6-K 1 chnr6k.htm UNITED STATES


 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________

FORM 6-K

______________


REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934


For the month of December 2008.


Commission File Number 0-26046


______________

China Natural Resources, Inc.

(Translation of registrant's name into English)

______________


Room 2205, West Tower, Shun Tak Centre,

200 Connaught Road Central, Sheung Wan, Hong Kong

(Address of principal executive offices)


Indicate by check mark whether the registrant files of will file annual reports under cover of Form 20-F or Form 40-F.  Form 20-F [X]   Form 40-F [ ]


Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): [ ]


Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): [ ]


Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12b3-2(b) under the Securities Exchange Act of 1934. Yes [ ] No [X].


If "Yes" is marked, indicated below the file number assigned to the registrant in connection with Rule 12b3-2(b): 82-_________.


 

 





Unaudited Results of Operations


Furnished herewith on behalf of China Natural Resources, Inc. are the following:


(a)

Unaudited Financial Statements:


-

Condensed Consolidated Statements Of Operations And Comprehensive Income (Unaudited) For The Three and Six Months Ended June 30, 2008 and 2007.


-

Condensed Consolidated Balance Sheets as of June 30, 2008 (Unaudited) and December 31, 2007


-

Condensed Consolidated Statements Of Cash Flows (Unaudited) For The Six Months Ended June 30, 2008 and 2007


-

Notes to Condensed Consolidated Financial Statements (Unaudited)


(b)

Management’s Discussion and Analysis of Financial Condition and Results of Operations


Neither the foregoing financial information nor the press release furnished herewith shall be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, and is not incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.


Exhibits


99.1

Press Release dated December 29, 2008.





SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


         

CHINA NATURAL RESOURCES, INC.

 

 

  

 

 

 

 

By:  

/s/ LI FEILIE

 

 

Li Feilie

Chairman and Chief Executive Officer

 

Date:   December 29, 2008




CHINA NATURAL RESOURCES, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)

THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007

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


  

 

Three Months Ended June 30.

 

 

Six Months Ended June 30.

 

  

 

2008

 

 

2007

 

 

2008

 

 

2008

 

 

2007

 

 

2008

 

  

 

RMB

 

 

RMB

 

 

US$

 

 

RMB

 

 

RMB

 

 

US$

 

NET SALES (Note 5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Related party

 

 

163,625

 

 

 

––

 

 

 

23,872

 

 

 

166,687

 

 

 

––

 

 

 

24,319

 

Others

 

 

79,850

 

 

 

33,070

 

 

 

11,650

 

 

 

115,457

 

 

 

58,962

 

 

 

16,844

 

  

 

 

243,475

 

 

 

33,070

 

 

 

35,522

 

 

 

282,144

 

 

 

58,962

 

 

 

41,163

 

COST OF SALES

 

 

(197,445

)

 

 

(10,205

)

 

 

(28,806

)

 

 

(229,095

)

 

 

(17,991

)

 

 

(33,423

)

GROSS PROFIT

 

 

46,030

 

 

 

22,865

 

 

 

6,716

 

 

 

53,049

 

 

 

40,971

 

 

 

7,740

 

SELLING, GENERAL AND

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ADMINISTRATIVE EXPENSES,

 

 

(11,696

)

 

 

(2,673

)

 

 

(1,706

)

 

 

(25,435

)

 

 

(5,738

)

 

 

(3,711

)

including share-based compensation expense of RMB13,008 (US$1,898) for the six months ended 30 June 2008(2007: nil) and RMB6,504 (US$949) for the three months ended 30 June 2008 (2007: nil)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

 

34,334

 

 

 

20,192

 

 

 

5,010

 

 

 

27,614

 

 

 

35,233

 

 

 

4,029

 

INTEREST EXPENSE

 

 

(833

)

 

 

––

 

 

 

(122

)

 

 

(1,068

)

 

 

––

 

 

 

(156

)

INTEREST INCOME

 

 

372

 

 

 

424

 

 

 

54

 

 

 

1,120

 

 

 

843

 

 

 

163

 

OTHER INCOME (EXPENSE), NET

 

 

(698

)

 

 

(34

)

 

 

(102

)

 

 

2,705

 

 

 

(41

)

 

 

395

 

LOSS ATTRIBUTABLE TO INVESTMENT IN UNCONSOLIDATED INVESTEE

 

 

(2,306

)

 

 

––

 

 

 

(336

)

 

 

(4,437

)

 

 

––

 

 

 

(647

)

INCOME BEFORE INCOME TAXES

 

 

30,869

 

 

 

20,582

 

 

 

4,504

 

 

 

25,934

 

 

 

36,035

 

 

 

3,784

 

INCOME TAXES

 

 

(8,114

)

 

 

(3,267

)

 

 

(1,184

)

 

 

(8,748

)

 

 

(5,798

)

 

 

(1,277

)

NET INCOME

 

 

22,755

 

 

 

17,315

 

 

 

3,320

 

 

 

17,186

 

 

 

30,237

 

 

 

2,507

 

OTHER COMPREHENSIVE LOSS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(3,504

)

 

 

(360

)

 

 

(511

)

 

 

(15,753

)

 

 

(564

)

 

 

(2,298

)

COMPREHENSIVE INCOME

 

 

19,251

 

 

 

16,955

 

 

 

2,809

 

 

 

1,433

 

 

 

29,673

 

 

 

209

 

INCOME PER SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

1.18

 

 

 

1.50

 

 

 

0.17

 

 

 

0.91

 

 

 

2.62

 

 

 

0.13

 

Diluted

 

 

0.99

 

 

 

1.29

 

 

 

0.14

 

 

 

0.77

 

 

 

2.23

 

 

 

0.11

 

WEIGHTED AVERAGE NUMBER OF

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHARES OUTSTANDING

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

19,323,416

 

 

 

11,548,416

 

 

 

19,323,416

 

 

 

18,982,757

 

 

 

11,548,416

 

 

 

18,982,757

 

Diluted

 

 

22,926,151

 

 

 

13,377,836

 

 

 

22,926,151

 

 

 

22,235,670

 

 

 

13,547,420

 

 

 

22,235,670

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements

 

 

 

 

 

 

 

 

 




CHINA NATURAL RESOURCES, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2008 AND DECEMBER 31, 2007

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


 

 

 

 

 

June 30,

 

 

December 31,

 

 

June 30,

 

 

 

 

 

 

2008

 

 

2007

 

 

2008

 

 

 

 

 

 

RMB

 

 

RMB

 

 

US$

 

 

 

Notes

 

 

(Unaudited)

 

 

 

 

 

(Unaudited)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

323,362

 

 

 

483,689

 

 

 

47,177

 

Trade receivables

 

 

 

 

 

2,008

 

 

 

1,525

 

 

 

293

 

Bills receivable

 

 

 

 

 

24,720

 

 

 

13,000

 

 

 

3,606

 

Other receivables

 

 

 

 

 

73,515

 

 

 

967

 

 

 

10,725

 

Inventories

 

 

3

 

 

 

222,247

 

 

 

4,633

 

 

 

32,424

 

Prepaid assets

 

 

 

 

 

 

42,307

 

 

 

––

 

 

 

6,173

 

Due from related companies

 

 

5

 

 

 

33,118

 

 

 

––

 

 

 

4,832

 

TOTAL CURRENT ASSETS

 

 

 

 

 

 

721,277

 

 

 

503,814

 

 

 

105,230

 

INVESTMENT IN UNCONSOLIDATED INVESTEES

 

 

6

 

 

 

26,958

 

 

 

30,495

 

 

 

3,933

 

PROPERTY AND EQUIPMENT, NET

 

 

4

 

 

 

247,732

 

 

 

37,772

 

 

 

36,143

 

OTHER ASSETS

 

 

 

 

 

 

8,823

 

 

 

10,000

 

 

 

1,287

 

TOTAL ASSETS

 

 

 

 

 

 

1,004,790

 

 

 

582,081

 

 

 

146,593

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

 

 

 

 

 

89,845

 

 

 

991

 

 

 

13,108

 

Advance from customers

 

 

 

 

 

 

5,206

 

 

 

2,169

 

 

 

760

 

Accrued liabilities

 

 

 

 

 

 

4,194

 

 

 

3,367

 

 

 

612

 

Taxes payable

 

 

 

 

 

 

4,269

 

 

 

5,593

 

 

 

623

 

Other payables

 

 

 

 

 

 

38,144

 

 

 

32,497

 

 

 

5,565

 

Dividends payable

 

 

 

 

 

 

170

 

 

 

170

 

 

 

25

 

Capital lease obligation – current portion

 

 

7

 

 

 

9,607

 

 

 

––

 

 

 

1,402

 

Due to related companies

 

 

5

 

 

 

243,552

 

 

 

2,221

 

 

 

35,532

 

TOTAL CURRENT LIABILITIES

 

 

 

 

 

 

394,987

 

 

 

47,008

 

 

 

57,626

 

NON CURRENT LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital lease obligation – non current portion

 

 

7

 

 

 

15,868

 

 

 

––

 

 

 

2,315

 

TOTAL LIABILITIES

 

 

 

 

 

 

410,855

 

 

 

47,008

 

 

 

59,941

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Preferred shares, no par:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Authorized - 10,000,000 shares;

 

 

 

 

 

 

––

 

 

 

––

 

 

 

––

 

Common shares, no par:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Authorized - 200,000,000 shares;

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issued and outstanding - 17,323,416 and 19,323,416 shares at December 31, 2007 and June 30, 2008, respectively

 

 

 

 

 

 

312,081

 

 

 

312,081

 

 

 

45,531

 

   Reserves

 

 

 

 

 

 

7,331

 

 

 

7,331

 

 

 

1,069

 

    Additional paid-in capital

 

 

8

 

 

 

198,272

 

 

 

127,707

 

 

 

28,927

 

    Excess of purchase price to controlling shareholder

 

 

2

 

 

 

(13,136

)

 

 

––

 

 

 

(1,916

)

    Retained earnings

 

 

 

 

 

 

118,101

 

 

 

100,916

 

 

 

17,230

 

    Other comprehensive loss

 

 

 

 

 

 

(28,714

)

 

 

(12,961

)

 

 

(4,189

)

TOTAL SHAREHOLDERS' EQUITY

 

 

 

 

 

 

593,935

 

 

 

535,073

 

 

 

86,652

 

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

1,004,790

 

 

 

582,081

 

 

 

146,593

 

 

 

See notes to condensed consolidated financial statements

 




CHINA NATURAL RESOURCES, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2008 AND 2007

(Amounts in thousands)


 

 

Six months ended June 30,

 

 

 

2008

 

 

2007

 

 

2008

 

 

 

RMB

 

 

RMB

 

 

US$

 

Net cash (used in)/ provided by operating activities

 

 

(69,545

)

 

 

22,443

 

 

 

(10,146

)

  

 

 

 

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(6,612

)

 

 

(986

)

 

 

(965

)

Investment in an unconsolidated investee

 

 

(900

)

 

 

––

 

 

 

(131

)

Net cash received on acquisition of subsidiary

 

 

14,694

 

 

 

––

 

 

 

2,144

 

Advance to an unconsolidated investee

 

 

(29,796

)

 

 

––

 

 

 

(4,347

)

Advances from related companies

 

 

30,827

 

 

 

––

 

 

 

4,497

 

Repayment from related companies

 

 

42,524

 

 

 

––

 

 

 

6,204

 

Repayment to related companies

 

 

(173,817

)

 

 

(1,131

)

 

 

(25,359

)

Repayment to a director

 

 

––

 

 

 

(8,508

)

 

 

––

 

  

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(123,080

)

 

 

(10,625

)

 

 

(17,957

)

  

 

 

 

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from exercise of warrant

 

 

57,558

 

 

 

––

 

 

 

8,397

 

Repayment for capital lease

 

 

(4,524

)

 

 

––

 

 

 

(660

)

  

 

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

53,034

 

 

 

––

 

 

 

7,737

 

  

 

 

 

 

 

 

 

 

 

 

 

 

NET (DECREASE)/ INCREASE IN CASH AND CASH EQUIVALENTS

 

 

(139,591

)

 

 

11,818

 

 

 

(20,366

)

  

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(20,736

)

 

 

(679

)

 

 

(3,024

)

  

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, at beginning of period

 

 

483,689

 

 

 

136,991

 

 

 

70,567

 

  

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, at end of period

 

 

323,362

 

 

 

148,130

 

 

 

47,177

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 





CHINA NATURAL RESOURCES, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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


1.

BASIS OF PRESENTATION


Management has elected to prepare the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”).  Accordingly, they do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.  It is therefore suggested that these unaudited condensed consolidated financial statements be read in conjunction with the summary of significant accounting policies and notes to financial statements included in the Company’s Annual Report on Form 20-F for the year ended December 31, 2007, filed with the SEC in June 2008.  In the opinion of management, except as disclosed below, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and six-month periods ended June 30, 2008, are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.


Our consolidated financial statements include the accounts of China Natural Resources, Inc. and those of its direct and indirect wholly-owned and majority-owned subsidiaries (collectively referred to as the “Company”).  The Company’s subsidiaries as of January 1, 2008, are as described in the Company’s Form 20-F for the year ended December 31, 2007.


On March 4, 2008, the Company acquired Mark Faith Technology Development Limited, a Hong Kong company and its wholly-owned subsidiary, Bayannaoer City Feishang Copper Company Limited, a PRC company (Note 2).  The results of operations of Mark Faith have been included in the Company’s interim consolidated financial statements since its acquisition date.


During the six months ended June 30, 2008, the Company also formed a new wholly-owned subsidiary, China Coal Mining Investment Limited (“China Coal”).  The Company, through Yunnan Feishang Mining Co. Ltd. and China Coal, also established an indirectly wholly-owned subsidiary Yangpu Lianzhong Mining Co., Ltd. (“Yangpu Lianzhong”).


For the convenience of the reader, amounts in Renminbi (“RMB”) have been translated into United States dollars (“US$”) at the applicable rate of US$1.00 = RMB6.8543 as quoted by the People’s Bank of China as of June 30, 2008.  No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate, or at all.


2.

ACQUISITION


On March 4, 2008 (the “Acquisition Date”), the Company acquired all of the issued and outstanding capital stock of Mark Faith Technology Development Limited (“Mark Faith”) and its wholly-owned subsidiary, Bayannaoer City Feishang Copper Company Limited (“Feishang Copper”), collectively referred to as “Mark Faith”.  The Company acquired Mark Faith from Feishang Group Limited (the “Shareholder”). The Shareholder, a British Virgin Islands corporation, is also the principal shareholder of China Natural Resources, Inc., and Mr. Li Feilie, the sole officer, director and beneficial owner of the Shareholder, is the Chairman and Chief Executive Officer of China Natural Resources, Inc.


The Company paid cash of RMB24,252 (approximately US$3,538), which was based on the lesser of  the audited consolidated net asset value of Mark Faith as of December 31, 2007 or RMB24,252.  In addition, the Company paid the Shareholder RMB47,291 (approximately US$6,899) in satisfaction of outstanding indebtedness of Mark Faith to the Shareholder.  The acquisition was accounted for using the purchase method of accounting.




Mark Faith was incorporated in Hong Kong in August 2006.  Mark Faith operates through its wholly-owned subsidiary, Feishang Copper, a company established under the laws of the People's Republic of China ("PRC") in Inner Mongolia.


Feishang Copper's principal business activity is the smelting of copper concentrates to produce blister copper (a highly pure copper produced during an intermediate stage of copper smelting).  The production process also produces sulfuric acid, gold and silver.  The copper smelting plant of Feishang Copper is located at Bayannaoer City, Inner Mongolia, the PRC, approximately 1,050 kilometers north of Beijing.


Feishang Copper commenced construction and installation of its copper smelting and refining facilities (the “Smelter”) in late 2005.  The Smelter has been in trial production since May 2007 and is not yet operating at full capacity.  The Smelter is expected to commence commercial production in early 2009, subject to the procurement of necessary permits from the relevant government authorities.


The following represents the preliminary purchase price allocation at the date of the Mark Faith acquisition:


  

 

RMB

 

 

US$

 

Cash and cash equivalents

 

 

38,947

 

 

 

5,682

 

Accounts receivable

 

 

8,876

 

 

 

1,295

 

Inventories and other current assets

 

 

259,593

 

 

 

37,873

 

Property and equipment

 

 

216,315

 

 

 

31,559

 

Other assets

 

 

2,480

 

 

 

362

 

Excess of purchase price over net asset value of Mark Faith

 

 

13,136

 

 

 

1,916

 

Current liabilities

 

 

(494,341

)

 

 

(72,121

)

Non current liabilities

 

 

(20,754

)

 

 

(3,028

)

  

 

 

 

 

 

 

 

 

Purchase price

 

 

24,252

 

 

 

3,538

 


The purchase price allocation is not considered final as of the date of this report because the audited net asset value of Mark Faith as of December 31, 2007 has not yet been finalized. The excess of the consideration paid over the carrying value of the net assets acquired has been classified as contra equity, similar to a distribution of equity.


The following unaudited pro forma financial information presents the Company’s consolidated results of operations as if the acquisition of Mark Faith had occurred as of the beginning of each of the periods presented below.  The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations that would have been reported by the Company had the acquisitions been completed as of the beginning of the periods presented, and should not be taken as representative of the Company’s future consolidated results of operations or financial condition.


  

 

Three Months Ended June 30

 

 

Six Months Ended June 30

 

  

 

2008

 

 

2007

 

 

2008

 

 

2008

 

 

2007

 

 

2008

 

  

 

RMB

 

 

RMB

 

 

US$

 

 

RMB

 

 

RMB

 

 

US$

 

Revenue

 

 

243,475

 

 

 

33,070

 

 

 

35,522

 

 

 

373,456

 

 

 

58,962

 

 

 

54,485

 

Net income

 

 

22,755

 

 

 

16,144

 

 

 

3,320

 

 

 

4,138

 

 

 

28,728

 

 

 

604

 

Net income per share – basic

 

 

1.18

 

 

 

1.40

 

 

 

0.17

 

 

 

0.22

 

 

 

2.49

 

 

 

0.03

 

Net income per share – diluted

 

 

0.99

 

 

 

1.21

 

 

 

0.14

 

 

 

0.19

 

 

 

2.12

 

 

 

0.03

 





3.

INVENTORIES


  

 

June 30,

2008

 

 

December 31,

2007

 

 

June 30,

2008

 

  

 

RMB

 

 

RMB

 

 

US$

 

Raw materials

 

 

90,204

 

 

 

4,024

 

 

 

13,160

 

Work in progress

 

 

69,880

 

 

 

422

 

 

 

10,195

 

Finished goods

 

 

62,163

 

 

 

187

 

 

 

9,069

 

  

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

222,247

 

 

 

4,633

 

 

 

32,424

 


4.

PROPERTY AND EQUIPMENT, NET


  

 

June 30,

2008

 

 

December 31,

2007

 

 

June 30,

2008

 

  

 

RMB

 

 

RMB

 

 

US$

 

At cost:

 

 

 

 

 

 

 

 

 

  Buildings

 

 

66,801

 

 

 

27,919

 

 

 

9,746

 

  Machinery and equipment

 

 

190,362

 

 

 

6,537

 

 

 

27,773

 

  Motor vehicles

 

 

6,301

 

 

 

3,571

 

 

 

919

 

  Mining rights

 

 

12,586

 

 

 

12,586

 

 

 

1,836

 

  

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

276,050

 

 

 

50,613

 

 

 

40,274

 

Accumulated depreciation and amortization

 

 

(28,318

)

 

 

(12,841

)

 

 

(4,131

)

  

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

247,732

 

 

 

37,772

 

 

 

36,143

 


5.

RELATED PARTY BALANCES AND TRANSACTIONS


At June 30, 2008, amounts due from/ to related companies comprise:


 

 

June 30,

2008

 

 

December 31,

2007

 

 

June 30,

2008

 

 

 

RMB

 

 

RMB

 

 

US$

 

Due from related companies:

 

 

 

 

 

 

 

 

 

Wuhu Heng Chang Copper Refining Co., Ltd. (“Wuhu Hengchang”)

 

 

25,774

 

 

 

––

 

 

 

3,760

 

Jiangxi Haiji Leasing Co., Ltd.

 

 

3,600

 

 

 

––

 

 

 

526

 

Wuhu Hengxin Copper Group Co., Ltd.

 

 

3,744

 

 

 

––

 

 

 

546

 

  

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

33,118

 

 

 

––

 

 

 

4,832

 

  

 

 

 

 

 

 

 

 

 

 

 

 

Due to related companies:

 

 

 

 

 

 

 

 

 

 

 

 

  Wuhu Feishang Non-Metal Material Co. Ltd. (“WFNM”)

 

 

79

 

 

 

1,197

 

 

 

12

 

  Shenzhen Xupu Investment Co., Ltd.

 

 

38,688

 

 

 

––

 

 

 

5,644

 

Feishang Group Limited

 

 

90,768

 

 

 

1,024

 

 

 

13,242

 

Wuhu Hengxin Copper Group Co., Ltd.

 

 

3

 

 

 

––

 

 

 

––

 

Wuhu Hengchang

 

 

114,014

 

 

 

––

 

 

 

16,634

 

  

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

243,552

 

 

 

2,221

 

 

 

35,532

 


Wuhu Hengchang, Jiangxi Haiji Leasing Co., Ltd., Wuhu Hengxin Copper Group Co., Ltd., WFNM, Shenzhen Xupu Investment Co., Ltd., and Feishang Group Limited, are controlled by Mr. Li Feilie who is also an officer, director and, indirectly, the principal beneficial shareholder of the Company.




The balances due to/ from the related companies are unsecured, interest-free and are repayable on demand.


Feishang Copper sells its products primarily to companies located in the PRC.  During the period from the acquisition date through June 30, 2008, approximately RMB163,625 (US$23,872) for the three months ended June 30, 2008 and RMB166,687 (US$24,319) for the six months ended June 30, 2008 of Feishang Copper’s sales were to Wuhu Henchang, a related company.


6.

INVESTMENT IN UNCONSOLIDATED INVESTEES


At June 30, 2008 and December 31, 2007, the Company owns 48% of Hainan Nonferrous Metal Mining Development Company Limited (“Hainan”) and at June 30, 2008, the Company owns 45% of Longchuan Jinshi Mining Development Company Limited (“Longchuan”)


Financial information of Hainan as of June 30, 2008 and December 31, 2007, and for the three and six months ended June 30, 2008, is as follows:


  

 

June 30,

2008

 

 

December 31,

2007

 

 

June 30,

2008

 

  

 

RMB

 

 

RMB

 

 

US$

 

Assets:

 

 

 

 

 

 

 

 

 

  Current assets

 

 

30,065

 

 

 

32,315

 

 

 

4,386

 

  Non-current assets

 

 

25,223

 

 

 

31,495

 

 

 

3,680

 

  

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

55,288

 

 

 

63,810

 

 

 

8,066

 

  

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

  Current liabilities

 

 

204

 

 

 

279

 

 

 

30

 

  Shareholders’ equity

 

 

55,084

 

 

 

63,531

 

 

 

8,036

 

  

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

55,288

 

 

 

63,810

 

 

 

8,066

 


  

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

  

 

2008

 

 

2008

 

 

2008

 

 

2008

 

  

 

RMB

 

 

US$

 

 

RMB

 

 

US$

 

Revenue

 

 

––

 

 

 

––

 

 

 

––

 

 

 

––

 

Expense

 

 

4,263

 

 

 

622

 

 

 

8,447

 

 

 

1,232

 

Net loss

 

 

(4,263

)

 

 

(622

)

 

 

(8,447

)

 

 

(1,232

)


Financial information of Longchuan as of June 30, 2008, and for the three and six months ended June 30, 2008, is as follows:


  

 

June 30, 2008

 

  

 

RMB

 

 

US$

 

Assets:

 

 

 

 

 

 

  Current assets

 

 

4,166

 

 

 

608

 

  Equipment

 

 

881

 

 

 

128

 

  

 

 

5,047

 

 

 

736

 

  

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

  Current liabilities

 

 

3,896

 

 

 

568

 

  Shareholders’ equity

 

 

1,151

 

 

 

168

 

  

 

 

5,047

 

 

 

736

 






  

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

  

 

2008

 

 

2008

 

 

2008

 

 

2008

 

  

 

RMB

 

 

US$

 

 

RMB

 

 

US$

 

Revenue

 

 

––

 

 

 

––

 

 

 

––

 

 

 

––

 

Expense

 

 

578

 

 

 

84

 

 

 

851

 

 

 

124

 

Net loss

 

 

(578

)

 

 

(84

)

 

 

(851

)

 

 

(124

)


7.

CAPITAL LEASE OBLIGATION


  

 

June 30,

2008

 

 

December 31, 2007

 

 

June 30,

2008

 

  

 

RMB

 

 

RMB

 

 

US$

 

Amount payable under capital lease:

 

 

 

 

 

 

 

 

 

  Within one year

 

 

9,607

 

 

 

––

 

 

 

1,402

 

  More than one year, but not exceeding

five years

 

 

15,868

 

 

 

––

 

 

 

2,315

 

Present value of lease obligations

 

 

25,475

 

 

 

––

 

 

 

3,717

 

Less: amount due within one year

 

 

(9,607

)

 

 

 

 

 

 

(1,402

)

  

 

 

 

 

 

 

 

 

 

 

 

 

Amount due after one year

 

 

15,868

 

 

 

––

 

 

 

2,315

 


The Company, through its recently acquired subsidiary Mark Faith, has entered into a capital lease obligation for certain of its plant and machinery for a lease term of three years commencing in December 2007.  The present value of this capital lease in December 2007 was RMB30,000 (US$4,377)


8.

ADDITIONAL PAID IN CAPITAL


  

 

RMB

 

 

US$

 

Balance at December 31, 2007

 

 

127,707

 

 

 

18,632

 

Exercise of warrant

 

 

57,557

 

 

 

8,397

 

Share based compensation

 

 

13,008

 

 

 

1,898

 

  

 

 

 

 

 

 

 

 

Balance at June 30, 2008

 

 

198,272

 

 

 

28,927

 


On February 1, 2008, the warrant holder exercised warrants to purchase 2,000,000 common shares and paid the Company the exercise price of US$8,000 (RMB57,557).


On January 7, 2008, 1,000,000 stock options were granted to the Company’s CEO at an exercise price of US$22.64 per share (the fair market value of the Company’s common stock as of the grant date).  The options were valued at approximately RMB78,048 (US$11,387), which are being amortized over the requisite service period of three years.


9.

INCOME TAXES


In March 2007, the 10th People’s Congress of China passed the China Unified Corporate Income Tax Law (the “Unified Tax Law”), effective on January 1, 2008, which establishes a single unified 25% income tax rate for most companies, with a preferential income tax rate of 15% to be applicable to sino-foreign joint ventures for three years commencing from its third profitable year [2005 for Wuhu Feishang Enterprise Development Company Limited (“Wuhu”)] through its fifth profitable year (2007 for Wuhu).  Beginning January 1, 2008, income tax for all PRC subsidiaries of the Company is now levied at a 25% tax rate.  For the six months ended June 30, 2008, the difference between the statutory tax rate of 25% and the effective tax rate of approximately 34% is due to operating losses of certain companies of the Group for which these losses have been fully allowed for.





10.

SUBSEQUENT EVENTS


On July 11, 2008, the Company entered into an agreement to acquire all of the issued and the outstanding capital stock of Pineboom Investment Ltd. and its wholly-owned subsidiaries (collectively, the “Dayun Coal Mine”) and to assume the outstanding indebtedness of Dayun Coal Mine to the former shareholder on the closing date.  The total purchase price is to be US$25,000, subject to adjustment.  The closing of this acquisition is expected to occur in 2009.


On August 13, 2008,  the Company entered into an agreement to acquire all of the issued and the  outstanding capital stock of Newhold Investment Ltd. and its wholly-owned subsidiaries (collectively, the “Yongfu Coal Mine”) and to assume the outstanding indebtedness of Yongfu Coal Mine to the former shareholder on the closing date.  The total purchase price is to be US$42,000, subject to adjustment.  The closing of this acquisition is expected to occur in 2009.



11.

CONCENTRATION OF RISK


Concentration of credit risk:


Financial instruments that potentially subject the Company to significant concentration of credit risk consist principally of cash deposits and trade receivables.


(i)

Cash and cash deposits


The Company maintains its cash and cash deposits primarily with various PRC state-owned banks and Hong Kong based financial institutions.  The Company performs periodic evaluations of the relative credit standing of those financial institutions.


(ii)

Sales and trade receivables


The Company sells zinc, iron and copper products to companies in the PRC.  Management considers that the Company’s current customers are generally creditworthy, and credit is extended based on an evaluation of the customers’ financial conditions and, therefore, generally collateral is not required.  The Company maintains reserves for potential credit losses based on its loss history and aging analysis.  Such losses have been within management’s expectations.  At December 31, 2007, the largest five customers accounted for 100% of the Company’s trade receivables.  During the six months ended June 30, 2008, the largest five customers accounted for approximately 89% of Wuhu’s sales (approximately 12% of the Company’s total sales).  During the same period, the five largest customers of Feishang Copper accounted for approximately 93% of Mark Faith’s sales (approximately 81% of the Company’s total sales).


Wuhu’s entire production of zinc for the six months ended June 30, 2008 was sold to a single customer, Huludao Zinc Industry Co. Ltd. (“Huludao”).  Wuhu is a party to a one-year non-binding sales contract with Huludao, subject to renewal every year.  While the sales contract has been renewed on an annual basis in the past, in the event Wuhu and Huludao are unable to agree upon renewal terms or if Wuhu’s sales contract with Huludao is not renewed for any other reason, Wuhu will have to identify one or more alternative outlets for its mineral production.


Wuhu sub-contracts its ore extraction work to a third party.  To some extent, Wuhu’s operations are affected by the performance of the contractor, whose activities are not within the Company’s control.  If the contractor fails to achieve the guaranteed monthly extraction volume, or the contractor otherwise fails to perform its obligations under its agreement with the Company, the agreement may be terminated by the Company; however, termination of the relationship could adversely affect the Company’s operating results.




Feishang Copper has a one-year sales contract with Wuhu Hengchang (a related party) subject to annual renewal; however, the sales contract does not obligate Wuhu Henchang to purchase copper from Feishang Copper.  Given the large percentage of sales derived from Wuhu Hengchang, in the event Wuhu Hengchang ceases or reduces its purchases from Feishang Copper, or if Feishang Copper and Wuhu Hengchang are unable to agree upon renewal terms, or Feishang Copper’s sales contract with Wuhu Hengchang is not renewed for any other reason, Feishang Copper will have to identify other alternative outlets for its copper production which may have a material adverse effect on Feishang Copper’s results of operations.


Copper concentrates are required for Feishang Copper’s smelting and refining operation.  Copper concentrates are generally purchased domestically.  Feishang Copper has a long term supply agreement with Bayannaoer West Region Copper Co. Ltd. (“Bayannaoer West”), in connection with which Feishang Copper is required to make payment for materials prior to delivery.  For the period from the acquisition date through June 30, 2008, Bayannaoer West accounted for approximately 66% of Feishang Copper’s purchases of copper concentrates.


Feishang Copper’s financial results are significantly affected by the market price of the metal that it produces.  It has entered into copper future index contracts to manage price fluctuation.




MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


FORWARD LOOKING STATEMENTS


The following discussion includes statements that constitute “forward-looking statements” within the meaning of Federal securities laws.  These statements include, without limitation, statements regarding the intent, belief and current expectations of management with respect to the Company's policies regarding investments, dispositions, financings, conflicts of interest and other matters; and trends affecting the Company's financial condition or results of operations.  Forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, many of which are outside of our control, and actual results may differ materially from those in the forward-looking statement.  Among the risks and uncertainties that could cause our actual results to differ from our forward-looking statements are uncertainties relating to our business operations and operating results, uncertainties regarding the governmental, economic and political environment in the People’s Republic of China, risks and hazards associated with the Company’s mining and smelting activities, uncertainties associated with metal price volatility, uncertainties associated with the Company’s reliance on third-party contractors and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission, including without limitation the information set forth in our Annual Report on Form 20-F under the heading, "Risk Factors".  While management believes that its assumptions forming the bases for forward looking statements are reasonable, assumed facts or bases generally vary from actual results, and there can be no assurance that the expectations or beliefs expressed in forward looking statements will be achieved or accomplished.


SALES AND GROSS PROFIT


Sales for the six months ended June 30, 2008 reached a record RMB282.14 million (US$41.16 million), a surge of 378.53% compared to the same period of 2007.  The increase was mainly attributable to the consolidation of sales of blister copper, sulphuric acid following the acquisition of Mark Faith on March 4, 2008.  Revenue from Mark Faith contributed RMB243.88 million (US$35.58 million), or approximately 86.44% of the total sales of the Company.


Sales for the second quarter of 2008 totaled RMB243.48 million (US$35.52 million), a 636.22% increase over the same period last year.  The increase was mainly attributable to the contribution of the recently acquired Mark Faith subsidiary.


Sales of zinc concentrates, iron concentrates and micaceous dioxide iron grey by Wuhu during the six month period decreased by RMB20.69 million (US$3.02 million) or 35.09% to RMB38.27 million (US$5.58 million). The decrease was mainly caused by (i) a production suspension of all mines in Fanchang county (including our Wuhu mine site) for the first quarter of 2008 for safety evaluation triggered by a nearby mine accident that occurred on December 11, 2007 in Fanchang county; (ii) a drop in zinc concentrates production as a result of its mining operation entering the low ore grade zone; and (iii) a plunge in zinc concentrates from the peak in 2006 to only an average of approximately RMB9,659 during the period, despite a 121.93% rise in iron concentrates’ average price.


Sales of zinc concentrates, iron concentrates and micaceous dioxide iron grey by Wuhu for the second quarter of 2008 totaled RMB29.72 million (US$4.34 million), representing a decrease of RMB3.35 million (US$0.49 million) or 10.13% from the same period a year ago.  This was mainly caused by (i) the drop in the average selling price of zinc concentrates, although the price effect was partially offset by the increase in iron concentrates’ average selling price; and (ii) the drop in the volume of zinc concentrates as the mining operation was in the low ore grade region.


Gross profit margin for the six months ended June 30, 2008 fell to 18.80% from 69.49% in the same period of 2007.  This was a result of (i) the inherently lower gross profit margin characteristics of blister copper product from the recently acquired Mark Faith; and (ii) the drop in average selling price of zinc concentrates.  The gross profit margin for the second quarter of 2008 dropped from 69.14% last year to 18.91% this year primarily due to the same reasons cited above.





Gross profit margin of Wuhu dropped from 69.49% for the six months ended June 30, 2007 to 59.08% for the same period of 2008.  This was due to (i) an increase in processing cost arising from the decline of zinc grade; (ii) an increase in labor cost; and (iii) a decrease in the average selling price of zinc concentrates, although the decrease was partly offset by the increase in the average selling price of iron concentrates.  The drop in gross profit margin for the second quarter of 2008 was caused by the same factors.


SELLING, GENERAL AND ADMINISTRATIVE EXPENSES


Selling, general and administrative expenses increased by RMB19.70 million (US$2.87 million) or 343.27% to RMB25.44 million (US$3.71 million) for the six months ended June 30, 2008 from RMB5.74 million (US$0.84 million) for the same period of 2007.  The increase was mainly due to (i) the recognition of RMB13.01 million (US$1.90 million) employee share-based compensation expense (a non-cash item calculated at the time the share options were granted and based on a number of inputs such as the volatility of the market price of the company's stock for the past years); and (ii) the inclusion of selling, general and administrative expenses of RMB3.78 million (US$0.55 million) from the acquisition of Mark Faith since March 4, 2008.


Selling, general and administrative expenses increased by RMB9.02 million (US$1.32 million) or 337.56% to RMB11.70 million (US$1.71 million) for the second quarter of 2008 from RMB2.67 million (US$0.39 million) for the same quarter of 2007.  The increase was mainly resulted from (i) the recognition of RMB6.51 million (US$0.95 million) share-based compensation expense; and (ii) the inclusion of selling, general and administrative expenses following the acquisition of Mark Faith.


INTEREST EXPENSE


Interest expense for the three and six months ended June 30, 2008, primarily consisted of the capital lease obligation by Mark Faith.  The Company did not incur any interest expense for the three and six months ended June 30, 2007.


INTEREST INCOME


Interest income increased by RMB277,000 (US$40,000) or 32.86%, to RMB1,120,000 (US$163,000) for the six months ended June 30, 2008 from RMB843,000 (US$123,000) for the same period in 2007.  This increase was contributed by the higher cash balance in 2008 arising from the funds received in a private placement and the exercise price of employee stock options.


Interest income decreased by RMB52,000 (US$7,600) or 12.26%, to RMB372,000 (US$54,000) for the second quarter of 2008 from RMB424,000 (US$62,000) for the same quarter in 2007.  This was due to the lower saving rate earned on Hong Kong dollar deposits.


OTHER INCOME/ EXPENSE


Other income for the six months ended June 30, 2008 increased to RMB2,705,000 (US$394,000) from a net loss of RMB41,000 (US$6,000) for the same period in 2007.  This is primarily attributable to the gain on the copper future contracts, which was accounted for by the Company as a derivative financial instrument at fair value, for the purpose of hedging against a drop in the raw material copper price of Mark Faith.


The Company recorded a net loss of RMB698,000 (US$102,000) for the second quarter of 2008, compared to a net loss of RMB34,000 (US$5,000) for the same period a year earlier.  The increase was mainly due to the RMB RMB766,000 (US$112,000) loss on the copper future contracts for hedging purpose.




INCOME TAXES


Management believes that the Company is not subject to US taxes.


Under the current laws of the BVI, dividends and capital gains arising from the Company’s investments in the BVI are not subject to income taxes and no withholding tax is imposed on payments of dividends to the Company.


In March 2007, the 10th People’s Congress of China passed the Unified Tax Law, effective on January 1, 2008, which establishes a single unified 25% income tax rate for most companies, with a preferential income tax rate of 15% to be applicable to sino-foreign joint ventures for three years commencing from its third profitable year (2005 for Wuhu) through fifth profitable year (2007 for Wuhu).  Beginning January 1, 2008, income tax for all PRC’s subsidiaries of the Company is levied at a 25% tax rate.  For the six months ended June 30, 2008, the difference between the statutory tax rate of 25% and the effective tax rate of approximately 34% is due to operating losses of certain companies of the Group for which these losses have been fully allowed for.


NET INCOME


Net income decreased by RMB13,051,000 (US$1,904,000) from RMB30,237,000 (US$4,411,000) for the six months ended June 30, 2007 to RMB17,186,000 (US$2,507,000) for the six months ended June 30, 2008.  The drop was primarily due to (i) a continued softening in the price of zinc after it reached its peak in 2006; (ii) a reduction in the production of zinc concentrates as a result of its mining operations entering the low ore grade zone; (iii) a production suspension of all mines in Fanchang county for the first quarter of 2008 for safety evaluation; and (iv) the recognition of approximately RMB 13.1 million (US$1.9 million) relating to non-cash employee share-based compensation expense.


Net income increased by RMB5,440,000 (US$794,000) from RMB17,315,000 (US$2,526,000) for the three months ended June 30, 2007 to RMB22,755,000 (US$3,320,000) for the three months ended June 30, 2008.  The increase was primarily attributable to the contribution of the recently acquired Mark Faith subsidiary, although the contribution was partially offset by the factor (i), (ii) and (iv) described above..


LIQUIDITY AND CAPITAL RESOURCES


The Company’s primary liquidity needs are to fund operating expenses, capital expenditures and acquisitions. To date, the Company has financed its working capital requirements primarily through internally generated cash.


Net cash used in operating activities for the six months ended June 30, 2008 was approximately RMB69,545,000 (US$10,146,000), as compared to the net cash from operating activities of RMB22,443,000 (US$3,274,000) for the corresponding period in 2007.  The change from net cash inflows from last period to net cash outflow this period was mainly due to the increases of RMB51,506,000 (US$7,514,000) inventory and RMB60,030,000 (US$8,758,000) other receivable and prepayment in copper smelting business of Mark Faith.


The following summarizes the Company’s financial condition and liquidity at the dates indicated:


 

 

June 30,

2008

 

December 31,

2007

 

 

RMB

 

RMB

 

 

(Unaudited)

 

 

Current ratio

 

1.83x

 

10.72x

Working capital

 

326,290,000

 

456,806,000

Ratio of interest-bearing debt to shareholders’ equity

 

0.04x

 

0.00x





Net cash used in investing activities for the six months ended June 30, 2008 was RMB123,080,000 (US$17,957,000).  This is comprised of (i) a net repayment of RMB100,466,000 (US$14,657,000) to related companies; (ii) net cash received on the acquisition of Mark Faith amounting to RMB14,694,000 (US$2,144,000); (iii) an investment and advance to an unconsolidated investee of RMB30,696,000 (US$4,479,000); and (iv) payment for acquisition of property, plant and equipment amounting to RMB6,612,000  (US$965,000)


Net cash provided by financing activities for the six months ended June 30, 2008 was RMB53,034,000 (US$7,737,000), as compared with nil amount of financing activities in the corresponding period of 2007.  This was primarily attributable to (i) the monies received on the exercise of warrants of RMB57,558,000 (US$8,397,000); and (ii)  a RMB4,524,000 (US$660,000) principal repayment by Mark Faith under the capital lease during the period.


Other than the capital lease obligation disclosed above, the Company has no other contractual obligations and commercial commitments as at June 30, 2008.


Except as disclosed above, there have been no other significant changes in financial condition and liquidity for the period ended June 30, 2008.  The Company plans to finance the two coal mine acquisitions announced on July 15, 2008 and August 13, 2008 by equity/ debt financing.  Other than the financing of the two acquisitions, the Company believes that internally generated funds will be sufficient to satisfy its anticipated working capital needs for at least the next twelve months.


In the event that our operating plan changes due to changes in our strategic plans, lower-than-expected revenues, unanticipated expenses, increased competition, unfavorable economic conditions or other unforeseen circumstances, including the continued turmoil and tightening of the credit markets, and further weakening of consumer confidence and spending, our liquidity may be negatively impacted.  If so, we could be required to adjust our expenditures for the remainder of 2008 and for 2009 to conserve working capital or raise additional capital, possibly including debt or equity financing, to fund operations and our growth strategy.


OFF BALANCE SHEET ARRANGEMENTS


The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.