U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark one)

x

Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Quarterly Period Ended March 31, 2012

 

or

 

¨

Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File Number 000-50491

 

China Shen Zhou Mining & Resources, Inc.

(Name of small business issuer in its charter)

 

Nevada		87-0430816
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

No. 166 Fushi Road, Zeyang Tower, Suite 1211 Shijingshan District, Beijing, China 100043 People’s Republic of China		100043
(Address of principal executive offices)		(Zip Code)

 

Issuer's telephone number:   86-010-88906927

 

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  x   No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨	Accelerated filer  ¨
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)	Smaller reporting company x

 

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

 

As of May 10, 2012, the Registrant had 38,347,523 shares of common stock outstanding.

 

 Except as otherwise indicated by the context, references in this Form 10-Q to:

 

“SHZ,” the “Company,” “we,” “our,” or “us” are references to China Shen Zhou Mining & Resources, Inc and its subsidiaries, unless the context indicates otherwise.

 

“U.S. Dollar,” “$” and “US$” mean the legal currency of the United States of America.

 

“RMB” means Renminbi, the legal currency of China.

 

“China” or the “PRC” are references to the People’s Republic of China.

 

“U.S.” is a reference to the United States of America.

 

“SEC” is a reference to the Securities & Exchange Commission of the United States of America.

 

 

China Shen Zhou Mining & Resources, Inc.

 

Table of Contents

 

		Page
PART I	FINANCIAL INFORMATION	3
Item 1.	Financial Statements:	3
	Consolidated Balance Sheets as of March 31, 2012 (Unaudited) and December 31, 2011 (Audited)	3
	Consolidated Statements of Operations and Comprehensive Income (Unaudited) Three Months Ended March 31, 2012 and 2011	4
	Consolidated Statements of Cash Flows (Unaudited) Three months Ended March 31, 2012 and 2011	5
	Notes to Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	27
PART II	OTHER INFORMATION	28
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Mining Safety Disclosure	28
Item 5.	Other Information	28
Item 6.	Exhibits	28

 

 

PART I - FINANCIAL INFORMATION

 

  Item 1. Financial Statements

 

CHINA SHEN ZHOU MINING & RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

 

		March 31, 2012				December 31, 2011
		(Unaudited)				(Audited)
ASSETS
Current assets:
Cash and cash equivalents		$	5,057			$	5,569
Notes receivable, net			546				1,019
Accounts receivable, net			402				3,332
Advances to suppliers			2,378				1,833
Acquisition deposit			-				2,359
Other deposits			832				258
Inventories			9,907				7,479
Due from related parties			1,913				-
Restricted assets			11,854				2,536
Deferred financing costs			802				-
Total current assets			33,691				24,385
Restricted assets			278				175
Prepayment for vehicle rent			423				443
Property, machinery and mining assets, net			83,595				60,313
Total assets		$	117,987			$	85,316
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	3,788			$	3,324
Short term loans			18,621				11,996
Receipts in advance			3,938				1,528
Other payables and accruals			4,195				2,772
Government loan			1,630				-
Acquisition payable			5,676				-
Convertible preferred stock			5,000				-
Derivative liabilities			4,032				-
Due to related parties			493				250
Taxes payable			2,126				1,877
Total current liabilities			49,499				21,747
Long term loans			1,741				-
Total liabilities			51,240				21,747
STOCKHOLDERS’ EQUITY:
Convertible preferred stock ($0.001 par value; 10,000 shares authorized; 5,000 shares and 0 shares issued and outstanding as of March 31, 2012 and December 31, 2011 respectively)			-				-
Common stock ($0.001 par value; 50,000,000 shares authorized; 33,610,207 shares and 32,285,973 shares issued and outstanding as of March 31, 2012 and December 31, 2011 respectively)			34				32
Additional paid-in capital			55,621				58,425
Statutory reserves			1,732				1,732
Accumulated other comprehensive income			6,496				6,109
Accumulated deficit			(16,521	)			(13,344	)
Stockholders' equity - China Shen Zhou Mining & Resources, Inc. and Subsidiaries			47,362				52,954
Noncontrolling interest			19,385				10,615
Total stockholders’ equity			66,747				63,569
Total liabilities and stockholders’ equity		$	117,987			$	85,316

 

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

 

 

 

  CHINA SHEN ZHOU MINING & RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Amounts in thousands, except per share data)

 

		For the Three Months Ended
		March 31, 2012				March 31, 2011
		(Unaudited)				(Unaudited)
Net revenue		$	1,506			$	1,896
Cost of sales			862				1,232
Gross profit			644				664
Operating expenses:
Selling and distribution expenses			24				36
General and administrative expenses			2,862				2,190
Provision for doubtful accounts			69				(90	)
Total operating expenses			2,955				2,136
Net loss from operations			(2,311	)			(1,472	)
Other income (expense):
Interest expense			(508	)			(145	)
Warrant modification			(578	)			-
Fair value change at derivative liabilities			(29	)			-
Other, net			(25	)			(42	)
Total loss			(1,140	)			(187	)
Loss from continuing operations before income taxes			(3,451	)			(1,659	)
Income tax expenses			-				-
Loss from continuing operations			(3,451	)			(1,659	)
Discontinued operations:
Loss from operations of discontinued component, net of taxes			-				(4	)
Loss from discontinued operations			-				(4	)
Net loss			(3,451	)			(1,663	)
Add: Noncontrolling interests attributable to the noncontrolling interests			279				55
Less: Preferred stock dividends			(5	)			-
Net loss - attributable to China Shen Zhou Mining & Resources, Inc. and Subsidiaries			(3,177	)			(1,608	)
Other comprehensive income:
Foreign currency translation adjustments			387				157
Comprehensive loss		$	(2,790	)		$	(1,451	)
Net loss per common share – basic and diluted
From continuing operations		$	(0.10	)		$	(0.05	)
From discontinued operations			-				(0.00	)
		$	(0.10	)		$	(0.05	)
Weighted average common shares outstanding
- Basic and Diluted			32,891				30,055

 

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

 

 

 

CHINA SHEN ZHOU MINING & RESOURCES, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands, except share data)

 

		For the Three Months Ended
		March 31, 2012				March 31, 2011
		(Unaudited)				(Unaudited)
Cash flows from operating activities:
Net loss		$	(3,177	)		$	(1,608	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss from operations of discontinued component, net of income tax benefits			-				4
Provision for doubtful accounts			69				(90	)
Warrant modification			578				-
Deemed dividend expense			5				-
Amortization of warrants attached to preferred stock			17				-
Amortization of deferred financing costs for preferred stock			29				-
Fair value change at derivative liabilities			29				-
Depreciation and amortization			1,053				746
Noncontrolling interests			(279	)			(55	)
Changes in operating assets and liabilities:
(Increase) decrease in -
Notes receivable			480				-
Accounts receivable			3,675				145
Advances to suppliers			(202	)			(1,354	)
Other deposits			(399	)			(434	)
Prepayment for vehicle rent			23
Prepayment for office rent			-				51
Inventories			(1,941	)			(1,479	)
Restricted assets			(9,320	)			(100	)
Increase (decrease) in -
Accounts payable			(510	)			(1,117	)
Receipts in advance			1,530				1,212
Other payables and accruals			(1,473	)			(1,977	)
Taxes payable			(911	)			(353	)
Net cash used in operating activities from continuing operations			(10,724	)			(6,409	)
Net cash used in operating activities from discontinued operations			-				(30	)
Net cash used in operating activities			(10,724	)			(6,439	)
Cash flows from investing activities:
Purchases of property, machinery and mining assets			(267	)			(367	)
Acquisition of subsidiaries, net of cash and cash equivalents acquired			-				(3,250	)
Net cash used in investing activities			(267	)			(3,617	)
Cash flows from financing activities:
Due to related parties			(1,896	)			(1,908	)
Proceeds from issuance of common stock			-				20,000
Issuance costs of common stock			-				(1,516	)
Proceeds from convertible preferred stock			5,000				-
Proceeds from warrants			224				-
Issuance costs of convertible preferred stock			(320	)			-
Repayment at short-term loans			(8,246	)			(6,611	)
Proceeds from short-term loans and long-term loans			15,668				6,366
Net cash provided by financing activities			10,430				16,331
Foreign currency translation adjustment			49				(95	)
Net (decrease) increase in cash and cash equivalents			(512	)			6,180
Cash and cash equivalents at the beginning of the period			5,569				1,546
Cash and cash equivalents at the end of the period		$	5,057			$	7,726
Non-cash investing and financing activities
Additional Shares issued to Acquire Xinyi Fluorite		$	1			$	-
Supplemental disclosures of cash flow information:
Cash paid for interest expenses		$	259			$	96
Cash paid for income tax		$	23			$	-

 

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

 

 

China Shen Zhou Mining & Resources, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 1 - DESCRIPTION OF BUSINESS AND ORGANIZATION

 

China Shen Zhou Mining & Resources, Inc. and its subsidiaries (collectively known as the “Company” or “we”) are principally engaged in the exploration, development, mining, and processing of fluorite, barite, zinc, lead, copper, and other nonferrous metals in the People’s Republic of China (“PRC” or “China”).

 

At March 31, 2012, the subsidiaries of China Shen Zhou Mining & Resources, Inc. were as follows: 

Name		Domicile and Date of Incorporation		Paid-in Capital			Percentage of Effective Ownership			Principal Activities
American Federal Mining Group, Inc. (“AFMG”)		Illinois November 15, 2005		USD	10		100	%		Investments holdings
Inner Mongolia Xiangzhen Mining Industry Group Co. Ltd. (“Xiangzhen Mining”)		The PRC July 3, 2002		RMB	88,860,699		100	%		Acquisition, exploration and extraction, and development of natural resource properties
Inner Mongolia Wulatehouqi Qianzhen Ore Processing Co., Ltd. (“Qianzhen Mining”)		The PRC September 22, 2002		RMB	37,221,250		100	%		Sales and processing of nonferrous metals and chemical products
Xinjiang Buerjin County Xingzhen Mining Company (“Xingzhen Mining”)		The PRC April 10, 2006 (Acquired on April 28, 2006)		RMB	50,000,000		90	%		Exploration of solid metals, processing and sales of mining products
Jinde Xinyi Fluorite Company (“Xinyi Fluorite”)		The PRC September 18, 2003 (Acquired on January 13, 2011)		RMB	3,200,000		55	%		Extraction, processing and sales of fluorite products
Wuchuan Dongsheng Mining Co., Ltd. (“Dongsheng Mining”)		The PRC December 13, 1999 (Acquired on January 16, 2012)		RMB	3,000,000		60	%		Extraction, processing and sales of fluorite and barite products
Guizhou Qianshi Resources Development Co., Ltd.(“Qianshi Resources”)		The PRC April 30, 2005 (Acquired on February 7, 2012)		RMB	1,000,000		60	%		Extraction, processing and sales of fluorite and barite products
Yanhe Tujiazu Autonomous County Meilan Mining Co., Ltd.(“Meilan Mining”)		The PRC November 20, 2007 (Acquired on February 7, 2012)		RMB	1,334,000		60	%		Extraction and sales of fluorite and barite products

 

NOTE 2- BASIS OF PRESENTATION

 

These consolidated financial statements for interim periods are unaudited. In the opinion of management, all adjustments, consisting of normal, recurring adjustments, and disclosures necessary for a fair presentation of these interim statements have been included. The results reported in these consolidated financial statements are not necessarily indicative of the results that may be reported for the entire year. The accompanying consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted in the United States of America.  These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed on March 27, 2012.

 

NOTE 3 – ACQUISITION

 

On January 16, 2012, the Company through its subsidiary Xiangzhen Mining entered into an equity transfer and capital increase agreement (the “Wuchuan Agreement”) to acquire 60% of the equity interests of Dongsheng Mining.

 

Pursuant to the Wuchuan Agreement, the Company acquired the equity from the two shareholders of Dongsheng Mining (Gang Liu, a Chinese citizen, and Qiang Liu, a Chinese citizen) for total consideration in the amount of RMB 93 million (approximately US$ 14.65 million) (the “Purchase Price”). The Purchase Price comprised RMB 43 million (approximately US$ 6.77 million) of the Company’s common stock and RMB 50 million (approximately US$ 7.90 million) in cash.

 

On February 7, 2012, the Company through its subsidiary Xiangzhen Mining purchased a 60% equity interest in Qianshi Resources, from Qianshi Resources’ two shareholders (Gang Liu and Guojian Zhou, a Chinese citizen) for RMB 6,000,000 (approximately US$ 0.94 million) in the form of 337,457 shares of the Company’s common stock. On February 7, 2012, the Company through its subsidiary Xiangzhen Mining also purchased a 60% equity interest in Meilan Mining, from Meilan Mining’s shareholder (Gang Liu) for RMB 9,000,000 (approximately US$ 1.42 million) in the form of 506,186 shares of the Company’s common stock.

 

 

By April 15, 2012, the Company had paid cash amounting to RMB 50 million (approximately US$ 7.90 million) to increase the capital of Dongsheng Mining. On May 2, 2012, 3,262,091 shares of the Company’s common stock were issued to the original shareholders of Dongsheng Mining, Meilan Mining, and Qianshi Resources. The fair value of the Company’s common stock on the date of the transaction was $1.74. As a result, we recorded a total of $13,573,000 of transaction costs in connection with the acquisition of Dongsheng Mining, Meilan Mining, and Qianshi Resources.

 

Below are tables containing the preliminary estimated purchase price allocations for Dongsheng Mining, Meilan Mining, and Qianshi Resources:

 

	Shares			Price per share
Fair value of the Company’s stock will be issued - Dongsheng Mining (Issued on May 2, 2012)		2,418,448		$	1.74			$	4,208,000
Fair value of the Company’s stock will be issued - Qianshi Resources (Issued on May 2, 2012)		506,186			1.74				587,000
Fair value of the Company’s stock will be issued - Meilan Mining (Issued on May 2, 2012)		337,457			1.74				881,000
									5,676,000
Cash									7,897,000
Total purchase price								$	13,573,000
Fair value of acquired assets and liabilities:
Net assets acquired								$	6,860,000
Estimated fair value of identifiable extraction rights									18,269,000
Cash consideration will be invested to increase the stockholders' equity									7,897,000
Liabilities									(10,404,000	)
									22,622,000
Acquisition of 60% share									60	%
									13,573,000
Purchase price									13,573,000
Goodwill								$	-
								Noncontrolling Interests
								$	22,622,000
									40	%
								$	9,049,000

 

The fair value of identifiable extraction rights of Dongsheng Mining, Meilan Mining, and Qianshi Resources were estimated according to the 2011 mineralized material evaluation report. In 2012, exploration activities will be finished to renovate the mines of Dongsheng Mining, Meilan Mining, and Qianshi Resources, and the fair value of identifiable extraction rights will be determined according to the 2012 mineralized material evaluation report. Once determined, the Company will record the acquisition at fair value. In addition, the full value of their share of the noncontrolling interest in Dongsheng Mining, Meilan Mining, and Qianshi Resources will be reflected upon completion of the valuation.

 

The unaudited pro forma consolidated results of Dongsheng Mining, Meilan Mining, and Qianshi Resources's operations for the first quarter of 2012 did not have material difference with the unaudited consolidated statement of operations for the three months ended March 31, 2012.

 

The following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of Dongsheng Mining, Meilan Mining, and Qianshi Resources had occurred during the period of January 1, 2011 through March 31, 2011:

 

Net revenue		$	2,690
Cost of sales			1,811
Gross profit			879
Operating expenses:
Selling and distribution expenses			44
General and administrative expenses			2,667	(a)
Provision for doubtful accounts			(43	)
Total operating expenses			2,668
Net loss from operations			(1,789	)
Other income (expense):
Interest expense			(217	)
Investment loss			(46	)
Other, net			(85	)
Total other loss			(348	)
Loss from continuing operations before income taxes			(2,137	)
Income tax benefits			41
Loss from continuing operations			(2,096	)
Discontinued operations :
Loss from operations of discontinued component, net of taxes			(4	)
Loss from discontinued operations			(4	)
Net loss			(2,100	)
Add: Noncontrolling interests attributable to the noncontrolling interests			230	(b)
Net loss - attributable to China Shen Zhou Mining & Resources, Inc. and Subsidiaries			(1,870	)
Other comprehensive income:
Foreign currency translation adjustments			157
Comprehensive loss		$	(1,713	)
Net loss per common share – basic and diluted
From continuing operations		$	(0.06	)
From discontinued operations			(0.00	)
		$	(0.06	)
Weighted average common shares outstanding
- Basic and Diluted			33,317	(c)

 

 

(a)

Includes amortization of acquired intangible assets of approximately $207,000 based on the unit-of-production method.

(b)

Noncontrolling interest of 40% of ownership in Dongsheng Mining, Meilan Mining, and Qianshi Resources for purpose of pro forma. Upon final evaluation of assets acquired, the Company will reflect the proper value of the noncontrolling interest.

(c)

Assumes 3,262,091 common shares issued for the purchase of Dongsheng Mining, Meilan Mining, and Qianshi Resources were outstanding for the entire three month pro forma period.

 

The unaudited pro forma information does not purport to be indicative of the results that would have been obtained had these events actually occurred at the beginning of the period presented and is not intended to be indicative of future results.

 

NOTE 4 - DISCONTINUED OPERATIONS

 

On April 12, 2011, the Company through its subsidiary Qianzhen Mining entered into an equity transfer agreement (the “Agreement”) to sell its 60% equity interest in Qingshan Metal to a Chinese citizen Mr. Mao Huang (the “Investor”), a related party of the Company.

 

Pursuant to the Agreement, Qianzhen Mining sold all of its Equity in Qingshan Metal to the Investor for total consideration in the amount of RMB 8.5 million (approximately $1.3 million) (the “Transfer Price”). The payment of the Transfer Price offset the debt owed by Qianzhen Mining to the Investor. Qianzhen Mining no longer holds any equity interests in Qingshan Metal.

 

The Company has recorded a loss from operations of discontinued component, net of income taxes, of approximately $4,000 for the three months ended March 31, 2011. In accordance with Accounting Standard Codification (“ASC”) 360 (Formerly FAS 144) of Financial Accounting Standards Board (“FASB”), Accounting for Impairment or Disposal of Long-Lived Assets, the Company has reflected Qingshan Metal’s results of operations in the consolidated statements of operations through the date of the sale as discontinued operations for all periods presented. The cash flows of discontinued operations also have been reclassified.

 

The following table presents the revenue, net loss from discontinued operations and on disposal of Qingshan Metal for the periods presented:

 

		Three months Ended March 31,
		2012				2011
		(In thousands)				(In thousands)
Revenue		$	-			$	-
Net loss from discontinued operations,		$	Not Applicable			$	(4	)
Net loss on disposal of subsidiary		$	Not Applicable			$	Not Applicable

 

NOTE 5 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

The Company’s consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”). The preparation of the Company’s consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting periods. The calculations more dependent on management’s use of estimates and assumptions are those related to mineral reserves and valuations of proven and probable reserves that are the basis for future cash flow estimates utilized in impairment calculations; the estimated lives of the mineralized bodies based on estimated recoverable volume through the end of the period over which the company has extraction rights that are the basis for units-of-production depreciation; depletion and amortization calculations; estimates of fair value for certain reporting units and asset impairments (including impairments of goodwill, long-lived assets and investments); write-downs of inventory to net realizable value; reserves for contingencies and litigation; and the fair value and accounting treatment of financial instruments. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ significantly from these estimates.

 

Certain of the Company’s accounting policies require higher degrees of judgment than others in their application. Management evaluates all of its estimates and judgments on an on-going basis.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries (AFMG, Xiangzhen Mining, and Qianzhen Mining) and its majority owned subsidiaries (Xingzhen Mining and Xinyi Fluorite). All inter-company balances and transactions have been eliminated.

 

The minority interest in the net assets and earnings or losses of Xingzhen Mining have been absorbed by the Company as the minority interest holders in the subsidiary have no basis in their investment in the subsidiary.

 

Basis of Preparation

 

The accompanying consolidated financial statements have been prepared in conformity with US GAAP. The basis of accounting differs from that used in the statutory accounts of the Company, which are prepared in accordance with the accounting principles of the PRC (“PRC GAAP”). The Company’s functional currency is the Chinese Renminbi (“RMB”); however the accompanying consolidated financial statements have been translated and presented in United States Dollars (“USD”). All significant inter-company transactions and balances have been eliminated.

 

 

Cash and Cash Equivalents

 

The Company considers all highly liquid debt instruments purchased with a maturity period of three months or less to be cash or cash equivalents. The carrying amounts reported in the accompanying consolidated balance sheets for cash and cash equivalents approximate their fair value. Substantially all of the Company’s cash is held in bank accounts in the PRC and is not protected by FDIC insurance or any other similar insurance. Restricted cash is excluded from cash and cash equivalents and is included in restricted assets.

 

Accounts Receivable

 

Accounts receivable is stated at cost, net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses resulting from the failure of customers to make required payments. The Company reviews the accounts receivable on a periodic basis and makes allowances where there is doubt as to the collectibility of individual balances. In evaluating the collectibility of individual receivable balances, the Company considers many factors, including the age of the balance, the customer’s payment history and current credit-worthiness, and current economic trends.

 

Inventories

 

Inventories are stated at the lower of cost, determined on a weighted average basis, and net realizable value. Costs of finished goods are composed of direct materials, direct labor and an attributable portion of manufacturing overhead. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose. Our management regularly evaluates the composition of our inventory to identify slow-moving and obsolete inventory to determine if a valuation allowance is required.

 

Deferred Financing costs

 

Deferred financing costs represent legal, due diligence and other direct costs incurred to raise capital or obtain debt. Direct costs include only “out-of-pocket” or incremental costs directly related to the effort, such as a finder’s fee and accounting and legal fees. These costs will be capitalized if the efforts are successful, or expensed when unsuccessful. Indirect costs are expensed as incurred. Deferred financing costs related to convertible preferred stock are amortized over the life of the debt. Deferred financing costs related to issuing equity are charged to Paid in Capital. The treatment of issuance costs on liability for which the Company has elected the fair value option is further described in “Debt or derivative liabilities recorded at fair value” below.

 

Derivative Financial instruments

 

The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risk. Terms of convertible promissory note instruments are reviewed to determine whether or not they contain embedded derivative instruments that are required under FASB ASC 815, Derivatives and Hedging (“ASC 815”) to be accounted for separately from the host contract, and recorded on the balance sheet at fair value. The fair value of derivative liabilities, if any, is required to be revalued at each reporting date, with corresponding changes in fair value recorded in current period operating results.

 

Freestanding warrants issued by the Company in connection with the issuance or sale of debt and equity instruments are considered to be derivative instruments, and are evaluated and accounted for in accordance with the provisions of ASC 815. Pursuant to ASC 815, an evaluation of specifically identified conditions is made to determine whether the fair value of warrants issued is required to be classified as equity or as a derivative liability.

 

On January 19, 2011, the Company agreed to sell to certain institutional investors 2,836,883 shares of the Company’s common stock and warrants to purchase up to 851,066 shares of the Company’s common stock in a registered direct public offering. The warrants were exercisable immediately following the closing date of the Offering and will remain exercisable for three years thereafter at an exercise price of $8.46 per share.  The exercise price of the warrants is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and in the event the Company issues or is deemed to issue shares of common stock for less than the exercise price then in effect.   The Company also granted to the placement agent at the closing of the Offering warrants to purchase that number of shares of our common stock equal to 8% of the aggregate number of shares underlying the warrants placed in the Offering.  The Placement Agent’s Warrants had the same terms as the warrants offered in the Offering, except that the initial exercise price was 120% of the exercise price in the warrants offered in the Offering.  On March 21, 2012, the exercise price of the warrants was adjusted to $1.21 and these warrants have been reclassified from equity to a derivative liability for their future fair market value. The valuation of warrants, as a derivative liability, will be valued at market. Under ASC 815, the warrants will be carried at fair value and adjusted during each reporting period subsequent to reclassification to a derivative liability from that of an equity instrument.

 

On March 21, 2012, the Company entered into a Securities Purchase Agreement (the “2012 SPA”) with certain institutional Investors, pursuant to which the Company will offer up to an aggregate of $10 million of Series A Convertible Preferred Stock, $0.001 par value per share (the “Preferred Stock”) and warrants to purchase approximately 1,960,785 shares of common stock of the Company, par value $0.001 per share. Under the SPA, the Investors may purchase up to an aggregate of 10,000 shares of Preferred Stock in the Offering. FT Global Capital, Inc. acted as the sole placement agent for the transaction. The Company has also agreed to grant to the placement agent at the Initial Closing of the Offering warrants to purchase 392,157 shares of common stock. The Placement Agent’s Warrants shall have the same general terms as the Warrants offered in the Offering, except that the initial exercise price was 120% of the initial exercise price in the Warrants offered in the Offering.

 

The Company will issue the Preferred Stock and Warrants in two $5 million tranches. Upon the closing of the first tranche on Monday, March 26, 2012, the Investors purchased $5.0 million of newly issued Preferred Stock and related Warrants. Each of the initial purchasers, at their option, may purchase their allocation of Preferred Stock in the second tranche by delivery of written notice to the Company at any time prior to the first anniversary of the initial closing date. Subject to the satisfaction of certain conditions, the Company may force the initial purchasers to purchase the Preferred Stock in the second tranche at any time after the satisfaction of such conditions and prior to the four month anniversary of the initial closing date. In order for the Company to trigger the mandatory purchase requirement, the Company must obtain shareholder approval as may be required by the NYSE Amex and the Company must also satisfy certain other conditions.

 

The rights, preferences and privileges of the Preferred Stock are set forth in the Amended and Restated Certificate of Designations of Series A Convertible Preferred Stock, that the Company filed with the Secretary of State of the State of Nevada on March 26, 2012. The initial conversion price of the preferred stock was $2.04 (the “Conversion Price”), subject to anti-dilution adjustments.

 

The Preferred Stock will amortize in installment payments, which will be payable in common stock, subject to certain equity conditions, or, at the Company’s discretion, in cash. The dividend rate on the Preferred Stock is 5% per annum, payable quarterly in common stock, subject to certain equity conditions, or, at the Company’s discretion, in cash.

 

At the closing of the initial tranche, the Investors received warrants to purchase, in the aggregate, approximately 1,960,785 shares of common stock, which are exercisable for 42 months beginning on the initial closing date (including warrants to purchase approximately 980,393 shares of common stock, which were paid as additional consideration for the commitment of the initial purchasers to fund the second tranche). No additional warrants will be issued upon the consummation of the second tranche. The warrants have an initial exercise price of $2.04, and are subject to anti-dilution adjustments.

 

The Company accounted for the embedded conversion features included in its Series A Preferred Stock as well as the related warrants issued during 2012 and the warrants issued in connection with the issuance of the Company’s shares of Common stock during 2011 as derivative liabilities through March 31, 2012. The aggregate fair value of derivative liabilities at March 31, 2012 amounted to $4,032,000.

 

 

Equity Investment

 

The Company accounts for its equity investment using the equity method unless its value has been determined to be other than temporarily impaired, in which case we write the investment down to its impaired value. The Company reviews its investment periodically for impairment and makes appropriate reductions in carrying value when an other-than-temporary decline is evident; however, for non-marketable equity securities, the impairment analysis requires significant judgment. During its review, the Company evaluates the financial condition of the issuer, market conditions, and other factors providing an indication of the fair value of the investments. Adverse changes in market conditions or operating results of the issuer that differ from expectation, could result in additional other-than-temporary losses in future periods. As of March 31, 2012, the Company had accrued 100% impairment provision of $1,836,000.

 

Property, Machinery and Mining Assets

 

Expenditures for new facilities or equipment and expenditures that extend the useful lives of existing facilities or equipment are capitalized and depreciated using the straight-line method at rates sufficient to depreciate such costs over the estimated productive lives, which do not exceed the related estimated mine lives, of such facilities based on mineralized material.

 

Mineral exploration costs are expensed as incurred. After a mine is considered to be in the development or production stage or considered to have proven or probable reserves further exploration costs are also expensed as incurred.

 

Extraction rights are stated at the lower of cost and recoverable amount. When extraction rights are obtained from the government according to mining industry practice in the PRC, extraction rights are capitalized as incurred and are amortized using the units-of-production (“UOP”) method over the estimated life of the mineralized body based on estimated recoverable volume through to the end of the period over which the Company has extraction rights.

 

Once a mine is considered to be in the development or production stage, major development costs are amortized using the UOP method based on the estimated recoverable volume of the mineralized material. The Company determines whether a mine is in development or production stage based upon standard mining industry practices in the PRC. Given that commencing development and production at mining properties prior to establishing proven and probable reserves (to the extent necessary to meet the definition under Industry Guide 7), and often after only establishing inferred resources, is standard business practice in the mining industry in the PRC, the Company believes it is appropriate to account for the Xiangzhen Mining property as a production-stage operation and to account for the Xingzhen Mining, Xinyi Fluorite, Dongsheng Mining, Meilan Mining and Qianshi Resources properties as development-stage projects.

 

At the Company’s surface mines, development costs include costs to further delineate the mineralized body and remove overburden to initially expose the mineralized body. At the Company’s underground mines, development costs include the costs of building access ways, shaft sinking and access, lateral development, drift development, and ramps and infrastructure development.

 

To the extent that these costs benefit the entire mineralized body, they are amortized over the estimated life of the mineralized body. Costs incurred to access specific mineralized blocks or areas that only provide benefit over the life of that area are amortized over the estimated life of that specific mineralized block or area. Interest cost allocable to the cost of developing mining properties and to constructing new facilities, if any, is capitalized until such assets are ready for their intended use.

 

Land use rights are stated at cost, less accumulated amortization. Land use right amortization is computed using the straight-line method over the estimated useful lives of 25 years.

 

Estimated useful lives of the Company’s assets are as follows:

 

	Useful Life
	(In years)
Land use rights	25
Buildings	3-25
Machinery	12
Mining assets	License term
Motor vehicle	6
Equipment	5
Extraction rights	License term
Exploration rights	License term

 

 

Foreign Currency

 

The Company’s principal country of operations is the PRC. The financial position and results of operations of the Company’s subsidiaries located in the PRC are recorded using Renminbi (“RMB”) as the functional currency. The results of operations denominated in foreign currencies are translated at the average rate of exchange during the reporting period.

 

Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the market rate of exchange at that date. The registered equity capital denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution. All translation adjustments resulting from the translation of the financial statements into the reporting currency (“US dollar”) are recorded in accumulated other comprehensive income, a separate component within shareholders’ equity.

 

The exchange rates used to translate amounts in RMB into US Dollars for the purposes of preparing the consolidated financial statements are as follows:

 

		March 31, 2012			December 31, 2011
Balance sheet items, except for the registered and paid-up capital and retained earnings, as of the period ended			US$1=RMB6.3185			US$1=RMB6.3585

 

			For the Three Months Ended March 31, 2012			For the Three Months Ended March 31, 2011
Amounts included in the statements of operations and statements of cash flow for the period			US$1=RMB6.3089			US$1=RMB6.5713

 

For the Three Months Ended March 31, 2012 and 2011, foreign currency translation adjustment is approximately $387,000 and $157,000 respectively, have been reported as comprehensive income in the consolidated statement of comprehensive income.

 

Although government regulations now allow conversion of RMB for current account transactions, significant restrictions still remain. Hence, such translations should not be construed as representations that RMB could be converted into U.S. Dollars at that rate or any other rate.

 

The value of the RMB against the U.S. Dollar and other currencies may fluctuate and is affected by, among other things, changes in Chinese political and economic conditions. Any significant revaluation of the RMB may materially affect the Company’s financial condition in terms of U.S. Dollar reporting.

 

Noncontrolling Interest

 

Noncontrolling interests in the Company’s subsidiaries are recorded in accordance with the provisions of FASB ASC 810 and are reported as a component of equity, separate from the parent’s equity. Purchase or sale of equity interests that do not result in a change of control are accounted for as equity transactions. Results of operations attributable to the noncontrolling interest are included in our consolidated results of operations and, upon loss of control, the interest sold, as well as interest retained, if any, will be reported at fair value with any gain or loss recognized in earnings.

 

Revenue Recognition

 

Revenue is recognized on the sale of products when title has transferred to the customer in accordance with the specified terms of each product sales agreement and all of the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectibility is reasonably assured. Generally, the Company’s product sales agreements provide that title and risk of loss pass to the customer when the quantity and quality of the products delivered are certified and accepted by the customer.

 

Sales revenue is recognized, net of PRC business taxes, sales discounts and returns at the time when the merchandise is sold to the customer. Based on historical experience, management estimates that returns of sold products are immaterial and has not made allowance for estimating such amounts.

 

Stripping Costs

 

Stripping costs are costs of removing overburden and other mine waste materials. Stripping costs incurred during the production phase of a mine are variable production costs that are included as a component of inventory to be recognized in cost of sales in the same period as the revenue from the sale of the related inventory.

 

Asset Impairment – Long-lived Assets

 

The Company reviews and evaluates its long-lived assets including property, machinery and mining assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. An impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the assets, including goodwill, if any. An impairment loss is measured and recorded based on discounted estimated future cash flows. Future cash flows are estimated based on quantities of recoverable metals, corresponding expected commodity prices (considering current and historical prices, price trends and related factors), production levels and operating costs of production and capital, all based on life-of-mine plans. Existing proven and probable reserves and value beyond proven and probable reserves are included when determining the fair value of mine site reporting units acquired and, subsequently, in determining whether the assets are impaired. The term “recoverable metals” refers to the estimated amount of metals that will be obtained after taking into account losses during ore processing and treatment. Estimates of recoverable metals from such exploration stage metal interests are risk adjusted based on management’s relative confidence in such materials. In estimating future cash flows, assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of future cash flows from other asset groups. The Company’s estimates of future cash flows are based on numerous assumptions and it is possible that actual future cash flows will differ significantly from the estimates, as actual future quantities of recoverable metals, prices, production levels and operating costs of production and capital are each subject to significant risks and uncertainties. Accumulated impairment provisions of $1,080,000 and $1,073,000, respectively for the years ended March 31, 2012 and December 31, 2011 were recorded for the property and machinery of Qianzhen Mining.

 

 

Financial Instruments

 

Effective January 1, 2008, the Company adopted FASB ASC 820-Fair Value Measurements and Disclosure or ASC 820 for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements establishes a framework for measuring fair value and expands disclosure about such fair value measurements. The adoption of ASC 820 did not have an impact on the Company’s financial position or operating results, but did expand certain disclosures.

 

ASC 820 defines fair value as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:

 

Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities

 

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data

 

Level 3: Unobservable inputs for which there is little or no market data and require the use of the reporting entity’s own assumptions.

 

The Company values its financial instruments by estimating their fair value. The estimated fair value amounts have been determined by the Company using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.

 

The Company’s financial instruments primarily consist of cash and cash equivalents, accounts receivable, restricted assets, accounts payable, other payables and accruals, short-term bank loans, convertible preferred stock, derivative liabilities, and other current liabilities.

 

Cash and cash equivalents include money market securities and commercial paper that are considered to be highly liquid and easily tradable. These securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within the fair value hierarchy.

 

As of the balance sheet dates, the estimated fair values of the financial instruments were not materially different from their carrying values as presented due to the relatively short maturities of these instruments and to the fact that the interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profile at the respective year ends.

 

Taxation

 

(a) Enterprise Income Tax

 

Taxation on profits earned in the PRC are calculated on the estimated assessable profits for the year at the rates of taxation prevailing in the PRC after taking into account the benefits from any special tax credits or “tax holidays” allowed in the PRC.

 

The Company provides for deferred income taxes using the asset and liability method. Under this method, the Company recognizes deferred income taxes for tax credits and net operating losses available for carry-forwards and significant temporary differences. The Company classifies deferred tax assets and liabilities as current or non-current based upon the classification of the related asset or liability in the financial statements or the expected timing of their reversal if they do not relate to a specific asset or liability. The Company provides a valuation allowance to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of or all of the deferred tax assets will not be realized.

 

Income taxes are accounted for under the Statement of FASB ASC 740, Income Taxes. Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax loss carry forwards. Any deferred tax assets and liabilities would be measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

 

(b) Value Added Tax

 

The Provisional Regulations of the PRC Concerning Value Added Tax promulgated by the State Council came into effect on January 1, 1994. Under these regulations and the Implementing Rules of the Provisional Regulations of the PRC Concerning Value Added Tax, a value added tax is imposed on goods sold in or imported into the PRC and on processing, repair and replacement services provided within the PRC.

 

Value added tax payable in the PRC is charged on an aggregated basis at a rate of 13% or 17% (depending on the type of goods involved) on the full price collected for the goods sold or, in the case of taxable services provided, at a rate of 17% on the charges for the taxable services provided, but excluding, in both cases, any amount paid in respect of value added tax included in the price or charges, and less any deductible value added tax already paid by the taxpayer on purchases of goods and services in the same financial year.

 

(c) Resource Tax

 

All units and individuals engaged in the exploitation of mineral products as prescribed in the Regulations within the territory of the PRC shall pay a Resource Tax. The tax payable for Resource Tax shall be computed in accordance with the assessable volume of the taxable products and the prescribed unit tax amount.

 

Transportation charges

 

Transportation charges represent costs to deliver the Company’s inventory to points of sale. Transportation costs are expensed and charged to cost of sales as incurred.

 

Stock Based Compensation

 

In December 2004, the Financial Accounting Standards Board, or FASB, issued FASB ASC 718-10-55 - Compensation-Stock Compensation, or ASC 718-10-55. Under ASC 718-10-55, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. In addition, FASB ASC 825-10-50-10 – Financial Instruments – Overall – Disclosures, or ASC 825-10-50-10, expresses views of the Securities and Exchange Commission, or the SEC, staff regarding the interaction between ASC 718-10-55 and certain SEC rules and regulations and provides the staff's views regarding the valuation of share-based payment arrangements for public companies. The Company’s compensation cost is measured on the date of grant at its fair value. Such compensation amounts, if any, are amortized over the respective vesting periods or period of service of the option grant.

 

 

Net Income Per Common Share

 

Basic and diluted earnings per share are presented for net income and for income from continuing operations. Basic earnings per share is computed by dividing net income by the weighted-average number of outstanding common shares for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts that may require the issuance of common shares in the future were converted. Diluted earnings per share is computed by increasing the weighted-average number of outstanding common shares to include the additional common shares that would be outstanding after conversion and adjusting net income for changes that would result from the conversion. Only those securities or other contracts that result in a reduction in earnings per share are included in the calculation.

 

Comprehensive Income (Loss)

 

Accumulated other comprehensive income includes foreign currency translation adjustments. Total comprehensive loss for the first quarter ended March 31, 2012 and 2011 was approximately ($2,790,000) and ($1,451,000), respectively.

 

Reclassifications

 

Certain reclassifications have been made to the prior periods’ financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or the sum of retained earnings and statutory reserves.

 

Recently Issued Accounting Pronouncements

 

A variety of proposed or otherwise potential accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative and preliminary nature of those proposed standards, management has not determined whether implementation of such proposed standards would result in material changes to our consolidated financial statements.

 

NOTE 6 – NOTES RECEIVABLE

 

At March 31, 2012 and December 31, 2011, notes receivable were approximately $546,000 and $1,019,000, respectively. Notes receivable are consisted of bank’s acceptance bills from customers for the purchase of the Company’s products. Bank’s acceptance bills are accepted by the remitters’ banks, that entitle the holders to receive the full face amount from the banks at maturity, bear no interest and generally ranges from three to six months from the date of issuance. The Company can also endorse a bank’s acceptance bill as payment to its suppliers before the bank’s acceptance bill maturity date.

 

NOTE 7 – ACCOUNTS RECEIVABLE

 

Accounts receivable consist of the following:

 

		March 31, 2012				December 31, 2011
		(In thousands)				(In thousands)
Accounts receivable		$	500			$	3,413
Less: Allowance for doubtful accounts			(98	)			(81	)
		$	402			$	3,332

 

The activities in the Company’s allowance for doubtful accounts are summarized as follows:

 

		March 31, 2012				December 31, 2011
		(In thousands)				(In thousands)
Balance at the beginning of the year		$	81			$	166
Add: Allowance for doubtful accounts			17				-
Less: write off the provision during the period			-				(85	)
Balance at the end of the period		$	98			$	81

 

NOTE 8 - ADVANCES TO SUPPLIERS

 

Advances to suppliers consist of the following:

 

		March 31, 2012				December 31, 2011
		(In thousands)				(In thousands)
Advances to suppliers		$	2,767			$	1,943
Less: Allowance for doubtful accounts			(389	)			(110	)
		$	2,378			$	1,833

 

The activities in the Company’s allowance for doubtful accounts are summarized as follows:

 

		March 31, 2011				December 31, 2011
		(In thousands)				(In thousands)
Balance at the beginning of the year		$	110			$	192
Add: provision during the period			279				-
Less: write off the provision during the period			-				(82	)
Balance at the end of the period		$	389			$	110

 

 

NOTE 9 - OTHER DEPOSITS

 

Other deposits consist of the following:

 

		March 31, 2012				December 31, 2011
		(In thousands)				(In thousands)
Other deposits		$	992			$	357
Less: Allowance for doubtful accounts			(160	)			(99	)
		$	832			$	258

 

The activities in the Company’s allowance for doubtful accounts are summarized as follows:

 

		March 31, 2012				December 31, 2011
		(In thousands)				(In thousands)
Balance at the beginning of the year		$	99			$	63
Add: provision during the period			61				36
Balance at the end of the period		$	160			$	99

 

NOTE 10 - DUE FROM RELATED PARTIES

 

Due from related parties classified as long term liabilities consist of the following:

 

		March 31, 2012				December 31, 2011
		(In thousands)				(In thousands)
Mr. Gang Liu	(a)	$	433			$	-
Mr. Wenrui Li	(b)		32				-
Due from Guizhou Yanhe Dongsheng Mining, Ltd. (“Yanhe Dongsheng”)	(c)		83				-
Due from Chongqing Fengdu Dongsheng Mining, Ltd. (“Fengdu Dongsheng”)	(c)		83				-
Due from Hubei Dongsheng Mining, Ltd. (“Hubei Dongsheng”)	(c)		193				-
Due from Chongqing Henrun Mining, Ltd. (“Chongqing Henrun”)	(c)		95				-
Due from Guizhou Wuchuan Shanxian Food, Ltd. (“Shanxian Food”)	(c)		918				-
Due from Guizhou Zhengan Zunzheng Mining Development, Ltd. (“Zunzheng Mining”)	(c)		76				-
Due from Wuchuan Chenhe Dongsheng Fluoride Industry Co., Ltd. (“Chenhe Fluoride”)	(d)		270				-
Less: Allowance for doubtful accounts	(e)		(270	)			-
		$	1,913			$	-

 

(a)

Mr. Gang Liu is a minor shareholder and the General Manager of Dongsheng Mining, Meilan Mining, and Qianshi Resources.

 

(b)

Mr. Li is a family member of Mr. Gang Liu.

 

(c)

Yanhe Dongsheng, Fengdu Dongsheng, Hubei Dongsheng, Chongqing Henrun, Shanxian Food and Zunzheng Mining are owned by Mr. Gang Liu.

 

(d)

Chenhe Fluoride’s 30% equity interest is owned by Dongsheng Mining.

 

(e)

An accumulated impairment provision of $270,000 for the year ended December 31, 2011 was recorded for Chenhe Fluoride for its losses during last three years.

 

According to Wuchuan Agreement, the Company shall bear the original debts of Dongsheng Mining, Meilan Mining, and Qianshi Resources amounting to no more than RMB 50,000,000 ($7.90 million). The funds due from related parties will be returned to pay the original debts of Dongsheng Mining, Meilan Mining, and Qianshi Resources.

 

NOTE 11 - INVENTORIES

 

Inventories consist of the following:

 

		March 31, 2012				December 31, 2011
		(In thousands)				(In thousands)
Raw materials		$	1,784			$	1,623
Unprocessed ore	(a)		4,593				3,204
Consumables			166				181
Finished goods and semi-manufactured goods			3,364				2,471
		$	9,907			$	7,479

 

(a)

Unprocessed ore is the inventory that consists of materials extracted from the mines that have not been processed. These inventories are primarily maintained in large mounds of materials stored in the mine field in the form of a “stockpile.” These stockpiles are measured at the reporting date by qualified experts using industry standards. Such standards taking into account the volume, density, and mineral content in such stockpiles. The cost for such stockpiles includes extraction cost from mines, labor, amortization and depreciation, and other overhead costs. Any proven or probable reserves are not included in the Company’s inventory.

 

Under normal circumstances, ores will be extracted, processed and sold within the same month. When the price of fluorite powder rose significantly in 2011, the Company increased extraction of fluorite ore in order to produce fluorite powder. However, due to certain issues in processing ores the capacity of the processing plant was limited and a large quantity of ores were not processed and sold in the usual timeframe.

 

 

NOTE 12 - RESTRICTED ASSETS

 

Restricted assets are the deposits consisting of the following:

 

		March 31, 2012				December 31, 2011
		(In thousands)				(In thousands)
Bank drafts pledged for the short term bank loans (see Note 15)		$	3,941			$	2,536
Other deposit pledged for the short term bank loans (see Note 15)			7,913				-
		$	11,854			$	2,536

      

NOTE 13 - PROPERTY, MACHINERY AND MINING ASSETS, NET

 

Property, machinery and mining assets consist of the following:

 

		March 31, 2012				December 31, 2011
		(In thousands)				(In thousands)
Land use rights		$	1,786			$	1,764
Buildings			18,635				15,452
Machinery			15,162				13,316
Mining assets			13,930				13,476
Motor vehicles			3,060				2,465
Equipment			556				437
Extraction rights	(a)		50,427				31,703
Construction in progress			1,052				325
			104,608				78,938
Less:
Accumulated depreciation and amortization			(19,933	)			(17,552	)
Impairment provision			(1,080	)			(1,073	)
		$	83,595			$	60,313

 

(a)

The extraction right’s significant increase of approximately $18.72 million was mainly due to the acquisition cost of the extraction rights of Dongsheng Mining, Qianshi Resources and Meilan Mining, which were acquired in January and February 2012.

 

Depreciation and Amortization

 

Depreciation and amortization expense in aggregate for the three months ended March 31, 2012 and 2011 was approximately $1,053,000 and $746,000, respectively.

 

Impairment Provision

 

The accumulated impairment provision was recorded for the assets of Qianzhen Mining, a subsidiary of the Company within the nonferrous metals segment.

 

Exploration and Extraction Rights

 

As in most jurisdictions, mineral rights in China are divided into two types: extraction rights and exploration rights. Extraction rights refer to the rights obtained in accordance with the law for exploitation of mineral reserves and market control of mineral products. In nearly every jurisdiction in the world, mineral rights are absolutely exclusive. In China, however, there are no clear stipulations regarding the exclusivity of mineral rights. The Amendment of China Mining Regulation stressed the security of mineral rights and its Article 6 stated that “upon discovery of mineral reserves, the exploration licensees have the privileged priority to obtain mining rights to the mineral reserves within the exploration area.”  According to the Ministry of Land and Resources, this privileged priority will be guaranteed under further amendments to be made in the near future.

 

Exploration rights refer to the rights obtained in accordance with the law for exploring for mineral reserves within the areas authorized by the exploration license. The Company has been granted mineral exploration permits. These exploration rights enable the Company to explore selected prospective mines for possible economic value to mine and develop. Under Chinese mining laws and regulations, generally an exploration license is valid for no more than three years and extension of the exploration license shall not exceed two years and two extensions.

 

NOTE 14 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

At March 31, 2012 and December 31, 2011, accounts payable and accrued liabilities were approximately $3,788,000 and $3,324,000, respectively. Accounts payable and accrued liabilities are primarily payments due to suppliers and vendors for mining and transportation services.

  

 

NOTE 15 - SHORT-TERM LOANS

 

Short-term loans consisted of the following:

 

		March 31, 2012				December 31, 2011
		(in thousands)				(in thousands)
7.01% note payable to China Citic Bank matures on March 31, 2012, collateralized with Xiangzhen’s extraction right, land use right and some machineries		$	-			$	3,145
7.01% note payable to China Citic Bank matures on March 31, 2012, collateralized with Xiangzhen’s extraction right, land use right and some machineries			-				3,145
5.15% note payable to Mr. Mao Huang, a related party of the Company, matures on January 26, 2012, collateralized with Xingzhen’s extraction right and the ore processing plant			-				2,560
9.76% note payable to Baiyin Credit Union matures on Janurary 17, 2012, guaranteed by the bank draft of the Company			-				944
11.15% note payable to Baiyin Credit Union matures on December 17, 2012 with interest due on the 20th day of each quarter and principal due at date of maturity, guaranteed by Xingzhen Mining			-				315
11.15% note payable to Baiyin Credit Union matures on December 21, 2011 with interest due on the 20th day of each quarter and principal due at date of maturity, guaranteed by Xingzhen Mining			-				315
9.76% note payable to Baiyin Credit Union matures on April 21, 2012, guaranteed by the bank draft of the Company	(a)		791				786
9.76% note payable to Baiyin Credit Union matures on May 9, 2012, guaranteed by the bank draft of the Company	(b)		791				786
9.18% note payable to China Citic Bank matures on March 31, 2013, collateralized with Xiangzhen’s extraction right			7,914				-
9.76% note payable to Baiyin Credit Union matures on July 20, 2012, guaranteed by the bank draft of the Company			2,532				-
9.76% note payable to Baiyin Credit Union matures on July 20, 2012, guaranteed by the bank draft of the Company			317				-
9.76% note payable to Baiyin Credit Union matures on July 28, 2012, guaranteed by the bank draft of the Company			317				-
11.15% note payable to Baiyin Credit Union matures on May 9, 2012, guaranteed by the bank draft of the Company			142				-
12.00% note payable to Mr. Mao Huang, a related party of the Company, matures on January 26, 2013, collateralized with Xingzhen’s extraction right and the ore processing plant			2,652				-
Note payable to Ms. Li Pan, matures on April 20, 2012, secured by the house of Ms. Xiaojing Yu, the chairperson and CEO of the Company	(c)		3,165				-
		$	18,621			$	11,996

(a) The loan amount of approximately $791,000 was repaid in April, 2012.

(b) The loan amount of approximately $791,000 was repaid in May, 2012.

(c) The loan amount of approximately $3,165,000 was repaid on April 12, 2012.

 

NOTE 16 - LONG-TERM LOANS

 

Long-term loans consisted of the following:

 

		March 31,				December 31,
		2012				2011
		(in thousands)				(in thousands)
13.30% note payable to Wuchuan Credit Union matures on January 11, 2015 with interest due on the 20th day of each month, collateralized with Dongsheng Mining’s extraction rights.		$	1,741			$	-

 

NOTE 17 – RECEIPTS IN ADVANCE

 

Receipts in advance consisted of the following:

 

		March 31, 2012				December 31, 2011
		(In thousands)				(In thousands)
Receipts in advance from fluorite customers		$	3,327			$	1,528
Receipts in advance from nonferrous metals customers			611				-
		$	3,938			$	1,528

 

As of March 31, 2012, receipts in advance totaled approximately $3,938,000, which consisted of advances from 34 customers.

 

The following table shows the receipts in advance of the Company’s major customers (10% or more of consolidated receipts in advance) as of March 31, 2012:

 

		Receipts in advance				Percentage
Customer		(In thousands)				(%)
Ningxia Jinhe Chemistry Ltd		$	1,000				25	%
Shandong Zhaohe New Material Ltd			517				13	%
Taiyuan Xinhaixiang Furnace Charge Ltd			399				10	%
		$	1,916				48	%

 

As of December 31, 2011, receipts in advance totaled approximately $1,528,000, which consisted of advances from 15 customers.

 

The following table shows the receipts in advance of the Company’s major customers (10% or more of consolidated receipts in advance) as of December 31, 2011:

 

		Receipts in advance				Percentage
Customer		(In thousands)				(%)
Inner Mongolia Huadesanli Trading Ltd		$	472				31	%
Weichang Jintai Mining Ltd			295				20	%
Houma Huatai Furnace Charge Ltd			215				14	%
Anhui Jinyang fluorine Chemical Ltd			157				10	%
		$	1,139				75	%

 

  

NOTE 18 – GOVERNMENT LOAN

 

As of March 31, 2012, the government loan amount to approximately $1.63 million was the fiscal appropriation from the local government for the construction of Fenshui Town Fluorite and Barite Flotation Plant in Wuchuan Yilao & Miao Autonomous County, Zunyi City, Guizhou Province in the PRC. The loan may be required to return back to the local government, if the Company’s construction does not qualify the manufacturing standards at fluorite and flotation plants and certified by the local government. If the Company’s construction qualifies the standards and certified by the local government, the loan will not be required to return to the local government and will be a deduction of the Company’s construction cost. As of March 31, 2012, the construction was still in progress and expecting to be completed in 2012.

 

NOTE 19 – OTHER PAYABLES AND ACCRUALS

 

Other payables and accruals consist of the following:

 

		March 31, 2012				December 31, 2011
		(In thousands)				(In thousands)
Accruals for payroll, bonus and other operating expenses		$	1,450			$	841
Payables for construction service vender			701				135
Loan to a third company			744				-
Loan to individuals			461				-
Others payables			839				1,796
		$	4,195			$	2,772

 

NOTE 20 - DUE TO RELATED PARTIES

 

Due to related parties classified as long term liabilities consist of the following:

 

		March 31, 2012				December 31, 2011
		(In thousands)				(In thousands)
Due to directors of the Company:
Ms. Xiaojing Yu, CEO of the Company		$	109			$	106
Mr. Xueming Xu, Director of the Company			13				13
Due to Mr. Xiaoming Yu, General Manager of Xiangzhen Mining			128				127
Due to Mr. Mao Huang, the minority shareholder of Xingzhen Mining			4				4
Due to Mr. Guojian Zhou, a minor shareholder of Qianshi Resources			198				-
Due to Mr. Shuanglong Tian, a minor shareholder of Meilan Mining			41				-
		$	493			$	250

 

NOTE 21 - SERIES A CONVERTIBLE PREFERRED STOCK

 

On March 21, 2012, the Company entered into a Securities Purchase Agreement (the “2012 SPA”) with certain institutional Investors (the “Investors”), pursuant to which the Company will offer up to an aggregate of $10 million of Series A Convertible Preferred Stock, $0.001 par value per share (the “Preferred Stock”) and warrants (the “Warrants”) to purchase approximately 1,960,785 shares of common stock of the Company, par value $0.001 per share (such offer being the “Offering”). Under the SPA, the Investors may purchase up to an aggregate of 10,000 shares of Preferred Stock in the Offering. The Offering was effected as a takedown from the Company’s shelf registration statement on Form S-3 (File No. 333-171243), which became effective on January 7, 2011, pursuant to a prospectus supplement to be filed with the U.S. Securities and Exchange Commission. FT Global Capital, Inc. acted as the sole placement agent for the transaction.

 

The Company will issue the Preferred Stock and Warrants in two $5 million tranches. Upon the closing of the first tranche on Monday, March 26, 2012, the Investors purchased $5.0 million of newly issued Preferred Stock and related Warrants. Each of the initial purchasers, at their option, may purchase their allocation of Preferred Stock in the second tranche by delivery of written notice to the Company at any time prior to the first anniversary of the initial closing date. Subject to the satisfaction of certain conditions, the Company may force the initial purchasers to purchase the Preferred Stock in the second tranche at any time after the satisfaction of such conditions and prior to the four month anniversary of the initial closing date. In order for the Company to trigger the mandatory purchase requirement, the Company must obtain shareholder approval as may be required by the NYSE Amex and the Company must also satisfy certain other conditions. Accordingly, the preferred stock has been classified as a liability.

 

The rights, preferences and privileges of the Preferred Stock are set forth in the Amended and Restated Certificate of Designations of Series A Convertible Preferred Stock (the “Certificate of Designations”), that the Company filed with the Secretary of State of the State of Nevada on March 26, 2012. The initial conversion price of the preferred stock was $2.04 (the “Conversion Price”), subject to anti-dilution adjustments. 

 

The Preferred Stock will amortize in installment payments, which will be payable in common stock, subject to certain equity conditions, or, at the Company’s discretion, in cash. The dividend rate on the Preferred Stock is 5% per annum, payable quarterly in common stock, subject to certain equity conditions, or, at the Company’s discretion, in cash.

 

At the closing of the initial tranche, the Investors received warrants to purchase, in the aggregate, approximately 1,960,785 shares of common stock, which are exercisable for 42 months beginning on the initial closing date (including warrants to purchase approximately 980,393 shares of common stock, which were paid as additional consideration for the commitment of the initial purchasers to fund the second tranche). No additional warrants will be issued upon the consummation of the second tranche. The warrants have an initial exercise price of $2.04, and are subject to anti-dilution adjustments.

 

A holder of Preferred Stock or Warrants, subject to certain exceptions, will be prohibited from converting Preferred Stock or exercising Warrants for shares of common stock if, as a result of such conversion, the holder, together with its affiliates, would own more than 4.99% (or up to 9.99%, as elected by such holder upon 61 days prior written notice) of the total number of shares of the Company’s common stock then issued and outstanding. 

 

Pursuant to terms of the Offering, the Company is restricted during certain periods of time and in certain circumstances in its ability to issue securities. Also, for a period of 18 months following the initial closing, the Investors shall have certain participation rights.

 

The aggregate net proceeds to the Company, after deducting placement agent fees and other estimated offering expenses payable by the Company, are estimated to be approximately $9.35 million. The placement agent will receive a placement fee equal to 5% of the gross proceeds of the Offering. The agreement with the placement agent contains certain representations, warranties, and covenants by the Company. It also provides for indemnification by the Company of the placement agent in certain circumstances.

 

The Company has also agreed to grant to the placement agent at the Initial Closing of the Offering warrants (the “Placement Agent’s Warrants”) to purchase 392,157 shares of common stock. The Placement Agent’s Warrants shall have the same general terms as the Warrants offered in the Offering, except that the initial exercise price was 120% of the initial exercise price in the Warrants offered in the Offering. 

 

NOTE 22 - STOCKHOLDERS’ EQUITY

 

Common Stock

 

We have 50,000,000 shares of common stock, par value $0.001, authorized. At March 31, 2012 and December 31, 2011 there were 33,610,207 shares and 32,285,973 shares of common stock issued and outstanding, respectively.

 

 

After negotiations with the original shareholders of Xinyi Fluorite and as required by the Agreement in circumstances where the Company’s stock price has changed, the Company on February 13, 2012 issued an additional 1,139,128 shares of common stock to the original shareholders.

 

On March 30, 2012, the Company issued 185,106 shares of the common stock in connection with a partial exercise of the warrants granted in January 2011 with the adjusted exercise price $1.21 per share.

  

Common stock authorized and outstanding table

 

		Par value  authorized				Issuance date			Shares  outstanding
Common stock at 01/01/2012			50,000,000							32,285,973
Additional shares issued as acquisition consideration for Xinyi Fluorite						02/13/2012				1,139,128
Shares issued in connection with a partial exercise of warrants granted in 2011						03/30/2012				185,106
Common stock at 03/31/2011										33,610,207

 

Common Stock Purchase Warrants

 

On January 19, 2011, the Company agreed to sell to certain institutional investors 2,836,883 shares of the Company’s common stock and warrants to purchase up to 851,066 shares of the Company’s common stock in a registered direct public offering (the “Offering”).  The Offering was effected as a takedown from the Company’s shelf registration statement on Form S-3 (File No. 333-171243), which became effective on January 7, 2011, pursuant to a prospectus supplement to be filed with the U.S. Securities and Exchange Commission.

 

The common stock and warrants were sold in fixed combinations, with each combination consisting of one share of common stock and a warrant to purchase 0.30 shares of common stock.  The purchase price was $7.05 per fixed combination.  The warrants were exercisable immediately following the closing date of the Offering and will remain exercisable for three years thereafter at an exercise price of $8.46 per share.  The exercise price of the warrants is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and in the event the Company issues or is deemed to issue shares of common stock for less than the exercise price then in effect.   

 

On March 21, 2011, the exercise price of the warrants was adjusted to $1.21 and these warrants have been reclassified from equity to a derivative liability for their future fair market value The valuation of warrants, as a derivative liability, will be valued at market. Under ASC 815, the warrants will be carried at fair value and adjusted during each reporting period subsequent to reclassification to a derivative liability from that of an equity instrument.

 

The exercisability of the warrants may be limited if, upon exercise, the holder or any of its affiliates would beneficially own more than 4.99% of the Company’s common stock.

 

The Company also granted to the placement agent at the closing of the Offering warrants (the “Placement Agent’s Warrants”) to purchase that number of shares of our common stock equal to 8% of the aggregate number of shares underlying the warrants placed in the Offering.  The Placement Agent’s Warrants had the same terms as the warrants offered in the Offering, except that the initial exercise price was 120% of the exercise price in the warrants offered in the Offering.  The Placement Agent’s Warrants, and shares underlying the Placement Agent’s Warrants, were each included in the prospectus supplement to be filed with the U.S. Securities and Exchange Commission. On March 21, 2011, the exercise price of the warrants was adjusted to $1.21 and these warrants have been reclassified from equity to a derivative liability for their future fair market value. The valuation of warrants, as a derivative liability, will be valued at market. Under ASC 815, the warrants will be carried at fair value and adjusted during each reporting period subsequent to reclassification to a derivative liability from that of an equity instrument.

 

 

During the three months ended March 31, 2012, 185,106 warrants were exercised. 

 

		Warrants to purchase The Company’s common stock				Average exercise price
		(Shares)				(In US dollars)
Outstanding warrants at January 19, 2011			851,066			$	1.21
Warrants granted to the placement agent			68,085				1.21
Exercised			(185,106	)			1.21
Expired			-				-
Outstanding warrants at March 31, 2012			734,045			$	1.21

  

On March 21, 2012, the Company entered into a Securities Purchase Agreement (the “2012 SPA”) with a certain institutional Investors (the “Investors”), pursuant to which the Company will offer up to an aggregate of $10 million of Series A Convertible Preferred Stock, $0.001 par value per share (the “Preferred Stock”) and warrants (the “Warrants”) to purchase approximately 1,960,785 shares of common stock of the Company, par value $0.001 per share (such offer being the “Offering”). Under the SPA, the Investors may purchase up to an aggregate of 10,000 shares of Preferred Stock in the Offering. The Offering was effected as a takedown from the Company’s shelf registration statement on Form S-3 (File No. 333-171243), which became effective on January 7, 2011, pursuant to a prospectus supplement to be filed with the U.S. Securities and Exchange Commission. FT Global Capital, Inc. acted as the sole placement agent for the transaction.

 

The Company also granted to the placement agent at the initial closing of the Offering warrants (the “Placement Agent’s Warrants”) to purchase 392,157 shares of common stock. The Placement Agent’s Warrants shall have the same general terms as the Warrants offered in the Offering, except that the initial exercise price was 120% of the initial exercise price in the Warrants offered in the Offering. 

 

		Warrants to purchase The Company’s common stock				Average exercise price
		(Shares)				(In US dollars)
Outstanding warrants at March 21, 2012			1,960,785			$	2.04
Warrants granted to the placement agent			392,157				2.45
Exercised			-				-
Expired			-				-
Outstanding warrants at March 31, 2012			2,352,942			$	2.11

 

 

Common Stock Future issuance plan

 

On January 16, 2012, the Company through its subsidiary Xiangzhen Mining, entered into an equity transfer and capital increase agreement to acquire 60% of the equity interests of Wuchuan Dongsheng Mining Co., Ltd.(“Dongsheng Mining”), for total consideration of RMB 93 million in the form of 2,418,448 of the Company’s common stock and RMB 50 million (approximately US$ 7.88 million) in cash.

 

On February 7, 2012, the Company through its subsidiary Xiangzhen Mining purchased a 60% equity interest in Guizhou Qianshi Resources Development Co., Ltd. (“Qianshi Resources”), for RMB 6,000,000 in the form of 337,457 shares of the Company’s common stock.

 

On February 7, 2012, the Company through its subsidiary Xiangzhen Mining purchased a 60% equity interest in Yanhe Tujiazu Autonomous County Meilan Mining Co., Ltd. (“Meilan Mining”), for RMB 9,000,000 in the form of 506,186 shares of the Company’s common stock.

 

On March 21, 2012, the Company entered into a Securities Purchase Agreement (the “SPA”) with certain institutional investors, pursuant to which the Company will offer up to an aggregate of $10 million of Series A Convertible Preferred Stock, and warrants to purchase approximately 1,960,785 shares of common stock of the Company (such offer being the “Offering”). Under the SPA, the investors may purchase up to an aggregate of 10,000 shares of preferred stock in the Offering. The initial conversion price of the preferred stock is $2.04, subject to anti-dilution adjustments. The Company has also agreed to grant to the placement agent at the initial closing of the Offering warrants to purchase 392,157 shares of common stock. The placement agent’s warrants shall have the same general terms as the warrants offered in the Offering, except that the initial exercise price was 120% of the initial exercise price in the warrants offered in the Offering. 

  

Available common stock in the future table

  

		Par value authorized				Shares outstanding				Available Shares
Available common stock at 03/31/2012			50,000,000				33,610,207				16,389,793
Warrants granted in January 2011 to purchase the Company’s common stock											(734,045	)
Will issue shares of common stock to the original shareholders of Dongsheng Mining (Issued on May 2, 2012)											(2,418,448	)
Will issue shares of common stock to the original shareholders of Qianshi Resources (Issued on May 2, 2012)											(337,457	)
Will issue shares of common stock to the original shareholders of Meilan Mining (Issued on May 2, 2012)											(506,186	)
Will issue shares to employees based on the 2009 Omnibus Long-term Incentive Plan											(840,000	)
Series A Convertible Preferred Stock to purchase the Company’s common stock											(4,901,960	)
Warrants granted in March 2012 to purchase the Company’s common stock											(2,352,942	)
Available Common stock at 05/14/2012											4,298,755

 

NOTE 23 - DEFINED CONTRIBUTION RETIREMENT PLANS

 

As stipulated by the regulations of the PRC government, companies operating in the PRC have defined contribution retirement plans for their employees. The PRC government is responsible for the pension liability to these retired employees. Commencing January 1, 2002, the Company is required to make specified contributions to the state-sponsored retirement plan at 20% of the basic salary cost of their staff. Each of the employees of the PRC subsidiaries is required to contribute 6% of his/her basic salary.  

 

NOTE 24 - STATUTORY RESERVES

 

In accordance with the PRC Companies Law, the Company’s PRC subsidiaries were required to transfer 10% of their profit after tax, as determined in accordance with accounting standards and regulations of the PRC, to the statutory surplus reserve and a percentage of not less than 5%, as determined by management, of the profit after tax to the public welfare fund. With the amendment of the PRC Companies Law which was effective January 1, 2006, enterprises in the PRC are no longer required to transfer any profit to the public welfare fund. Any balance of public welfare fund brought forward from December 31, 2005 should be transferred to the statutory surplus reserve. The statutory surplus reserve is non-distributable. There was no statutory reserve transferred for the three months ended March 31, 2012 and 2011.

 

NOTE 25 - ASSET RETIREMENT OBLIGATIONS

 

According to the “Rules on Mineral Resources Administration” and “Rules on Land Rehabilitation” of the PRC, mining companies causing damages to cultivated land, grassland or forest are required to restore the land to a state approved by the local governments.

 

The Company has identified and recognized the asset retirement obligations related to the Company’s mining sites. The Company has deposited approximately $278,000 and $175,000, respectively, in the Company’s bank accounts at March 31, 2011 and December 31, 2011 as guaranteed funds for the company’s future asset retirement obligations.

 

NOTE 26 - OPERATING RISK

 

Country risk

 

Currently, the Company’s revenues are mainly derived from sales in the PRC. The Company hopes to expand its operations in the PRC, however, there are no assurances that the Company will be able to achieve such an expansion successfully. Therefore, a downturn or stagnation in the economic environment of the PRC could have a material adverse effect on the Company’s financial condition.

 

Products risk

 

The Company competes with larger companies, who have greater funds available for expansion, marketing, research and development and to attract more qualified personnel. There can be no assurance that the Company will remain competitive with larger competitors.

   

Exchange risk

 

The Company cannot guarantee that the current exchange rate will remain steady, therefore there is a possibility that the Company could post the same amount of profit for two comparable periods and because of a fluctuating exchange rate actually post higher or lower profit depending on exchange rate of PRC Renminbi (RMB) converted to U.S. dollars on that date. The exchange rate could fluctuate depending on changes in the political and economic environments without notice.  

 

Political risk

 

Currently, the PRC is in a period of growth and is openly promoting business development in order to bring more business into the PRC. Additionally, the PRC allows a PRC corporation to be owned by a United States corporation. If the laws or regulations are changed by the PRC government, the Company’s ability to operate in the PRC could be affected.

   

 

Key personnel risk

 

The Company’s future success depends on the continued services of executive management in China. The loss of any of their services would be detrimental to the Company and could have an adverse effect on business development. The Company does not currently maintain key-man insurance on their lives. Future success is also dependent on the ability to identify, hire, train and retain other qualified managerial and other employees. Competition for these individuals is intense and increasing.

 

Non-compliance with financing requirements

 

The Company might need to obtain future financing that requiring timely filing of registration statements, having those registration statements declared effective, and registering the shares offered. The Company might be subject to liquidated damages and other penalties if they continue to obtain future financing requiring registration statements, and do not having those registration statements filed and declared effective in a prompt manner.

 

NOTE 27 - COMMITMENTS AND CONTINGENCIES

 

General

 

The Company follows ASC 450, Accounting for Contingencies , in determining its accruals and disclosures with respect to loss contingencies. Accordingly, estimated losses from loss contingencies are accrued by a charge to income when information available prior to issuance of the financial statements indicates that it is probable that a liability could be been incurred and the amount of the loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is made in the financial statements when it is at least reasonably possible that a material loss could be incurred.

    

Mining Industry in PRC

 

The Company’s mining operations are and will be subject to extensive national and local governmental regulations in China, which may be revised or expanded at any time. A broad number of matters are subject to regulations.  Generally, compliance with these regulations requires the Company to obtain permits issued by government, state and local regulatory agencies.  Certain permits require periodic renewal or review of their terms and conditions.  The Company cannot predict whether it will be able to obtain or renew such permits or whether material changes in permit terms and conditions will be imposed. The inability to obtain or renew permits or the imposition of additional terms and conditions could have a material adverse effect on the Company’s ability to develop and operate its properties.

   

Environmental matters

 

Environmental laws and regulations to which the Company is subject as it progresses from the development stage to the production stage create additional concerns and mandate additional requirements for the Company. Failure to comply with applicable laws, regulations and permits can result in injunctive actions, damages and civil and criminal penalties.  The laws and regulations applicable to the Company’s activities change frequently and it is not possible to predict the potential impact on the Company from any such future changes.

 

Although management believes that the Company is in material compliance with the statutes, laws, rules and regulations of every jurisdiction in which it operates, no assurance can be given that the Company’s compliance with the applicable statutes, laws, rules and regulations will not be challenged by governing authorities or private parties, or that such challenges will not lead to material adverse effects on the Company’s financial position, results of operations, or cash flows.

 

The Company is not involved in any legal matters arising in the normal course of business. While incapable of estimation, in the opinion of the management, the individual regulatory and legal matters in which it might be involved in the future are not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

 

NOTE 28 - SEGMENT INFORMATION

 

The Company follows FASB ASC 280-Segment Reporting, which requires that companies disclose segment data based on how management makes decision about allocating resources to segments and evaluating their performance. The Company has two operating segments identified by product, “fluorite” and “nonferrous metals”. The fluorite segment consists of our fluorite extraction and processing operations conducted through the Company’s subsidiary, Xiangzhen Mining, Xinyi Fluorite, Dongsheng Mining, Meilan Mining, and Qianshi Resources. The nonferrous metals segment consists of the Company’s copper, zinc, lead and other nonferrous metal exploration, extraction and processing activities conducted through the Company’s subsidiaries, Qianzhen Mining, Xingzhen Mining.

 

The Company primarily evaluates performance based on income before income taxes and excluding non-recurring items.

 

The segment data presented below were prepared on the same basis as the Company’s consolidated financial statements.

 

Three Months Ended March 31, 2012		Fluorite				Nonferrous metals				Consolidated
		(In thousands)				(In thousands)				(In thousands)
Segment revenue		$	1,506			$	-			$	1,506
Inter-segment revenue			-				-				-
Revenue from external customers		$	1,506			$	-			$	1,506
Segment income (loss)		$	(1,707	)		$	(572	)		$	(2,279	)
Unallocated corporate income											(1,172	)
Loss from continuing operations before income taxes										$	(3,451	)
Income tax expenses											-
Loss from discontinuing operations, net of taxes											-
Net loss										$	(3,451	)
Total segment assets		$	122,218			$	38,751			$	160,969
Inter-segment receivables			(25,058	)			(19,410	)			(44,468	)
		$	97,160			$	19,341			$	116,501
Other unallocated corporate assets											1,486
										$	117,987
Other segment information:
Depreciation and amortization		$	810			$	243			$	1,053
Expenditure for segment assets		$	41			$	226			$	267

 

 

Three Months Ended March 31, 2011 (unless otherwise indicated)		Fluorite				Nonferrous metals				Consolidated
		(In thousands)				(In thousands)				(In thousands)
Segment revenue		$	1,896			$	-			$	1,896
Inter-segment revenue			-				-				-
Revenue from external customers		$	1,896			$	-			$	1,896
Segment loss		$	(313	)		$	(976	)		$	(1,289	)
Unallocated corporate income											(370
Loss from continuing operations before income taxes										$	(1,659	)
Income tax expenses											-
Loss from discontinuing operations before income taxes											(4	)
Net loss										$	(1,663	)
Total segment assets as of December 31, 2011		$	79,076			$	15,392			$	94,468
Inter-segment receivables as of December 31, 2011			(12,660	)			2,966				(9,694	)
		$	66,416			$	18,358			$	84,774
Other unallocated corporate assets as of December 31, 2011											542
										$	85,316
Other segment information:
Depreciation and amortization		$	483			$	264			$	746
Expenditure for segment assets		$	277			$	90			$	367

 

The following summarizes identifiable assets by geographic area:

 

		March 31, 2012				December 31, 2011
		(In thousands)				(In thousands)
China		$	116,501			$	84,774
Unallocated corporate assets			1,486				542
		$	117,987			$	85,316

 

The following summarizes net losses before provision for income tax:

  

		For Three Months Ended
		March 31,  2012				March 31,  2011
		(In thousands)				(In thousands)
China		$	(2,279	)		$	(1,293	)
Unallocated corporate operating income (loss)			(1,172	)			(370	)
		$	(3,451	)		$	(1,663	)

 

NOTE 29 - OTHER INCOME, NET

 

		For Three Months Ended
		March 31, 2012				March 31, 2011
		(In thousands)				(In thousands)
Subsidiary income		$	16			$	-
Exchange gain			-				(31	)
Donation			(45	)			-
others			4				(11	)
		$	(25	)		$	(42	)

 

NOTE 30 - EARNINGS PER SHARE

 

The following table is a reconciliation of the weighted average shares used in the computation of basic and diluted earnings per share from continuing and discontinued operations for the periods presented (amounts in thousands, except per share data):

 

 

		For Three months Ended
		March 31, 2012				March 31, 2011
		(In thousands, except per share data)				(In thousands, except per share data)
Loss from continuing operations available to common shareholders:
-Basic and Diluted		$	(3,177	)		$	(1,604	)
Loss from discontinued operations available to common shareholders:
-Basic and Diluted		$	-			$	(4	)
Weighted average number of shares:
-Basic and Diluted			32,891				30,055
Loss per share from continuing operations
-Basic and Diluted		$	(0.10	)		$	(0.05	)
Loss per share from discontinued operations
- Basic and Diluted		$	-			$	(0.00	)

 

The outstanding warrants were not included in the calculation since they were out-of-the money as of March 31, 2012.

 

NOTE 31 - CONCENTRATION OF CUSTOMERS AND SUPPLIERS

 

The Company had three customers who contributed approximately $1,027,000 or 68% of the Company’s consolidated net revenue for the three months ended March 31, 2012. For the same period of 2011, the Company had two main customers who contributed approximately $1,491,000 or 79% of the Company’s consolidated net revenue.

 

The following table shows the Company’s major customers (10% or more of consolidated net revenue) for the three months ended March 31, 2012:

 

		Revenue				Percentage
Customer		(In thousands)				(%)
Inner Mongolia Huadesanli Trading Ltd		$	519				34	%
Weichang Jintai Mining Ltd			252				17	%
Zibo Hongying Trading Ltd			256				17	%
		$	1,027				68	%

   

The following table shows the Company’s major customers (10% or more of consolidated net revenue) for the Three Months Ended March 31, 2011:

 

		Revenue				Percentage
Customer		(In thousands)				(%)
Henan Zhongse Ltd		$	1,080				57	%
Ningxia Jinhe Ltd			411				22	%
		$	1,491				79	%

 

The Company had no concentrated suppliers for the three months ended March 31, 2012 and 2011.

 

NOTE 32 - SUBSEQUENT EVENT

 

On May 2, 2012, 3,262,091 shares of the Company’s common stock were issued as the noncash acquisition consideration to the original shareholders of Dongsheng Mining, Meilan Mining, and Qianshi Resources.

 

On May 7, 2012, 1,475,225 shares of the Company’s common stock were issued as the Pre-Company installment shares to redeem a third of the convertible preferred stock.

 

 

ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

 

The following management’s discussion and analysis should be read in conjunction with our consolidated financial statements and the notes thereto and the other financial information appearing elsewhere in this quarterly report. In addition to historical information, the following discussion contains certain forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to our future plans, objectives, expectations and intentions. These statements may be identified by the use of words such as “may”, “will”, “could”, “expect”, “anticipate”, “intend”, “believe”, “estimate”, “plan”, “predict”, and similar terms or terminology, or the negative of such terms or other comparable terminology. Although we believe the expectations expressed in these forward-looking statements are based on reasonable assumptions within the bound of our knowledge of our business, our actual results could differ materially from those discussed in these statements. Factors that could contribute to such differences include, but are not limited to, those discussed in the “Risk Factors” section of the Annual Report on Form 10-K filed on March 29, 2011. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

 

Our financial statements are prepared in U.S. Dollars and in accordance with generally accepted accounting principles in the United States of America. See “Exchange Rates” below for information concerning the exchange rates at which Renminbi (“RMB”) were translated into U.S. Dollars (“USD”) at various pertinent dates and for pertinent periods.

   

OVERVIEW

 

The Company through its subsidiaries, is engaged in the exploration, development, mining, and processing of fluorite, barite and nonferrous metals such as zinc, lead and copper in China. The Company has the following principal areas of interest in China: (a) fluorite extraction and processing in the Sumochaganaobao region of Inner Mongolia; (b) fluorite and barite extraction and processing in the Wuchuan County of Guizhou province; (c) fluorite and barite extraction and processing in the Yanhe County of Guizhou province; (d) fluorite extraction and processing in Jingde County, Anhui Province; (e) zinc/copper/lead processing in Wulatehouqi of Inner Mongolia; and (f) zinc/copper exploration, mining and processing in Xinjiang.

 

BUSINESS STRATEGY

 

Resumption of Production Capacity to Meet Demand

 

▼ Fluorite

 

Xiangzhen Mining

  

In November 2007, Xiangzhen Mining finished construction of a mining project with a capacity of 300,000 metric tons and a processing plant with a capacity of 200,000 metric tons. Xiangzhen Mining owns 100% of the fluorite mining rights of Inner Mongolia Sumochaganaobao.

 

In 2011, Xiangzhen Mining extracted approximately 190,000 metric tons of fluorite ore, produced 41,000 metric tons of fluorite lumps and sold 49,000 metric tons of fluorite lumps with total sales of approximately US$ 6.38 million, accounting for approximately 25% of the revenues of our fluorite business. Xiangzhen Mining also produced 56,000 metric tons of fluorite powder and sold 49,000 metric tons of fluorite powder for approximately US$ 16.03 million, which accounted for approximately 63% of the revenues of our fluorite business.  

  

Xinyi Fluorite

  

On January 13, 2011, the Company through its subsidiary Xingzhen Mining acquired 55% of the equity interests of Xinyi Fluorite. Xinyi Fluorite owns 100% of one processing plant with a processing capacity of 60,000 metric tons of fluorite ore per year and the mining rights of the Guangrong Mine and the Qingzhen Fluorite Xinyi Mine No. 1.

 

After the acquisition, the Company performed certain renovations and Xinyi Mine No. 1 resumed production on February 10, 2011. The processing plant resumed its production on March 26, 2011.

 

In 2011, Xinyi Fluorite extracted approximately 14,000 metric tons of fluorite ore, produced 9,000 metric tons of fluorite powder and sold 9,000 metric tons of fluorite powder for approximately US$3.16 million, which accounted for approximately 12% of the revenues of our fluorite business.

 

On November 18, 2011, Xinyi Fluorite engaged geological evaluation institution SRK Consulting China Ltd. (SRK) to evaluate the current situation and potential extraction volume at Xinyi Mine No. 1. In order to satisfy disclosure requirements, a technical report that satisfies JORC standards will soon to be delivered to us, and it will include an estimation of the volume of the mine’s reserves.

 

Plans for extraction and processing fluorite in 2012

 

In 2012, Xiangzhen Mining plans to be in normal production. We plan to extract 150,000 metric tons of fluorite ore, produce 40,000 metric tons of fluorite powder, and produce 60,000 metric tons of fluorite lumps. We plan to sell 40,000 metric tons of fluorite powder and 60,000 metric tons of fluorite lumps.

 

In 2012, Xinyi Fluorite plans to be in normal production. We plan to extract 60,000 metric tons of fluorite ore produce 25,000 metric tons of fluorite powder, and produce 10,000 metric tons of fluorite lumps. We plan to sell 25,000 metric tons of fluorite powder and 60,000 metric tons of fluorite lumps.

 

We also plan to do the following work in 2012 :

 

Ensure and stabilized our current production condition, extract and process to capacity and carry-out our current plans.

 

According to changes in the prices of fluorite powder and fluorite lumps, adjust our product structure of fluorite powder and fluorite lumps to ensure the highest profit.

 

We will still strive to leverage our position as one of the leaders in the industry to acquire additional appropriate fluorite reserves.

 

Acquire advanced fluorine chemical technology and develop and construct highly profitable down stream products using fluorite as a raw material.

 

 

Dongsheng Mining

 

On January 16, 2012, the Company through its subsidiary Xiangzhen Mining, entered into an equity transfer and capital increase agreement to acquire 60% of the equity interests of Dongsheng Mining. Dongsheng Mining is a limited liability company legally incorporated on December 13, 1999 and validly existing in Wuchuan Yilao & Miao Autonomous County, Zunyi City, Guizhou Province in the PRC. Dongsheng Mining has a registered capital of RMB 2,000,000 with its business mainly in extraction and processing of fluorite ore and barite ore. Currently, it owns 100% of the mining rights of Shuanghe Fluorite Mine, Fenshui Qingshuzi Barite and Fluorite Mine, Baicun Fluorite Mine, Luping Fluorite Mine and Shibuya Barite and Fluorite Mine, and it also owns Douru Town Fluorite Flotation Plant and the Fenshui Town Fluorite and Barite Flotation Plant, and a 30% equity interest of Wuchuan Chenhe Dongsheng Fluoride Industry Co., Ltd. in Wuchuan Yilao & Miao Autonomous County, Zunyi City, Guizhou Province in the PRC.

 

Meilan Mining

 

On February 7, 2012, the Company through its subsidiary Xiangzhen Mining purchased a 60% equity interest in Meilan Mining. Meilan Mining is a PRC limited liability company legally incorporated on November 20, 2007 and validly existing in Yanhe Tujiazu Autonomous County, Tongren City, Guizhou Province in the PRC. Meilan Mining has a registered capital of RMB 1,334,000 and its primary business is the extraction of fluorite ore and barite ore. Currently, Meilan Mining owns 100% of the mining rights to the fluorite ores in Fengshuiling, Banchang Town, Yanhe Tujiazu Autonomous County, Tongren City, Guizhou Province in the PRC.

 

Qianshi Resources

 

On February 7, 2012, the Company through its subsidiary Xiangzhen Mining purchased a 60% equity interest in Qianshi Resources. Qianshi Resources is a PRC limited liability company legally incorporated on April 30, 2005 and validly existing in Yanhe Tujiazu Autonomous County, Tongren City, Guizhou Province in the PRC. Qianshi Resources has a registered capital of RMB 1,000,000 and its primary business is the extraction and processing of fluorite ore and barite ore. Currently, Qianshi Resources owns 100% of the mining rights of Jingliang Fluorite Mine, and the Fluorite Flotation Plant in the Huangtu Town, Yanhe Tujiazu Autonomous County, Tongren City, Guizhou Province in the PRC.

 

▼ Non-ferrous Metals

 

Xingzhen Mining

 

In July 2006, Xingzhen Mining started to build a 200,000 metric tons/year zinc-copper ore mining and processing project at Keyinbulake Multi-Metal Mine in Buerjin County, Aletai Region, Xinjiang Uygur Autonomous Region.

 

On April 28, 2008, Xingzhen Mining completed a successful test of its facilities and subsequently started production. In parallel with processing, Xingzhen Mining continued exploration in the area.

 

In 2011, Xingzhen produced zinc concentrates and copper concentrates equivalent to 2,639 metric tons of zinc metal and 214 metric tons of copper metal as compared to 3,129 and 155 metric tons in 2010, respectively, and sold zinc concentrates and copper concentrates equivalent to 2,761 metric tons of zinc metal and 254 metric tons of copper metal, as compared to 2,538 and 115 metal tons in 2010, respectively, accounting for approximately 63% and 37%, respectively, of the total revenues of our nonferrous business of approximately $4.98 million as compared to 79%, 21% and $3.60 million in 2010, respectively.

 

In 2012, weather conditions permitting, we plan to start production at the end of April or the beginning of May. We did not stop excavating in 2011. We plan to extract ores of 130,000 metric tons, process ores of 130,000 metric tons, and produce approximately 5,000 metal tons of zinc concentrate and approximately 470 metal tons of copper concentrate.

 

Qianzhen Mining

 

Before the end of 2007, Qianzhen Mining processed ores supplied by local mining companies. Since then, the supplier contracts expired.

 

No production occurred at Qianzhen Mining in 2011 due to a lack of ore supply.

 

Due to a potential asset reorganization, we do not plan to produce at Qianzhen Mining in 2012.

 

Exploration Activities

 

Keyinbulake Copper-Zinc Mine

 

In 2011, Xingzhen Mining continued exploration as planned, with a focus on: ground drilling, surveying, geophysical prospecting, geological surveying, documenting, rock-mineral experimenting, etc. It is described as following:

 

Ground drilling: drilled 23 holes, total project amount was 8,335.29 meters.

 

Surveying: tunnel survey was 2,000 meters, 1:1000 survey was 1.485 square kilometers.

 

Geophysical prospecting: powerful induced polarization sounding (VIP method) a hundred points, advanced magnetic survey (network 50X20 meters) was 3.92 square kilometers.

 

Documenting: tunneling 138.54 meters, trenching 1,629.91 square meters, drilling 8,335.29 meters.

 

Rock-mineral experimenting: sampling 687 items, rock-mineral determined 37 items.

 

In 2012, we plan to channel 1,000 cubic meters, drill underground 2,500 meters, and ground drill 1,000 meters.

 

Qingzheng Fluorite Xinyi Mine No. 1

 

In 2011, we renovated our mines and increased capacity to 60,000 metric tons per year. We expanded our work based in two areas: underground mining projects and geophysical exploration.

 

 

Underground mining project: the plan was started during 2011 and we plan on finishing the project in June 2012. The project’s main focus is 216, 256 middle section reclamation works and development, venting system rehabilitation and implementation of the six security systems and production safety standards required by the State Council. We successfully implemented the six security systems required by State Council and passed inspection of safety standard V required by the local government. We also developed 1,500 meters of drift tunnels; performed ground drilling of 300 meters, and underground drilling of 250 meters.

 

In 2012, in order to continue underground exploration, we plan to drill 6 holes and develop 2,000 meters of drift tunnels.

 

Xinglong Town Guangrong Fluorite Mine

 

No exploration work was done in 2011.

 

Considering the self development, we plan to increase the mining depth to below +60 meter level, therefore we need to drill and control below +60 meters elevation minerals. In 2012, we plan to drill 3 holes, and develop 1,000 meters of drift tunnels.

 

Acquiring More Mineral Reserves

 

To increase our reserve base and insure supply to our processing facilities, we plan to acquire domestic and foreign large-scale mines when the right opportunities arise. We also expect to acquire additional nonferrous metal mines and fluorite mines domestically that have good extracting and operating conditions and possess all necessary governmental licenses.    

  

 

RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2012 AS COMPARED TO THREE MONTHS ENDED MARCH 31, 2011

 

Selected information from the Consolidated Statements of Operations

 

		For the three months ended March 31,
		2012				2011
		(in thousands)				(in thousands)
Net revenue		$	1,506			$	1,896
Gross profit		$	644			$	664
- Gross profit margin			43	%			35	%
General and administrative expenses		$	2,862			$	2,190
Interest expenses		$	508			$	145
Net loss attributable to the Company		$	(3,177	)		$	(1,608	)

 

REVENUES. Net revenues for the three months ended March 31, 2012 were approximately $1,506,000, representing an approximately $390,000 or 21% decrease as compared to the same period of 2011.

 

GROSS PROFIT AND GROSS PROFIT MARGIN. For the three months ended March 31, 2012, gross profit was approximately $644,000, which decreased by approximately 3% from $664,000 in gross profit for the same period of 2011. Gross profit margin was approximately 43% for the three months ended March 31, 2012, which increased from the gross profit margin of 35% for the same period of 2011.

 

GENERAL AND ADMINISTRATIVE EXPENSES. For the three months ended March 31, 2012, general and administrative expenses increased by approximately $672,000 to $2,862,000 in 2012 as compared to $2,190,000 in 2011. The increase was mainly due to the increased administrative expense of $511,000 associate with the newly acquired Dongsheng Mining, Meilan Mining, and Qianshi Resources entities.

 

INTEREST EXPENSE. Interest expense increased by approximately $363,000 from the same period of 2011. The increase was mainly due to the increase in the principal and the interest ratio of the short term loans.

 

NET LOSS ATTRIBUTABLE TO THE COMPANY. Net loss attributable to the Company for the three months ended March 31, 2012 was approximately $3,177,000, as compared to $1,608,000 for the same period of 2011. Basic net losses per share were $0.10 and $0.05 for the three months ended March 31, 2012 and 2011, respectively.

 

SEGMENT PERFORMANCE ANALYSIS

 

		Segment revenue								Segment loss
		For the three months ended March 31,								For the three months ended March 31,
		2012				2011				2012				2011
		(In thousands)				(In thousands)				(In thousands)				(In thousands)
Fluorite		$	1,506			$	1,896			$	(1,707	)		$	(313	)
Nonferrous metals		$	-			$	-			$	(572	)		$	(976	)

 

Fluorite

 

For the first quarter of 2012, the fluorite segment revenue decreased by 21% from approximately $1,896,000 for the three months ended March 31, 2011 to approximately $1,506,000 for the three months ended March 31, 2012. The decrease was primarily due to the decrease in sales volume for fluorite products. The fluorite powder sales volume for the three months ended March 31, 2012 was approximately 1,100 tons, representing an approximately 4,900 ton or 82% decrease as compared to the same period of 2011.

 

Our fluorite segment loss was approximately $1,707,000 for the three months ended March 31, 2012, compared to a segment loss of approximately $313,000 in the same period of 2011.

 

Nonferrous Metals

 

Due to the inclement weather in the first quarters of 2012 and 2011, the Company ceased processing non-ferrous metal and had no sales of nonferrous metals in the first quarters of 2012 and 2011, respectively. The nonferrous metals segment loss was mainly due to depreciation and amortization, interest fees and employees’ wages in the first quarter of 2012 and 2011.

 

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

 

Cash and cash equivalents were $5.06 million as of March 31, 2012, a decrease of $0.51 million as compared to the balance at December 31, 2011 of $5.57 million.

 

Net cash used in operating activities for the three months ended March 31, 2012 was $10.72 million, representing a $4.28 million increase as compared to $6.44 million in cash used for the same period in 2011. 

 

Net cash used in investing activities for the three months ended March 31, 2012 was $0.27 million, as compared to $3.62 million used for the same period of 2011.

 

Net cash provided by financing activities for the three months ended March 31, 2012 was $10.43 million, as compared to $16.33 million provided for the same period of 2011.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We have never entered into any off-balance sheet financing arrangements and have not formed any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

 

INFLATION

 

The Company does not foresee any material adverse effects on its earnings as a result of inflation.

 

 

CRITICAL ACCOUNTING POLICIES

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

 

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimates are made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur, could materially impact the consolidated financial statements.

 

We believe that the following critical accounting policies reflect the significant estimates and assumptions which are used in the preparation of the consolidated financial statements and affect our financial condition and results of operations.

 

Property, Plant and Mine Development

 

Expenditures for new facilities or equipment and expenditures that extend the useful lives of existing facilities or equipment are capitalized and depreciated using the straight-line method at rates sufficient to depreciate such costs over the estimated productive lives, which do not exceed the related estimated mine lives, of such facilities based on mineralized material.

 

Mineral exploration costs are expensed as incurred. After a mine is considered to be in the development or production stage or considered to have proven or probable reserves further exploration costs are also expensed as incurred.

 

Extraction rights are stated at the lower of cost and recoverable amount. When extraction rights are obtained from the government according to mining industry practice in the PRC, extraction rights are capitalized as incurred and are amortized using the units-of-production (“UOP”) method over the estimated life of the mineralized body based on estimated recoverable volume through to the end of the period over which the Company has extraction rights.

 

Once a mine is considered to be in the development or production stage, major development costs are amortized using the UOP method based on the estimated recoverable volume of the mineralized material. The Company determines whether a mine is in development or production stage based upon standard mining industry practices in the PRC. Given that commencing development and production at mining properties prior to establishing proven and probable reserves (to the extent necessary to meet the definition under Industry Guide 7), and often after only establishing inferred resources, is standard business practice in the mining industry in the PRC, the Company believes it is appropriate to account for the Xiangzhen Mining property as a production-stage operation and to account for the Xingzhen Mining, Xinyi Fluorite, Dongsheng Mining, Meilan Mining and Qianshi Resources properties as development-stage projects.

 

At the Company’s surface mines, development costs include costs to further delineate the mineralized body and remove overburden to initially expose the mineralized body. At the Company’s underground mines, development costs include the costs of building access ways, shaft sinking and access, lateral development, drift development, and ramps and infrastructure development.

 

To the extent that these costs benefit the entire mineralized body, they are amortized over the estimated life of the mineralized body. Costs incurred to access specific mineralized blocks or areas that only provide benefit over the life of that area are amortized over the estimated life of that specific mineralized block or area. Interest cost allocable to the cost of developing mining properties and to constructing new facilities, if any, is capitalized until such assets are ready for their intended use.

 

Land use rights are stated at cost, less accumulated amortization. Land use right amortization is computed using the straight-line method over the estimated useful lives of 25 years.

 

Estimated useful lives of the Company’s assets are as follows:

 

			Useful Life
			(In years)
Land use rights			25
Buildings			3-25
Machinery			12
Mining assets			License term
Motor vehicle			6
Equipment			5
Extraction rights			License term
Exploration rights			License term

 

Asset Impairment

 

Long-lived Assets

 

The Company reviews and evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. An impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the assets, including goodwill, if any. An impairment loss is measured and recorded based on discounted estimated future cash flows. Future cash flows are estimated based on quantities of recoverable metals, corresponding expected commodity prices (considering current and historical prices, price trends and related factors), production levels and operating costs of production and capital, all based on life-of-mine plans. Existing proven and probable reserves and value beyond proven and probable reserves are included when determining the fair value of mine site reporting units at acquisition and, subsequently, in determining whether the assets are impaired. The term “recoverable metals” refers to the estimated amount of gold or other commodities that will be obtained after taking into account losses during ore processing and treatment. Estimates of recoverable metals from such exploration stage metal interests are risk adjusted based on management’s relative confidence in such materials. In estimating future cash flows, assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of future cash flows from other asset groups. The Company’s estimates of future cash flows are based on numerous assumptions and it is possible that actual future cash flows will be significantly different than the estimates, as actual future quantities of recoverable metals, gold and other commodity prices, production levels and operating costs of production and capital are each subject to significant risks and uncertainties.

 

Stock Based Compensation

 

In December 2004, the Financial Accounting Standards Board, or FASB, issued FASB ASC 718-10-55 - Compensation-Stock Compensation, or ASC 718-10-55. Under ASC 718-10-55, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. In addition, FASB ASC 825-10-50-10 – Financial Instruments – Overall – Disclosures, or ASC 825-10-50-10, expresses views of the Securities and Exchange Commission, or the SEC, staff regarding the interaction between ASC 718-10-55 and certain SEC rules and regulations and provides the staff's views regarding the valuation of share-based payment arrangements for public companies. The Company’s compensation cost is measured on the date of grant at its fair value. Such compensation amounts, if any, are amortized over the respective vesting periods or period of service of the option grant.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not required.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures (as defined in Rules 13a – 15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. This information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.     

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None

 

Item 1A. Risk Factors

 

Not required

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None

 

Item 3. Defaults Upon Senior Securities

 

None

 

Item 4. Mining Safety Disclosure

 

Not applicable

 

Item 5. Other Information

 

None

 

Item 6.  Exhibits

 

The following exhibits are hereby filed or furnished with this Quarterly Report on Form 10-Q.

 

Exhibit Number		Description
31.1*		Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Principal Accounting Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
32*		Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
101.INS†		XBRL Instance Document
101.SCH†		XBRL Taxonomy Extension Schema Document
101.CAL†		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF†		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB†		XBRL Taxonomy Extension Label Linkbase Document
101.PRE†		XBRL Taxonomy Extension Presentation Linkbase Document

 

*Filed herewith.

†Furnished herewith.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant certifies that it has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized, in Beijing.

 

	CHINA SHEN ZHOU MINING & RESOURCES, INC.
Date: May 14, 2012	By:	/s/ Xiaojing Yu
		Xiaojing Yu, Chief Executive Officer
		(Principal Executive Officer)

 

Date: May 14, 2012	By:	/s/ Jiayin Zhu
		Jiayin Zhu, Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)