PREPAID LAND USE RIGHTS

9 Months Ended

Sep. 30, 2013

NOTE 9

PREPAID LAND USE RIGHTS

The Company has recorded as prepaid land use rights the lump sum payments made to acquire long-term interests to utilize the land underlying the building and production facility. This type of arrangement is common for the use of land in the PRC. The prepaid land use rights are expensed on the straight-line basis over the term of the land use rights of 50 years.

The amounts expensed on the prepaid land use right were $307,902 and $302,940 for the nine months ended September 30, 2013 and 2012, and $103,503 and $100,673 for the three months ended September 30, 2013 and 2012, respectively. The estimated expense of the prepaid land use rights over each of the next five years and thereafter will be $415,023 per annum.

As of September 30, 2013, prepaid land use rights included RMB32,399,100 ($5,269,860) representing payments made by Lihua Copper to a local authority to acquire a 50-year right to use a parcel of land which will be used for expansion of its manufacturing facilities. As of September 30, 2013, RMB2,399,100 ($390,224) remained unpaid and is included as other payables and accruals. Apart from the payment of $5,269,860 to the local authority, the Company also paid $5,901,242 to various local authorities primarily as compensation to the local communities in connection with the Company’s acquisition of these land use rights.

The Company has completed all the formalities in relation to the acquisition of the land use rights, except for paying the last payment of RMB2,399,100 ($390,224). Based on the Company’s understanding of the process, each year the local government allocates certain area (mu) of land to selected local manufacturers. However, the physical land use right certificates are not issued to those manufacturers until the local government receives the formal annual land quota from the state government. The Company received a land use rights certificate in November 2011 for 100 mu out of a total of 180 mu of land allocated to the Company, and management believes they can receive the land use rights certificate for the remaining 80 mu. However, the timing of receiving the certificate is highly dependent on the local government. Upon receipt of the land use right certificates for the remaining 80 mu of land, the Company will pay the remaining land use payments.

Based upon the local government practice, as well as the Company’s prior experience obtaining land use rights after going through the same process, management believes that the risk of losing the already allocated land use right is extremely low. In the unlikely event that the local government is unable to issue the physical land use right certificate for the remaining 80 mu of land, the Company believes it would have the right to receive a refund of the payment we made to the local government with respect to the land use right and, request to receive additional monies from the local government for construction costs incurred to date on the land.