2,408.1 million to RMB14,128.5 million in 2005, a 20.6% increase over 2004. This was mainly attributable to the increase in sales volumes supplemented by the increase in average selling prices of primary aluminum in 2005. The increase was partially offset by decreased revenue from carbon and other products.

 

Cost of sales. The total cost of sales for our primary aluminum segment increased by 18.2% from RMB11,239.8 million in 2004 to RMB13,280.6 million in 2005, mainly due to increases in sales volumes as noted above, and unit production cost. The increase in unit production cost was attributable to increased prices in alumina used as raw material to produce primary aluminum and electricity. The increase unit production cost, however, was partially offset by the increases in production volume.

 

Operating (Loss) Profit. The primary aluminum segment recorded an operating profit of RMB231.9 million in 2005, compared to an operating loss of RMB43.9 million in 2004, primarily due to increased sales volumes and increased average selling prices of primary aluminum in 2005.

 

Corporate and Other Services Segment

 

Our corporate and other services segment reflected the expenses for our headquarters and research and development services and revenue from product sales of our research institute to external customers. This segment recorded an operating loss of RMB48.5 million and RMB76.9 million for the years ended December 31, 2005 and 2004, respectively.

 

Working Capital and Liabilities

 

Our primary sources of funding are cash generated by operating activities, prepayments and deposits from customers, short-term and long-term borrowings, and proceeds from equity or debt offerings. Our primary uses of funds have been production-related working capital, repayment of short-term and long-term borrowings and capital expenditures. Since 2004, we have required our customers to make deposits or

 

- 61 -

 


 

prepayments for purchases of alumina. As of December 31, 2006, the total amount of deposits and prepayments received amounted to RMB425.7 million. Our current assets amounted to RMB25,728 million at December 31, 2006, representing an increase of RMB8,765 million as compared with RMB16,963 million at December 31, 2005.

 

As of December 31, 2006, our cash and cash equivalents amounted to RMB12,803 million, representing an increase of RMB5,205 million as compared with RMB7,598 million as of December 31, 2005.

 

As of December 31, 2006, our inventories amounted to RMB9,036 million, representing an increase of RMB1,801 million as compared with RMB7,235 million as of December 31, 2005. Our revenue rate of inventory in 2006 was 5.15, representing an increase of 1.17 as compared with the 3.98 in the previous year, resulting from the effective management of inventory.

 

Our net accounts receivable amounted to RMB2,026 million, representing an increase of RMB1,065 million as compared with RMB961 million as of December 31, 2005. Of the accounts receivable, bills receivable increased by RMB858 million from RMB712 million as of December 31, 2005 to RMB1, 570 million, while trade receivables increased by RMB206 million from RMB250 million as of December 31, 2005 to RMB456 million. The revenue rate of accounts receivable remained relatively unchanged at approximately 8.7.

 

As of December 31, 2006, our current liabilities amounted to RMB21,561 million, representing an increase of RMB6,623 million as compared with RMB14,938 million at the end of 2005. Of the current liabilities, the total short-term loans increased by RMB1,380 million to RMB5,113 million from RMB3,733 million in 2005; short-term bonds amounted to RMB4,985 million, representing an increase of RMB3,014 million as compared to the corresponding period in 2005; and the accounts payable, current income taxes payable and other current liabilities increased by RMB238 million, RMB705 million and RMB1,285 million, respectively.

 

In May 2006, we issued short-term bonds in the principal amount of RMB3 billion at par for repayment of certain short-term borrowings and for working capital purposes. In December 2006, we issued short-term bonds in the principal amount of RMB2 billion at discount for working capital purposes.

 

As a result of the foregoing, our net current assets amounted to RMB4,167 million as of December 31, 2006. This represented an increase of RMB2,142 million as compared to the net current assets of RMB2,025 million as of December 31, 2005.

 

As of December 31, 2006, our liquidity ratio (current assets/current liabilities) was 1.19, representing an increase of 0.05 as compared to 1.14 as of December 31, 2005. Our quick ratio ((current assets - inventories)/current liabilities) was 0.77, representing an increase of 0.12 as compared to the 0.65 in 2005.

 

Our gearing ratio (total borrowings/(total borrowings + total equity - minority interest)) decreased to 29.58% as of December 31, 2006 from 32.05% as of December 31, 2005, representing a decrease of 2.47 percentage points, which was mainly attributable to the H Shares placement of the Company and increased profit.

 

Our ability to obtain additional external financing in the future and the cost of such financing are subject to a variety of uncertainties, including:

 

*

obtaining PRC government approvals required to access domestic or international financing or to undertake any project involving significant capital investment, which, depending on the circumstances, may include one or more approvals from the NDRC, the State Administration of Foreign Exchange, the Ministry of Commerce and the China Securities Regulatory Commission;

 

 

*

our future operating performances, financial condition and cash flows;

 

 

*

the cost of financing and the condition of financial markets; and

 

 

*

potential changes in monetary policy of the PRC government with respect to bank interest rates and lending practices.

 

 

- 62 -

 


 

If we fail to achieve timely rollover, extension or refinancing of our short-term debt, we may be unable to meet our obligations in connection with debt service, accounts payable and/or other liabilities when they become due and payable.

 

In light of our good credit standing and various domestic and overseas financing methods, we believe that there will be no difficulty in financing capital investments. Our capital expenditures and external investment are mainly financed by operating activities, long-term and short-term loans and additional shares placement.

 

Cash and Cash Equivalents

 

Our cash and cash equivalents as of December 31, 2006 amounted to RMB12,803 million, including Renminbi balances and foreign currency deposits of AUD31.95 million, US$30.67 million and HK$9.42 million. Cash and cash equivalents above include RMB3,000 million of time deposit. The following table sets forth, for the periods indicated, a condensed summary of our statement of cash flows:

 

 

For the Years Ended December 31,

 


 

2004

2005

2006

 




 

RMB

RMB

RMB

 




 

(in millions)

 

 

Net cash generated from operating activities:

 

 

 

 

 

 

 

Operating profit before working capital changes(1)

11,349.3

12,595.7

20,438.9

Net change in working capital(2)

(891.6)

(652.9)

(2,772.1)

Interest paid

(456.3)

(686.4)

(766.6)

PRC income tax paid

(1,736.2)

(2,666.2)

(3,676.2)

 




 

 

 

 

Total

8,265.2

8,590.2

13,224.0

 




 

 

 

 

Net cash used in investing activities:

 

 

 

 

 

 

 

Capital expenditures

(8,972.4)

(8,051.6)

(6,538.9)

Purchase of intangible assets

(81.6)

(28.7)

(29.4)

Investment in jointly controlled entities

(49.5)

(117.2)

(402.8)

 

 

 

 

- 63 -

 


 

Interest received

61.5

89.4

155.4

Increase in time deposit

-

-

(3,000.0)

Others

(13.8)

(713.1)

(428.5)

 




 

 

 

 

Total

(9,055.8)

(8,821.2)

(10,244.2)

 




 

 

 

 

Net cash inflow/(outflow) from financing activities:

 

 

 

 

 

 

 

Net proceeds from issue of shares

3,250.7

-

4,390.5

Net borrowings

1,884.5

1,509.2

(3,559.7)

Proceeds from short-term bonds

-

1,943.2

4,913.4

Repayment of short-term bonds

-

-

(2,000)

Net contribution from owner and minority shareholders

360.5

180.9

92.4

Dividend paid by a subsidiary to minority shareholders

(16.9)

(83.6)

(81.4)

Dividends paid

(1,060.8)

(1,944.8)

(4,529.9)

 




 

 

 

 

Total

4,418.0

1,604.9

(774.7)

 




 

 

 

 

Net increase in cash and cash equivalents

3,627.4

1,373.9

2,205.0

 




 

 

 

 


 

 

 

 

 

 

 

(1)

Represents profit before income tax and minority interest as adjusted for depreciation expense, loss on disposal of property, plant and equipment, interest income and interest expenses.

 

 

- 64 -

 


 

(2)

Represents (increase) decrease in inventories, accounts receivable and other current assets, accounts payable and other payables and accruals.

 

 

Net Cash Generated From Operating Activities

 

Cash from operations increased by RMB4,634 million or 53.95% from RMB8,590 million in 2005 to RMB13,224 million in 2006. The increase was primarily the result of our increased profit.

 

Net Cash Used in Investing Activities

 

Net cash used in investing activities in 2006 was RMB10,244 million, increasing by RMB1,423 million compared with RMB8,821 million in 2005. This was mainly due to the increase in our capital expenditure.

 

Net Cash Outflow from Financing Activities

 

Net cash outflow from financing activities amounted to RMB775 million in 2006, which was a decrease of RMB2,380 million as compared with an inflow of RMB1,605 million in 2005. In 2006, there was cash outflow consisting of short-term bond repayments of RMB2 billion, bank loan repayments of RMB6,438 million and dividend payments of RMB4,611 million. These were partially offset by cash inflow from proceeds generated from our placement of new H Shares for net proceeds of approximately RMB4,390 million, the issuance of short-term bonds for net proceeds of RMB4,913 million, additional bank loans taken of RMB2,879 million. We continue to benefit from the centralized cash management system implemented since 2002. We expect that this system will continue to help:

 

*

centralize and simplify internal clearing and settlement procedures;

 

 

*

utilize excess bank deposits to reduce bank borrowings;

 

 

*

reduce accounts receivable; and

 

 

*

improve the efficiency of our internal funds management.

 

 

Bank Loans and Banking Facilities

 

The aggregate maturities of our outstanding long-term bank loans as of December 31, 2006 were as follows:

 

 

Principal Outstanding as of

Maturity Date

December 31, 2006

 


 

RMB

US$(1)

 



 

(in millions)

 

 

2007

2,350.8

301.2

2008

2,082.7

266.9

2009 and thereafter

6,398.1

819.8

 

 

 

- 65 -

 


 

Total

10,831.6

1,387.9

 



 

 

 

_________________

 

 

 

 

 

(1)

Translated solely for the convenience of the reader into U.S. dollars at the noon buying rate prevailing on December 29, 2006 of US$1.00 to RMB7.8041.

 

 

Please see Note 17 to our audited consolidated financial statements for a more detailed description of our long-term debt including interest rate and maturity profile.

 

Our net borrowings for the years ended December 31, 2004, 2005 and 2006 were as follows:

 

 

As of December 31,

 


 

2004

2005

2006

2006

 





 

RMB

RMB

RMB

US$(1)

 





 

(in millions)

 

 

Short-term loans

3,448.9

2,379.0

2,762.0

353.9

Short-term bonds

-

1,970.8

4,985.1

638.8

Long-term loans

8,465.3

11,044.5

10,831.6

1,387.9

 





 

 

 

 

 

Total debt

11,914.2

15,394.3

18,578.7

2,380.6

 





 

 

 

 

 

Less: Cash and cash equivalents

(6,223.8)

(7,597.7)

(12,802.8)

(1,640.5)

 





 

 

 

 

 

Net debt

5,690.4

7,796.6

5,775.9

740.1

 





 

 

 

 

 


 

 

 

 

 

 

 

 

 

- 66 -

 


 

(1)

Translated solely for the convenience of the reader into U.S. dollars at the noon buying rate prevailing on December 29, 2006 of US$1.00 to RMB7.8041.

 

 

As of December 31, 2006, we had secured bank loans of RMB1,187.4 million and we, on a stand-alone basis, provided guarantees in respect of RMB1,554.9 million of long-term bank loans and RMB1,170.0 million of short-term bank loans for our subsidiaries.

 

As of December 31, 2006, Chinalco guaranteed RMB494.0 million of our bank loans. The guarantees by Chinalco and its subsidiaries to various banks in respect of banking facilities and loans granted to third parties as of December 31, 2000 remained with Chinalco after our reorganization.

 

As of December 31, 2006, we had total banking facilities of RMB50,082.2 million, inclusive of long-term facilities of approximately RMB17,600.0 million and other loan facilities of approximately RMB32,482.0 million. Out of the total banking facilities granted, amounts totaling RMB13,679.6 million have been utilized as of December 31, 2006. Approximately RMB16,200.0 million in bank facilities must be renewed in 2007. We believe that we will be able to renew these facilities when they expire.

 

Foreign Exchange

 

We conduct our business primarily in Renminbi, which is also our functional and reporting currency. We convert a portion of our Renminbi revenue into other currencies to meet foreign currency financial obligations and to pay for imported equipment and materials. Under current foreign currency regulations in China, to meet these needs, we are permitted to convert Renminbi into the necessary foreign currencies at authorized banks based on a presentation of the relevant contracts. We may also borrow foreign currency loans from such banks for these purposes. To the extent that we need to obtain foreign currency funding for capital projects as defined under foreign exchange regulations, we would be required to obtain approval from the State Administration of Foreign Exchange. Transactions in foreign exchange are translated at exchange rates prevailing at the transaction dates. Monetary assets and liabilities expressed in foreign currencies at the balance sheet date are translated at exchange rates prevailing at the balance sheet date. Exchange differences arising in these cases are recognized as income or expense in the profit and loss account.

 

Renminbi is not a freely convertible currency. The restrictions on foreign exchange imposed by the PRC government may result in material differences between future exchange rate and current exchange rate or historical exchange rate. The changes in the exchange rate of Renminbi will impact our ability to carry out operations relating to foreign exchange. Those changes will also impact our ability to pay dividends in HK dollars and to pay dividends of American Depository Shares in U.S. dollars. We believe that we are able to obtain sufficient foreign exchange to implement the above-mentioned obligations. As of December 31, 2006, our foreign currency denominated loans amounted to RMB9.0 million, all was denominated in Danish Krone. In addition, our foreign currency denominated short-term bank deposits amounted to RMB451.7 million, of which RMB239.5 million was denominated in U.S. dollars, RMB196.8 million was denominated in Australian dollars and RMB9.5 million was denominated in HK dollars. Most of our sales are domestic and, as such, we have a limited amount of foreign currency denominated accounts receivable. See "Item 11 - Quantitative and Qualitative Disclosures about Market Risk - Foreign Exchange Rate Risk". Our sources of foreign exchange include the H Share placement, borrowings and funds converted from Renminbi. We do not anticipate that we will incur significant additional foreign currency debt in the near future.

 

We have been, and will continue to be, affected by changes in exchange rates in connection with our ability to meet our foreign currency obligations and will be affected by such changes in connection with our ability to pay dividends on H Shares in HK dollars and on ADSs in U.S. dollars. As of December 31, 2006, we maintained bank balances of US$30.7 million, HK$9.4 million, 32.0 million Australian dollars and 0.4 million euros and 0.3 million Swiss francs or the equivalent of approximately RMB451.7 million for purposes of satisfying our foreign currency obligations and paying dividends to our overseas shareholders. We believe that we have obtained or will be able to obtain sufficient foreign exchange to continue to satisfy these obligations. We do not engage in any financial contract or other arrangement to hedge our currency exposure.

 

Impact of Appreciation of Renminbi

 

- 67 -

 


 

We believe that, since the price of domestic alumina is determined with reference to the price of imported alumina, the appreciation of Renminbi will affect prices of the domestic spot market of alumina.

 

However, the appreciation of Renminbi will not have a significant impact on our operations because our import and export volume and foreign currency loans were minimal in 2006. From the perspective of production costs, the appreciation of Renminbi will, to some extent, decreased our competitiveness in the international market.

 

Inflation

 

According to the National Bureau of Statistics of China, China experienced inflation of 0.7% in 2001, deflation of 0.8% in 2002, inflation of 1.2%, 3.9%, 1.8% and 1.3% in 2003, 2004, 2005 and the first nine months ended September 30, 2006, respectively. As a result, inflation in the PRC has not had a significant impact on our operating performances in recent years.

 

Trend Information

 

In 2006, China's GDP growth rate reached 10.5%. China's economy is expected to continue its strong growth in 2007, with increasingly important contribution from industrial growth. We expect the national demand for alumina and primary aluminum to grow in line with the nation's continuous economic growth. The recovery of the global economy is expected to further enhance aluminum consumption and support market prices of primary aluminum and alumina.

 

However, we will continue to face challenges in 2007, such as:

 

*

an increase in production cost resulting from continued increases in prices of raw materials, fuel and power; and

 

 

*

intensified domestic competition resulting from the cancellation of tax refund for primary aluminum export and the enhancement of the production capacity of alumina.

 

 

U.S. GAAP Reconciliation

 

Our financial statements are prepared in accordance with HKFRS, which differs in various material respects from U.S. GAAP. See Note 35 to our audited consolidated financial statements for details. The summary of differences involve management's estimates and assumptions which may affect the reported amounts of assets and liabilities, the disclosure regarding contingent assets and liabilities and revenues and expenses. These material differences, as they apply to our financial statements, relate primarily to the following:

 

(a)

Revaluation of property, plant and equipment

 

 

(b)

Amortization of goodwill

 

 

(c)

Unrecognized excess of interest in the net fair value of net assets acquired over cost

 

 

(d)

Revaluation of mining rights

 

 

(e)

Minority interest

 

 

(f)

Income tax effect of U.S. GAAP adjustments

 

 

For further details regarding recent developments of U.S. GAAP, see Note 35 to our audited consolidated financial statements. For further details regarding recent accounting pronouncements of HK GAAP, see Note 2(a) to our audited consolidated financial statements.

 

Contractual obligations

 

The following table summarizes our contractual obligations and commercial commitments as of December 31, 2006:

 

- 68 -

 


 

 

Payment due by period

 

Total

2007

2008-2009

2010-2011

Thereafter

 






 

RMB

RMB

RMB

RMB

RMB

 






 

(in millions)

 

 

Long-term debt

10,831.6

2,350.8

4,152.6

2,242.1

2,086.1

Interest payments

1,815.0

571.5

442.4

313.4

487.7

Operating leases

12,432.6

300.9

601.8

601.7

10,928.2

Capital contributions

750.4

750.4

-

-

-

Purchase obligations

2,167.3

2,167.3

-

-

-

 






 

 

 

 

 

 

Total

27,996.9

6,140.9

5,196.8

3,157.2

13,502.0

 






 

 

 

 

 

 

Capital Expenditures and Capital Commitments

 

The following table sets forth our capital expenditures by segment for the years ended 2004, 2005 and 2006, and the capital expenditures in each segment as a percentage of our total capital expenditures for such years.

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 


 

2004

2005

2006

 




 

RMB

%

RMB

%

RMB

%

 







 

(in millions, except percentages)

 

 

- 69 -

 


 

Alumina

5,399.0

49.3

5,369.6

63.8

3554.9

40.9

Primary aluminum

5,257.4

48.1

2,793.9

33.2

4324.2

49.7

Corporate and other services

76.8

0.7

124.8

1.5

122.2

1.4

Unallocated

208.4

1.9

129.6

1.5

693.0

8.0

 







 

 

 

 

 

 

 

Total

10,941.6

100%

8,417.9

100%

8,694.3

100%

 







 

 

 

 

 

 

 

In 2006, we spent approximately 90.5% of our 2006 capital expenditure of RMB8,694.32 million to improve our alumina and primary aluminum production capacity.

 

*

We used RMB3,554.9 million of our alumina segment expenditures: (i) to expand our alumina production capacity; (ii) to undertake technological improvements to our alumina production processes and facilities; (iii) for the Shandong alumina project involving the upgrade of our innovative energy-saving sintering technology as well as the alumina project involving the reconstruction and expansion of Bayer technology; (iv) for the Zhongzhou alumina project involving the upgrade of the sintering process as well as the project involving alumina concentration with added bauxite after digestion of the ore-dressing Bayer process.

 

 

*

We used RMB4,324.2 million to expand our primary aluminum production capacity by merger and acquisition of primary aluminum smelters, such as Shanxi Huasheng, Fushun Aluminum, Shandong Huayu, Zunyi Aluminum, Gansu Hualu and Jiaozuo Wanfang.

 

 

In 2007, we expect to use approximately RMB16,600 million for technology upgrade and construction; of this amount, we expect to use approximately RMB10,100 million for our alumina project, and approximately RMB6,500 million for our primary aluminum projects.

Our capacity expansion plan reflects our focus on expanding our alumina production capacity to take advantage of our market position in China. In addition, we continually evaluate acquisition and joint venture opportunities and may take advantage of these opportunities if we determine that it is in our and our shareholders' best interests. We expect that our alumina and primary aluminum production capacity will reach 9,937,000 and 2,989,200 tonnes, respectively, by the end of 2007.

These are our current plans with respect to our capital expenditures. They may change as circumstances change, and may be modified as our business plans evolve. Other than as required by law, we do not undertake any obligation to publish updates of our plans.

As of December 31, 2006, our capital commitments relating to investments in property, plant and equipment amounted to RMB8,200 million, of which those contracted but not provided for amounted to RMB2,167 million and those authorized and not contracted amounted to RMB6,033 million. Our external investment commitments amounted to RMB880 million, mainly attributable to the establishment of Guangxi Huayin alumina project and Chalco Zunyi Alumina through joint venture. Our investment in construction and upgrade of technology as well as external investment and acquisition improved our capacity and output of alumina and primary aluminum.

 

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Research and Development

Our department of science and technology coordinates the research and development efforts undertaken at our Research Institute and technology centers at our plants. The Research Institute, the only organization in China dedicated to aluminum research, is responsible for the research and development of technologies and associated projects that are applied at our relevant plants. The technology centers at our plants focus on providing engineering solutions to, and technological application of, research and development efforts. Each of the plants also conducts operational testing and pilot experimentation relating to various research and development topics. Although we collaborate with universities and other research institutions in China on some of our projects, we generally do not outsource our research and development.

 

Our total expenditure for research and development was approximately RMB132.6 million, RMB113.4 million and RMB113.5 million for 2004, 2005 and 2006, respectively.

 

ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

 

All of our directors and supervisors are elected for a three-year term. At the expiry of the term of office, the term is renewable upon re-election. Each of our directors and supervisors has entered into a service contract with us for a term of three years. The service contract is not terminable by us within one year without payment of compensation (other than statutory compensation). There were no arrangements providing for benefits upon termination of our directors, supervisors or other senior management personnel.

 

In addition to director's fees, our directors are entitled to performance bonuses. The executive directors are also entitled to the welfare benefits provided under the relevant PRC laws and regulations.

 

Directors

 

At our annual general meeting of shareholders held on June 7, 2004, Messrs. Xiong Weiping, Chen Xiaozhou, Joseph C. Muscari, Chiu Chi Cheong Clifton and Wang Dianzuo were re-elected for further terms of three years, and Messrs. Xiao Yaqing, Luo Jianchuan and Chen Jihua were elected for terms of three years. Mr. Xiao Yaqing was elected Chairman of the board of directors and Chief Executive Officer. At the extraordinary shareholders' meeting held on September 28, 2004, Mr. Kang Yi was elected to fill the vacancy in our Board. At our annual general meeting of shareholders held on June 9, 2005, Mr. Shi Chungui was elected as our Non-executive Director in place of Mr. Chen Xiaozhou. Further, at our extraordinary general meeting of shareholders held on October 14, 2005, Mr. Poon Yiu Kin, Samuel was elected as our Independent Non-executive Director in place of Mr. Chiu Chi Cheong Clifton who resigned with effect from October 14, 2005. Mr. Xiong Weiping resigned from his office as an Executive Director on August 23, 2006. Mr. Zhang Chengzhong was appointed as an Executive Director of the Company to replace Mr. Xiong Weiping at the Extraordinary General Meeting on October 13, 2006. At the annual general meeting on May 18, 2007, the third session of the Board was established. The members are Xiao Yaqing, Luo Jianchuan, Chen Jihua, Shi Chungui, Poon Yiu Kin, Samuel and Kang Yi, and three new directors, Liu Xiangmin, Helmut Wieser and Zhang Zuoyuan, with Mr. Xiao Yaqing serving as the Chairman. The term of directors' service is three years. The business address of each of our directors is No. 62 North Xizhimen Street, Hai Dian District, Beijing, People's Republic of China, 100082.

 

We follow our home country practice in relation to the composition of our board of directors in reliance on the exemption provided under Section 303A.00 of the NYSE Corporate Governance Rules available to foreign private issuers. Our home country practice does not require a majority of directors of a listed company to be independent directors. As such, the majority of our directors are not independent within the meaning of NYSE Corporate Governance Rules.

 

The table and discussion below set forth information concerning our directors as of December 31, 2006.

 

- 71 -

 


 

Name

Age

Positions with the Company




 

 

 

Executive Directors

 

 

 

 

 

Xiao Yaqing

48

Chairman of the board of directors and Chief Executive Officer

 

 

 

Luo Jianchuan

44

Director and Senior Vice President

 

 

 

Chen Jihua

39

Director, Vice President and Chief Financial Officer

 

 

 

Zhang Chengzhong

47

Director and Vice President

 

 

 

Non-executive Directors

 

 

 

 

 

Shi Chungui

67

Director

 

 

 

Joseph C. Muscari

60

Director

 

 

 

Independent Non-executive Directors

 

 

 

 

 

Poon Yiu Kin, Samuel

47

Independent Director

 

 

 

Wang Dianzuo

73

Independent Director

 

 

 

Kang Yi

66

Independent Director

 

 

 

The table and discussion below set forth information concerning our directors appointed at our annual general meeting held on May 18, 2007:

 

Name

Age

Positions with the Company




 

 

 

- 72 -

 


 

Executive Directors

 

 

 

 

 

Xiao Yaqing

48

Chairman of the board of directors and Chief Executive Officer

Luo Jianchuan

44

Director and President

Chen Jihua

39

Director, Vice President and Chief Financial Officer

Liu Xiangmin

45

Director and Vice President

 

 

 

Non-executive Directors

 

 

 

 

 

Shi Chungui

67

Director

Helmet Wieser

53

Director

 

 

 

Independent Non-executive Directors

 

 

 

 

 

Poon Yiu Kin, Samuel

47

Independent Director

Kang Yi

66

Independent Director

Zhang Zuoyuan

73

Independent Director

 

 

 

Executive Directors

 

Xiao Yaqing, aged 48, is the Chairman and Chief Executive Officer of the Company. He has been employed by our Company since 2004. Mr. Xiao is the Chairman of the Remuneration and Nomination Committee under the Board of our Company and is the President of Chinalco. Mr. Xiao graduated from Central South University of Industry where he majored in pressure processing and received a doctorate degree. Mr. Xiao is a professor-grade senior engineer. Mr. Xiao has abundant academic achievement and more than twenty years of extensive practical experience in the fields of metallic materials and management. He has been the engineer, department head, deputy chief engineer and chief engineer of Northeast Light Alloy Fabrication Plant. He has also been the General Manager of Northeast Light Alloy Corporation Limited, the Factory Manager of Southwest Aluminum Fabrication Plant, the Chairman and General Manager of Southwest Aluminum (Group) Co., Ltd. and the Deputy General Manager of Chinalco.

 

Luo Jianchuan, aged 44, is an Executive Director and the President. He has been employed by the Company since 2001. Mr. Luo graduated from Central South University of Industry majored in resources

 

- 73 -

 


 

and environment economy and received a doctorate degree. Mr. Luo is a senior engineer with about 20 years of experience in nonferrous metal import and export trading management and extensive professional experience in trading and management. Mr. Luo formerly served as the engineer of the Lead and Zinc Bureau under China Non-ferrous Metals Industry Corporation, the Manager of Haikou Nanxin Industry & Commerce Corporation, Assistant to General Manager of Jinpeng Mining Development Corporation, the Deputy General Manager and General Manager of Xinquan Corporation, Assistant to General Manager of China Non-Ferrous Metals Industry Trading Group Corporation, the Deputy Chief of the Trading Division of China Copper, Lead & Zinc Group Corporation, the General Manager of China Aluminum International Trading Corporation Limited and the General Manager of the Operations and Sales Division of the Company.

 

Chen Jihua, aged 39, is an Executive Director, Vice President and Chief Financial Officer of the Company. He has been employed by the Company since 2001. Mr. Chen holds a Master's degree from Central University of Finance and Banking. Mr. Chen has participated in a wide range of corporate and financial management projects. He formerly served as the Executive Manager of the International Finance Department of China Chengxin Securities Rating Company Limited, the Chief Financial Officer with Red Bull Vitamin Beverages Company Limited and China Operations of ALJ Group of Saudi Arabia. He also formerly served as the Chief Financial Officer with Jitong Network Communications Company Limited.

 

Liu Xiangmin, aged 45, is a Vice President and the Executive Director of the Company since May 2007. He has been employed by the Company since 2001. Mr. Liu graduated from Central South University of Industry, majoring in non-ferrous metal science and has also obtained a Doctorate degree in Metallurgy Engineering. He is a professor-grade senior engineer and has extensive professional experience in the fields of non-ferrous metals metallurgy and corporate management. Mr. Liu previously served as a Deputy Head and then the Head of the Alumina branch of Zhongzhou Aluminum Plant, a Deputy Head of Zhongzhou Aluminum Plant, and the General Manager of Zhongzhou Branch of the Company.

 

Non-executive Directors

 

Shi Chungui, aged 67, is a Non-executive Director of the Company and a member of the Expert Consultancy Committee of China Cinda. He has been employed by the company since 2005. Mr. Shi graduated from Northeast University of Finance and Economics in 1964 with a Bachelor's degree in accounting. Mr. Shi has extensive experience in the management of financial, governmental and business administrative matters. Mr. Shi was previously the Head of Commerce Bureau of Qinhuangdao City, Hebei Province, the Standing Deputy Mayor of Qinhuangdao City, Hebei Province, the President of Hebei Branch of China Construction Bank, the President of Beijing Branch of China Construction Bank, a Deputy President of the Head Office of China Construction Bank and a Deputy President of China Cinda Asset Management Corporation.

 

Helmut Wieser, aged 53, is a Non-executive Director of the Company since May 2007 and the Vice Executive President of Alcoa International (Asia) Limited ("Alcoa") and Group President responsible for Alcoa's global mill products, rigid packaging and hard alloy extrusion businesses. He also oversees Alcoa's businesses in the Asia Pacific region. In addition, Helmut is a member of the Alcoa Executive Council. He joined Alcoa in 2000 as Vice President, operations for Alcoa's flat-rolled products group in Europe based in Geneva and a year later was named President of the group. He was elected Vice President of Alcoa in 2004, when he was named President of the North American and European Mill Products Organization, and was elected executive Vice President in 2005. Prior to joining Alcoa, Mr. Wieser was an executive member of the board and Chief Operating Officer of Austria Metal Group. Helmut received a Master's degree in mechanical engineering and economics in 1981 from the University of Graz.

 

Independent Non-executive Directors

 

Poon Yiu Kin, Samuel, aged 47, is an Independent Non-executive Director and the Chairman of the Audit Committee of the Company. Mr. Poon was appointed as the Independent Non-executive Director of the Company in October 2005. Mr. Poon holds a Master of Business Administration degree from the London Business School and a Bachelor in Business Administration degree from The Chinese University of Hong Kong. Mr. Poon is also an Independent Non-Executive Director of Yue Yuen Industrial (Holdings) Limited and a member of Executive Committee and Honorary Treasury of English Schools Foundation. He is the

 

- 74 -

 


 

Vice Chairman of the Joint Committee on Student Finance of the Education and Manpower Bureau and an adjunct Professor of Peking University, National Chengchi University of Taiwan and The Chinese University of Hong Kong. Mr. Poon formerly served as a Managing Director and held various positions in Merrill Lynch, including Co-head of Investment Banking and Head of Debt Capital Markets for the Asia Pacific region, and Head of Corporate Finance for Europe, the Middle East and Africa.

 

Kang Yi, aged 66, is an Independent Non-executive Director of the Company. Mr. Kang was appointed as the Independent Non-executive Director of the Company in 2004. Mr. Kang graduated in 1965 from Central South University of Technology in the expertise of the metallurgy of nonferrous metals, and is a professor grade senior engineer. Mr. Kang is the Chairman of the China Non-ferrous Metals Industry Association. He is also a member of the national Committee of the Chinese People's Political Consultative Conference ("CPPCC"), a member of the China Association for Science and Technology, the Chairman of Non-ferrous Metals Society of China and an Independent Non-Executive Director of Jiangxi Copper Company Limited and Baotou Aluminum Corporation Limited. Mr. Kang once served as the factory manager of Qingtongxia Aluminum Plant, the Head of the Economic Committee of Ningxia Hui Autonomous Region, a Deputy General Manager of China Non-ferrous Metals Industry Corporation, and a Deputy Head of the State Non-ferrous Metals Industry Bureau.

 

Zhang Zuoyuan, aged 73, was appointed to be our Independent Non-executive Director on May 18, 2007. He is also a member of Academy of Chinese Academy of Social Sciences and a researcher of the Institute of Economics. Mr. Zhang graduated from the Faculty of Economics of Zhongnan University of finance and economics. He had served as assistant researcher, deputy researcher and researcher of Institute of Economics in the Chinese Academy of Sciences, a director and researcher of Institute of Finance, Trade and Economics; director and researcher of the Institute of Industrial Economics, and a director and researcher of Institute of Economics. He had also been a tutor of doctorate students and chief editor of Finance & Trade Economics and Economics Research Journal. Mr. Zhang has extensive professional experience in political and economics, pricing and marketing. He is a member of the Ninth and Tenth Sessions of the Chinese People's Political Consultative Conference, deputy director of China Association of Pricing, China Society of Urban Economy and Chinese Society for Urban Development Studies, a director of Chinese Society for Cost Studies and the Secretary-General of Foundation of Sun Ye Fang Economics and Science.

 

Supervisors

 

Our supervisors are elected to represent our employees and shareholders and serve a term of three years or until the election of their respective successors. Mr. Luo Tao and Mr. Ou Xiaowu respectively resigned as Chairman of the Supervisory Committee and Supervisor of the Company with effect from 23 August 2006, and Mr. Ao Hong and Mr. Zhang Zhankui have been appointed as Chairman of the Supervisory Committee and Supervisor respectively at the Extraordinary General Meeting on October 13, 2006. On May 18, 2007, Mr. Ao Hong, Mr. Yuanli and Mr. Zhang Zhankui were elected to renew their terms of office.

 

The supervisors convened two meetings in 2006. The table and discussion below set forth certain information concerning our supervisors.

 

Name

Age

Positions with the Company




 

 

 

Ao Hong

46

Chairman of the Committee of Supervisors

 

 

 

Yuan Li

49

Supervisor (employee representative), General Manager of Corporate Culture Department of the Company

 

 

 

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Zhang Zhankui

49

Supervisor

 

 

 

Ao Hong, aged 46, is a Vice President of Chinalco. Mr. Ao graduated from Kunming University of Science and Technology and majored in Metallurgy. He holds a Master's degree and is a professor-grade senior engineer with extensive experience in non-ferrous metals research, corporate management, corporate governance and internal control. Mr. Ao formerly served as an engineer, senior engineer, Head of General Office and Vice Chairman of Beijing General Research Institute for Non-ferrous Metals, the Chairman of GRINM Semiconductor Materials Co., Ltd., Guorui Electronic Materials Co., Ltd., Beijing Guojing Infrared Optical Technology Co., Ltd., Guowei Silver Anticorrosive Materials Company and Guo Jing Micro-electronic Holdings Ltd. in Hong Kong, respectively.

 

Yuan Li, aged 49, is a Supervisor elected as the employee representative of the Company and the General Manager of the Corporate Culture Department of the Company. He has been employed by the Company since 2001. Mr. Yuan is an engineer with extensive administrative and managerial experiences. He formerly served as the Deputy Director of the General Management Office under the General Office of China Non-ferrous Metals Industry Corporation, head of the Department of Research and Survey as well as the chief of the Secretariat and an assistant inspector of the State Bureau of Non-ferrous Metals Industry and Deputy Director of the Department of Political Affairs and the Director of the Community Union Working Department of Chinalco.

 

Zhang Zhankui, aged 49, is a postgraduate of economic management and a senior accountant. He has extensive experience in corporate finance accounting, fund management, project auditing and business management. Mr. Zhang formerly served as the Head of Finance Division and then Head of the Audit Division of China General Design Institute for Non-ferrous Metals, a Deputy General Manager of Beijing Enfei Tech-industry Group, Head of the Accounting Division of the Finance Department and a Deputy Head of the Finance Department of China Copper Lead & Zinc Group Corporation, a manager of the Asset and Finance of the Listing Office of Chinalco and Head of the Fund Division of the Finance Department of Chinalco and a manager of the Comprehensive Division of the Finance Department of the Company.

 

Other Senior Management Personnel

 

The table and discussion below set forth certain information concerning other senior management personnel.

 

Name

Age

Positions with the Company




 

 

 

Ding Haiyan

49

Vice President

 

 

 

Jiang Yinggang

44

Vice President

 

 

 

Liu Qiang

43

Secretary to the Board

 

 

 

Ding Haiyan, aged 49, is a Vice President of the Company and has been employed by Chalco since 2001. As a holder of a Master's degree in Labor Economics and a Doctorate candidate, Mr. Ding is a senior economist with extensive experience in labor, wages, insurance, merger and acquisition of enterprises and capital operation. He once served as a Director of Labor Wage Division and Deputy Director of the Bureau of Labor and Insurance of China Nonferrous Metals Industry Corporation, Deputy Director-General of the Enterprise Reform Department of the State Bureau of Non-ferrous Metals Industry as well as a Manager of

 

- 76 -

 


 

the Department of Asset Management, a Deputy Director of the Listing Office and Assistant to president of Chinalco, and an Executive Director and the Secretary of the Board of the Company.

 

Jiang Yinggang, aged 44, is a Vice President of the Company and the General Manager of Qinghai Branch of the Company. Mr. Jiang has a Bachelor degree and a Master degree in non-ferrous metal engineering. He is a professor-grade senior engineer and has served as Deputy Head and then Head of Corporate Management Department of Qinghai Aluminum Plant, the Head of Qinghai Aluminum Smelter, Deputy General Manager and General Manager of Qinghai Aluminum Company Limited, and General Manager of Qinghai branch of the Company.

 

Liu Qiang, aged 43, is the Secretary to the Board and has been employed by the Company since 2001. She has been the Secretary to the Board since November 2003. Ms. Liu holds a Master's degree in English literature and is a professor-grade senior translator. She has extensive experience in the import and export of non-ferrous metals and analysis of the aluminum market. Ms. Liu formerly worked with the China National Non-Ferrous Metals Import and Export Corporation. During her term of office, she studied at the University of International Business and Economics, majored in Finance, accounting and MBA course. She formerly served as the Finance Manager of the Australian branch of the China National Non-Ferrous Metal Import and Export Corporation; senior analyst for the Aluminum Industry and Market of China National Non-Ferrous Metals Trading Group; senior analyst for the Aluminum Industry and Market of China National Metals and Minerals Import and Export Corporation; and deputy manager of the Import and Export Division of China Aluminum International Trading Corporation Limited.

 

Audit Committee

 

Currently, our audit committee consists of three Independent Non-executive Directors, namely, Mr. Poon Yiu Kin, Samuel, Mr. Kang Yi and Mr. Zhang Zuoyuan. Mr. Poon Yiu Kin, Samuel is the Chairman of the audit committee. Our audit committee satisfies the requirements of Rule 10A-3 of the Exchange Act and NYSE Rule 303A.06 relating to audit committees, including the requirements relating to independence of the audit committee members. The primary duties of our audit committee as set out in the committee charter are to review our annual and interim financial reports, review and approve the selection of and remuneration paid to our independent auditors, approve audit and audit-related services, approve related party transactions, supervise our internal financial reporting process, including our internal controls and disclosure controls and procedures, supervise our internal and external auditors, and review management policies. The audit committee convened four meetings in 2006.

 

Remuneration Committee

 

We have established a remuneration committee. Our remuneration committee consists of one Executive Director, namely Mr. Chen Jihua and three Independent Non-executive Directors, Mr. Kang Yi, Mr. Poon Yiu Kin, Samuel, and Mr. Zhang Zuoyuan. Mr. Kang Yi serves as the Chairman of the Committee.

 

Committee members' responsibilities as set out in the committee charter include reviewing compensation policies and performance appraisals with respect to the directors and senior management, reviewing the regulations of assessment of achievement and performance of Executive Directors and senior managers. In 2006, the Committee convened three meetings, mainly focusing on the preparation of remuneration policies for Directors and senior management; assessment of achievement and performance of Executive Directors and senior management. We follow our home country practice in relation to the composition of our remuneration committee in reliance on the exemption provided under NYSE Corporate Governance Rule 303A.00 available to foreign private issuers. Our home country practice does not require us to establish a remuneration committee which must be composed entirely of independent directors.

 

Nomination Committee

 

We have established a nomination committee which consists of two Executive Directors, namely Mr. Xiao Yaqing and Mr. Luo Jianchuan and three Independent Non-executive Directors, Mr. Kang Yi, Mr. Poon Yiu Kin, Samuel, and Mr. Zhang Zuoyuan. Mr. Xiao Yaqing serves as the Chairman of the Committee.

 

Committee members' responsibilities as set out in the committee charter include reviewing and

 

- 77 -

 


 

recommending selection of independent directors and members of the committees under the board of directors, approving the terms of directors service contracts, and the appointment and removal of senior executives. In 2006, the Committee convened three meetings, mainly focusing on approval of the terms of the service contracts of Directors; nomination of candidates of Executive Director for the new Board.

 

We follow our home country practice in relation to the composition of our nomination committee in reliance on the exemption provided under NYSE Corporate Governance Rule 303A.00 available to foreign private issuers. Our home country practice does not require us to establish a nomination committee which must be composed entirely of independent directors.

 

Planning and Development Committee

 

We have established a strategic planning and development committee which consists of two Executive Directors, Mr. Luo Jianchuan and Mr. Liu Xiangmin, and three managers, Mr. Ding Haiyan, Mr. Xie Hong and Mr. Yu Xinxing with Mr. Luo Jianchuan serving as the Chairman. In accordance with the committee charter, the committee reviews and assesses our strategic plans for development, fiscal budgeting, investment, business operations and annual rates of return on investments.

 

Disclosure Committee

 

Our disclosure committee consists of the Chief Executive Officer, the Chief Financial Officer and other senior management members. Our Chief Executive Officer and Chief Financial Officer serve as the Chairman and Vice Chairman of the committee, respectively. The committee implements our disclosure controls and procedures and reviews information disclosed to ensure accurate, open and timely disclosure. In 2006, the Company made some changes to the members of Disclosure Committee, and the risk management and internal controls have been enhanced. All discloseable information (including annual and interim results) shall be subject to the approval of the Company's Disclosure Committee with the Chief Executive Officer as its Chairman. For the purpose of discloseable financial statements and the relevant information, the Chief Financial Officer shall confirm that the Company's results and financial position have been reflected on a true and fair basis under relevant accounting principles and requirements.

 

Compensation

 

Directors', Supervisors' and Senior Officers' Compensation

 

The aggregate amount of cash compensation paid by us to our directors (not including our Independent Directors), supervisors and senior management in 2006 for services performed as directors, supervisors and officers or employees of our Company was approximately RMB7.7 million. The aggregate amount of cash compensation paid by us to our supervisors and senior management in 2006 was RMB0.5 million and RMB2.2 million, respectively. In addition, our executive directors and supervisors who are employees receive compensation in the form of housing allowances, other allowances and benefits in kind, including our contribution to the pension plans for our directors and supervisors. Directors and supervisors who are not employed by us receive fees for their services. We have entered into three-year service contracts with all of our directors and supervisors. None of these service contracts provides benefits to our directors upon termination.

 

Details of the emoluments paid to the Company's Directors during the reporting period are as follows:

 

 

As of December 31, 2006

 

 

 

 

 

Employer's

 

 

 

 

 

contribution to

 

 

 

 

Discretionary

retirement

 

Name of Director

Fees

Salary

bonus

schemes

Total

 

RMB'000

RMB'000

RMB'000

RMB'000

RMB'000

 

 

 

 

 

 

- 78 -

 


 

Executive Directors

 

 

 

 

 

Xiao Yaqing

-

754

622

19

1,395

Luo Jianchuan

-

555

351

19

925

Chen Jihua

-

506

282

19

807

Zhang Chengzhong(1)

-

506

282

19

807

Xiong Weiping(2)

-

423

346

12

781

Non-Executive Directors

 

 

 

 

 

Shi Chungui

150

-

-

-

150

Joseph C. Muscari(3)

150

-

-

-

150

Independent Non-Executive Directors

 

 

 

 

 

Poon Yiu Kin, Samuel

266

-

-

-

266

Wang Dianzuo(4)

266

-

-

-

266

Kang Yi

266

-

-

-

266

 






 

 

 

 

 

 

 

1,098

2,744

1,883

88

5,813

 






 

 

 

 

 

 

(1)

Mr. Zhang Chengzhong was appointed as an Executive Director of the Company on October 13, 2006 and resigned on May 18, 2007.

 

 

(2)

Mr. Xiong Weiping resigned from his office as an Executive Director of the Company on August 23, 2006.

 

 

(3)

Mr. Joseph C Muscari resigned from his office as a Non-Executive Director of the Company on May 18, 2007.

 

 

(4)

Mr. Wang Dianzuo resigned from his office as a Non-Executive Director of the Company on May 18, 2007.

 

 

Senior Management Incentive System

 

In order to better provide incentives for our senior management and improve our shareholders' value, we adopted a special compensation system for our senior management designed to link our senior management's financial interests with our operating performances. Under this system, the senior management's compensation consists of the following components:

 

*

basic salaries;

 

 

*

performance bonuses; and

 

 

*

incentive bonuses.

 

 

Board Practices

 

Board of Directors

 

Pursuant to the articles of association, our board of directors consists of nine directors, one of whom is the Chairman. Directors are elected at the shareholders' general meeting by vote of shareholders, and serve for terms of three years. Upon the expiration of the term of their office, they may serve successive terms if re-elected at the shareholders' general meeting. The current board of directors, excluding Mr. Shi Chungui, Mr. Poon Yiu Kin, Samuel, Mr. Kang Yi and Mr. Zhang Chengzhong, was elected at the shareholders' annual general meeting held on June 7, 2004. Mr. Shi Chungui was elected at the shareholders' annual general

 

- 79 -

 


 

meeting held on June 9, 2005. Mr. Poon Yiu Kin, Samuel was elected at the shareholders' extraordinary general meeting held on October 14, 2005. Mr. Kang Yi was elected in the extraordinary shareholders' meeting held on September 28, 2004. Mr. Zhang Chengzhong was appointed as an Executive Director of the Company to replace Mr. Xiong Weiping at the Extraordinary General Meeting on October 13, 2006. The second session of the Board and Supervisory Committee will expire upon the conclusion of the 2006 Annual General Meeting. The third session of the Board came into effect upon approval at the annual general meeting convened on May 18, 2007. The third session of the Board comprises six directors from the second session of the Board, namely Xiao Yaqing, Luo Jianchuan, Chen Jihua, Shi Chungui, Poon Yiu Kin, Samuel and Kang Yi, and three new directors Liu Xiangmin, Helmut Wieser and Zhang Zuoyuan.

 

Supervisory Committee

 

We have a supervisory committee composed of three supervisors. Supervisors serve a term of three years. Upon the expiration of their terms of office, they may be reappointed to serve consecutive terms. The supervisory committee is presided over by a chairman who may be elected or removed with the consent of two-thirds or more of the members of the supervisory committee. The term of office of the Chairman is three years, renewable upon re-election. The Supervisory Committee of the Company consists of three members, with one supervisor being elected from the staff as a representative of the employees. Members of the Supervisory Committee may also observe meetings of the board of directors. Our current Supervisory Committee was appointed at the shareholders' annual general meeting held on June 7, 2004. Mr. Luo Tao and Mr. Ou Xiaowu respectively resigned as Chairman of the Supervisory Committee and Supervisor of the Company on August 23, 2006, and Mr. Ao Hong and Mr. Zhang Zhankui have been appointed as Chairman of the Supervisory Committee and Supervisor respectively at the Extraordinary General Meeting on October 13, 2006. The third session of the Supervisory Committee came into effect upon approval at the Annual General Meeting convened on May 18, 2007. All the members of the second session of the committee were elected to renew their terms of office.

 

Supervisors attend board meetings as non-voting members. The Supervisory Committee is responsible to the shareholders' general meeting and has the following duties and responsibilities:

 

*

to supervise our handling of our financial matters;

 

 

*

to supervise any acts of directors, the general manager, deputy general manager and other senior officers that are in violation of laws, administrative regulations or our articles of association;

 

 

*

to request directors, the general manager, deputy general manager and other senior officers to rectify their acts that are detrimental to the interests of Chalco;

 

 

*

to verify such financial information as financial reports, business reports and profit distribution plans submitted by the board of directors to the shareholders' general meeting, and arrange certified public accountants and auditors to verify issues;

 

 

*

to propose to convene interim shareholders' general meetings; and

 

 

*

to bring lawsuits against directors on behalf of Chalco.

 

 

Audit Committee

 

See "Item 6. Directors, Senior Management and Employees - Audit Committee".

 

Employees

 

As of December 31, 2004, 2005 and 2006, we had a total of approximately 68,620, 68,200 and 88,004 employees, respectively.

 

The table below sets forth the number of our employees by function as of the period indicated:

 

 

As of December 31,

 

 

- 80 -

 


 

 


 

2004

2005

2006

 




 

 

% of Total

 

% of Total

 

% of Total

 

 

 

 

 

 

 

Function:

 

 

 

 

 

 

 

 

 

 

 

 

 

Alumina production

38,100

55.5

38,124

55.9

38,360

43.6

Primary aluminum production

19,150

27.9

19,164

28.1

35,564

40.4

Mining

3,550

5.2

3,431

5.0

4,400

5.0

Research and development

1,980

2.9

1,990

2.9

2,552

2.9

Sales and marketing

740

1.1

686

1.0

880

1.0

Management and other

5,100

7.4

4,805

7.1

6,248

7.1

 







 

 

 

 

 

 

 

Total

68,620

100.0%

68,200

100.0%

88,004

100%

 







 

 

 

 

 

 

 

The table below sets forth the number of our employees as of December 31, 2006:

 

Location

Employees

% of Total




 

 

 

Shandong

 

 

Shandong Plant

10,787

12.3

 

 

 

Henan

 

 

Henan plant

10,387

11.8

Zhongzhou plant

5,000

5.7

Research Institute

994

1.1

 

 

 

- 81 -

 


 

Bauxite mine branch

2,666

3

 

 

 

Guizhou

 

 

Guizhou plant

15,285

17.4

 

 

 

Guangxi

 

 

Guangxi plant

5,546

6.3

 

 

 

Shanxi

 

 

Shanxi plant

12,633

14.4

 

 

 

Qinghai

 

 

Qinghai plant

5,893

6.7

Others (including the employees of newly established subsidiary and the companies joined in by merging and acquisition)

18,683

21.2

Headquarters

130

0.1

 



 

 

 

Total

88,004

100.0%

 



 

 

 

We have workers' unions at the plant level that protect employees' rights and welfare benefits, organize educational programs, encourage employee participation in management decisions, and assist in mediating disputes between us and individual employees. All employees are union members. We have not been subjected to any strikes or other labor disturbances that have interfered with our operations, and we believe that we have good relationships with our employees.

 

The remuneration package of our employees includes salary, bonuses and allowances. Employees also receive welfare benefits including medical care, housing subsidies, childcare and education, retirement and other miscellaneous items.

 

- 82 -

 


 

In accordance with applicable PRC regulations, we participate in pension contribution plans organized by provincial and municipal governments, under which each of our plants is required to contribute an amount equal to a specified percentage of the sum of its employees' salaries, bonuses and various allowances. The amount of contribution as a percentage of the employees' salary is, on average, approximately 20.0% depending in part on the location of the plant and the average age of the employees. We have made all required pension contributions up to December 31, 2006. Retirees who retired prior to the date of the reorganization will have their pensions paid out of the pension plans established by the PRC government. We also contribute to a welfare fund for our employees. Our contributions to this fund are made at rates ranging from 5% to 10% of our after-tax income. In addition, we have introduced a new employee incentive plan which includes performance bonuses for our employees. We provide to our employees various social welfare benefits through hospitals, schools, retirement homes and other institutions owned by Chinalco and its other affiliates or through third parties.

 

Share Ownership

 

None of our directors, supervisors or senior management owns any interest in any shares or options to purchase our shares.

 

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

 

Major Shareholders

 

We are a joint stock limited company organized under the laws of the PRC. Our parent company, Chinalco, a state-owned enterprise, owned 39.59% of our outstanding common shares after our placement of H Shares on May 9, 2006, and currently owns 40.46% of our outstanding common shares following the A Shares issuance and the transfer by China Orient of all its equity interest in us to Chinalco, which was processed at the same time when our A Shares were issued on April 30, 2007. The parent company holds a significant portion of our domestic shares in the form of state legal person shares and can exercise all rights as our controlling shareholder according to the relevant laws, rules and regulations. The parent company has substantial influence over our management and policies and corporate actions, not only in its capacity as the largest shareholder, but also because two of our directors, including our Chairman, hold senior management positions with Chinalco and Chinalco has nominated two of the three members of our Supervisor Committee.

 

The following table sets forth information regarding ownership of our issued and outstanding capital stock as of December 31, 2006. The table includes all persons who are known by us to own, either as beneficial owners or holders of record, five percent or more of our capital stock.

 

 

As of December 31, 2006

 


 

 

Approximate % of

Holders of Domestic Shares and H Shares

No. of shares

issued share capital

 



 

(in millions)

 

 

- 83 -

 


 

Holders of Domestic Shares

 

 

 

 

 

Chinalco

4,612.2

39.59

 

 

 

China Cinda

900.6

7.73

 

 

 

China Construction Bank

709.8

6.09

 

 

 

China Orient

602.3

5.17

 

 

 

China Development Bank

554.9

4.76

 

 

 

Guangxi Investment

196.8

1.69

 

 

 

Guizhou Development

129.4

1.11

 

 

 

Holders of H Shares

 

 

 

 

 

Alcoa

884.2

7.59

 

 

 

Other public investors

3,059.8

26.27

 

 

 

The following table sets forth information regarding ownership of our issued and outstanding capital stock as of May 31, 2007. The shares and share capital changed as a result of the A Shares issuance and the transfer between China Orient and Chinalco. The table includes all persons who are known by us to own, either as beneficial owners or holders of record, five percent or more of our capital stock.

 

 

As of May 31, 2007

 


 

 

Approximate % of

Holders of Domestic Shares and H Shares

No. of shares

issued share capital

 



 

(in millions)

 

 

Holders of Domestic Shares

 

 

 

 

 

- 84 -

 


 

Chinalco

5214.4

40.46

 

 

 

China Cinda

900.6

6.99

 

 

 

China Construction Bank

709.8

5.51

 

 

 

China Development Bank

554.9

4.31

 

 

 

Guangxi Investment

196.8

1.53

 

 

 

Guizhou Development

129.4

1.00

 

 

 

Lanzhou Aluminum

79.5

0.62

 

 

 

Lanzhou Economy and Information Consulting Company

9.2

0.07

 

 

 

Holders of H Shares

 

 

 

 

 

Alcoa

884.2

6.86

 

 

 

Other public investors

3,059.8

23.74

 

 

 

Public investors of A Shares

1,148.1

8.91

 

 

 

We are not aware of any arrangement that may at a subsequent date result in a change of control of Chalco.

 

On May 9, 2006, we placed 644,100,000 H Shares in the share capital of our Company at a price of HK$7.25 per H Share. The Placing Shares comprise (i) 600,000,000 new H Shares to be allotted and issued by the Company and (ii) 44,100,000 H Shares to be converted from the same number of existing State-owned domestic shares that are to be allocated from Chinalco to the National Social Security Fund Council (the "NSSF") of the PRC, in reliance upon Regulation S under the U.S. Securities Act of 1933. The Placing Shares represent approximately 5.83% of the existing issued share capital of our Company and approximately 5.53% of the issued share capital of our Company as enlarged by the issuance of the new H Shares. The Placing shares were listed on the Hong Kong Stock Exchange on May 19, 2006.

 

On April 30, 2007, dealings in the A Shares on the Shanghai Stock Exchange commenced. We initially offered 1,236,731,739 A Shares in exchange for the existing issued shares held by the shareholders of Shandong Aluminum and Lanzhou Aluminum, other than those held by us. Our total share capital increased to 12,886.6 million shares from 11,049.9 million shares.

 

To the best of our knowledge, as of December 31, 2006, none of the outstanding H Shares was held by United States holders of record, and all of the outstanding ADSs were held by 42 United States holders of record. Because only PRC investors can hold domestic shares, there were no non-PRC holders holding the domestic shares of record. Our ADS ratio changed from one (1) ADS representing one hundred (100) H Shares to one (1) ADS representing twenty-five (25) H Shares. The ratio change is effected with respect to

 

- 85 -

 


 

the holders of ADSs of record on October 6, 2006. The new ADSs have been distributed to the holders of ADSs on October 11, 2006.

 

As an owner of at least 30% of our issued and outstanding shares, the parent company is deemed a controlling shareholder and therefore may not exercise its voting rights relating to our shares with respect to various matters in a manner prejudicial to the interests of our other shareholders. See "Item 10. Additional Information - Memorandum and Articles of Association". In accordance with our articles of association, each share of our capital stock has one vote and the shares of the same class have the same rights. Other than the restrictions noted in the first sentence of this paragraph, the voting rights of our major holders of domestic shares are identical to those of any other holders of our domestic shares, and the voting rights of our major holders of H Shares are identical to those of our other holders of H Shares. Holders of domestic shares and H Shares are deemed to be shareholders of different classes for some matters, which may affect their respective interests. Holders of H Shares and domestic shares are entitled to the same voting rights.

 

Related Party Transactions

 

Connected Transactions under Hong Kong Listing Rules

 

Under the HKSE Listing Rules, transactions between connected persons and us constitute connected transactions and such transactions are normally subject to reporting, announcement and/or shareholders' approval unless otherwise waived by the Hong Kong Stock Exchange. Under the HKSE Listing Rules, Chinalco, Guangxi Associate, Guangxi Baise, Guizhou Development and Shanxi Zhangze, are considered our connected persons. According to certain waivers granted by the Hong Kong Stock Exchange on December 22, 2003, our Independent Non-executive Directors must review and certify annually that the contracts entered into between us and our connected persons are based on normal commercial terms that are fair and reasonable. Commencing on June 7, 2004, our Audit Committee pre-approves related-party transactions in accordance with the NYSE Listing Rules. The following transactions are exempted from the strict compliance of the requirements under the HKSE Listing Rules in relation to connected transactions, subject to certain conditions as stated in the waiver letter issued by the Hong Kong Stock Exchange.

 

Although connected transactions are not synonymous with related party transactions, the concepts are sufficiently similar that the following description of our connected transactions would satisfy the disclosure requirements under U.S. securities laws. See the table below for a list of the amounts paid under such transactions for the years ended December 31, 2004, 2005 and 2006.

 

We have the following ongoing connected transactions with Chinalco, our largest shareholder, Guangxi Associate, Guizhou Development and Southwest Aluminum.

 

*

Comprehensive Social and Logistics Services Agreement;

 

 

*

General Agreement on Mutual Provision of Production Supplies and Ancillary Services;

 

 

*

Mineral Supply Agreement;

 

 

*

Provision of Engineering, Construction and Supervisory Services Agreement;

 

 

*

Land Use Rights Leasing Agreement;

 

 

*

Buildings Leasing Agreement and Head Office Leasing Agreement - Building leasing

 

 

*

Trademarks License Agreement;

 

 

*

Aluminum Ingots and Alumina Supply Agreement; and

 

 

*

Aluminum Ingots Agency Agreement.

 

 

Comprehensive Social and Logistics Services Agreement

 

Chinalco provides certain social welfare and logistics services on a continuing basis to us. To regulate our relationship with Chinalco in this regard, we have entered into the Comprehensive Social and Logistics

 

- 86 -

 


 

Services Agreement with Chinalco on November 5, 2001 for the provision of social welfare and logistics services.

 

The annual limit is proposed to be increased because (a) the logistics services equipment is expected to be refurnished in 2007 due to the aging of the equipment over the years, and therefore, this will result in increased expenses, (b) since many of our facilities have expanded their production capabilities, there will be an increase in the use of the logistics services provided by Chinalco, and (c) it is expected that Chinalco's costs for providing the services will increase over the previous years and therefore, it will mean increased charges to us.

 

General Agreement on Mutual Provision of Production Supplies and Ancillary Services

 

Chinalco retained certain non-core assets and businesses relating to ancillary production supplies and services which include assets and businesses for, among other things, (a) supply of various raw materials required in the course of production of alumina and primary aluminum; (b) provision of transportation and loading services; and (c) the provision of production supporting service, which continue to provide ancillary production supplies and services to us on an ongoing basis.

 

As the domestic supply of coal, electricity, fuel and logistics services in 2005 and 2006 was tense, it is expected that the situation will remain tense in 2007 and the near future, causing the relevant costs of the production supplies and services of Chinalco to continue to increase. The proposed increase in annual limit is due to an expected increase of costs and charges for Chinalco to provide cement, coal, transportation and other related products and services. The increases in costs and charges are expected to continue to increase in line with the continued growth of the market prices and PRC economic development environment. Further, with the expansion in the Company's production capabilities, there will be a corresponding increase in the use of the products and services provided by Chinalco.

 

In addition, following the completion of several of our newly built alumina facilities, the upgrading of certain of our alumina productions, and the completion of several domestic mergers and acquisitions by us, our production capacity of smelting and alumina is expected to experience significant increases, and the need for the production supplies and ancillary services provided by Chinalco will accordingly increase significantly.

 

Chinalco also retained all its assets and businesses relating to aluminum fabrication (except for aluminum fabrication capacity of Shandong Aluminum). It purchases its supply of primary aluminum as well as other alumina products from us. On the other hand, Chinalco transferred to us (a) operating assets and businesses for the production of alumina, primary aluminum, scrap materials, coal and pitch, and (b) assets and businesses for provision of ancillary production supplies and services which include, among other things, the supply of electricity, gas, heat and water, spare parts and the provision of repair and maintenance services. Such assets and businesses continue to provide ancillary production supplies and services to Chinalco.

 

As the subsidiaries of Chinalco has continued to increase, including companies such as China Aluminum Ruimin Aluminum Strap Company Limited and Lanzhou Liancheng Aluminum Industrial Company Limited, the need for these subsidiaries to purchase our products has also increased accordingly and hence, larger quantities of alumina are being purchased from us. It is expected that Chinalco will continue to acquire more subsidiaries in 2007 to 2009, and these subsidiaries will also purchase their primary aluminum and alumina products from us, and therefore, a proposed increase in the annual limit is deemed appropriate due to the anticipated increase of the sale of primary aluminum and alumina products from us to Chinalco.

 

Mineral Supply Agreement

 

Chinalco retained certain assets and businesses relating to several small bauxite mines and limestone quarries in respect of which the mining rights have not been transferred to us. Chinalco continues to provide bauxite and limestone to us on an ongoing basis. Chinalco also purchases bauxite and limestone from other mines and re-sells the bauxite and limestone to us.

 

To regulate the relationship between Chinalco and us in these respects, we entered into a Mineral Supply Agreement with Chinalco on November 5, 2001.

 

- 87 -

 


 

As two of our alumina production facilities will commence production in 2007, the demand for bauxite and limestone for its production is also expected to increase accordingly. It is also expected that the costs and volume of purchase of these minerals by us will continue to increase in the coming three financial years ending December 31, 2009.

 

Provision of Engineering, Construction and Supervisory Services Agreement

 

Chinalco retained all its operating assets and liabilities relating to metallurgical construction and construction supervisory services and Luoyang Research Institute for Non-ferrous Metals Processing, which specializes in engineering design. The other operating assets and liabilities relating to engineering design services have been transferred to us.

 

Chinalco has provided and continues to provide metallurgical design, construction and supervisory services to us. In turn, we have provided and continue to provide various research and development services relating to engineering design to Chinalco.

 

We have entered into a Provision of Engineering, Construction and Supervisory Services Agreement with Chinalco dated November 5, 2001, which was renewed in December 26, 2006, relating to the provision of such engineering design, construction and supervisory services.

 

Land Use Rights Leasing Agreement

 

Chinalco leased to us all the 453 pieces or parcels of land for the purposes of all aspects of our operations and businesses. On November 5, 2001, we entered into the Land Use Rights Leasing Agreement with Chinalco for the leasing of these 453 parcels of land covering an aggregate area of approximately 58.3 million square meters, which are located in six provinces in the PRC. The annual rent payable to Chinalco is approximately RMB239.1 million.

 

As a result of the adjustment in the standard land price and land use tax made by relevant local authorities in 2004, Chinalco was required to pay an extra tax amount of RMB66.0 million. On January 11, 2005, after arm-length negotiations between Chinalco and us, we agreed to bear the annual tax increment beginning from January 1, 2004, pursuant to which our payment of the rental for land use right increased from RMB173.0 million to RMB239.1 million. We had applied and recommended to the HKSE for the amendment of maximum amount of annual land use right payable by us be adjusted from RMB200.0 million to RMB250.0 million.

 

Due to the adjustment of land tax in Zhongzhou Plant and Shanxi Plant, and at the request of Chinalco, we have agreed to bear the increase in land tax of approximately RMB44.9 million of these two branch factories of the Company. The relevant land use rights were leased to us pursuant to the Land Use Right Leasing Agreement between our Company and Chinalco dated November 5, 2001. Payment by us of the increased land tax for Chinalco will exceed the annual limit of this category of continuing connected transactions of RMB250 million. Therefore, we revise the annual cap for the Land Use Right Leasing Agreement for the year ending December 31, 2006 to RMB290 million. Our Directors consider that the relevant PRC authorities will continue to increase the land rates and land use taxes in the next three years due to the continued and steady growth of the PRC economy and in order to ensure that Chinalco will receive the same amount of rental payment before the increase in land rates and land use taxes, our Directors propose an annual cap of RMB400 million as the annual limit for this category of continuing connected transactions for the coming three financial years ending December 31, 2009.

 

Buildings Leasing Agreement and Head Office Leasing Agreement - Building leasing

 

At the Special General Meetings of the Company held on February 27, 2007, it is approved to aggregate the rental payable to Chinalco under the Buildings Leasing Agreement dated November 5, 2001 with the rent payable under the Head Office Leasing Agreement to China Aluminum Development Company Limited under one category of continuing connected transactions and apply for an aggregate annual limit of RMB100 million for each of the three years ending December 31, 2009.

 

Chinalco transferred to us, among other operating assets, ownership of the buildings and properties for the operation of our core businesses, with Chinalco retaining the buildings and properties for its remaining

 

- 88 -

 


 

operations. We leased to Chinalco and Chinalco leased to us a number of buildings and properties for ancillary uses, which include buildings and properties mainly for offices, dormitory, canteen and storage purposes. The buildings and properties we lease to Chinalco comprise 59 buildings with an aggregate gross floor area of 62,819 square meters. In turn, the buildings and properties Chinalco leases to us for ancillary uses comprise 100 buildings with an aggregate gross area of 273,637 square meters. We entered into the Buildings Leasing Agreement on November 5, 2001 with Chinalco, regarding the terms and conditions for the lease of these buildings and properties.

 

At the time of the 2003 Waiver Renewal, the annual limit for the Buildings Leasing Agreement was set at RMB12 million, being the estimated total amount of rent payable by us to Chinalco in respect of approximately 100 buildings leased by us from Chinalco pursuant to the Buildings Leasing Agreement dated 5 November 2001. Due to the steady growth of the PRC economy, we expect that the aggregate amount of rental payable by us to Chinalco will increase during the next three years. On March 28, 2005, we entered into a tenancy agreement with China Aluminum Development Company Limited, a wholly-owned subsidiary of Chinalco, in respect of the office premises at 12th to 16th floors and 18th to 31st floors of No. 62 North Xizhimen Street, Hai Dian District, Beijing, PRC with an aggregate gross floor area of 30,160.81 square meters for a term of three years. The annual rent amounts to RMB61.6 million, determined according to the prevailing market rate. The eight months' period from February 15, 2005 to October 14, 2005 during renovation was rent free.

 

Due to the recent increase in rent of office premises in Beijing, we at the request of China Aluminum Development has agreed to make prepayment of the annual rent and property management fees of the leased premises for the remaining two years of the tenancy. The prepayment amounted to RMB145,314,782. Considering the rapid and steady economic growth in the PRC during the past three years and the general trend of rental increase during the same years, the Directors propose an annual cap of RMB100 million for the three years ending December 31, 2009. During 2006, we made a prepayment of RMB74 million per year for the next two years to Chinalco in respect of the head office rental and property management fees.

 

Trademarks License Agreement

 

Chinalco transferred to us, among other trademarks, two trademarks relating to its retained operating assets and businesses. To enable Chinalco to continue operating its retained assets and businesses using these two trademarks, the parties entered into a Trademarks License Agreement dated November 5, 2001 whereby we have granted to Chinalco and its associates free of charge a non-exclusive right to use these two trademarks for ten years from July 1, 2001, but may be extended upon negotiations with Chinalco. Pursuant to such agreement, we are responsible for the payment of a total annual fee of no more than RMB1,000 to maintain the effective registration.

 

Aluminum Ingots and Alumina Supply Agreement

 

Our Directors propose to aggregate the annual limits of the supply of aluminum ingots and alumina to Guangxi Nonferrous Metal under the Aluminum Ingots and Alumina Supply Agreement dated November 5, 2001 with the annual limits of Alumina Supply Agreement with Guangxi Baise under one category of continuing connected transactions and to apply for an aggregate annual limit of RMB450 million for each of the three years ending December 31, 2009.

 

For the two years ended December 31, 2005, the historical amounts of the supply of aluminum ingots and alumina to Guangxi Nonferrous Metal increased from RMB86 million to RMB122 million, respectively. Our Directors estimate that the total amounts of transactions with Guangxi Nonferrous will increase to approximately RMB180 million for the year ending December 31, 2006, which may exceed the annual limit approved by the independent Shareholders in the 2003 Waiver Renewal. By an announcement dated December 13, 2006, we announced the revision of the annual limit of the transactions with Guangxi Nonferrous Metal under this agreement to RMB190 million for the year ending December 31, 2006. Our Directors estimate that the amounts of transactions with Guangxi Nonferrous Metal will be approximately RMB150 million for each of the years ending December 31, 2009.

 

In addition, Guangxi Baise, which is a subsidiary of Guangxi Investments will enter into the Baise Agreement with us for the supply of alumina to Guangxi Baise. As Guangxi Baise is a 48% subsidiary of

 

- 89 -

 


 

Guangxi Investments, it is therefore an associate of Guangxi Investments and a connected person of us. The Baise Agreement between the Company and Guangxi Baise started from January 1, 2007 to December 31, 2009. Under the agreement, Guangxi Baise shall purchase from us a total of 270,000 tonnes of alumina, of which 70,000 tonnes shall be delivered by us to Guangxi Baise for the year ending December 31, 2007 and 100,000 tonnes shall be delivered for each of the two years ending December 31, 2009.

 

Aluminum Ingots Agency Agreement

 

Guizhou Development has been and continues to be our agent for the distribution and sale of our aluminum ingots and related products for a commission. Such transactions between Guizhou Development and us are connected transactions within the meaning of the Listing Rules.

 

To regulate the relationship between Guizhou Development and ourselves in this respect, we entered into an agency agreement on November 5, 2001 relating to the sale of aluminum ingots by Guizhou Development as our agent.

 

Guangxi Huayin Aluminum Co., Ltd.

 

We established a joint venture company, Guangxi Huayin Aluminum Co., Ltd., with Guangxi Associate and China Minmetals on February 18, 2003 to undertake the construction of an alumina plant to exploit the discovery of a bauxite deposit in western Guangxi Zhuang Autonomous Region. According to a Supplemental Agreement dated July 31, 2005, the total investment of Guangxi Huayin Aluminum Co., Ltd. was increased from RMB10 million to RMB8,491.0 million and 25% of which will be contributed by the shareholders according to their proportionate shareholding in the joint venture company. As a result, we, Guangxi Associate and China Minmetals will contribute RMB701 million, RMB721.5 million and RMB701 million, respectively, from 2005 to 2007. We contributed RMB116.9 million on August 4, 2005, RMB454.0 million in 2006 and expect to contribute the remaining amounts in 2007. The remaining 75% of the total investment of the joint venture company will be financed by bank loans. See "Item 4. Information on the Company - Business Overview - Property Plant and Equipment - Our Expansion and Profit Improvement Plan - Guangxi Alumina Project".

 

Huaze Contracting Agreement - management and operations of electricity generators

 

On 15 January 2003, we entered into a joint venture with Shanxi Zhangze for the establishment of a joint venture company named as Shanxi Huaze Aluminum and Power Company Limited ("Huaze Aluminum"). Huaze Aluminum is held as to 60% by the Company and as to the remaining 40% by Shanxi Zhangze. Under the Listing Rules, Shanxi Zhangze is a substantial shareholder of Huaze Aluminum, one of the Company's subsidiaries, and therefore a connected person of us. Huaze Aluminum proposes to enter into the Huaze Contracting Agreement with Shanxi Zhangze by contracting the management and operations of the electricity generators numbers 3 and 4 to Shanxi Zhangze with effect from 1 January 2007 to 31 December 2009.

 

Amounts Received or Paid Under Material Related Party Transactions

 

During the years ended December 31, 2004, 2005 and 2006, we had the following material related party transactions:

 

 

Years Ended December 31,

 


 

2004

2005

2006

 




 

RMB

RMB

RMB

 




 

 

 

 

- 90 -

 


 

 

(in thousands)

 

 

Sales of materials and finished goods to:

 

 

 

 

 

 

 

    Chinalco Group

1,700,746

3,088,968

4,030,852

    Jointly controlled entity

52,424

45,480

11,109

    Associate company

-

570,470

1,342,997

    Other related party

-

85,509

155,885

Provision of utility services to Chinalco and its subsidiaries

219,952

310,438

298,259

 

 

 

 

Provision of engineering, construction and supervisory services by Chinalco Group

830,582

2,176,041

1,453,848

 

 

 

 

Purchase of property, plant and equipment from:

 

 

 

    Chinalco and its subsidiaries(1)

115,098

-

 

 

 

 

 

Purchase of key and auxiliary materials from:

 

 

 

 

 

 

 

    Chinalco Group

633,664

700,829

2,558,883

    An associated company

-

220,772

585,835

Provision of social services and logistics services by Chinalco Group

927,252

951,247

1,044,401

 

 

 

 

Land and building rental charged by Chinalco

239,810

253,805

295,408

 

 

 

 

Building rental charged to Chinalco

-

44,575

50,660

 

 

 

 


 

 

 

 

 

 

 

(1)

Our subsidiary, Shandong Aluminum, purchased two kilns from Shandong Aluminum Plant. The purchase price is based on an independent valuation report.

 

 

See Note 34 to our audited consolidated financial statements for a detailed discussion of our related party transactions.

 

ITEM 8.

FINANCIAL INFORMATION

 

 

Consolidated Statements and Other Financial Information

 

See pages F-1 to F-74 following Item 19.

 

- 91 -

 


 

Legal Proceedings

 

In 2006, Fushun Aluminum, our subsidiary, was claimed by several banks to be jointly liable for repayment of loans lent by the several banks to the vendor from whom we acquired the shares of Fushun Aluminum and the claims by the banks are for repayment of a total bank loan of RMB971.19 million. In March 2007, Fushun Aluminum was claimed by another bank to be liable to the bank for repayment of bank loan lent by that bank to the vendor in the sum of RMB283.68 million. Fushun Aluminum was acquired by us from the vendor. Our Directors, after obtaining independent legal advice, are of the opinion that as the acquisition was conducted on a fair principle and the consideration was set close to the asset value of the assets acquired, no contingency provision for such claim is necessary as of December 31, 2006. Therefore, our Directors believe that such proceeding will not have a material effect on our financial condition and results of operations.

 

Dividends

 

Our board of directors declares dividends, if any, in Renminbi with respect to H Shares on a per share basis and pays such dividends in HK dollars. Any final dividend for a financial year is subject to shareholders' approval. The Bank of New York, as depositary, converts the HK dollar dividend payments and distributes them to holders of ADSs in U.S. dollars, less expenses of conversion. Under the PRC Company Law and our articles of association, all of our shareholders have equal rights to dividends and distributions. The holders of the H Shares share proportionately on a per share basis in all dividends and other distributions declared by our board of directors.

 

The declaration of dividends is subject to the discretion of our board of directors, which takes into account the following factors:

 

*

our financial results;

 

 

*

capital requirements;

 

 

*

contractual restrictions on the payment of dividends by us to our shareholders or by our subsidiaries to us;

 

 

*

our shareholders' interests;

 

 

*

the effect on our credit worthiness;

 

 

*

general business conditions; and

 

 

*

other factors our board of directors may deem relevant.

 

 

We may only distribute dividends after we have made allowance for:

 

*

recovery of losses, if any;

 

 

*

allocation to the statutory common reserve fund;

 

 

*

allocation to the statutory common welfare reserve fund; and

 

 

*

allocation to a discretionary common reserve fund if approved by our shareholders and after allocation is made to the statutory common reserve fund.

 

 

The minimum and maximum aggregate allocations to the statutory funds are 15% and 20%, respectively, of our net income determined in accordance with PRC GAAP. Under PRC law, our distributable earnings will be equal to our net income determined in accordance with PRC GAAP or HK GAAP, whichever is lower, less allocations to the statutory and discretionary funds.

 

The Board of directors declared a final dividend of RMB0.214 per share for 2005 and an interim dividend of RMB0.188 per ordinary share for 2006 in respect of the six months ended June 30, 2006. The Board of directors proposed to declare a final dividend of RMB0.115 per share for 2006 which is subject to approval

 

- 92 -

 


 

of shareholders at the shareholder's general meeting to be convened on July 10, 2007. We believe that our dividend policy strikes a balance between two important goals:

 

*

providing our shareholders with a competitive return on investment; and

 

 

*

assuring sufficient reinvestment of profits to enable us to achieve our strategic objectives.

 

 

See "Item 10. Additional Information - Taxation" for a discussion of the tax consequences of receipt of dividends.

 

Other Significant Changes since December 31, 2006

 

On January 16, 2007, we announced that the proposed resolutions approving the respective share reforms, share exchanges and mergers of Shandong Aluminum and Lanzhou Aluminum have been duly approved by the shareholders of Shandong Aluminum and Lanzhou Aluminum at their respective special general meetings and meetings of the relevant shareholders held on January 15, 2007. Application has been made to the CSRC for the A Share Issue and the formal written approval from the CSRC was received by us on April 20, 2007. We were initially offering 1,236,731,739 A Shares, and the dealings in the A Shares on the Shanghai Stock Exchange commenced on April 30, 2007.

 

A resolution relating to the issue of long-term corporate bonds by us in a principal amount not exceeding RMB5 billion was approved at our Special General Meeting held on February 27, 2007. On March 19, 2007, we received the requisite approvals and on June 13, 2007, we issued long-term corporate bonds in the principal amount of RMB2 billion. The proceeds raised from the bonds issuance will be used mainly for renovation or expansion projects of alumina and aluminum.

 

On March 19, 2007, we received the requisite approvals and on June 15, 2007, we issued domestic short-term bonds in the total principal amount of RMB3 billion. The net proceeds of the short-term bonds issuance will be principally used as our working capital.

 

In April 2007, China Orient Asset transferred its entire 5.17% equity interest in the Company or 602,246,135 shares to Chinalco. Upon the transfer, China Orient Asset ceased to be a shareholder of the Company and Chinalco's interest in the Company increased to 40.46%.

 

ITEM 9.

THE OFFER AND LISTING

 

 

The Hong Kong Stock Exchange is the principal non-US trading market for our H Shares. Before October 2006, the ADSs, each representing 100 H Shares, have been issued by the Bank of New York as depositary and are listed on the NYSE. Our ADS ratio changed from one (1) ADS representing one hundred (100) H Shares to one (1) ADS representing twenty-five (25) H Shares. The ratio change is effected with respect to the holders of ADSs of record on October 6, 2006. The new ADSs have been distributed to the holders of ADSs on October 11, 2006. No additional H Shares were issued by reason of this change.

 

The following table sets forth, for the periods indicated, the reported high and low closing prices for our shares on each of these two stock exchanges:

 

 

NYSE

Hong Kong Stock Exchange

 



Calendar Period

High

Low

High

Low

 





 

(US$ per ADS)

(HK$ per H Share)

 

 

 

- 93 -

 


 

2002

24.25

9.38

1.94

0.73

2003

81.70

14.40

6.15

1.13

2004

 

 

 

 

    First Quarter

85.00

62.85

6.75

4.925

    Second Quarter

91.80

45.88

7.05

3.50

    Third Quarter

66.36

42.71

5.05

3.275

    Fourth Quarter

68.91

56.83

5.40

4.40

2005

 

 

 

 

    First Quarter

66.35

51.20

5.25

4.02

    Second Quarter

61.10

50.04

4.70

3.87

    Third Quarter

62.80

53.64

4.90

4.15

    Fourth Quarter

78.84

57.37

6.10

4.52

2006

 

 

 

 

    First Quarter

109.27

74.74

8.55

5.85

    Second Quarter

110.12

64.15

8.70

5.00

    Third Quarter(1)

78.05

64.72

6.00

4.88

    Fourth Quarter(1)

23.90

15.54

7.50

4.90

    December

24.35

19.65

7.61

5.82

2007

 

 

 

 

    January(1)

25.03

21.74

7.67

6.85

    February(1)

27.34

22.60

8.49

7.47

    March(1)

26.40

21.68

8.19

6.92

    April(1)

30.61

25.99

9.59

8.05

    May(1)

35.11

28.92

10.96

8.95

 

 

 

 

 

(1)

Effective in October, 2006, the Company's American Depository Shares (the "ADSs") ratio has been changed from 1 ADS representing 100 H Shares to 1 ADS representing 25 H Shares.

 

 

ITEM 10.

ADDITIONAL INFORMATION

 

 

- 94 -

 


 

Our registered office is located at No.12B, Fuxing Road, Hai Dian District, Beijing, People's Republic of China 100814. Our telephone number at this address is (86) 10 8229 8103.

 

Share Capital

 

On January 6, 2004, we placed 549,976,000 additional H Shares, par value of RMB1.00 each, to certain independent professional and institutional investors who are non-U.S. persons outside the United States pursuant to Regulation S of the U.S. Securities Act of 1933 at a price of HK$5.658 per H Share. Further, on June 9, 2005, the annual general shareholders' meeting passed a resolution to grant the board of directors an unconditional general mandate to issue, allot and deal with additional H Shares not exceeding twenty percent of aggregate nominal amount of H Shares then in issue during the period from June 9, 2005 to the earlier of: (i) the conclusion of the next annual general meeting; (ii) twelve months from June 9, 2005; or (iii) the date on which the resolution was revoked or varied by an extraordinary general shareholders' meeting. Such general mandate is subject to approvals by the China Securities and Regulatory Commission and other relevant PRC government authorities. See "Item 4 - Information on the Company - History and Development of the Company - Our H Shares Placement".

 

As approved by the shareholders and the China Securities Regulatory Commission, on April 30, 2007, we initially offered 1,236,731,739 A Shares by way of share exchange with all the shareholders of Shandong Aluminum and Lanzhou Aluminum other than us, including the third party or parties (if any) who provide cash alternatives to the shareholders of Shandong Aluminum and Lanzhou Aluminum. Because the proceeds from our A Share issuance were used to acquire Shandong Aluminum and Lanzhou Aluminum, we did not raise any funds by the issuance. Our total share capital increased to 12,886,607,892 shares, comprising 7,794,564,567 restricted A Shares, 1,148,077,357 unrestricted A Shares and 3,943,965,968 H Shares.

 

Memorandum and Articles of Association

 

A copy of the English translation of our articles of association was filed with the SEC as an exhibit to the registration statement on Form F-1 (Registration No. 333-14068) under the Securities Act in connection with a global offering of our H Shares and American depositary shares on December 5, 2001. Subsequently, our articles of association underwent the following amendments:

 

1.

Article 3 is amended to read as follows:

 

 

 

"Place of the Company: No.62 North Xizhimen Street, Beijing, PRC

 

Postal code: 100082

 

Tele: (010) 82298080

 

Graphics context facsimile: (010) 82298081"

 

 

2.

In Article 6, reference to "the general meeting of shareholders on 9 June, 2005" is amended to "the general meeting of shareholders on 27 February, 2007"

 

 

3.

The first paragraph of Article 10 is amended to read as follows:

 

 

 

"The Company may invest in other companies but shall not be an investor jointly liable for the invested company's debts unless otherwise required by law."

 

 

 

The last paragraph of Article 10 is deleted.

 

 

4.

A new paragraph, reading as follows, is added to Article 20 as the second paragraph of that Article

 

 

 

"Contributions by promoters of the Company at the time of incorporation are as follows:

 

 

 

 

Means of

Date of

Promoter

Shares Subscribed

Contribution

Contribution

 

 

 

 

Aluminum Corporation of China

7,673,770,000

Net Asset

June 28, 2001

 

 

 

 

- 95 -

 


 

Guangxi Development Group Limited

196,800,000

Net Asset

June 28, 2001

Guizhou Provincial Materials Development and Investment Corporation

129,430,050

Net Asset

June 28, 2001

 


 

 

 

 

 

 

Total

8,000,000,000

 

 

 


 

 

 

 

 

 

5.

Article 21 is amended to read as follows:

 

 

 

"After incorporation, the Company issues 2,749,889,968 overseas listed foreign shares, i.e. H Shares, of which 2,499,900,153 are new shares and 249,989815 million stock shares are sold by certain shareholders.

 

 

 

After the foregoing issuing of H Shares, the company has a total of 10,499,900,153 shares with an equity structure as follows: a total of 7.750010185 billion domestic shares, accounting 73.81% of the Company's total equities, including: 4,656,261,060 shares by the promoter Aluminum Corporation of China, accounting around 44.35% of the total equities; 196,800,000 shares by the promoter Guangxi Investment Group Co., Ltd., accounting around 1.87% of the total equities; 129,430,000 shares by the promoter Guizhou Provincial Materials Development and Investment Corporation, accounting around 1.23% of the total equities; 1,610,332,210 shares by China Cinda Asset Management Corporation, accounting for around 15.34% of the total equities; 602,246,135 shares by China Orient Asset Management Corporation, accounting around 5.73% of the total equities; 554,940,780 shares by State Development Bank, accounting for 5.29% of the total equities. 2,749,889,968 (H Shares) are to be held by investors of overseas listed foreign shares, accounting for 26.19% of the Company's total equities.

 

 

 

With the approval of the examination body authorized by the State Council, the Company additionally issued 549,976,000 overseas listed foreign shares (H shares) in 2004.

 

 

 

After the foregoing issuing of H shares, the company has a total of 11,049,876,153 shares, comprising 7,750,010,185 domestic shares representing 70.13% of the total equities, including 4,612,161,060 shares by the promoter Aluminum Corporation of China, accounting around 42.14% of the total equities; 196,800,000 shares by the promoter Guangxi Investment Group Co., Ltd., accounting around 1.78% of the total equities; 129,430,000 shares by the promoter Guizhou Provincial Materials Development and Investment Corporation, accounting around 1.17% of the total equities; 1,610,332,210 shares by China Cinda Asset Management Corporation, accounting for around 14.57% of the total equities; 602,246,135 shares by China Orient Asset Management Corporation, accounting around 5.45% of the total equities; 554,940,780 shares by State Development Bank, accounting for 5.02% of the total equities; and 3,299,865,968 shares by shareholders of overseas listed foreign shares (H Shares) accounting for around 29.87% of the total equities.

 

 

 

With the approval of the State Council, China Construction Bank Corporation took back the 6.42% of the company's shares it had delegated to the care of Cinda Asset Management Corporation in 2005, and thenceforth directly holds the shares and become a shareholder of the company. It causes no change to the total number of shares of the company but the number of shares held by China Cinda Asset Management Corporation was decreased accordingly.

 

 

 

After the foregoing change of shareholder, the company has a total of 11,049,876,153 shares, comprising 7,750,010,185 domestic shares representing 70.13% of the total equities, including 4,656,261,060 shares by the promoter Aluminum Corporation of China, accounting around 42.14% of the total equities; 196,800,000 shares by the promoter Guangxi Investment Group Co., Ltd., accounting around 1.78% of the total equities; 129,430,000 shares by the promoter Guizhou Provincial Materials Development and Investment Corporation, accounting around 1.17% of the total equities; 900,559,074 shares by China Cinda Asset Management Corporation, accounting for around 8.15% of the total equities; 709,773,136

 

 

- 96 -

 


 

 

shares by China Construction Bank Corporation, accounting for around 6.42% of the total equities, 602,246,135 shares by China Orient Asset Management Corporation, accounting around 5.45% of the total equities; 554,940,780 shares by State Development Bank, accounting for 5.02% of the total equities; and 3,299,865,968 shares by shareholders of overseas listed foreign shares (H Shares) accounting for around 29.87% of the total equities.

 

 

 

With the approval of the examination body authorized by the State Council, the Company additionally issued 644,100,000 overseas listed foreign shares (H Shares) in 2006, including 600,000,000 new shares and 44,100,000 existing shares sold by certain shareholders.

 

 

 

After the foregoing issuing of H Shares, the company has a total of 11,649,876,153 shares, comprising 7,705,910,185 domestic shares representing 66.15% of the total, including 4,612,261,060 shares by the promoter Aluminum Corporation of China, accounting around 39.59% of the total equities; 196,800,000 shares by the promoter Guangxi Investment Group Co., Ltd., accounting around 1.69% of the total equities; 129,430,000 shares by the promoter Guizhou Provincial Materials Development and Investment Corporation, accounting around 1.11% of the total equities; 900,559,074 shares by China Cinda Asset Management Corporation, accounting for around 7.73% of the total equities; 709,773,136 shares by China Construction Bank Corporation, accounting for around 6.09% of the total equities, 602,246,135 shares by China Orient Asset Management Corporation, accounting around 5.17% of the total equities; 554,940,780 shares by State Development Bank, accounting for 4.76% of the total equities; and 3,943,965,968 shares by shareholders of overseas listed foreign shares (H Shares) accounting for 33.85% of the total issued common shares.

 

 

 

The Company issued 1,236,731,739 A Shares in 2007 upon approval of the shareholders' general meeting by way of special resolutions and upon approval of the State Council authorised approving authorities.

 

 

 

The existing shareholding structure of the Company shall be: 12,886,607,892 ordinary shares of which 8,942,641,924 are held by holders of A Shares, representing 69.39% of the total issued ordinary shares of the Company, 3,943,965,968 shares are held by holders of overseas listed foreign shares, representing 30.61% of the total issued ordinary shares of the Company."

 

 

6.

The second paragraph of Article 28 is amended as follows:

 

 

 

"The company must notify its creditors of the intended capital reduction within 10 days and issue public notice in newspaper within 30 days following the date on which such a decision is made. The creditors have the right to demand the company to liquidate its liabilities or provide corresponding debt service guarantees within 30 days following the receipt of the notification letter or 45 days following the public notice in the newspaper."

 

 

7.

Clause (3) of Article 29 is re-scheduled to become Clause (5), and two additional clauses are added as Clause (3) and (4) respectively, such that the relevant clauses of the Article, as amended, read as follows:

 

 

 

(3)

"Granting bonus shares to employees of the company."

 

 

 

 

(4)

"Shareholders disagreeing with General Meeting's resolution on merger or division of the company and requiring the company to acquire the shares in their possession."

 

 

 

 

(5)

"Other purposes permitted by law and administrative regulations."

 

 

 

8.

The first paragraph of Article 32 is amended to read as follows:

 

 

 

"After the repurchase, the Company must cancel or transfer the repurchased shares before the deadline set by relevant laws and administrative regulations, and file its capital changes with its original registrant in the event of the cancellation."

 

 

9.

Article 39 is amended to read as follows:

 

 

- 97 -

 


 

 

"The stocks are signed by the Company's legal representative, and if required by the securities exchange on which the Company's stocks are listed, by other senior members of the management. The stocks become valid with the Company seal (include the Company's securities seal), which must be authorized by the Company's chair of board. The signature of the Company's chair of the board or other senior members of the management may also take printing form."

 

 

10.

Article 41 is amended to read as follows:

 

 

 

"During their tenures, the director, supervisor, manager and other senior management member shall report periodically to the Company their shareholding of the Company's stock and its changes. Share transfers by the foregoing personnel shall proceed in accordance with laws, regulations and/or applicable listing rules."

 

 

11.

The first paragraph of Article 42 is amended, the original second paragraph is deleted and two new paragraphs is added to become the second and third paragraphs, such that the Article, as amended, is to read as follows:

 

 

 

"All the profits gained by directors, supervisor, general managers, deputy general managers and other senior executives and a shareholder holding above 5% of the Company's shares through selling his shares issued by the Company in six months following the purchase of such shares or through repurchasing his shares issued by the Company in six months following the sale of such shares belong to the Company and the board will take back such proceeds, except that sale of shares will not be subject to the 6-month limit when the seller is a securities company that has become holder of more than 5% of the company's shares as remaining out of the underwritten quantity.

 

 

 

If the board fails to do so as required by the foregoing provision, the shareholder shall have the right to require the board to execute said provision within 30 days. When the board continues to fail the execution within said period of time, the shareholder shall have the right to directly bring a legal action before a people's court in his own name and for the interests of the company.

 

 

 

If the board fails to execute the first provision, the responsible director(s) shall be jointly liable according to law."

 

 

12.

Article 47 is amended to read as follows:

 

 

 

"No registration of changes in the shareholder roster as a result of stock transfer can take place within 30 days preceding the convocation of general shareholder meeting or five days preceding the day on which the Company decides to allocate dividends. The foregoing applies to H Shares shareholders. Note: The present article is not applicable to A Shares shareholders."

 

 

13.

Article 48 is amended to read as follows:

 

 

 

"When the Company convokes a general shareholder meeting, allocates dividend, liquidates or performs other activities that require the verification of equity rights, the board of directors or the general meeting convener must specify a date as the equity rights determination date. The shareholders registered in shareholder roster after closing as at the equity rights determination date are the Company's shareholders entitled to appropriate rights and interests."

 

 

14.

In Article 50, reference to "Article 150" of the Company Law is amended to "Article 144".

 

 

15.

A new paragraph, reading as follows, is added to Article 53 as the last paragraph of that Article:

 

 

 

The Company shall not exercise any of its rights to freeze or otherwise impair any of the rights attaching to any shares of the Company by reason only that person or persons who are interested directly or indirectly therein have failed to disclose their interests to the Company.

 

 

16.

The second clause of Article 54 is amended to read as follows:

 

 

- 98 -

 


 

 

(2)

"Lawfully request, convene, chair, attend in person or appoint a proxy to attend and vote at shareholder's general meetings in respect of the number of shares held;"

 

 

 

 

The Sub-Clause numbered (5)(2)(5) of Article 54 is amended to read as follows:

 

 

 

(5)

"minutes of shareholders' general meetings, resolutions of board meetings and supervisory committee meetings."

 

 

 

 

A new Sub-Clause, numbered (5)(2)(6), reading as follows, is added to Article 54:

 

 

 

(6)

"debenture counterfoils and financial reports of the company."

 

 

 

 

A new Clause (7), reading as follows, is added to Article 54:

 

 

 

(7)

"Shareholders disagreeing with general meetings' resolutions on merger or division of the company may require the company to acquire the shares in their possession."

 

 

 

 

The original Clause (7) of Article 54 is renumbered to Clause (8), which is amended to read as follows:

 

 

 

(8)

"Lodge legal actions before people's courts against acts damaging the company's interests or infringing shareholders' legal rights and interests and claim for relevant rights according to Companies Law or other laws and administrative regulations."

 

 

 

 

The original clause (8) of Article 54 is renumbered as Clause (9), which is amended to read as follows:

 

 

 

(9)

"any other rights specified in laws, administrative regulations departmental rules and the Company's Articles of Association."

 

 

 

17.

The third clause of the first paragraph of Article 55 is rescheduled as the fifth clause, with two new clauses added to become the third clause and the fourth clause, such that the relevant clauses of the Article, as amended are to read as follows:

 

 

 

(3)

"Withdrawal of contribution is not permitted unless otherwise required by laws and regulations."

 

 

 

 

(4)

"Not abuse shareholder's rights to damage the interests of the company or other shareholders; and not abuse the company's independent legal capacity and the shareholder's limited liability to damage the interests of the company's creditors. A shareholder causing losses of the company or other shareholders by abusing his shareholder's rights shall be liable for compensation according to law. A shareholder evading debts and severely damage the interests of the company's creditors by abusing the company's independent legal capacity and his limited shareholder's liability shall be jointly liable for the company's debts."

 

 

 

 

(5)

"other obligations specified in laws, administrative regulations and the Company's Articles of Association."

 

 

 

18.

A new article, reading as follows, is added to the Articles of Association as Article 56:

 

 

 

"The controlling shareholder and actual controller of the company shall not damage the company's interests by virtue of its related position, or otherwise it shall be liable for compensating the resulting losses of the company.

 

 

 

The controlling shareholder and actual controller of the company assumes integrity obligation to the company and its public shareholders. The controlling shareholder shall exercise its rights as investor in strict compliance with law, not damage the legal rights and interests of the company and its public shareholders through profit sharing, asset restructuring, external investment, occupation of funds or providing surety for loans, and not leverage on its controlling position to impair the interests of the company and its public shareholders."

 

 

- 99 -

 


 

19.

The Original Article 56 is renumbered as Article 57.

 

 

20.

The Original Article 57 is renumbered as Article 58, with the last paragraph of the Original Article 57 is deleted.

 

 

21.

The Original Article 58 is renumbered as Article 59.

 

 

22.

The Original Article 59 is renumbered as Article 60, with Clause (13) of the first paragraph thereof is deleted and Clause (14) be rescheduled to become Clause (13). Three new clauses, namely, Clause (14) ,Clause (15) and Clause (16) are is added and the original Clause (15) is amended and rescheduled to become Clause (17), such that the relevant clauses of the Article, as amended, are to read as follows:

 

 

 

(13)

"to examine and approve decisions in relation to share-based remunerations (such as right share or share option etc.) of the employees."

 

 

 

 

(14)

"make decision on purchase or sale of substantial assets within one year that exceed 25% of the company's total assets."

 

 

 

 

(15)

"make decisions on external guarantee matters subject to review and approval by general meetings as required by laws, administrative regulations and the Article of Association of the company."

 

 

 

 

(16)

"review and approve changes of purpose of the funds raised."

 

 

 

 

(17)

"other matters the resolutions concerning which shall be made by the shareholders' general meeting, as stipulated by laws, administrative regulations, department rules and the Articles of Association of the Company."

 

 

 

23.

A new article, reading as follows, is added to the Articles of Association as Article 61:

 

 

 

"Any and all external guarantee matters of the company shall be subject to review and approval of the board. The following guarantee matters shall further be submitted to general meeting for review and approval:

 

 

 

(1)

Any guarantee provided after the gross amount of external guarantees offered by the company and its held subsidiaries has reached or exceeded 50% of the latest audited net asset;

 

 

 

 

(2)

Guarantee offered to an object with an asset-debt ratio of above 70%;

 

 

 

 

(3)

Any single guarantee amounting above 10% of the latest audited net asset;

 

 

 

 

(4)

Guarantee offered to a shareholder, the actual controller of the company or its related parties;

 

 

 

 

(5)

Any guarantee provided after the company's external guarantees have reached or exceeded 25% of its latest audited total assets;

 

 

 

 

(6)

Other guarantee matters to be submitted to general meeting for review and approval as required by laws, administrative regulations and the Articles of Association of the company.

 

 

 

 

A director, manager, senior deputy manager, deputy manager or any other senior executive of the company shall be liable for compensation when they have caused losses to the company by violating the external guarantee approval authority and review procedure requirements set forth in laws, administrative regulations or the Articles of Association of the company, and the company may bring a legal action against him according to law."

 

 

24.

The Original Article 60 is renumbered as Article 62.

 

 

25.

The Original Article 61 is renumbered as Article 63.

 

 

26.

The Original Article 62 is renumbered as Article 64. The first paragraph of the Original Article 62 is amended to read as follows:

 

 

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"Shareholders' general meetings can be annual general meetings or extraordinary general meetings. Shareholders' general meetings are held once a year within six months after the end of the previous financial year."

 

 

 

In the second paragraph of the Original Article 62, Clause (2) and Clause (3) is amended and Clause (5) is deleted, such that the relevant clauses of the Article, as amended, are to read as follows:

 

 

 

(2)

"where the unrecovered losses of the Company amount to one-third of the total amount of its paid-in capital."

 

 

 

 

(3)

"where requested by shareholder(s) holding 10 percent or more of the Company's shares for more than ninety consecutive days(the number of shares held shall be the figure as at the date of the written request from the shareholder)."

 

 

 

27.

The Original Article 63 is renumbered as Article 65.

 

 

28.

The Original Article 64 is renumbered as Article 66.

 

 

29.

The Original Article 65 is renumbered as Article 67, and is amended to read as follows:

 

 

 

"When the Company convenes a shareholders' annual general meeting, the board, the supervisory committee and the shareholder(s) independently or collectively holding more than 3% of the company's shares shall have the right to present proposals to the company.

 

 

 

A shareholder independently or collectively holding more than 3% of the company's shares may present extraordinary proposals and submit them in writing to the general meeting convener 10 days prior to the meeting; the convener shall send a supplementary notice of general meeting to announce such extraordinary proposals within 2 days after receiving them.

 

 

 

Except for the circumstances set forth in the foregoing provision, the convener shall not change the proposals stated in the general meeting notice or include any additional proposals after sending the general meeting notice."

 

 

30.

The Original Article 66 is renumbered as Article 68, which is amended to read as follows:

 

 

 

"The matter to be discussed and decided at the shareholders' general meeting shall be in accordance with Company Laws and the Company's Articles of Association, and any stipulation of the Company's Articles of Association can be decided at the general meeting of shareholders.

 

 

 

General meetings shall not vote on or make decisions on matters not included in the notice set forth in Articles 65 and 67 herein, or on proposals inconsistent with the requirements of Article 66 herein."

 

 

31.

The Original Article 67 is renumbered as Article 69.

 

 

32.

The Original Article 68 is renumbered as Article 70.

 

 

33.

The Original Article 69 is renumbered as Article 71.

 

 

34.

The Original Article 70 is renumbered as Article 72.

 

 

35.

The Original Article 71 is renumbered as Article 73.

 

 

36.

The Original Article 72 is renumbered as Article 74.

 

 

37.

The Original Article 73 is renumbered as Article 75.

 

 

38.

The Original Article 74 is renumbered as Article 76 and the following sentence is deleted from the Original Article 74:

 

 

 

"In the event that the associated shareholder cannot avoid voting because of special reasons, the Company, with the prior approval of related department, may go through the normal procedure of voting and

 

 

- 101 -

 


 

 

shall give detailed explanation on the issue in the announcement of the resolution made by shareholders at the general meeting."

 

 

39.

The Original Article 75 is renumbered as Article 77.

 

 

40.

The Original Article 76 is renumbered as Article 78.

 

 

41.

The Original Article 77 is renumbered as Article 79.

 

 

42.

The Original Article 78 is renumbered as Article 80. The following sentence is added at the end of the first paragraph of this Article:

 

 

 

"The company's shares held by itself carry no voting right and shall not be included in the total shares with voting shares at general meetings."

 

 

43.

The Original Article 79 is renumbered as Article 81.

 

 

44.

The Original Article 80 is renumbered as Article 82.

 

 

45.

The Original Article 81 is renumbered as Article 83.

 

 

46.

The Original Article 82 is renumbered as Article 84.

 

 

47.

The Original Article 83 is renumbered as Article 85.

 

 

48.

The Original Article 84 is renumbered as Article 86. A new Clause (6) is added to read as follows:

 

 

 

(6)

"The company's purchase, sale of substantial asset or provision of guarantee within one year that exceeds 30% of its latest audited total assets".

 

 

 

 

Clause 6 of the Original Article 84 is re-numbered as Clause 7, and is amended to read as follows:

 

 

 

(7)

" any other matters set forth by laws, administrative regulations or the Articles of Association and approved by general meetings by way of an ordinary resolution to be of a nature which may have a material impact on the Company and should be adopted by a special resolution."

 

 

 

49.

The Original Article 85 is renumbered as Article 87.

 

 

50.

The Original Article 86 is renumbered as Article 88, which is amended to read as follows:

 

 

 

"In the event that independent directors, the supervisory committee, or shareholders independently or collectively holding more than 10% of the company's shares request to convene an extraordinary shareholders' meeting, the following procedures shall be followed:

 

 

 

(1)

Sign one or several written requests identical in form and content asking for the board of directors to convene an extraordinary general meeting or a general meeting of certain class of shareholders and clarifying the agenda of the meeting. Within 10 days after receiving the written request, the board shall give written reply with regard to agree or disagree to convene the extraordinary general meeting.

 

 

 

 

(2)

When the board agrees to convene the extraordinary general meeting, it shall send notice of the meeting within 5 days after making the board resolution thereupon, and the changes to the original proposal as stated in the notice shall be subject to consent of the original proposer.

 

 

 

 

(3)

When the board disagrees to convene the extraordinary general meeting requisitioned by independent directors, it shall give reasons and make an announcement thereof.

 

 

 

 

(4)

When the board rejects the supervisory committee's request for convening an extraordinary general meeting or fails to make a reply within 10 days after receiving the proposal will be deemed as its inability to perform or non-performance of the duty to convene general meetings, in which case the supervisory committee may independently convene and chair the meeting and wherever possible, the

 

 

 

- 102 -

 


 

 

 

convening procedure shall be the same as the procedure observed by the board when calling in general meetings.

 

 

 

 

(5)

When the Board rejects shareholders' proposal for convening an extraordinary general meeting, the shareholders shall propose in writing to the supervisory committee to request the holding of the meeting.

 

 

 

 

If the supervisory committee agrees to hold the meeting, it shall send the general meeting notice within 5 days after receiving the shareholders' proposal, and the changes to the original proposal as included in the notice shall be subject to consent of the original proposer.

 

 

 

If the supervisory committee fails to send the notice within the specified time limit, it will be deemed as failing to convene and chair the meeting, in which case shareholders may independently call in and host the meeting (the shareholders convening the meeting shall hold not less than 10% of the company's shares before announcement of the resolution on holding of the general meeting. Wherever possible, the convening procedure shall be the same as that observed by the board when calling in general meetings.

 

 

 

In the event that the supervisory committee or the shareholders independently convene and proceed with a general meeting on their own as per the foregoing provisions, they shall notify the Board in writing and file with the authority in charge according to applicable requirements. The Board and Board Secretary shall collaborate with the general meeting and the Board shall provide the Shareholders' Register. All reasonable expenses incurred by the meeting shall be born by the Company and deducted from the money payable by the Company to the defaulting directors."

 

 

51.

The Original Article 87 is renumbered as Article 89, and is amended to read as follows:

 

 

 

"General meetings shall be chaired by Chairman of the Board, or by Vice Chairman of the Board when Chairman is unable to perform his duties or fails to perform his duties and attend the meetings, or by a director jointly elected by majority of directors when Vice Chairman is unable or fails to perform his duties.

 

 

 

A general meeting independently convened by the supervisory committee shall be hosted by chairman of the committee, or by vice chairman of the committee when chairman is unable to perform his duties or fails to perform his duties and attend the meeting, or by a member of the committee jointly elected by majority of all members of the committee when vice chairman is unable or fails to perform his duties.

 

 

 

A general meeting independently convened by shareholders shall be chaired by the representative elected by the convening shareholders.

 

 

 

When a general meeting becomes unable to further proceed due to the chairman's violation of the rules of proceeding, the meeting may elect a person to act as its chairman and continue if so agreed by majority of the attending shareholders with voting power."

 

 

52.

The Original Article 88 is renumbered as Article 90.

 

 

53.

The Original Article 89 is renumbered as Article 91.

 

 

54.

The Original Article 90 is renumbered as Article 92, with the second paragraph and the third paragraph thereof is amended to read as follows:

 

 

 

"The minutes of the shareholders' general meeting shall be kept by the secretary and signed by the attending directors, supervisory committee members, board secretary, the meeting convener or his representative and the meeting chairman.

 

 

 

The resolution(s) adopted by the shareholders' general meeting shall be seen as the summary of the meeting. Both the minutes and the summary of the shareholders' general meeting shall be written in Chinese. The minutes of the meeting accompanied by the book of signatures by the participating shareholders and the powers of attorney of attending representatives etc. shall be kept at the residence of the company for a period of not less than 10 years."

 

 

- 103 -

 


 

55.

The Original Article 91 is renumbered as Article 93.

 

 

56.

The Original Article 92 is renumbered as Article 94.

 

 

57.

The Original Article 93 is renumbered as Article 95, with reference to "Article 95" amended to "Article 97" and reference to "Article 99" amended to "Article 101".

 

 

58.

The Original Article 94 is renumbered as Article 96.

 

 

59.

The Original Article 95 is renumbered as Article 97, with reference to "Article 94" amended to "Article 96".

 

 

60.

The Original Article 96 is renumbered as Article 98, with reference to "Article 95" amended to "Article 97".

 

 

61.

The Original Article 97 is renumbered as Article 99.

 

 

62.

The Original Article 98 is renumbered as Article 100.

 

 

63.

The Original Article 99 is renumbered as Article 101.

 

 

64.

The Original Article 100 is renumbered as Article 102.

 

 

65.

The Original Article 101 is renumbered as Article 103.

 

 

66.

The Original Article 102 is renumbered as Article 104, and the first paragraph and second paragraph thereof are amended to read as follows:

 

 

 

Directors shall be elected at a shareholders' general meeting, for a term of three years (from the election date to the date on which the new Board of Directors is elected by general meeting). At the expiry of a director's term of office, the term is renewable upon re-election, but any Independent Director cannot keep the position continually for over six years.

 

 

 

The List of Director Nominees shall be sent as a motion to the shareholders' general meeting for resolution. The nominee for a Director other than Independent Director shall be named by the Board of Directors, Supervisory Committee and a shareholder holding individually or more shareholders holding collectively more than 3% of the total shares with voting rights. The nominated director will be elected by shareholders in general meetings."

 

 

 

In the fourth paragraph of Original Article 102, reference to "Article 100" is amended to "Article 102".

 

 

67.

The Original Article 103 is renumbered as Article 105, and Clause (2) and Clause (3) thereof are amended to read as follows:

 

 

 

(2)

"If the nomination of the non-independent director candidate occurs before the meeting of the Board of Directors of the Company, and if the applicable law, administrative regulations and/or related regulations concerning the listing have regulations concerning the above-mentioned nomination, the materials in written form concerning the nominee's information as mentioned in Clause (1) of this Article shall be announced together with the resolution of the Board of Directors in accordance with such regulations."

 

 

 

 

(3)

"If a temporary proposal for the election of the non-independent director is put forward by the shareholder(s), either individually or collectively, holding over 3% of the total shares of the Company, which have the right to vote, the below documents shall be submitted to the Company 10 days before the general meeting: the circular in written form concerning the nominated director candidate's intention and the nominee's consent of the nomination, and the written materials of the nominee's information and the nominee's guarantee as mentioned in Clause (1) of this Article. This kind of circular shall be announced neither earlier than the day after the proclamation of the circular concerning the holding the meeting for the election of the director, nor later than the 7th day after the meeting circular."

 

 

 

- 104 -

 


 

68.

The Original Article 104 is renumbered as Article 106.

 

 

69.

The Original Article 105 is renumbered as Article 107.

 

 

70.

The Original Article 106 is renumbered as Article 108. Clause (7) of the first paragraph of this Article is amended as follows:

 

 

 

(7)

"Develop the debt and financial policy of the Company, the plans concerning the increase or decrease of the registered capital of the Company, issuance of the debentures, other securities."

 

 

 

 

A new Clause (9), reading as follows, is added to the first paragraph of this Article:

 

 

 

(9)

"Determine other external guarantee matters subject to approval of general meeting according to laws, administrative regulations and the Articles of Association of the company."

 

 

 

 

The original Clause (9) of the first paragraph of this Article is renumbered as Clause (10), which is amended to read as follows:

 

 

 

(10)

"Determine the company's external investment, acquisition/sale of assets, asset mortgage, delegated financial management and related transactions within the terms of reference authorized by general meeting."

 

 

 

 

All subsequent clauses are renumbered accordingly.

 

 

 

The original Clause (11) of the first paragraph of this Article is renumbered as Clause (12), which is amended to read as follows:

 

 

 

(12)

"Appoint or dismiss the General Manager of the Company, based on the General Manager's nomination and recommendation, appoint or dismiss the Senior Deputy Manager, the Vice General Manager, the Chief Financial Officer, the Secretary of the Board of Directors, and decide their remunerations;

 

 

 

 

Appoint or change the members of the Board of Directors and the members of the Board of Supervisors of the wholly-owned subsidiaries of the Company, and appoint, change or recommend the shareholders' representatives, the directors and the supervisors of the jointly-owned subsidiaries of the Company."

 

 

 

The original Clause (15) of the first paragraph of this Article is renumbered as Clause (16), which is amended to read as follows:

 

 

 

(16)

"Decide all important and administrative issues, and sign all the important agreements except for issues to be decided by the shareholders' general meetings as regulated by the Companies Law and this Articles of Association; and"

 

 

 

 

The original Clause (16) of the first paragraph of this Article is renumbered as Clause (17), which is amended to read as follows:

 

 

 

(17)

"Exercise other functions and powers authorized by the shareholders' general meeting and this Articles of Association."

 

 

 

 

The second paragraph of this Article is amended to read as follows:

 

 

 

"Except that issues stated in Clause (7), (8), (9) and (14) shall be passed by two thirds of the directors, all above-mentioned issues shall be passed by over half of the directors."

 

 

 

A new paragraph, reading as follows, is added as the third paragraph of this Article:

 

 

 

"A director related to an enterprise concerned in matters subject to resolution at a board meeting shall neither exercise his own voting power on the resolution nor vote on it on behalf of any other director. The board meeting may proceed when majority of unrelated directors are present, the resolutions of the meeting shall be subject to endorsement of majority of unrelated directors, and the matters requiring votes of

 

 

- 105 -

 


 

 

more than two thirds of all directors shall be subject to approval of more than two thirds of all unrelated directors. When there are less than three unrelated directors attending the board meeting, the matter shall be submitted to a general meeting for discussion."

 

 

71.

The Original Article 107 is renumbered as Article 109.

 

 

72.

The Original Article 108 is renumbered as Article 110.

 

 

73.

The Original Article 109 is renumbered as Article 111.

 

 

74.

The Original Article 110 is renumbered as Article 112. Clause (4), Clause (5), and Clause (6) of the first paragraph thereof is deleted and Clause (7) of the first paragraph thereof is renumbered as Clause (4).

 

 

 

The second paragraph of the Original Article 110 is amended to read as follows:

 

 

 

"Vice Chairman of the Board shall assist the Board Chairman and perform duties on behalf of the Board Chairman when he is unable or fails to do so by himself; or a director jointly elected by majority of directors shall perform the duties when Vice Chairman is unable or fails to do so."

 

 

75.

The Original Article 111 is renumbered as Article 113, and the first paragraph of this Article is amended to read as follows:

 

 

 

"The board meeting shall be held at least 4 times per year and convened by the Board Chairman. All directors and supervisory committee members shall be informed of the board meeting 14 days before the meeting."

 

 

 

The second paragraph of this Article and Clause (1) thereof are amended to read as follows:

 

 

 

"The Board Chairman shall convene the temporary board meeting within 10 days of below cases regardless of the foregoing meeting notification time limits:

 

 

 

(1)

Proposed by shareholders representing more than 10% of votes."

 

 

 

76.

The Original Article 112 is renumbered as Article 114, with Clause (2) thereof amended to read as follows:

 

 

 

(2)

"If the Board of Directors has not decided the time and the venue of the board meetings, the Board Chairman shall advise all directors and supervisory committee members at least 14 days prior to the meeting about the time and the venue of the meeting via telefax, telegraph, facsimile, courier, registered post, or specifically designated persons, whereas in cases described otherwise by Article 113 of this Chapter, the above-mentioned regulation is not applicable."

 

 

 

77.

The Original Article 113 is renumbered as Article 115, with reference to "Article 112" thereof amended to "Article 114".

 

 

78.

The Original Article 114 is renumbered as Article 116, with reference to "Article 115" thereof amended to "Article 117".

 

 

79.

The Original Article 115 is renumbered as Article 117, with the first paragraph thereof is amended to read as follows:

 

"The directors shall be present in person at the board meeting. In case that a director cannot be present at the meeting, he shall give a written authorization asking another director to be present on his behalf at the meeting. The written authorization shall indicate clearly the name, matter, authority of the authorized agent and the validity term of the authorization."

 

 

80.

The Original Article 116 is renumbered as Article 118.

 

 

81.

The Original Article 117 is renumbered as Article 119, with the sentence "The meeting minutes shall be kept for not less than 10 years." is added at the end of this Article.

 

 

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82.

The Original Article 118 is renumbered as Article 120, with the second paragraph thereof is amended to read as follows:

 

 

 

"The directors who have voted for a resolution of the board meeting that are in breach of laws, administrative regulations, the Articles of Association and general meeting resolutions of the company shall be directly liable of it; the directors who are proven to have voted against such resolution during the voting and whose dissents have been recorded in the cahier of the board meeting can be exempted from liabilities; the directors who have given up his vote, or who have been absent at the meeting and have not authorized another person to be present on his behalf at the meeting shall not be exempted from liabilities; and the directors who have clearly expressed his dissent during the discussion but have not voted against the resolution shall not be exempted from liabilities."

 

 

83.

The Original Article 119 is renumbered as Article 121.

 

 

84.

The Original Article 120 is renumbered as Article 122, the original third paragraph is deleted, with new paragraphs added to become the third paragraph, and the fourth paragraph, such that the Article, as amended, is to read as follows:

 

 

 

"A director may resign before his term of office expires. The director who wants to resign shall submit a written resignation report to the Board of Directors. The independent director who wants to resign shall also explain issues related to his resignation or to the issues that he regards as necessary for shareholders and creditors of the Company to pay attention.

 

 

 

If a director's resignation results in the existing number of members of the Board of Directors to be less than the minimum quorum of the Board of Directors, the director's resignation report shall not come into effect until the vacancy resulted from his resignation is filled by his successor. Other directors of the Board of Directors shall hold a shareholder's general meeting to elect a new director at soonest. Before the shareholders' general meeting makes its resolution, the functions and the powers of the director who wants to resign and other members of the Board of Directors shall be reasonably restricted.

 

 

 

When an independent director has resigned and consequently caused the number of independent directors or board members falls below the quorum or the number required by the Articles of Association, the resigning independent director shall continue to perform his duties according to laws, administrative regulations and the Articles of Association until and before the replacing independent director assumes the office. The Board shall convene a general meeting to appoint a replacing independent director within two months and if it fails to do so, the resigning independent director may stop performing his duties.

 

 

 

Except for the above circumstance, a director's resignation shall take effect from the time when the resignation report arrives at the Board."

 

 

85.

A new article, reading as follows, is added to the Articles of Association as Article 123:

 

 

 

"Independent directors shall faithfully perform their duties, protect the company's interests and particularly protect the legal rights and interests of public shareholders of the company.

 

 

 

Independent directors shall perform their duties independently without being affected by the company's majority shareholders, actual controller or the institutions or individuals interested in the company's majority shareholders or actual controller."

 

 

86.

The Original Article 121 is renumbered as Article 124, and Clause (4) and Clause (5) of this Article are amended to read as follows:

 

 

 

(4)

" If a temporary proposal for the election of the independent director is put forward by the shareholder(s), either individually or jointly, holding over 3% of the total shares of the Company, which have the right to vote, the below documents shall be submitted to the Company 16 days before the general meeting: the circular in written form concerning the nominated director candidate's intention and the nominee's consent of the nomination, and the written materials of the nominee's information and the nominee's guarantee as mentioned in Clause (1) and Clause (2) of this Article.

 

 

 

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(5)

Before the shareholders' general meeting for the election of the independent director, if the applicable laws, rules and regulations and/or the applicable listing rules have related regulations, the Company shall submit the related materials concerning the nominee to the securities authorities under the leadership of the State Council and/or its dispatched institution and the stock exchange where the stock of the Company is listed. If the Board of Directors dissents from the nominee's information, it shall submit its written opinions to the related authorities. The nominee on whom the securities authorities under the leadership of the State Council do not agree shall not be considered independent director candidate. When the shareholders' general meeting is held for the election of the independent director, the Board of Directors of the Company shall explain whether the securities authorities under the leadership of the State Council dissent from the nominee."

 

 

 

87.

The Original Article 122 is renumbered as Article 125.

 

 

88.

The Original Article 123 is renumbered as Article 126.

 

 

89.

The Original Article 124 is renumbered as Article 127, and the Article is amended to read as follows:

 

 

 

"The Board of Directors shall apply to the shareholders' general meeting to dismiss or replace the independent director who has not been present at the board meeting in person in succession. Except for the foregoing circumstances or other circumstances preventing a person from the office of director as set forth in laws, administrative regulations and the Articles of Association, independent directors shall not be dismissed until the expiry of their term of office without reason. The Company shall announce the dismissal before the due date as special issue, while the independent director who believes his dismissal unreasonable may make a public announcement."

 

 

90.

The original Article 125 is renumbered as Article 128, with two new paragraphs added as the second paragraph and the third paragraph, such that the relevant paragraphs read as follows:

 

 

 

An independent director exercising authority described in Clauses (2), (3), (4), (6) and (7) under the present article shall obtain prior consent of more than half of all independent directors, and of all independent directors when the authority concerned in Clause (5) is concerned.

 

 

 

When independent directors engage external auditors and consultants to provide auditing of and advice on the company's specific matters, the company shall bear the costs and expenses incurred therefrom.

 

 

91.

The Original Article 126 is renumbered as Article 129.

 

 

92.

The Original Article 127 is renumbered as Article 130, which is amended to read as follows:

 

 

 

"Independent directors shall attend board meetings punctually, understand the company's production and operation developments, and initiatively investigate and obtain necessary information and materials for decision making. Independent directors shall submit annual report of all independent directors to general meeting of the Company accounting for the performance of their functions and responsibilities."

 

 

93.

A new article, reading as follows, is added to the Articles of Association as Article 131:

 

 

 

"The company shall establish the working system of independent directors and the board secretary shall actively assist independent directors in performing their duties. The company shall ensure that independent directors enjoy the same information access as other directors, provide relevant information and materials to independent directors in a timely manner, regularly inform the company's business results to them, and organize field visits for them when necessary."

 

 

94.

The Original Article 128 is renumbered as Article 132.

 

 

95.

The Original Article 129 is renumbered as Article 133.

 

 

96.

The Original Article 130 is renumbered as Article 134.

 

 

97.

The Original Article 131 is renumbered as Article 135.

 

 

- 108 -

 


 

98.

The Original Article 132 is renumbered as Article 136, with the second paragraph and the third paragraph thereof is amended to read as follows:

 

 

 

"The Company shall have one senior vice president, several vice presidents and one financial controller to assist the president. The senior vice president, vice presidents and financial controller shall be nominated by the president and appointed or removed by the Board of Directors.

 

 

 

The Directors can be appointed concurrently as president, senior vice president, vice president or other senior management positions, but the number of the foregoing directors shall not surpass one-half of the total directors of the Company."

 

 

99.

The Original Article 133 is renumbered as Article 137, with the Article is amended to read as follows:

 

 

 

"The tenure of the president is three years, which can be renewed through reappointment."

 

 

100.

The Original Article 134 is renumbered as Article 138, with Clause (7) thereof is amended to read as follows:

 

 

 

(7)

"to propose the appointment or dismissal of the Company's senior vice president, vice president(s) and the financial controller."

 

 

 

 

Clause (9) of the Original Article 134 is deleted. All subsequent clauses are renumbered accordingly.

 

 

101.

The Original Article 135 is renumbered as Article 139.

 

 

102.

The Original Article 136 is deleted in its entirety.

 

 

103.

The Original Article 137 is renumbered as Article 140.

 

 

104.

The Original Article 138 is renumbered as Article 141, which is amended to read as follows:

 

 

 

"When the president, senior vice president, vice presidents and financial controllers are performing their functions and powers, they shall not change the resolution of the shareholders' general meeting and the Board of Directors, nor shall they exceed the scope of authorization."

 

 

105.

The Original Article 139 is renumbered as Article 142, which is amended to read as follows:

 

 

 

"The president, senior vice president, vice presidents and the financial controllers in performing their functions and powers shall act honestly and diligently and in accordance with laws, administrative regulations and the Articles of Association."

 

 

106.

The Original Article 140 is renumbered as Article 143, which is amended to read as follows:

 

 

 

"In the event that the president, senior vice president, vice presidents, financial controllers or members of senior management resign, they shall notify, in writing, the Board of Directors three months in advance; in the event that the department managers resign, they shall notify the president in writing two months in advance."

 

 

107.

The Original Article 141 is renumbered as Article 144, which is amended to read as follows:

 

 

 

The Company shall have a supervisory committee. The Supervisory Committee is a standing supervisory agency of the Company which is responsible of the supervision of the Board of Directors and its members and senior officers such as the president, senior vice-president, vice presidents, and financial controllers so as to prevent them from the misuse of authority and infringing upon the legal rights of the shareholder, the Company and the Company's employees.

 

 

108.

The Original Article 142 is renumbered as Article 145.

 

 

109.

The Original Article 143 is renumbered as Article 146.

 

 

- 109 -

 


 

110.

The Original Article 144 is renumbered as Article 147, which is amended to read as follows:

 

 

 

"The nominee list of Supervisors acted by shareholder representatives shall be submitted to the shareholders' general meeting for resolution. The Supervisors acted by shareholder representatives shall be nominated by the Board of Directors, Supervisory Committee and one shareholder or several shareholders holding collectively more than 3% of the total shares of the Company with voting rights. The election and removal of such Supervisors shall be determined at the shareholders' general meeting of the Company. Supervisor committee members shall be elected referring to the non-independent director election procedure set forth in Article 105 herein."

 

 

111.

The Original Article 145 is renumbered as Article 148, which is to read as follows:

 

 

 

The Company's Directors, president, senior vice-president, vice presidents, financial controllers and other senior officers shall not serve as the Supervisor concurrently.

 

 

112.

The Original Article 146 is renumbered as Article 149, which is amended to read as follows:

 

 

 

"The Supervisory Committee shall meet at least once every six months and the meetings shall be convened and hosted by the chairman of the Supervisory Committee, or by a supervisory committee member jointly elected by majority of all supervisory committee members when the committee chairman is unable or fails to perform the duty. The notice of the meeting of the Supervisory Committee shall be sent to all the supervisors no less than 10 days before the meeting is convened. The notice shall contain the following items:

 

 

 

(1)

Date, venue and duration of the meeting;

 

 

 

 

(2)

Subject matter and topics of the meeting;

 

 

 

 

(3)

Date of the notice."

 

 

 

113.

The Original Article 147 is renumbered as Article 150, which is amended to read as follows:

 

 

 

"A supervisory committee member's two consecutive failures of either personally attending or authorizing any other member to attend supervisory committee meetings on his behalf will be deemed as his default of duties and the shareholders' general meeting or the employee representatives' meeting shall make decision to remove the defaulted Supervisor."

 

 

114.

The Original Article 148 is renumbered as Article 151, which is amended to read as follows:

 

 

 

"Any Supervisor may apply for resignation before his service term expires and the stipulations regarding director's tenure and resignation in Chapter Ten of this Articles of Association shall apply to Supervisors."

 

 

115.

The Original Article 149 is renumbered as Article 152. In the first paragraph of this Article, Clause (1), Clause (2), Clause (6) and Clause (8) is amended; the original Clause (5) is replaced by a new Clause (5), such that the relevant clauses, as amended, are to read as follows:

 

 

 

(1)

"to monitor the Company's financial matters, review and present written review opinions on the company's regular reports prepared by the Board."

 

 

 

 

(2)

"to supervise the Directors, President and other senior officers to ensure that they do not act in contravention of any law, regulation or the Articles of Association, to propose dismissals of directors or senior executives violating laws, administrative regulations, the Articles of Association or general meeting resolutions."

 

 

 

 

(5)

"may carry out investigation when finding any abnormal operation of the company; may engage professional accountants or law firms to provide assistance at expense of the company when necessary."

 

 

 

- 110 -

 


 

 

(6)

"to propose to convene a shareholders' extraordinary general meeting. Convene and chair general meetings when the Board fails to do so."

 

 

 

 

(8)

"to represent the Company in negotiations with or in bringing actions against directors or senior executives."

 

 

 

 

The last sentence of the Original Article 149 is amended to read as follows:

 

 

 

"The Supervisors may attend board meetings and present queries or advice on the matters subject to resolution at the meetings."

 

 

116.

The Original Article 150 is renumbered as Article 153.

 

 

117.

The Original Article 151 is renumbered as Article 154.

 

 

118.

The Original Article 152 is renumbered as Article 155, with the following sentence is added at the end of the Article:

 

 

 

"The records shall be kept for not less than 10 years."

 

 

119.

The Original Article 153 is renumbered as Article 156.

 

 

120.

The Original Article 154 is renumbered as Article 157.

 

 

121.

The Original Article 155 is renumbered as Article 158, with the words "as a result of mismanagement" of Clause (3) of the first paragraph thereof is deleted.

 

 

122.

The Original Article 156 is renumbered as Article 159.

 

 

123.

The Original Article 157 is renumbered as Article 160.

 

 

124.

The Original Article 158 is renumbered as Article 161.

 

 

125.

The Original Article 159 is renumbered as Article 162.

 

 

126.

The Original Article 160 is renumbered as Article 163, with Clause (11) thereof is amended to read as follows:

 

 

 

(11)

"not to misappropriate the Company's assets to set up deposit accounts in his own name or in any other name or to use such assets to guarantee the debts of a shareholder of the Company or any other personal liabilities; not lend funds of the company to others or use the company's assets to provide guarantee to others without consent of general meeting or the Board based on knowledge of the matter."

 

 

 

 

The following new paragraph is added as the last paragraph of this Article:

 

 

 

"Proceeds gained by directors, managers and other senior executives by violating the present article shall belong to the company, and the directors, managers or other senior executives shall be liable for compensating the resulting losses of the company, if any."

 

 

127.

A new article, reading as follows, is added to the Articles of Association as Article 164:

 

 

 

"When a general meeting requires attendance of directors, supervisors, managers and other senior executives, they shall attend as required and provide explanations and clarifications in response to shareholders' queries and advice.

 

 

 

Directors, supervisors, managers and other senior executives shall honestly provide relevant information and materials to the supervisory committee and not hinder the committee's exercise of its authority."

 

 

128.

The Original Article 161 is renumbered as Article 165.

 

 

- 111 -

 


 

129.

The Original Article 162 is renumbered as Article 166.

 

 

130.

The Original Article 163 is renumbered as Article 167, which is amended to read as follows:

 

 

 

"Directors, supervisors, managers and other senior executives shall be liable for compensating losses of the company arising from their breach of laws, administrative regulations, department regulations or the Articles of Association when performing their duties.

 

 

 

Any Director, Supervisor, president or other senior officer of the Company who has left his post without authorization before his tenure is terminated shall compensate to the Company the loss thus incurred to the Company."

 

 

131.

The Original Article 164 is renumbered as Article 168.

 

 

132.

The Original Article 165 is renumbered as Article 169.

 

 

133.

The Original Article 166 is renumbered as Article 170.

 

 

134.

The Original Article 167 is renumbered as Article 171.

 

 

135.

The Original Article 168 is renumbered as Article 172.

 

 

136.

The Original Article 169 is renumbered as Article 173.

 

 

137.

The Original Article 170 is renumbered as Article 174, with reference to "Article 168" amended to "Article 172".

 

 

138.

The Original Article 171 is renumbered as Article 175.

 

 

139.

The Original Article 172 is renumbered as Article 176.

 

 

140.

The Original Article 173 is renumbered as Article 177.

 

 

141.

The Original Article 174 is renumbered as Article 178.

 

 

142.

The Original Article 175 is renumbered as Article 179.

 

 

143.

The Title of Chapter 16 of the Articles of Association is amended to read as follows:

 

 

 

"Financial Accounting System, Profit Distribution And Auditing"

 

 

144.

The Original Article 176 is renumbered as Article 180.

 

 

145.

The Original Article 177 is renumbered as Article 181, with the third paragraph thereof is amended to read as follows:

 

 

 

"The Company shall make financial reports at the end of each accounting year and have them examined and verified by accounting firm according to law."

 

 

146.

The Original Article 178 is renumbered as Article 182.

 

 

147.

The Original Article 179 is renumbered as Article 183.

 

 

148.

The Original Article 180 is renumbered as Article 184.

 

 

149.

The Original Article 181 is renumbered as Article 185.

 

 

150.

The Original Article 182 is renumbered as Article 186.

 

 

151.

The Original Article 183 is renumbered as Article 187, which is amended to read as follows:

 

 

- 112 -

 


 

 

"The Company's financial reports shall be prepared according to the requirements of applicable laws, administrative regulations and department regulations."

 

 

152.

The Original Article 184 is renumbered as Article 188.

 

 

153.

The Original Article 185 is renumbered as Article 189.

 

 

154.

The Original Article 186 is renumbered as Article 190, which is amended to read as follows:

 

 

 

"The Company, after distributing this year profits after tax, should draw ten percent of the Company's net profits into the Company's legal reserve funds. When the legal reserve funds exceed fifty percent of the Company registered capital, the Company could stop the drawing.

 

 

 

When its legal reserve funds cannot make up prior year loss, the Company should first make up the loss with this year profits before drawing the legal reserve funds according to above-mentioned clause.

 

 

 

After having drawn the legal reserve fund from the profits after tax, the Company, through the shareholders' meeting resolutions, may draw discretionary reserve fund from the profits after tax.

 

 

 

The remaining profits after the Company making up the loss and setting aside reserve fund shall be distributed according to the shareholders' share proportions. The company's shares held by the company itself shall not participate in profit sharing."

 

 

155.

The Original Article 187 is renumbered as Article 191, and the first paragraph thereof is amended to read as follows:

 

 

 

"Before making up the loss and drawing for legal reserve fund, the Company shall not distribute dividends on shares or carry out any other distributions. The Company dividends should not be attached with any interests unless the Company has not distributed relevant interests on capital to the shareholders on the date due of dividends on shares."

 

 

156.

The Original Article 188 is renumbered as Article 192.

 

 

157.

The Original Article 189 is renumbered as Article 193, which is amended to read as follows:

 

 

 

"The Company's reserve fund (referring to legal reserve fund, discretionary reserve fund and capital reserve fund) can only be applied to make up the Company's loss, expand its line operation or change to increase its capital. Capital surplus shall not be used to offset the company's losses.

 

 

 

The Company can distribute new shares or increase the share denomination according to the shareholders' original share proportions after the shareholders' meeting resolution to change the reserve fund into capital. But when the legal reserve fund is changed into capital, the remaining reserve fund should not be less than twenty-five percent of the registered capital before the capitalization."

 

 

158.

The Original Article 190 is deleted in its entirety.

 

 

159.

The Original Article 191 is renumbered as Article 194.

 

 

160.

The Original Article 192 is renumbered as Article 195.

 

 

161.

The Original Article 193 is renumbered as Article 196.

 

 

162.

The Original Article 194 is renumbered as Article 197.

 

 

163.

The Original Article 195 is renumbered as Article 198, which is amended to read as follows:

 

 

 

"The Board of Directors can decide to distribute the mid-term or special dividends on shares when it complies with Clause (2) of the first paragraph of Article 60 and Clause (17) of the first paragraph of Article 108."

 

 

164.

The Original Article 196 is renumbered as Article 199.

 

 

- 113 -

 


 

165.

The Original Article 197 is renumbered as Article 200, which is amended to read as follows:

 

 

 

The Company shall appoint a receiving agent for holders of overseas listed foreign shares. The receiving agent shall receive on behalf of such shareholders any dividends or other amounts payable by the Company to them in respect of the overseas listed foreign shares.

 

 

 

The receiving agent appointed by the Company shall satisfy requirements provided under the laws or the relevant provisions of the stock exchange at the place where the shares of the Company are listed.

 

 

 

The receiving agent appointed by the Company for the shareholders of overseas listed foreign shares listed in Hong Kong shall be a trust company registered under the Trustee Ordinance of Hong Kong.

 

 

166.

The Original Article 198 is renumbered as Article 201.

 

 

167.

The Original Article 199 is renumbered as Article 202.

 

 

168.

The Original Article 200 is deleted in its entirety.

 

 

169.

The Original Article 201 is renumbered as Article 203.

 

 

170.

The Original Article 202 is renumbered as Article 204.

 

 

171.

The Original Article 203 is renumbered as Article 205.

 

 

172.

The Original Article 204 is renumbered as Article 206.

 

 

173.

The Original Article 205 is renumbered as Article 207.

 

 

174.

The Original Article 206 is renumbered as Article 208.

 

 

175.

The Original Article 207 is renumbered as Article 209.

 

 

176.

The Original Article 208 is renumbered as Article 210.

 

 

177.

The Original Article 209 is renumbered as Article 211.

 

 

178.

The Original Article 210 is renumbered as Article 212, with the following text is deleted from the 1st paragraph thereof:

 

"The merger or division of the Company shall be carried out under the following procedures:

 

 

 

(1)

The Board proposes an agenda for merger or division of the company;

 

 

 

 

(2)

A resolution by shareholders' general meeting according to stipulations of Articles of Association;

 

 

 

 

(3)

An agreement of Merger and Division reached between all relevant parties;

 

 

 

 

(4)

Upon approval authorization in accordance with laws;

 

 

 

 

(5)

To handle the relevant matters relating to merger or division, such as creditor's rights and debts;

 

 

 

 

(6)

To carry out the dissolve registration or change registration."

 

 

 

179.

The Original Article 211 is renumbered as Article 213, with the second paragraph thereof is amended to read as follows:

 

 

 

"Where the Company merges, the parties to a merger shall sign a merger agreement and formulate a balance sheet and a detailed inventory of assets. The Company shall inform its creditors of the intended merger within ten days following the date on which the merger resolution is adopted, and make

 

 

- 114 -

 


 

 

announcement in newspaper within thirty days. A creditor may require the company to pay off the outstanding debts or provide appropriate guarantee for the debts within 30 days from the date receiving the notice, or otherwise within 45 days from the date of the announcement when no such notice is received."

 

 

180.

The Original Article 212 is renumbered as Article 214, with the second paragraph and the third paragraph thereof is amended to read as follows:

 

 

 

"Where the Company decides to divide itself, the parties of the division shall sign a division agreement and formulate a balance sheet and a detailed inventory of assets. The Company shall inform its creditors of the intended division within ten days following the date on which the division resolution is adopted, and make announcement in newspaper within thirty days.

 

 

 

The businesses coming into being after division of the company shall be jointly liable for the company's debts prior to the division unless otherwise agreed in writing between the company and creditors prior to the division with regard to the payment of debts."

 

 

181.

The Original Article 213 is renumbered as Article 215.

 

 

182.

The Original Article 214 is renumbered as Article 216, with Clause (4) thereof is amended and a new Clause (5) is added, such that the relevant clauses, as amended, are to read as follows:

 

 

 

(4)

"The company's business license is revoked according to law or the company is ordered to close down or cancelled according to law as a result of its offence of laws or administrative regulations."

 

 

 

 

(5)

"The company is in severe difficulty during its business management and its further existence will cause material loss of shareholders' rights and interests and the difficulty cannot be solved by any other means, the shareholders representing more than 10% of total shares carrying voting rights have requested the People's Court to order dissolution of the company and the court dissolves the company according to law."

 

 

 

183.

The Original Article 215 is renumbered as Article 217, with the first paragraph thereof being amended and the second paragraph, the third paragraph and the fourth paragraph is deleted, such that, the Article, as amended, is to read as follows:

 

 

 

"A liquidation committee shall be set up within 15 days of the Company being dissolved pursuant to Clauses (1), (3), (4) and (5) of the preceding Article, and the composition of the liquidation team of the Company shall be determined by the Board or general meeting, failing which creditors may apply to the People's Court for the establishment of a liquidation committee from specified persons."

 

 

184.

The Original Article 216 is renumbered as Article 218.

 

 

185.

The Original Article 217 is renumbered as Article 219, which is amended to read as follows:

 

 

 

"The liquidation committee shall inform the creditors of the company of its establishment within ten days following the date of its establishment, and make announcement in newspaper within sixty days following the aforesaid date. The liquidation committee shall register the claims. The liquidation team shall make no payment to creditors during the period of debts claim."

 

 

186.

The Original Article 218 is renumbered as Article 220, with Clause (2) and Clause (4) thereof is amended to read as follows:

 

 

 

(2)

"to notify and announce to creditors."

 

 

 

 

(4)

"to pay off taxes owed by the Company and taxes incurred during the liquidation process."

 

 

 

187.

The Original Article 219 is renumbered as Article 221, with the second paragraph thereof is amended to read as follows:

 

 

 

"The assets of the Company shall be initially applied to the payment of the liquidation fee, after which the assets shall be applied to the payment of the following items in accordance with the following

 

 

- 115 -

 


 

 

sequences: (i) salaries payable to employees; (ii) social security contribution and legal compensations; (iii) unpaid tax balances; (iv) bank loans, Company debentures and other debts of the Company."

 

 

 

The last paragraph of the Original Article 219 is amended to read as follows:

 

 

 

"During liquidation, the Company may not engage in new business activities that are irrelevant to the liquidation."

 

 

188.

The Original Article 220 is renumbered as Article 222.

 

 

189.

The Original Article 221 is renumbered as Article 223.

 

 

190.

The Original Article 222 is renumbered as Article 224.

 

 

191.

The Original Article 223 is renumbered as Article 225.

 

 

192.

The Original Article 224 is renumbered as Article 226.

 

 

193.

The Original Article 225 is renumbered as Article 227.

 

 

194.

The Original Article 226 is renumbered as Article 228.

 

 

195.

The Original Article 227 is renumbered as Article 229.

 

 

196.

The Original Article 228 is renumbered as Article 230.

 

 

197.

The Original Article 229 is renumbered as Article 231.

 

 

198.

The Original Article 230 is renumbered as Article 232, which is amended to read as follows:

 

 

 

"Unless otherwise required, any notice or report that is stipulated to be delivered by the Articles of Association, the Company shall publish the public announcement on one or more national newspapers designated by securities regulatory authority of the State Council and other Chinese publications designated by the Board of Directors and publish the same public announcement at least on one major English and one major Chinese newspaper in Hong Kong in English and Chinese on the same day."

 

 

199.

The Original Article 231 is renumbered as Article 233.

 

 

200.

The Original Article 232 is renumbered as Article 234.

 

 

201.

The Original Article 233 is renumbered as Article 235.

 

 

202.

The Original Article 234 is renumbered as Article 236, which is amended to read as follows:

 

 

 

"In the Articles of Association, the term "accounting firm" shall have the same meaning as "auditors"".

 

 

See Exhibit 1.1 for the full text of the article of association.

 

Material Contracts

 

On March 12, 2007, we entered into a sponsorship agreement with CITIC Securities Co., Ltd. and China Galaxy Securities Co., Ltd. in relation to share swap merger of Shandong Aluminum Industry Co., Ltd. and Lanzhou Aluminum Co., Ltd. and public issue of our A Shares. Please see "Item 4 - Information on the Company - the A Shares Offering" and "Item 19 - Exhibit 4.2".

 

Exchange Controls

 

The existing foreign exchange regulations have significantly reduced government foreign exchange controls for transactions under the current account, including trade and service related foreign exchange transactions and payment of dividends. We may undertake current account foreign exchange transactions without prior

 

- 116 -

 


 

approval from the State Administration of Foreign Exchange by producing commercial documents evidencing such transactions, provided that they are processed through Chinese banks licensed to engage in foreign exchange transactions. The PRC government has stated publicly that it intends to make the Renminbi freely convertible in the future. However, we cannot predict whether the PRC government will continue its existing foreign exchange policy and when the PRC government will allow free conversion of Renminbi to foreign currency.

 

Foreign exchange transactions under the capital account, including principal payments in respect of foreign currency-denominated obligations, continue to be subject to significant foreign exchange controls and require the approval of the State Administration of Foreign Exchange. These limitations could affect our ability to obtain foreign exchange through debt or equity financing, or to obtain foreign exchange for capital expenditures.

 

Since 1994, the conversion of Renminbi into Hong Kong and United States dollars has been based on rates set by the People's Bank of China, which are set daily based on the previous day's PRC interbank foreign exchange market rate and current exchange rates on the world financial markets. Although the Renminbi US dollar exchange rate has been relatively stable since 1994, we cannot predict nor give any assurance of its future stability. Fluctuations in exchange rates may adversely affect the value, translated or converted into US dollars or Hong Kong dollars, of our net assets, earnings and any declared dividends. We cannot give any assurance that any future movements in the exchange rate of the Renminbi against the US dollar and other foreign currencies will not adversely affect our results of operations and financial condition.

 

Taxation

 

China Taxation

 

The following discussion summarizes the material PRC tax provisions relating to the ownership and disposition of H Shares or ADSs purchased in connection with the global offering and held by the investor as capital assets.

 

Dividends Paid to Individual Investors

 

Under the Provisional Regulations of China Concerning Questions of Taxation on Enterprises Experimenting with the Share System (the "Provisional Regulations") and other applicable tax laws and regulations, dividends paid by Chinese companies to individuals are generally subject to a PRC withholding tax of 20%. However, on July 21, 1993, the PRC State Administration of Taxation issued the Notice Concerning the Taxation of Gains on Transfer and Dividends from Shares (Equities) Received by Foreign Investment Enterprises, Foreign Enterprises and Foreign Individuals (the "Tax Provisions governing the ownership threshold above which such ownership must be disclosed Notice"). Under the Tax Notice, dividends paid by a Chinese company to foreign persons with respect to shares listed on an overseas stock exchange, or Overseas Shares, including the H Shares and ADSs, are exempt from PRC withholding taxes for the time being. However, if the Tax Notice is withdrawn, we will withhold such taxes as required by law.

 

The Individual Income Tax Law of China was amended effective January 1, 1994 and states that it supersedes any contradictory prior administrative regulation concerning individual income tax. The amended Individual Income Tax Law can be interpreted as providing that all non-PRC individuals are subject to the 20% withholding tax on dividends paid by a Chinese company on its Overseas Shares unless specifically exempted by the financial authority of the State Council of the PRC. However, in a letter dated July 26, 1994 to the former State Commission for Restructuring the Economic System, the former State Council Securities Committee and the CSRC, the PRC State Administration of Taxation restated the exemption. In the event that the letter is withdrawn, a 20% tax may be withheld on dividends paid to non-PRC individual holders of H Shares or ADSs, subject to reduction by an applicable tax treaty between China and the country where such holders reside. To date, the relevant tax authorities have not collected withholding tax from dividend payments on such shares exempted under the Tax Notice.

 

Dividends Paid to Non-PRC Enterprises

 

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According to the Provisional Regulations and other applicable tax laws and regulations, dividends paid by Chinese companies to non-PRC enterprises are ordinarily subject to a China withholding tax levied at a flat rate of 20%. However, according to the Tax Notice, a non-PRC enterprise with no permanent establishment in China receiving dividends paid on Overseas Shares is currently exempt from the 20% withholding tax. If the Tax Notice is withdrawn and such withholding tax becomes applicable in the future, such rate may still be reduced under relevant tax treaties, if applicable.

 

Tax Treaties

 

Non-PRC shareholders who are residents or citizens of a country that has entered into a double-taxation treaty with China may be entitled to a reduction in the amount of tax withheld, if any, imposed on the payment of dividends. China currently has such treaties with a number of countries, including:

 

*

the United States;

 

 

*

Australia;

 

 

*

Canada;

 

 

*

France;

 

 

*

Germany;

 

 

*

Japan;

 

 

*

Malaysia;

 

 

*

Singapore;

 

 

*

the United Kingdom; and

 

 

*

the Netherlands.

 

 

Under each one of such treaties, the rate of withholding tax imposed by China's taxation authorities is generally reduced. For example, under the double taxation treaty between China and the United States, China may tax dividends paid by us to an eligible U.S. holder up to a maximum of 10% of the gross amount received by such person. Under the treaty, an eligible U.S. holder is a person who, by reason of domicile, residence, place or head office, place of incorporation or any other criterion of similar nature is subject to taxation in the United States, as applicable under the treaty's "treaty shopping provisions".

 

Capital Gains

 

The Tax Notice provides that gains realized by non-PRC enterprises upon the sale of Overseas Shares which are not held by entities established by such enterprises in China and gains realized by non-PRC individuals upon the sale of Overseas Shares are not subject to withholding tax for the time being. However, as far as individuals are concerned, the Individual Income Tax Law of China, as amended on October 31, 1993 and effective on January 1, 1994, provides for a capital gains tax of 20% on individuals. On January 28, 1994, the Provisions for Implementing the Individual Income Tax Law of China was promulgated which provides that the measures to levy individual income tax on the gains realized on the sale of shares will be made in the future by the Ministry of Finance and subject to the approval of the State Council. On June 20, 1994, February 9, 1996 and March 30, 1998, the Ministry of Finance and the State Administration of Taxation issued notices providing that temporarily no capital gains tax will be imposed on gains from the sale of shares by individuals. However, it is uncertain whether the above exemption for non-PRC enterprises and non-PRC individuals will continue to apply or to be renewed in the future. If such exemption does not apply or is not renewed, and the Tax Notice is found not to apply, holders of H Shares or ADSs might be subject to a 20% tax on capital gains, unless reduced by an applicable double taxation treaty.

 

Under the Tax Reduction Notice, beginning from January 1, 2001, enterprise income tax at a reduced 10% rate will apply to interest, rental, license fees and other income obtained in China by non-PRC enterprises without agencies or establishments in China or by non-PRC enterprises of which such incomes do not have

 

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any substantive relationship with their agency or establishment in China. Therefore, if the exemption as described in the preceding paragraph does not apply or is not renewed, and the Tax Reduction Notice is found not to apply, a non-PRC enterprise shareholder might be subject to a 20% tax on capital gains, unless reduced by an applicable double taxation treaty.

 

Additional China Tax Considerations

 

Under the Provisional Regulations of the PRC Concerning the Stamp Duty, a stamp duty is not imposed by China on the transfer of shares, such as the H Shares or ADSs, of Chinese publicly traded companies that take place outside of China.

 

United States Federal Income Taxation

 

Each potential investor is strongly urged to consult his or her own tax advisor to determine the particular United States federal, state, local, treaty and foreign tax consequences of acquiring, owning or disposing of the H Shares or ADSs.

 

U.S. Holders

 

The following is a general discussion of material United States federal income tax consequences of purchasing, owning and disposing of the H Shares or ADSs if you are a U.S. holder, as defined below, and hold the H Shares or ADSs as capital assets within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code"). This discussion does not address all of the tax consequences relating to the purchase, ownership and disposition of the H Shares or ADSs, and does not take into account U.S. holders who may be subject to special rules including:

 

*

tax-exempt entities;

 

 

*

partnerships or other entities treated as partnerships for United States federal income tax purposes

 

 

*

banks, financial institutions, and insurance companies;

 

 

*

real estate investment trusts, regulated investment companies and grantor trusts;;

 

 

*

dealers or traders in securities , commodities or currencies;

 

 

*

U.S. holders liable for alternative minimum tax;

 

 

*

U.S. holders that own, actually or constructively, 10% or more of our voting stock;

 

 

*

persons who receive the H Shares or ADSs as compensation for services;

 

 

*

U.S. holders that hold the H Shares or ADSs as part of a straddle or a hedging or conversion transaction;

 

 

*

certain U.S. expatriates; or

 

 

*

U.S. holders whose functional currency is not the U.S. dollar.

 

 

Moreover, this description does not address United States federal estate and gift taxes or any state or local tax consequences of the acquisition, ownership and disposition of the H Shares or ADSs.

 

This discussion is based on the Code, its legislative history, final, temporary and proposed United States Treasury regulations promulgated thereunder, published rulings and court decisions as in effect on the date hereof, all of which are subject to change, or changes in interpretation, possibly with retroactive effect. In addition, this discussion is based in part upon representations of the depositary and the assumption that each obligation in the deposit agreement and any related agreements will be performed according to its terms.

 

You are a "U.S. holder" if you are a beneficial owner of H Shares or ADSs and are:

 

*

an individual citizen or resident of the United States for United States federal income tax purposes;

 

 

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*

a corporation or other entity treated as a corporation for United States federal income tax purposes created or organized under the laws of the United States or any political subdivision thereof;

 

 

*

any entity created or organized in or under the laws of any other jurisdiction if treated as a United States corporation pursuant to United States federal income tax laws;

 

 

*

an estate the income of which is subject to United States federal income tax without regard to its source; or

 

 

*

a trust:

 

 

*

subject to the primary supervision of a United States court and the control of one or more United States persons; or

 

 

*

that has elected to be treated as a United States person under applicable United States Treasury regulations.

 

 

If a partnership (including any entity treated as a partnership for United States federal tax purposes) is a beneficial owner of the H Shares or ADSs, the treatment of the partner in such partnership will generally depend upon the status of the partner and the activities of the partnership. If an investor is a partner in a partnership that holds H Shares or ADSs, such investor should consult its tax advisor.

 

We urge you to consult your tax advisors regarding the United States federal, state, local and non-United States tax consequences of the purchase, ownership and disposition of the H Shares or ADSs.

 

In general, if you hold ADRs evidencing ADSs, you will be treated as the owner of the H Shares represented by the ADSs. The following discussion assumes that we are not a passive foreign investment company, or PFIC, as discussed under "PFIC Rules" below.

 

Distributions on the H Shares or ADSs

 

The gross amount of any distribution (without reduction for any Chinese tax withheld) we make on the H Shares or ADSs out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes) will be includible in your gross income as ordinary dividend income when the distribution is actually or constructively received by you, or by the depositary in the case of ADSs. Distributions that exceed our current and accumulated earnings and profits will be treated as a return of capital to you to the extent of your basis in the H Shares or ADSs and thereafter as capital gain. Any dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from United States corporations. The amount of any distribution of property other than cash will be the fair market value of such property on the date of such distribution.

 

Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual, trust or estate prior to January 1, 2011 with respect to the H Shares or ADSs will be subject to taxation at a maximum rate of 15% if the dividends are "qualified dividends." Dividends paid on H Shares or ADSs will be treated as qualified dividends if either (i) we are eligible for the benefits of a comprehensive income tax treaty with the United States that the Internal Revenue Service, or IRS, has approved for the purposes of the qualified dividend rules, or (ii) the dividends are with respect to ADSs readily tradable on a U.S. securities market, provided that we were not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a PFIC. The Agreement Between the Government of the United States of America and the Government of the People's Republic of China for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income (the "Treaty") has been approved for the purposes of the qualified dividend rules, and we expect to qualify for benefits under the Treaty. Moreover, the ADSs are currently traded on the NYSE. Finally, based on our audited financial statements and relevant market data, we believe that we did not satisfy the definition for PFIC status for U.S. federal income tax purposes with respect to our 2006 taxable year. In addition, based on our audited financial statements and our current expectations regarding the value and nature of our assets, the sources and nature of our income, and relevant market data, we do not anticipate becoming a PFIC for our 2007 taxable year or any future year. However, our status in future years will depend on our

 

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income and assets (which for this purpose depends in part on the market value of the H Shares or ADSs) in those years. See the discussion of the PFIC rules below.

 

The U.S. Treasury has announced its intention to promulgate rules pursuant to which holders of common stock and intermediaries through whom such stock is held will be permitted to rely on certifications from issuers to establish that dividends are treated as qualified dividends. Because such procedures have not yet been issued, it is not clear whether we will be able to comply with them. Holders of H Shares or ADSs should consult their own tax advisers regarding the availability of the reduced dividend tax rate in light of their own particular circumstances.

 

If we make a distribution paid in HK dollars, you will be considered to receive the U.S. dollar value of the distribution determined at the spot HK dollar/U.S. dollar rate on the date such distribution is received by you or by the depositary, regardless of whether you or the depositary convert the distribution into U.S. dollars. Any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend payment is includible in your income to the date you or the depositary convert the distribution into U.S. dollars will be treated as ordinary income or loss from U.S. sources.

 

Subject to various limitations, any Chinese tax withheld from distributions in accordance with the Treaty will be deductible or creditable against your United States federal income tax liability. For foreign tax credit limitation purposes, dividends paid on the H Shares or ADSs will be foreign source income, and generally will be treated as "passive income" or, in the case of other U.S. holders, "financial services income" for taxable years ending on or before December 31, 2006. With respect to taxable years beginning after December 31, 2006, the foreign tax credit limitation categories will be limited to "passive category income" and "general category income." To the extent dividends are qualifying dividend income, in computing foreign tax credit limitations, individuals, trusts and estates must take into account the gross amount of the dividend multiplied by a fraction, the numerator of which is the special reduced rate described above, and the denominator of which is the highest ordinary income rate. Whether this partial exclusion will affect your ability to claim a foreign tax credit for the full amount of any Chinese tax withheld will depend on your particular circumstances. Each such recipient should consult its own tax adviser concerning the foreign tax credit limitation implications of the receipt of a qualifying dividend.

 

You may not be able to claim a foreign tax credit (and instead may claim a deduction) for non-United States taxes imposed on dividends paid on the H Shares or ADSs if you (i) have held the H Shares or ADSs for less than a specified minimum period during which you are not protected from risk of loss with respect to such shares, (ii) are obligated to make payments related to the dividends (for example, pursuant to a short sale) or (iii) hold the H Shares or ADSs in an arrangement in which your expected economic return, after non-United States taxes, is insubstantial.

 

Sale, Exchange or Other Disposition

 

Upon a sale, exchange or other disposition of the H Shares or ADSs, you will generally recognize capital gain or loss for United States federal income tax purposes in an amount equal to the difference between the U.S. dollar value of the amount realized and your tax basis, determined in U.S. dollars, in such H Shares or ADSs. Any gain or loss will generally be United States source gain or loss for foreign tax credit limitation purposes and as a result of the U.S. foreign tax credit limitation, foreign taxes, if any, imposed upon capital gains in respect of H Shares or ADSs may not be currently creditable. Capital gain of certain non-corporate U.S. holders, including individuals, is generally taxed at a maximum rate of 15 percent where the property has been held more than one year. Your ability to deduct capital losses is subject to significant limitations.

 

If you are paid in a currency other than U.S. dollars, any gain or loss resulting from currency exchange fluctuations during the period from the date of the payment resulting from sale, exchange or other disposition is made to the date you convert the payment into U.S. dollars will be treated as United States source ordinary income or loss.

 

PFIC Rules

 

In general, a foreign corporation is a PFIC for any taxable year in which, after applying relevant look-through rules with respect to the income and assets of subsidiaries:

 

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*

75% or more of its gross income consists of passive income, such as dividends, interest, rents, royalties, and gains from the sale of assets that give rise to such income; or

 

 

*

50% or more of the average quarterly value of its assets consists of assets that produce, or are held for the production of, passive income.

 

 

We believe that we will not meet either of the PFIC tests in the current or subsequent taxable years and therefore will not be treated as a PFIC for such periods. However, there can be no assurance that we will not be a PFIC in the current or subsequent taxable years.

 

If we were a PFIC in any taxable year that you held the H Shares or ADSs, you generally would be subject to special rules with respect to "excess distributions" made by us on the H Shares or ADSs and with respect to gain from your disposition of the H Shares or ADSs. An "excess distribution" generally is defined as the excess of the distributions you receive with respect to the H Shares or ADSs in any taxable year over 125% of the average annual distributions you have received from us during the shorter of the three preceding years, or your holding period for the H Shares or ADSs. Generally, you would be required to allocate any excess distribution or gain from the disposition of the H Shares or ADSs ratably over your holding period for the H Shares or ADSs. The portion of the excess distribution or gain allocated to a prior taxable year, other than a year prior to the first year in which we became a PFIC, would be taxed at the highest United States federal income tax rate on ordinary income in effect for such taxable year, and you would be subject to an interest charge on the resulting tax liability, determined as if the tax liability had been due with respect to such particular taxable years. The portion of the excess distribution or gain that is not allocated to prior taxable years, together with the portion allocated to the years prior to the first year in which we became a PFIC, would be included in your gross income for the taxable year of the excess distribution or disposition and taxed as ordinary income.

 

The foregoing rules with respect to excess distributions and dispositions may be avoided or reduced if you are eligible for and timely make a valid "mark-to-market" election. If your H Shares or ADSs were treated as shares regularly traded on a "qualified exchange" for United States federal income tax purposes and a valid mark-to-market election was made, in calculating your taxable income for each taxable year you generally would be required to take into account as ordinary income or loss the difference, if any, between the fair market value and the adjusted tax basis of your H Shares or ADSs at the end of your taxable year. However, the amount of loss you would be allowed is limited to the extent of the net amount of previously included income as a result of the mark-to-market election. The NYSE in which the ADSs will be traded is a qualified exchange for United States federal income tax purposes.

 

Alternatively, a timely election to treat us as a qualified electing fund under Section 1295 of the Code could be made to avoid the foregoing rules with respect to excess distributions and dispositions. You should be aware, however, that if we become a PFIC, we do not intend to satisfy record keeping requirements that would permit you to make a qualified electing fund election.

 

If you own the H Shares or ADSs during any year that we are a PFIC, you must file IRS Form 8621. We encourage you to consult your own tax advisor concerning the United States federal income tax consequences of holding the H Shares or ADSs that would arise if we were considered a PFIC.

 

Backup Withholding and Information Reporting

 

In general, information reporting requirements will apply to dividends in respect of the H Shares or ADSs or the proceeds of the sale, exchange, or redemption of the H Shares or ADSs paid within the United States, and in some cases, outside of the United States, other than to various exempt recipients, including corporations. In addition, you may, under some circumstances, be subject to "backup withholding" with respect to dividends paid on the H Shares or ADSs or the proceeds of any sale, exchange or transfer of the H Shares or ADSs, unless you

 

*

are a corporation or fall within various other exempt categories, and, when required, demonstrate this fact; or

 

 

- 122 -

 


 

*

Provide a correct taxpayer identification number on a properly completed IRS Form W-9 or a substitute form, certify that you are exempt from backup withholding and otherwise comply with applicable requirements of the backup withholding rules.

 

 

Any amount withheld under the backup withholding rules generally will be creditable against your United States federal income tax liability provided that you furnish the required information to the IRS in a timely manner. If you do not provide a correct taxpayer identification number you may be subject to penalties imposed by the IRS.

 

Hong Kong Taxation

 

The following discussion summarizes the material Hong Kong tax provisions relating to the ownership of H Shares or ADSs purchased in connection with the global offering and held by you.

 

Dividends

 

Under current practice, no tax will be payable in Hong Kong in respect of dividends paid by us.

 

Taxation of Capital Gains

 

No tax is generally imposed in Hong Kong in respect of capital gains from the sale of property (such as the H Shares). Trading gains from the sale of property by persons carrying on a trade, profession or business in Hong Kong, where such gains are derived from or arise in Hong Kong from such trade, profession or business, will be chargeable to Hong Kong profits tax, which is currently imposed at the rate of 17.5% on corporations and at a maximum rate of 16.0% on individuals. Gains from sales of the H Shares effected on the Hong Kong Stock Exchange will be considered to be derived from or arise in Hong Kong. Liability for Hong Kong profits tax would thus arise in respect of trading gains from sales of H Shares realized by persons carrying on a business of trading or dealing in Hong Kong in securities.

 

There will generally be no liability for Hong Kong profits tax in respect of profits from the sale of ADSs, where purchases and sales of ADSs are effected outside Hong Kong, e.g. on the NYSE.

 

Hong Kong Stamp Duty

 

Hong Kong stamp duty will be payable by each of the seller and the purchaser for every sale and purchase, respectively, of the H Shares. Stamp duty is charged at the rate of 0.2% of the value of the H Shares transferred (the buyer and seller each paying half of such stamp duty). In addition, a fixed duty of HK$5 is currently payable on an instrument of transfer of H Shares. If one of the parties to a sale is a non-resident of Hong Kong and does not pay the required stamp duty, the duty not paid will be assessed on the instrument of transfer (if any), and the transferee will be liable for payment of such duty.

 

The withdrawal of H Shares when ADSs are surrendered, and the issuance of ADSs when H Shares are deposited, may be subject to Hong Kong stamp duty at the rate described above for sale and purchase transactions, unless the withdrawal or deposit does not result in a change of beneficial ownership in the H Shares under Hong Kong law. The issuance of ADSs for deposited H Shares issued directly to the depositary or for the account of the depositary should not lead to a Hong Kong stamp duty liability. You are not liable for the Hong Kong stamp duty on transfers of ADSs outside of Hong Kong so long as it does not result in a change of beneficial interest in the H Shares.

 

Hong Kong Estate Duty

 

Hong Kong estate duty was abolished with effect from February 11, 2006.

 

Comparison of NYSE Corporate Governance Rules and PRC Corporate Governance Rules For Listed Companies

 

Under the amended Corporate Governance Rules of NYSE, foreign issuers (including us) listed on the NYSE are required to disclose a summary of the significant differences between their domestic corporate

 

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governance rules and NYSE corporate governance rules that would apply to a U.S. domestic issuer. We have posted a description of such differences on our website: http://www.chalco.com.cn/report/2005_e_06.pdf.

 

Documents on Display

 

We are subject to the information reporting requirements of the Exchange Act and, in accordance with the Act, file certain reports and other information with the SEC. You may read and copy any report, statement or other information filed by us at the SEC's public reference rooms in Washington, D.C., New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our reports and other information filed with the SEC are also available to the public from commercial document retrieval services and the website maintained by the SEC at http://www.sec.gov .

 

As a foreign private issuer, we are exempt from the rules under the Act prescribing the furnishing and content of proxy statements to shareholders.

 

ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

 

We are exposed to various types of market risks, including credit risk relating to financial assets, changes in foreign exchange rates, interest rates and the prices of alumina and primary aluminum, in the normal course of business.

 

We borrow short-term and long-term funds, including variable-rate debt, principally denominated in Renminbi. We hedge a limited amount of our sales through trading of futures contracts on the Shanghai Futures Exchange. Our hedging activities are subject to policies approved by our senior management. Substantially all of the financial instruments we hold are for purposes other than trading.

 

The following discussion, which constitutes "forward-looking statements" that involve risk and uncertainties, summarize our market-sensitive financial instruments including fair value, maturity and contract terms. Such discussions address market risk only and do not present other risks, which we face in the normal course of business.

 

Credit Risk

 

The carrying amount of accounts and other receivables included in the balance sheet represent our maximum exposure to credit risk in relation to our financial assets. We perform periodic credit evaluations of our customers and believe that we have made adequate provision for uncollectible accounts and other receivables in the financial statements.

 

None of our major customers exceed 10% of total revenue and do not individually present a material risk to our sales.

 

We maintain substantially all of our cash and cash equivalents in interest-bearing accounts in several major financial institutions in the PRC. No other financial assets carry a significant exposure to credit risk.

 

We use the majority of our futures contracts traded on the Shanghai Futures Exchange and LME to hedge against adverse fluctuations in aluminum prices and do not hold other derivatives instruments. The futures contracts are marked to market at balance sheet dates and corresponding unrealized holding gains (loss) are recorded in the income statement for the year. The fair value of the unrealized holding losses for the years ended December 31, 2004, 2005, and 2006 were RMB4,972,000, RMB8,360,000 and RMB5,703,000, respectively.

 

Foreign Exchange Rate Risk

 

We conduct our business primarily in Renminbi, which is also our functional and reporting currency. We convert a portion of our Renminbi revenue into other currencies to meet foreign currency financial obligations and to pay for imported equipment and materials.

 

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Many foreign currency exchange transactions involving Renminbi, including foreign exchange transactions under our capital account, are subject to foreign exchange controls and require the approval of the State Administration of Foreign Exchange. Actions taken by the PRC government could cause future exchange rates to vary significantly from current or historical exchange rates. Although the Renminbi to U.S. dollar exchange rate has been relatively stable since 1994, we cannot predict nor give any assurance of its future stability. Fluctuations in exchange rates could adversely affect the value, translated or converted into U.S. dollars or Hong Kong dollars, of our net assets, earnings and any declared dividends. We cannot assure you that any future movements in the exchange rates of Renminbi against the U.S. dollar and other foreign currencies will not adversely affect our operating performances and financial condition.

 

As of December 31, 2006, our foreign currency denominated loans amounted to RMB9.0 million, all of which was denominated in Danish Krone. In addition, our foreign currency denominated short-term bank deposits amounted to RMB451.7 million, of which RMB239.5 million was denominated in U.S. dollars, RMB196.8 million was denominated in Australian dollars, RMB9.5 million was denominated in Hong Kong dollars, RMB4.0 million was denominated in euros and RMB2.0 million was denominated in Swiss francs. Most of our sales are domestic and as such we have a limited amount of foreign currency denominated accounts receivable.

 

A significant depreciation in the Renminbi against major foreign currencies could have an adverse impact on our capital expenditures program. We have incurred relatively small amounts of foreign currency denominated debt for capital expenditures primarily relating to development of our alumina refineries, and may incur foreign currency denominated debt in the future. To the extent the Renminbi devalues against any of these currencies, it would correspondingly increase our repayment costs on such loans.

 

Interest Rate Risk

 

We are exposed to interest rate risk resulting from fluctuations in interest rates on our debt, primarily on our long-term debt obligations. Our debt consists of fixed and variable-rate debt obligations with original maturities ranging from one to 15 years. We undertake debt obligations to support general corporate purposes including capital expenditures and working capital needs. Upward fluctuations in interest rates increase the cost of new debt and the interest cost of outstanding variable rate borrowings. Fluctuations in interest rates can also lead to significant fluctuations in the fair values of our debt obligations. We do not currently use any derivative instruments to modify the nature of our debt so as to manage our interest rate risk.

 

The table below sets forth information about our interest rate sensitive financial instruments, including foreign currency denominated debt instruments that are sensitive to foreign currency exchange rates. The table presents principal cash flows and related weighted average interest rates by expected maturity dates. The information is presented in Renminbi equivalents. We do not have any capital lease obligations. The information below should be read in conjunction with our audited balance sheets and Note 17 to our audited financial statements.

 

 

Expected Maturity

 

 

 

 

 

 

 

2011 and

 

Fair

 

2007

2008

2009

2010

thereafter

Total

value

 








 

(in thousands, except percentage data)

 

 

Short-term loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Fixed rate (RMB)

2,762,040

-

-

-

-

2,762,040

2,762,040

Average interest rate

5.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate (RMB)

2,349,760

2,081,600

2,068,800

1,250,000

3,072,400

10,822,560

10,822,560

Average interest rate

5.5%

5.5%

5.7%

5.0%

5.7%

 

 

Fixed rate

 

 

 

 

 

 

 

    (Danish Krone)*

1,058

1,058

1,058

1,058

4,762

8,994

7,400

Average interest rate

0.3%

0.3%

0.3%

0.3%

0.3%

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*

Data in Renminbi equivalents.

 

 

Commodity Price Risk

 

We are exposed to fluctuations in the prices of alumina and primary aluminum. We import alumina from suppliers outside of China. Such purchases are made at market prices. In addition, all our sales of alumina and primary aluminum are made at market prices. Therefore, fluctuations in the prices of alumina and primary aluminum have a significant effect on our operating performances.

 

We enter into short-term futures contracts traded on the Shanghai Futures Exchange and LME to hedge a limited amount of sales of primary aluminum so as to minimize the impact of the fluctuations in the price of primary aluminum on our operating performances. Gains and losses on such futures contracts are recorded as other income or expenses at each balance sheet date. The contracts have maturity dates that do not exceed six months.

 

The fair value of futures contracts are based on quoted market prices. As of December 31, 2006, the Company's position in futures contracts and options of aluminum is as follows:

 

 

As of December 31, 2005

As of December 31, 2006

 

 

Contract

Market

Unrealized

 

 

Contract

Market

Unrealized

 

 

Tonnes

value

value

gain/(loss)

Maturity

Tonnes

value

value

gain/(loss)

Maturity

 

 

RMB

 

 

 

 

RMB

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Future Contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Short

5,000

83,644

92,004

(8,360)

February 2007 to May 2007

13,500

283,896

295,042

(11,146)

January 2007 to April 2007

Long

-

-

-

-

-

20,000

438,423

440,178

1,755

Jan-07

 

 

 

 

 

 

 

 

 

 

 

Options:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

-

-

-

-

-

31,000

23,543

19,855

3,688

January 2007 to December 2007

 

 

 

 

 

 

 

 

 

 

 

ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

 

Not applicable.

 

PART II

 

ITEM 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

 

 

As of December 31, 2006, we were not in default in the payment of principal or interest of any lender.

 

ITEM 14.

MATERIAL MO DIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

 

 

None.

 

ITEM 15.

CONTROLS AND PROCEDURES

 

 

As of the end of the period covered by this report, an evaluation was carried out under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of December 31, 2006 were effective.

 

Management's Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over

 

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financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

Under the supervision of and with the participation of the Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of the company's internal control over financial reporting as of December 31, 2006 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of Treadway Commission. Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2006.

 

We have excluded Fushun Aluminum Company Limited, Zunyi Aluminum Company Limited, Shandong Huayu Aluminum and Power Company Limited, Gansu Hualu Aluminum Company Limited and Shanxi Huasheng Aluminum Company Limited from our assessment of internal control over financial reporting as of December 31, 2006 because these entities were acquired during 2006 and qualified under current United States Securities and Exchange Commission regulations for exclusion from our assessment of internal control over financial reporting. All of these entities are subsidiaries of the Company and their total assets and total revenues in aggregate represent 11% and 7%, respectively, of our related consolidated financial statement amounts as of and for the year ended December 31, 2006.

 

PricewaterhouseCoopers, which has audited our consolidated financial statements for the fiscal year ended December 31, 2006, has also audited management's assessment of the effectiveness of our internal control over financial reporting and the effectiveness of our internal controls over financial reporting; their report is included herein.

 

Changes in Internal Control over Financial Reporting

 

During 2006, to enhance the effectiveness of our existing internal control and operational efficiency, we have implemented SAP information system at most of our significant locations. As a result of the implementation, certain of our internal controls over financial reporting have been redesigned or modified. Apart from the implementation of the SAP information system, there have been no significant changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect , our internal control over financial reporting during the year ended December 31, 2006.

 

ITEM 16.

[RESERVED]

 

 

ITEM 16A.

AUDIT COMMITTEE FINANCIAL EXPERT

 

 

Our Audit Committee members are Mr. Poon Yiu Kin, Samuel, Mr. Kang Yi and Mr. Zhang Zuoyuan. Our board of directors has determined that Mr. Poon Yiu Kin, Samuel is the financial expert serving on our Audit Committee as well as the Chairman of the Audit Committee. See "Item 6. Directors, Senior Management and Employees".

 

ITEM 16B.

CODE OF ETHICS

 

 

We have adopted a Code of Ethics that applies to our Chief Executive Officer, Chief Financial Officer, other directors, Independent Non-executive Directors, senior management and employees. We have posted our Code of Ethics on our website: http://www.chalco.com.cn. A copy of this Code of Ethics is available, without charge, upon request from the address on the cover of this Form 20-F.

 

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ITEM 16C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

 

PricewaterhouseCoopers served as our independent auditor for the 2006 fiscal year. A description of the fees billed to us by PricewaterhouseCoopers for professional services in each of the last two fiscal years is set forth below:

 

 

Year ended December 31,

 

2005

2006

 



 

RMB

RMB

 



 

 

 

 

(in thousands)

 

 

 

Audit fees

13,721

30,000

Audit-related fees

9,291

4,253

All other fees

978

781

 



 

 

 

Total

23,990

35,034

 



 

 

 

"Audit Fees" are the aggregate fees billed by PricewaterhouseCoopers for the provision of an integrated audit of (i) our consolidated annual financial statements; (ii) management's assessment of the effectiveness of our internal control over financial reporting; and (iii) the effectiveness of our internal control over financial reporting. "Audit-Related Fees" are fees charged by PricewaterhouseCoopers for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under "Audit Fees".

 

In April 2003, our Audit Committee established pre-approval policies and procedures under which all audit and non-audit services performed by our principal accountants must be approved by the Audit Committee. For 2006, all of the services provided by PricewaterhouseCoopers were pre-approved by the Audit Committee.

 

ITEM 16D.

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

 

 

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Not applicable.

 

ITEM 16E.

PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.

 

 

None.

 

PART III

 

ITEM 17

FINANCIAL STATEMENTS

 

 

We have elected to provide the financial statements and related information specified in Item 18 in lieu of Item 17.

 

ITEM 18

FINANCIAL STATEMENTS

 

 

See pages F-1 to F-74 following Item 19.

 

ITEM 19

EXHIBITS

 

 

Index of Exhibits

 

Documents filed as exhibits to this Annual Report:

 

Exhibit Number

Description

 

 

1.1

-

Article of Association amended and adopted by the shareholders' meeting on February 27, 2007

 

 

 

4.1

-

Placing Agreement among Aluminum Corporation of China Limited, J.P.Morgan Securities Ltd., CLSA Limited and China International Capital Corporation Hong Kong Securities Limited, dated May 9, 2006.

 

 

 

4.2

-

A Shares Sponsorship Agreement among Aluminum Corporation of China Limited, CITIC Securities Co., Ltd. and China Galaxy Securities Co., Ltd., dated on March 12, 2007.

 

 

 

8.1

-

List of Subsidiaries of Aluminum Corporation of China Limited as of December 31, 2006

 

 

 

12.1

-

Certifications pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities

 

 

 

- 130 -

 


 

 

 

Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

13.1

-

Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

SIGNATURES

 

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

ALUMINUM CORPORATION OF CHINA LIMITED

 

 

By:

                            /s/    XIAO Yaqing

 

 


 

XIAO Yaqing

 

Chief Executive Officer

Date: June 20, 2007

 

EXHIBIT 1.1

 

Aluminum Corporation of China Limited

 

Articles of Association

 

(Approved at the Special General Meeting held on 24 September, 2001)

 

(Approved by Economic and Trade Commission of People's Republic of China on 26 September, 2001)

 

(Revised as approved by Shareholders' General Meeting of the Company on 12 June, 2002)

 

(Revised as approved by Economic and Trade Commission of People's Republic of China on 5 July, 2002)

 

(Revised as approved by Shareholders' General Meeting of the Company on 7 June, 2004)

 

(Revised as approved by State-owned Assets Supervision and Administration Commission of the State Council on 30 July, 2004)

 

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(Revised as approved by Shareholders' General Meeting of the Company on 9 June, 2005)

 

(Revised as approved by Shareholders' General Meeting of the Company on 14 October, 2005)

 

(Revised as approved by Shareholders' General Meeting of the Company on 10 May, 2006)

 

(Revised as approved by Shareholders' General Meeting of the Company on 27 February, 2007)

 

(Revised as approved by State-owned Assets Supervision and Administration Commission of the State Council on [*])

 

Content

 

Chapter

Title

Page

 

 

 

Chapter 1

General Principles

1

 

 

 

Chapter 2

Business Objects and Scope

3

 

 

 

Chapter 3

Share Capital and Registered Capital

3

 

 

 

Chapter 4

Reduction of Capital and Repurchase of Shares

7

 

 

 

Chapter 5

Financial Assistance for the Acquisition of the Shares of the Company

9

 

 

 

Chapter 6

Share Certificates and Register of Shareholders

10

 

 

 

Chapter 7

Rights and Obligations of Shareholders

14

 

 

 

Chapter 8

Shareholders' General Meetings

17

 

 

 

Chapter 9

Special Procedures for the Voting of Class Shareholders

26

 

 

 

Chapter 10

Board of Directors

28

 

 

 

Chapter 11

Independent Directors

35

 

 

 

Chapter 12

Secretary of the Board of Directors of the Company

38

 

 

 

Chapter 13

Manager of the Company

40

 

 

 

Chapter 14

Supervisory Committee

41

 

 

 

Chapter 15

Qualifications and Obligations of the Directors, supervisors, Manager and other Senior executives of the Company

44

 

 

 

Chapter 16

Financial Accounting System, Profit Distribution And Auditing

50

 

 

 

Chapter 17

Appointment of Accounting Firm

54

 

 

 

Chapter 18

Merger and Division

56

 

 

 

Chapter 19

Dissolution and Liquidation

57

 

 

 

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Chapter 20

Procedures for Amendments to the Articles of Association

59

 

 

 

Chapter 21

Notices and Public Announcement

59

 

 

 

Chapter 22

Settlement of Disputes

60

 

 

 

Chapter 23

Bye-laws

61

 

 

 

Aluminum Corporation of China

 

Articles of Association

 

Chapter1

General Principles

 

 

Article 1

 

Aluminum Corporation of China (the "Company") is a joint stock limited company established in accordance with the Company Law ("Company Law") of the People's Republic of China (hereinafter referred to as the "PRC"), the Special Regulations of the State Council on the Overseas Share Offer and Listing of Joint Stock Limited Companies (chinese characters) (hereinafter referred to as "Special Regulations") and other relevant legislations and administrative regulations of the PRC.

 

The Company is established on 10th September 2001 by way of promotion under the approval given under State Economic and Trade Commission of the PRC (Guo Jing Mao Qi Gai [2001] No. 818) and the State Administration for Industry and Commence of the PRC and the business licence thereof was obtained. Licence number: 1000001003573 (2-1).

 

Aluminum Corporation of China, Guangxi Investment (Group) Co., Ltd. and Guizhou Provincial Materials Development and Investment Corporation are promoters of the Company.

 

Article 2

 

The registered name of the Company:

 

Chinese: (chinese characters)

 

Abbreviation: (chinese characters)

 

English: Aluminum Corporation of China Limited

 

Abbreviation: Chalco

 

Article 3

 

Place of the Company: No.62 North Xizhimen Street, Beijing, PRC

 

Postal code: 100082

 

Tele: (010) 82298080

 

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Graphics context facsimile: (010) 82298081

 

Article 4

 

The chairman of the board of directors of the Company shall be the legal representative of the Company.

 

Article 5

 

The Company is a joint stock limited company with foreign capitals with perpetual existence.

 

The rights and obligations in respect of the Company enjoyed and assumed by shareholders of the Company shall be limited to the extent of the class and number of shares held by them. The Company shall be liable to its creditors to the extent of all of its assets.

 

The Company is an independent legal person, governed and protected by the laws and administrative regulations of the PRC.

 

Article 6

 

Pursuant to the Company Law, the Special Regulations and "Mandatory Provisions for the Articles of Association of the Companies Listed Overseas" (hereinafter referred to as the "Mandatory Provisions") and other relevant legislations and administrative regulations, the original Articles of Association (hereinafter referred to as the "Original Articles") was amended by adoption of new Articles of Association of the Company (hereinafter referred to as the "Articles of Association of the Company" or the "Articles of Association") at the shareholders' general meeting held on 27th February, 2007.

 

Article 7

 

The registration of the Original Articles was completed and became effective on the Date of Incorporation.

 

The Articles of Association shall become effective after being passed by a special resolution at the Company's shareholders' general meeting and once approval is obtained from the State Council authorised approving authorities and the State Council Securities Commission. Once the Articles of Association have become effective, the Original Articles shall be replaced by the Articles of Association.

 

Article 8

 

From the date when the Articles of Association take effect, the Articles of Association shall constitute a legally binding document regulating the structure and activities of the Company and governs the rights and obligations between the Company and its shareholders and among the shareholders.

 

Article 9

 

The Articles of Association of the Company shall be binding on the Company, its shareholders, directors, supervisors, manager and other senior management officers. All the aforementioned persons may, pursuant to the Articles of Association, put forward claims concerning the affairs of the Company.

 

Under the circumstances not in breach of Article 22 of the Articles of Association, the shareholders may, in

 

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accordance with the Articles of Association, bring actions against the Company. The Company may, in accordance with the Articles of Association, bring actions against the shareholders, directors, supervisors, manager and other senior management officers. The shareholders may, in accordance with the Articles of Association, bring actions against each other. The shareholders may, in accordance with the Articles of Association, bring actions against the directors, supervisors, manager and other senior management officers.

 

For the purpose of this article, "action" includes taking court proceedings and arbitration proceedings.

 

Article 10

 

The Company may invest in other companies but shall not be an investor jointly liable for the invested company's debts unless otherwise required by law.

 

The Company shall not be a shareholder with unlimited liabilities of other profit-making organizations.

 

Article 11

 

Subject to the provisions of the laws and administrative regulations of PRC, the Company shall have the rights to raise funds or to borrow monies, including but not limited to the rights to issue bonds, or to charge or to pledge its properties.

 

Chapter 2

Business Objects and Scope

 

 

Article 12

 

The object of operations of the Company shall be: to maximize the interests of shareholders; to establish management system and operation mechanism align with the globe; to improve management for better efficiency; to improve product technology based on the market-oriented strategy with a view to cut the cost and expand the market share through product upgrading and technology renovation in order to enhance the overall competitiveness of the Company.

 

Article 13

 

The scope of operations of the Company shall be based on the items approved by the company registration authorities.

 

The Company's scope of operations includes: exploration and mining of bauxite, limestone mines; production and sales of aluminum, magnesium products, smelting products and processing products; production and sales of carbon products and related non-ferrous products, water, electricity and gas, oxygen and nitrogen for industrial use; examination, design and construction and installation; manufacturing, installation, checking and maintenance of mechanical equipment, parts and components and non-standard equipment; maintenance of vehicles and construction machinery, manufacturing and sales of special industrial vehicles; road freight transportation; installation, maintenance, checking and sales of telecommunication, communication and testing equipment; automatic testing control, network and software system design, installation and adjustment; office automation, equipment and related technology development and technology services.

 

Article 14

 

The Company may, according to the business requirement, set up wholly-owned subsidiaries and controlling

 

- 135 -

 


 

subsidiary, divisions such as branches and representative offices. Subsidiaries shall be names under the abbreviation of "Chalco" of Aluminum Corporation of China Limited and branches shall be named under the full name of Aluminum Corporation of China Limited.

 

With the approvals of the relevant government departments, the Company may from time to time make adjustments to its scope and means of operations according to the business requirements and may also set up branches and/or offices outside PRC and in the regions of Hong Kong, Macau and Taiwan (whether or not being wholly-owned).

 

Chapter 3 Share Capital and Registered Capital

 

Article 15

 

The Company may at any time create ordinary shares. The ordinary shares issued by the Company shall include domestic shares and foreign shares. Having regard to its requirements and upon the approvals of the State Council authorised approving authorities, the Company may create other class of shares.

 

Article 16

 

The shares issued by the Company shall have a par value of Renminbi 1 per share.

 

The aforesaid Renminbi shall mean the legal currency of the PRC.

 

Article 17

 

The Company may issue shares to domestic investors and overseas investors upon the approval of the authorities of the State Council responsible for securities.

 

The aforesaid overseas investors shall mean the investors from foreign countries and the regions of Hong Kong, Macau and Taiwan who subscribe for the shares issued by the Company; domestic investors shall mean the investors within the PRC other than those investors from the aforesaid regions who subscribed for the Shares issued by the Company.

 

Article 18

 

The shares issued by the Company to the domestic investors and subscribed for in Renminbi shall be called domestic shares. The shares issued by the Company to the overseas investors and subscribed in foreign currency shall be called foreign shares. Those foreign shares listed overseas shall be called overseas listed foreign shares. Shareholders of domestic shares and overseas listed foreign shares are ordinary shareholders and shall have the same obligations and rights.

 

The aforesaid foreign currency shall mean the legal currency of other countries or areas, other than Renminbi, recognized by the foreign exchange authority of PRC for the purpose of payment for the shares to the Company.

 

The domestic shares of the Company are deposited with Shanghai Branch of China Securities Depository and Clearing Corporation Limited. The overseas listed foreign shares of the Company are principally placed in the custody of Hong Kong Exchanges and Clearing Limited.

 

Article 19

 

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The foreign shares issued by the Company and listed in Hong Kong shall be called H Shares. H Shares shall mean the shares which have been admitted for listing on The Stock Exchange of Hong Kong Limited (hereinafter referred to as the "HKSE") and the par value of which is denominated in Renminbi and are subscribed for and traded in Hong Kong currency.

 

Article 20

 

Upon approval of the State Council authorised approving authorities, the total number of ordinary shares issuable by the Company is 11,450,000,000 shares. The Company shall upon its establishment issue 8,000,000,000 shares (all of which are domestic shares) to the promoter. Upon consent of the State Council and approval of the governing authorities of the PRC, one of the promoters of Aluminum Corporation of China shall transfer some of the shares to China Cinda Asset Management Corporation ("China Cinda"), China Orient Asset Management Corporation ("China Orient") and China Development Bank ("CDB"), of which 1,600,000,000 shares shall be transferred to China Cinda, 621,670,000 shares to China Orient and 572,840,000 shares to CDB.

 

Contributions by promoters of the Company at the time of incorporation are as follows:

 

 

 

Means of

Date of Contribution

Promoter

Shares Subscribed

Contribution

 

 

 

 

 

Aluminum Corporation of China

7,673,770,000

Net Asset

June 28, 2001

 

 

 

 

Guangxi Development Group Limited

196,800,000

Net Asset

June 28, 2001

 

 

 

 

Guizhou Provincial Materials Development

 

 

 

    and Investment Corporation

129,430,000

Net Asset

June 28, 2001

 

 

 

 

Total

8,000,000,000"

 

 

 

 

 

 

Article 21

 

After incorporation, the Company issues 2,749,889,968 overseas listed foreign shares, i.e. H Shares, of which 2,499,900,153 are new shares and 249,989815 million stock shares are sold by certain shareholders.

 

After the foregoing issuing of H Shares, the company has a total of 10,499,900,153 shares with an equity structure as follows: a total of 7.750010185 billion domestic shares, accounting 73.81% of the Company's total equities, including: 4,656,261,060 shares by the promoter Aluminum Corporation of China, accounting around 44.35% of the total equities; 196,800,000 shares by the promoter Guangxi Investment Group Co., Ltd., accounting around 1.87% of the total equities; 129,430,000 shares by the promoter Guizhou Provincial Materials Development and Investment Corporation, accounting around 1.23% of the total equities; 1,610,332,210 shares by China Cinda Asset Management Corporation, accounting for around 15.34% of the total equities; 602,246,135 shares by China Orient Asset Management Corporation, accounting around 5.73% of the total equities; 554,940,780 shares by State Development Bank, accounting for 5.29% of the total equities. 2,749,889,968 (H Shares) are to be held by investors of overseas listed foreign shares, accounting for 26.19% of the Company's total equities.

 

With the approval of the examination body authorized by the State Council, the Company additionally issued 549,976,000 overseas listed foreign shares (H Shares) in 2004.

 

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After the foregoing issuing of H Shares, the company has a total of 11,049,876,153 shares, comprising 7,750,010,185 domestic shares representing 70.13% of the total equities, including 4,612,161,060 shares by the promoter Aluminum Corporation of China, accounting around 42.14% of the total equities; 196,800,000 shares by the promoter Guangxi Investment Group Co., Ltd., accounting around 1.78% of the total equities; 129,430,000 shares by the promoter Guizhou Provincial Materials Development and Investment Corporation, accounting around 1.17% of the total equities; 1,610,332,210 shares by China Cinda Asset Management Corporation, accounting for around 14.57% of the total equities; 602,246,135 shares by China Orient Asset Management Corporation, accounting around 5.45% of the total equities; 554,940,780 shares by State Development Bank, accounting for 5.02% of the total equities; and 3,299,865,968 shares by shareholders of overseas listed foreign shares (H Shares) accounting for around 29.87% of the total equities.

 

With the approval of the State Council, China Construction Bank Corporation took back the 6.42% of the company's shares it had delegated to the care of Cinda Asset Management Corporation in 2005, and thenceforth directly holds the shares and become a shareholder of the company. It causes no change to the total number of shares of the company but the number of shares held by China Cinda Asset Management Corporation was decreased accordingly.

 

After the foregoing change of shareholder, the company has a total of 11,049,876,153 shares, comprising 7,750,010,185 domestic shares representing 70.13% of the total equities, including 4,656,261,060 shares by the promoter Aluminum Corporation of China, accounting around 42.14% of the total equities; 196,800,000 shares by the promoter Guangxi Investment Group Co., Ltd., accounting around 1.78% of the total equities; 129,430,000 shares by the promoter Guizhou Provincial Materials Development and Investment Corporation, accounting around 1.17% of the total equities; 900,559,074 shares by China Cinda Asset Management Corporation, accounting for around 8.15% of the total equities; 709,773,136 shares by China Construction Bank Corporation, accounting for around 6.42% of the total equities, 602,246,135 shares by China Orient Asset Management Corporation, accounting around 5.45% of the total equities; 554,940,780 shares by State Development Bank, accounting for 5.02% of the total equities; and 3,299,865,968 shares by shareholders of overseas listed foreign shares (H Shares) accounting for around 29.87% of the total equities.

 

With the approval of the examination body authorized by the State Council, the Company additionally issued 644,100,000 overseas listed foreign shares (H Shares) in 2006, including 600,000,000 new shares and 44,100,000 existing shares sold by certain shareholders.

 

After the foregoing issuing of H Shares, the company has a total of 11,649,876,153 shares, comprising 7,705,910,185 domestic shares representing 66.15% of the total, including 4,612,261,060 shares by the promoter Aluminum Corporation of China, accounting around 39.59% of the total equities; 196,800,000 shares by the promoter Guangxi Investment Group Co., Ltd., accounting around 1.69% of the total equities; 129,430,000 shares by the promoter Guizhou Provincial Materials Development and Investment Corporation, accounting around 1.11% of the total equities; 900,559,074 shares by China Cinda Asset Management Corporation, accounting for around 7.73% of the total equities; 709,773,136 shares by China Construction Bank Corporation, accounting for around 6.09% of the total equities, 602,246,135 shares by China Orient Asset Management Corporation, accounting around 5.17% of the total equities; 554,940,780 shares by State Development Bank, accounting for 4.76% of the total equities; and 3,943,965,968 shares by shareholders of overseas listed foreign shares (H Shares) accounting for 33.85% of the total issued common shares.

 

The Company issued 1,236,731,739 A Shares in 2007 upon approval of the shareholders' general meeting by way of special resolutions and upon approval of the State Council authorised approving authorities.

 

The existing shareholding structure of the Company shall be: 12,886,607,892 ordinary shares of which 8,942,641,924 are held by holders of A Shares, representing 69.39% of the total issued ordinary shares of the Company, 3,943,965,968 shares are held by holders of overseas listed foreign shares, representing 30.61% of the total issued ordinary shares of the Company.

 

Article 22

 

Upon the plan for the issue by the Company of overseas listed foreign shares and domestic shares being

 

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approved by the authorities of the State Council responsible for securities, the board of directors of the Company may implement arrangement for the respective issue thereof.

 

The plan for the issue of overseas listed foreign shares and domestic shares may be implemented respectively by the Company pursuant to the provisions as aforesaid within 15 months from the date of the approval of the China Securities Regulatory Commission ("CSRC").

 

Article 23

 

Where the total number of shares to be issued by the Company as determined under the plan includes the number of overseas listed foreign shares and the number of domestic shares, the capital shall each be raised by one installment; where the capital cannot be raised by one installment under special circumstances, it can be raised by separate installments with the approval of the State Council Securities Commission.

 

Article 24

 

The registered capital of the Company is RMB 12,886,607,892.

 

Article 25

 

The Company may, based on its operation and business requirements, approve an increase in its capital in accordance with the relevant provisions of the Articles of Association.

 

The manners in which the capital of the Company may be increased are as follows:

 

(1)

offer of new shares to investors not particularly designated;

 

 

(2)

placing of new shares to existing shareholders;

 

 

(3)

bonus issue of new shares to existing shareholders;

 

 

(4)

transfer of statutory capital reserve to share capital;

 

 

(5)

other methods as permitted by the laws and administrative regulations.

 

 

The increase in the capital of the Company by way of issuing new shares pursuant to the provisions of the Articles of Association shall be implemented in accordance with relevant laws and administrative regulations of PRC.

 

Article 26

 

Unless otherwise provided in the laws and administrative regulations, the shares of the Company may be freely transferable and shall be free from any lien.

 

Chapter 4

Reduction of Capital and Repurchase of Shares

 

 

Article 27

 

The Company may reduce its registered capital pursuant to the provisions of the Articles of Association.

 

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Article 28

 

Upon the reduction of registered capital, the Company shall prepare a balance sheet and a list of its assets.

 

The company must notify its creditors of the intended capital reduction within 10 days and issue public notice in newspaper within 30 days following the date on which such a decision is made. The creditors have the right to demand the company to liquidate its liabilities or provide corresponding debt service guarantees within 30 days following the receipt of the notification letter or 45 days following the public notice in the newspaper.

 

The registered capital shall not be less than the statutory minimum requirement after the reduction of capital.

 

Article 29

 

In the following circumstances, the Company may repurchase its issued shares in accordance with the procedures provided in the Articles of Association and with the approval of the relevant governing authorities of PRC:

 

(1)

cancellation of shares for the purpose of reducing capital of the Company;

 

 

(2)

amalgamation with other company which owns shares in the Company;

 

 

(3)

granting bonus shares to employees of the company.

 

 

(4)

shareholders disagreeing with General Meeting's resolution on merger or division of the company and requiring the company to acquire the shares in their possession.;

 

 

(5)

Other purposes permitted by law and administrative regulations.

 

 

The Company shall repurchase its issued shares in accordance with the provisions of Articles 30 to 33 herein.

 

Article 30

 

The Company may, with the approval of the relevant governing authorities of PRC, repurchase its shares in any of the following manner:

 

(1)

to make a repurchase offer to all shareholders in proportion to their respective shareholdings;

 

 

(2)

to repurchase shares in open trading on a stock exchange;

 

 

(3)

to repurchase shares by way of agreement other than through a stock exchange.

 

 

(4)

other manners pursuant to the laws and administrative regulations and approved by the securities authorities of the State Council.

 

 

Article 31

 

Where the Company repurchases shares by way of agreement other than through a stock exchange, it shall obtain the prior approval of the shareholders in a general meeting according to the provisions of the Articles of Association. Where prior approval has been obtained from the shareholders in a general meeting in the

 

- 140 -

 


 

same manner, the Company may release or modify the contract entered into in the aforesaid manner or waive any right granted under such contract.

 

The contract to repurchase shares referred to above shall include but not be limited to agreements agreeing to undertake the obligations to repurchase shares or acquiring the rights to repurchase shares.

 

The contract to repurchase shares or any of the rights provided therein are not capable of being assigned by the Company.

 

Article 32

 

After the repurchase, the Company must cancel or transfer the repurchased shares before the deadline set by relevant laws and administrative regulations, and file its capital changes with its original registrant in the event of the cancellation.

 

The registered capital of the Company will be reduced by the total nominal value of the shares so cancelled.

 

Article 33

 

Unless the Company is in the process of liquidation, the repurchase of issued shares by the Company shall be subject to the following provisions:

 

(1)

if the shares are repurchased at par value, payment may be made out of the balance of the distributable profits in the books of the Company or from the proceeds of fresh issue of new shares for the purpose of repurchase of existing shares;

 

 

(2)

if the shares are repurchased at a premium of the par value, payment up to the par value may be made out of the balance of the distributable profits in the books of the Company or from the proceeds of fresh issue of new shares for the purpose of repurchase; payment of the portion in excess of the par value shall be effected in the following manner:

 

 

 

(i)

if the repurchased shares were issued at par value, payment shall be made out of the balance of distributable profits in the books of the Company;

 

 

 

 

(ii)

if the repurchased shares were issued at a premium, payment shall be made out of the balance of distributable profits in the books of the Company or from the proceeds of fresh issue of new shares for the purpose of share repurchase provided that, the amount paid out of the proceeds of fresh issue of new shares shall not exceed the aggregate of premium received on the issue of the shares repurchased, nor the balance of capital surplus reserve fund account of the Company at the time of such repurchase (including the amount of the premium received on the fresh issue of new shares);

 

 

 

(3)

The payment for the following shall be made out of the distributable profits of the Company:

 

 

 

(i)

the acquisition of rights to repurchase its shares;

 

 

 

 

(ii)

the amendment of the contract for the repurchase of its shares;

 

 

 

 

(iii)

the release of any of its obligations under the repurchase contract.

 

 

 

(4)

After the registered capital of the Company has been reduced by the total nominal amount of the shares so cancelled pursuant to the relevant provisions, the amount which has been deducted from the distributable profits and used for repurchasing the nominal value of the shares shall be credited to the account of capital surplus reserve fund of the Company.

 

 

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Chapter 5

Financial Assistance for the Acquisition of the Shares of the Company

 

 

Article 34

 

No financial assistance shall be provided at any time and in any manner by the Company or its subsidiaries to any person acquiring or intending to acquire the shares of the Company. The person(s) acquiring the shares of the Company aforesaid shall include the person(s) who undertake(s), directly or indirectly, obligations as a result of an acquisition of shares of the Company.

 

No financial assistance shall be provided at any time and in any manner by the Company and its subsidiaries to reduce or release the obligations of the said person(s) undertaking such obligations.

 

This article shall not apply to the circumstances stated in Article 36 in this chapter.

 

Article 35

 

The financial assistance referred to in this chapter shall include but not be limited to the assistance in the following ways:

 

(1)

gift;

 

 

(2)

guarantee (including provision by the guarantor of an undertaking or property to secure the performance of obligations by the obligor), indemnity (other than an indemnity in respect of the Company's own neglect or default) or a release or waiver thereof;

 

 

(3)

provision of loan or making of a contract under which the obligations of the Company are to be fulfilled before the obligations of another party to the contract, the novation of the loan or changes of the parties to the contract and the assignment of rights under the loan and the contract;

 

 

(4)

any other financial assistance given by the Company when the Company is insolvent or has no net assets or when its net assets would thereby be reduced to a material extent.

 

 

The undertaking referred to in this chapter shall include the undertaking of obligations by the obligator of contract or arrangement (whether the contract or arrangement is enforceable or to be undertaken individually or jointly with others) or changes in his financial position in any manner.

 

Article 36

 

The following activities shall not be deemed to be prohibited by Article 34 of this chapter:

 

(1)

the provision of financial assistance is given in good faith in the interests of the Company and the principal purpose in giving such assistance is not for acquisition of shares in the Company, or the giving of the assistance is but an incidental part of a master plan of the Company;

 

 

(2)

the distribution of the assets of the Company by way of dividends in accordance with law;

 

 

(3)

the allotment of bonus shares as dividends;

 

 

(4)

a reduction of registered capital, repurchase of shares of the Company, adjustment of shareholding structure of the Company effected in accordance with the Articles of Association;

 

 

(5)

the lending of money by the Company in the ordinary course of its business where the lending of money is part of the scope of business (only if the Company has net assets which are not thereby reduced or to the extent that those assets are thereby reduced if the financial assistance is provided out

 

 

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of the distributable profits of the Company);

 

 

(6)

the provision of money by the Company for contributions to the share option scheme for employees (only if the Company has net assets which are not thereby reduced or to the extent that those assets are thereby reduced, if the financial assistance is provided out of the distributable profits of the Company).

 

 

Chapter 6

Share Certificates and Register of Shareholders

 

 

Article 37

 

The shares issued by the Company shall be in registered form.

 

The share certificates of the Company shall contain the following major particulars:

 

(1)

name of the Company;

 

 

(2)

date of incorporation of the Company;

 

 

(3)

class of the shares, nominal value and number of shares represented;

 

 

(4)

serial number of the share certificate;

 

 

(5)

other items to be contained as required by the Company Law, the Special Regulations and the stock exchange on which the shares of the Company are listed.

 

 

Article 38

 

The shares of the Company may be transferred, donated, inherited and charged in accordance with the relevant laws, administrative regulations and the Articles of Association.

 

The transfer and assignment of shares shall be registered with the share registrar appointed by the Company.

 

Article 39

 

The stocks are signed by the Company's legal representative, and if required by the securities exchange on which the Company's stocks are listed, by other senior members of the management. The stocks become valid with the Company seal (include the Company's securities seal), which must be authorized by the Company's chair of board. The signature of the Company's chair of the board or other senior members of the management may also take printing form.

 

Article 40

 

The Company does not accept shares as the subject of pledge.

 

Article 41

 

During their tenures, the director, supervisor, manager and other senior management member shall report periodically to the Company their shareholding of the Company's stock and its changes. Share transfers by

 

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the foregoing personnel shall proceed in accordance with laws, regulations and/or applicable listing rules.

 

Article 42

 

All the profits gained by directors, supervisor, general managers, deputy general managers and other senior executives and a shareholder holding above 5% of the Company's shares through selling his shares issued by the Company in six months following the purchase of such shares or through repurchasing his shares issued by the Company in six months following the sale of such shares belong to the Company and the board will take back such proceeds, except that sale of shares will not be subject to the 6-month limit when the seller is a securities company that has become holder of more than 5% of the company's shares as remaining out of the underwritten quantity.

 

If the board fails to do so as required by the foregoing provision, the shareholder shall have the right to require the board to execute said provision within 30 days. When the board continues to fail the execution within said period of time, the shareholder shall have the right to directly bring a legal action before a people's court in his own name and for the interests of the company.

 

If the board fails to execute the first provision, the responsible director(s) shall be jointly liable according to law.

 

Article 43

 

The Company shall keep a register of shareholders and enter therein the following particulars:

 

(1)

name, address (residential), occupation or nature of each shareholder;

 

 

(2)

class and number of shares held by each shareholder;

 

 

(3)

the amount paid or payable for the shares held by each shareholder;

 

 

(4)

the serial number of the share certificates held by each shareholder;

 

 

(5)

the date on which each person was entered in the register as a shareholder;

 

 

(6)

the date on which any person ceased to be a shareholder.

 

 

Unless there is evidence to the contrary, the register of shareholders shall be sufficient evidence of shareholdings in the Company.

 

Article 44

 

The Company may, in accordance with the agreement or understanding between the authorities of the State Council responsible for securities and overseas securities regulatory authorities, keep the register of shareholders in relation to overseas listed foreign shares outside the PRC and may appoint overseas agencies to manage such register. The original register of shareholders in relation to overseas listed foreign shares of the Company shall be kept in Hong Kong.

 

Copies of the register of shareholders in relation to overseas listed foreign shares shall be kept at the seat of the Company. Appointed overseas agencies shall from time to time ensure that the original register of shareholders in relation to overseas listed foreign shares and the copies thereof be consistent.

 

Where there is any inconsistency between the original register of shareholders of overseas listed foreign

 

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shares and the copies thereof, the original shall prevail.

 

Article 45

 

The Company shall have a complete register of shareholders.

 

The register of shareholders shall contain the following parts:

 

(1)

register of shareholders other than those provided in paragraphs (2) and (3) below kept at the seat of the Company;

 

 

(2)

register of shareholders in relation to overseas listed foreign shares kept at the location of the overseas stock exchange in which those shares are listed;

 

 

(3)

register of shareholders kept in other place(s) as the board of directors of the Company thinks fit for the purpose of listing the shares of the Company.

 

 

Article 46

 

Different parts of the register of shareholders shall not overlap. No transfer of any shares registered in any part of the register of shareholders, shall during the continuance of that registration, be registered in any other part of the register of shareholders.

 

All the fully paid overseas foreign shares listed in Hong Kong shall be freely transferable pursuant to the Articles of Association. However, the board of directors may refuse to recognize any instrument of transfer without assigning any reason thereof, unless:

 

(1)

a sum of HK$2.5 for each instrument of transfer or such higher amount as approved by the HKSE for the time being has been paid to the Company for registering any instrument of transfer or other documents related to or affecting the ownership of any shares;

 

 

(2)

the instrument of transfer only involves overseas listed foreign shares listed in Hong Kong;

 

 

(3)

the stamp duty payable in respect of the instrument of transfer has been paid;

 

 

(4)

relevant share certificates and such other evidence as the board of directors may reasonably require to show the right of the transferor to make the transfer have been produced;

 

 

(5)

if the shares are transferred to joint holders, the number of joint holders shall not exceed 4; and

 

 

(6)

the shares concerned are free of any lien in favour of the Company.

 

 

The overseas listed foreign shares of the Company shall be transferred in an ordinary or regular way or a way acceptable to the board of directors; such instrument of transfer may be executed by way of signing or affixing of valid seal in case the transferer or transferee is a corporate. In case the transferer or transferee is a clearing institution or its agent, such instrument of transfer may be executed by way of signing or affixing of seal in mode of printing. All instruments of transfer shall be placed at the legal address of the Company or any such place designated by the board of directors from time to time.

 

Any amendments or corrections to the different parts of the register of shareholders shall be carried out according to the governing laws of the place where the register of shareholders are kept.

 

Article 47

 

No registration of changes in the shareholder roster as a result of stock transfer can take place within 30 days

 

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preceding the convocation of general shareholder meeting or five days preceding the day on which the Company decides to allocate dividends. The foregoing applies to H Shares shareholders. Note: The present article is not applicable to A Shares shareholders.

 

Article 48

 

When the Company convokes a general shareholder meeting, allocates dividend, liquidates or performs other activities that require the verification of equity rights, the board of directors or the general meeting convener must specify a date as the equity rights determination date. The shareholders registered in shareholder roster after closing as at the equity rights determination date are the Company's shareholders entitled to appropriate rights and interests.

 

Article 49

 

Any person who does not agree to the register of shareholders and requests to have his name registered thereon or removed therefrom may apply to the court of law with competent jurisdiction on the register for rectification of the register.

 

Article 50

 

Any shareholder whose name is registered in the register of shareholders or any person who requests to have his name registered in the register of shareholders who has lost his share certificate (the "Original Certificate"), may apply to the Company for issuing new share certificate in respect of such shares (the "Relevant Shares").

 

Domestic shareholder who has lost his share certificate may apply for the issue of new share certificate in accordance with Section 144 of the Company Law.

 

Holder of overseas listed foreign shares who has lost his share certificate may apply for the issue of new share certificate in accordance with the laws, stock exchange rules and other relevant regulations of the place where the original register of shareholders in relation to overseas listed foreign shares is kept.

 

Application for replacement of lost share certificate made by a holder of H Shares shall be subject to the following requirements:

 

(1)

Applicant shall submit the application in standard form prescribed by the Company together with a notarial certificate or statutory declaration. The notarial certificate or statutory declaration shall include the reason of the application made by the applicant, the circumstances under which the share certificate was lost and the supporting evidence and a declaration that no other person shall be entitled to register as a shareholder in respect of the Relevant Shares.

 

 

(2)

No declaration made by any person other than the applicant has been received by the Company for registration as a shareholder of the Relevant Shares prior to the determination of the Company to issue new certificate.

 

 

(3)

If the Company determines to issue new share certificate to the applicant as replacement, it shall publish a notification for issuing new certificate for replacement purpose in the newspaper designated by the board of directors and the period for such notification shall be 90 days and such notification shall be published at least once every 30 days.

 

 

(4)

Prior to the publishing of the notification for issuing new certificate for replacement purpose, the Company shall submit a copy of the notification to be published to the stock exchange where its shares are listed. The notification may be published upon the reply of such stock exchange confirming that the said notification has been exhibited in such stock exchange. The period for the exhibition of the

 

 

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notification in such stock exchange shall be 90 days.

 

 

 

If the consent of the application for replacement of the certificates has not been obtained for the registered shareholders of the Relevant Shares, the Company shall send to the said shareholder by post a copy of such notification to be published.

 

 

(5)

Upon the expiry of 90 days for the publication and exhibition of the notification as provided in paragraphs (3) and (4) above and no objection has been received from any person against the replacement of certificate, new share certificate shall be issued to the applicant based on his application.

 

 

(6)

Where the Company issues new share certificate pursuant to this article, it shall forthwith cancel the Original Certificate and make such entry in the register of shareholders in order to record such cancellation and issue.

 

 

(7)

All expenses relating to the cancellation of Original Certificate and the issue of new share certificate by the Company shall be borne by the applicant. The Company shall be entitled to refuse to take any action until the applicant can provide reasonable indemnity.

 

 

Article 51

 

Upon the issue by the Company of new share certificate pursuant to the provisions of the Articles of Association, the name of the bona fide purchaser who acquires the Relevant Shares or the person who subsequently registered as the shareholder of the said shares (as a bona fide purchaser) shall not be removed from the register of shareholders.

 

Article 52

 

The Company shall assume no liability for any loss incurred by any person as a result of the cancellation of the Original Certificate or in issuing new share certificate, unless it can be proved by such person that the Company is fraudulent.

 

Chapter 7

Rights and Obligations of Shareholders

 

 

Article 53

 

Shareholders of the Company shall be the persons who hold the shares of the Company in accordance with the laws and have their names registered in the register of shareholders.

 

Shareholders shall enjoy the rights and assume the obligations according to the class of and number of shares held by them. Shareholders holding the same class of shares shall enjoy the same rights and assume the same obligations.

 

In case of joint holders, if one of the joint holders dies, only the surviving joint holders shall be deemed by the Company to be such persons as having the ownership of the relevant shares. The board of directors shall have the right, for the purpose of making amendments to the register of shareholders, to demand a death certificate where it deems appropriate to do so. In case of joint holding of shares, only the joint holder whose name appears first in the register of members is entitled to receive the relevant shares and the Company's notices, and to attend and exercise voting rights at a general meeting of the Company. Any notice delivered to that person shall be deemed as having been delivered to all joint holders of the relevant shares.

 

The Company shall not exercise any of its rights to freeze or otherwise impair any of the rights attaching to any shares of the Company by reason only that person or persons who are interested directly or indirectly therein have failed to disclose their interests to the Company.

 

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Article 54

 

A holder of ordinary shares of the Company shall have the following rights:

 

(1)

to claim dividends and distribution of profits in any other form in proportion to the number of shares held;

 

 

(2)

lawfully request, convene, chair, attend in person or appoint a proxy to attend and vote at shareholder's general meetings in respect of the number of shares held;

 

 

(3)

to supervise and manage the business activities of the Company and to put forward proposals and raise inquiries;

 

 

(4)

to transfer, donate or pledge shares in accordance with the laws, administrative regulations and the Articles of Association;

 

 

(5)

to receive information as provided in the Articles of Association of the Company, including:

 

 

 

1.

the right to a copy of the Articles of Association upon payment of the costs thereof;

 

 

 

 

2.

upon payment of reasonable charges, the right to inspect and make copies of:

 

 

 

 

 

(1)

all parts of the register of shareholders;

 

 

 

 

 

 

(2)

personal particulars of the directors, supervisors, general manager and other senior management officers of the Company, including:

 

 

 

 

 

 

 

(a)

present forename and surnames and any former forename or surname and any aliases;

 

 

 

 

 

 

 

 

(b)

principal address (residential);

 

 

 

 

 

 

 

 

(c)

nationality;

 

 

 

 

 

 

 

 

(d)

occupation and all other part-time occupation and duties;

 

 

 

 

 

 

 

 

(e)

identification documents and its number.

 

 

 

 

 

 

 

(3)

state of the share capital of the Company;

 

 

 

 

 

 

(4)

reports showing the total nominal value and number of shares repurchased by the Company since the end of the last financial year, the highest and the lowest price paid and the aggregate amount paid by the Company in respect of each class of its shares repurchased;

 

 

 

 

 

 

(5)

minutes of shareholders' general meetings, resolutions of board meetings and supervisory committee meetings.

 

 

 

 

 

 

(6)

debenture counterfoils and financial reports of the company.

 

 

 

 

(6)

the right to participate in the distribution of the surplus assets of the Company in proportion to the number of shares held in the event of the termination or liquidation of the Company;

 

 

(7)

Shareholders disagreeing with general meetings' resolutions on merger or division of the company may require the company to acquire the shares in their possession.

 

 

(8)

Lodge legal actions before people's courts against acts damaging the company's interests or infringing

 

 

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shareholders' legal rights and interests and claim for relevant rights according to Companies Law or other laws and administrative regulations;

 

 

(9)

any other rights specified in laws, administrative regulations departmental rules and the Company's Articles of Association.

 

 

Article 55

 

A holder of ordinary shares of the Company shall undertake the following obligations:-

 

(1)

to comply with the Articles of Association;

 

 

(2)

to pay subscription monies according to the number of shares subscribed and the method of subscription;

 

 

(3)

Withdrawal of contribution is not permitted unless otherwise required by laws and regulations;

 

 

(4)

Not abuse shareholder's rights to damage the interests of the company or other shareholders; and not abuse the company's independent legal capacity and the shareholder's limited liability to damage the interests of the company's creditors. A shareholder causing losses of the company or other shareholders by abusing his shareholder's rights shall be liable for compensation according to law. A shareholder evading debts and severely damage the interests of the company's creditors by abusing the company's independent legal capacity and his limited shareholder's liability shall be jointly liable for the company's debts;

 

 

(5)

other obligations specified in laws, administrative regulations and the Company's Articles of Association.

 

 

A shareholder shall not be liable to make further contribution to the share capital other than the terms as agreed by the subscriber at the time of subscription.

 

Article 56

 

The controlling shareholder and actual controller of the company shall not damage the company's interests by virtue of its related position, or otherwise it shall be liable for compensating the resulting losses of the company.

 

The controlling shareholder and actual controller of the company assumes integrity obligation to the company and its public shareholders. The controlling shareholder shall exercise its rights as investor in strict compliance with law, not damage the legal rights and interests of the company and its public shareholders through profit sharing, asset restructuring, external investment, occupation of funds or providing surety for loans, and not leverage on its controlling position to impair the interests of the company and its public shareholders.

 

Article 57

 

In addition to the obligations imposed by the laws and administrative regulations or required by the listing rules of the stock exchange on which the shares of the Company are listed, the controlling shareholder, in exercising the power as a shareholder, shall not exercise his voting rights in a manner prejudicial to the interests of all or some part of the shareholders when making decision on the following matters:

 

(1)

to relieve a director or Supervisor of his duty to act honestly in the best interests of the Company;

 

 

(2)

to approve the expropriation by a director or Supervisor (for his own benefit or for the benefit of

 

 

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(2)

another), in any guise, the assets of the Company, including but not limited to an opportunity beneficial to the Company;

 

 

(3)

to approve the expropriation by a director or Supervisor (for his own benefit or for the benefit of another) the individual rights of other shareholders, including but not limited to rights to distributions and voting rights save and except restructuring of the Company submitted for approval by the shareholders in general meeting in accordance with the Articles of Association.

 

 

Article 58

 

A controlling shareholder referred to in the preceding article means a person who satisfies any one of the following conditions:

 

(1)

he may alone or acting in concert with others have the power to elect more than half of the directors;

 

 

(2)

he may alone or acting in concert with others have the power to exercise 30 per cent. or more of the voting rights in the Company or control the exercise of 30 per cent. or more of the voting rights in the Company;

 

 

(3)

he may alone or acting in concert with others holds 30 per cent. or more of the issued shares of the Company;

 

 

(4)

he may alone or acting in concert with others have de facto control of the Company in any other manner.

 

 

Chapter 8

Shareholders' General Meetings

 

 

Article 59

 

The shareholders' general meeting shall be the source of authority of the Company and shall exercise its powers according to the laws.

 

Article 60

 

The shareholders' general meeting shall have the following powers:-

 

(1)

to determine the business policies and investment plans;

 

 

(2)

to elect and replace directors and to determine the remuneration of the directors;

 

 

(3)

to elect and replace Supervisors who are representatives of the shareholders and to determine the remuneration of such Supervisors;

 

 

(4)

to consider and to approve the report of the board of directors;

 

 

(5)

to consider and to approve the report of the supervisory committee;

 

 

(6)

to consider and to approve the annual financial budgets and final accounts;

 

 

(7)

to consider and to approve the plan for profit distribution and plan for making up losses;

 

 

(8)

to resolve on the increase in or reduction of the registered capital of the Company;

 

 

(9)

to resolve on the amalgamation, demerger, dissolution and liquidation of the Company;

 

 

(10)

to resolve on the issue of debentures of the Company;

 

 

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(11)

to resolve on the appointment, dismissal or discontinuance of appointment of the accounting firm;

 

 

(12)

to amend the Articles of Association;

 

 

(13)

to examine and approve decisions in relation to share-based remunerations (such as right share or share option etc.) of the employees;

 

 

(14)

make decision on purchase or sale of substantial assets within one year that exceed 25% of the company's total assets;

 

 

(15)

make decisions on external guarantee matters subject to review and approval by general meetings as required by laws, administrative regulations and the Article of Association of the company;

 

 

(16)

review and approve changes of purpose of the funds raised;

 

 

(17)

other matters the resolutions concerning which shall be made by the shareholders' general meeting, as stipulated by laws, administrative regulations, department rules and the Articles of Association of the Company

 

 

The shareholders' general meeting may authorize or appoint the board of directors to effect those matters authorised or appointed by the shareholders' general meeting.

 

Article 61

 

Any and all external guarantee matters of the company shall be subject to review and approval of the board. The following guarantee matters shall further be submitted to general meeting for review and approval:

 

(1)

Any guarantee provided after the gross amount of external guarantees offered by the company and its held subsidiaries has reached or exceeded 50% of the latest audited net asset;

 

 

(2)

Guarantee offered to an object with an asset-debt ratio of above 70%;

 

 

(3)

Any single guarantee amounting above 10% of the latest audited net asset;

 

 

(4)

Guarantee offered to a shareholder, the actual controller of the company or its related parties;