中國基礎資源控股有限公司 China Primary Resources Holdings Limited 此乃要件 請即處理 THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION
本通函僅作參考，並不構成收購、購買或認購中國基礎資源控股有限公司證券之邀請或要約。 This circular appears for information purpose only and does not constitute an invitation or offer to acquire, purchase or subscribe for securities of China Primary Resources Holdings Limited. 閣下如對本通函任何方面或應採取之行動有任何疑問，應諮詢 閣下之股票經紀或其他註冊 If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should 證券交易商、銀行經理、律師、專業會計師或其他專業顧問。 consult your stockbroker or other registered dealer in securities, bank manager, solicitors, professional accountant or other professional adviser. 閣下如已將名下中國基礎資源控股有限公司之股份全部售出或轉讓，應立即將本通函連同隨 If you have sold or transferred all your shares in China Primary Resources Holdings Limited, you 附之代表委任表格送交買主或承讓人或經手買賣或轉讓之銀行、註冊證券交易商或其他代理 should at once hand this circular and the accompanying form of proxy to the purchaser or transferee, or 商，以便轉交買主或承讓人。 to the bank, registered dealer in securities or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee. 香港聯合交易所有限公司對本通函之內容概不負責，對其準確性或完整性亦不發表任何聲明， The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this circular, 並明確表示概不就因本通函全部或任何部份內容而產生或因倚賴該等內容而引致之任何損失 makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any losses howsoever arising from or in reliance upon the whole or any part of the contents of this 承擔任何責任。
circular.
THE THE ACQUISITION OF IN INTEREST 22.28% A
VERYSUBSTANTIAL ACQUISITION
ISSUE OF CONVER OF ISSUE IN RELATION IN TO （於開曼群島註冊成立之有限公司） (Incorporated in the Cayman Islands with limited liability)
（股份代號：8117） AND (Stock code: 8117)
就收購一間採礦公司22.28%權益 BONDS TIBLE VERY SUBSTANTIAL ACQUISITION 之非常重大收購事項 IN RELATION TO 及 THE ACQUISITION OF A 22.28% INTEREST IN A MINING COMPANY AND
發行可換股債券 COMP MINING A ISSUE OF CONVERTIBLE BONDS
中國基礎資源控股有限公司之財務顧問 Financial adviser to China Primary Resources Holdings Limited
Optima Capital Limited （前稱卓越企業融資有限公司） ANY (formerly known as VXL Financial Services Limited)
本公司謹訂於二零零七年十月二日（星期二）中午十二時正假座香港九龍尖沙咀廣東道5號海 A notice convening the EGM to be held at Suite 1415, Ocean Centre, 5 Canton Road, Tsim Sha Tsui, 洋中心1415室召開股東特別大會，大會通告載於本通函第238頁至第266頁。無論 閣下能否 Kowloon, Hong Kong on Tuesday, 2nd October, 2007 at 12:00 p.m. is set out on pages 238 to 266 of this 出席股東特別大會，務請按照隨附之代表委任表格上印列之指示填妥表格及盡快交回本公司 circular. Whether or not you are able to attend the EGM, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon and return the same to the Company’s 於香港之股份過戶登記分處卓佳登捷時有限公司，地址為香港灣仔皇后大道東28號金鐘匯中 Hong Kong branch share registrar, Tricor Tengis Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road
心26樓，並在任何情況下均不可遲於股東特別大會或其任何續會（視情況而定）指定舉行時間 5th September, 2007 East, Wanchai, Hong Kong as soon as possible and in any event not less than 48 hours before the time 48 小時前送達。 閣下填妥及交回代表委任表格後，仍可依願親身出席股東特別大會或其任 appointed for the holding of the EGM or any adjourned meeting (as the case may be). Completion and 何續會，並於會上投票。 return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjourned meeting should you so wish. 本通函自刊發日期起將在創業板網站http://www.hkgem.com之「最新公司公告」網頁內登載最 少七日及在本公司指定網站http://china-p-res.etnet.com.hk內登載。 This circular will remain on the GEM website at http://www.hkgem.com on the “Latest Company Announcements” page for at least seven days from the date of its publication and the Company’s designated website at http://china-p-res.etnet.com.hk. 5th September, 2007 二零零七年九月五日
33797 cover 1 9/4/07, 18:11 CHARACTERISTICS OF GEM
GEM has been established as a market designed to accommodate companies to which a high investment risk may be attached. In particular, companies may list on GEM with neither a track record of profitability nor any obligation to forecast future profitability. Furthermore, there may be risks arising out of the emerging nature of companies listed on GEM and the business sectors or countries in which the companies operate. Prospective investors should be aware of the potential risks of investing in such companies and should make the decision to invest only after due and careful consideration. The greater risk profile and other characteristics of GEM mean that it is a market more suited to professional and other sophisticated investors.
Given the emerging nature of companies listed on GEM, there is a risk that securities traded on GEM may be more susceptible to high market volatility than securities traded on the Main Board and no assurance is given that there will be a liquid market in the securities traded on GEM.
The principal means of information dissemination on GEM is publication on the internet website operated by the Stock Exchange. Listed companies are not generally required to issue paid announcements in gazetted newspapers. Accordingly, prospective investors should note that they need to have access to the GEM website in order to obtain up-to-date information on GEM-listed issuers.
- i - CONTENTS
Page
Definitions ...... 1
Letter from the Board ...... 7
Appendix I – Accountants’ report of Xin Shougang ...... 32
Appendix II – Financial information on the Group ...... 63
Appendix III – Financial information on the Enlarged Group ...... 118
Appendix IV – Unaudited pro forma financial information of the Enlarged Group ...... 136
Appendix V – Valuation report of properties of the Enlarged Group ...... 148
Appendix VI – Business valuation report on the Mining Sites ...... 160
Appendix VII – Reports on forecast underlying the valuation ...... 177
Appendix VIII – Technical assessment report on the Mining Sites ...... 180
Appendix IX – General information ...... 228
Notice of EGM ...... 238
- ii - DEFINITIONS
Unless the context requires otherwise, the following terms shall have the following meanings in this circular:
“Acquisition” the acquisition of the Sale Shares by Yichang Shoukong pursuant to the terms of the Acquisition Agreement
“Acquisition Agreement” the agreement dated 14th November, 2006 entered into between Yichang Shoukong and GORE in relation to the Acquisition and as supplemented by the Supplemental Deed, the Second Supplemental Deed and the Third Supplemental Deed
“Amendments” the amendments on certain terms of the Acquisition Agreement pursuant to the Second Supplemental Deed
“Announcement” the initial announcement of the Company dated 9th January, 2007 in relation to, among other things, the Acquisition
“associates” has the meaning ascribed to it under the GEM Listing Rules
“Board” board of Directors
“Bondholder(s)” holder(s) of the Convertible Bonds from time to time
“Business Day” a day (other than Saturday, Sunday and public or statutory holiday) on which banks are open for business in Hong Kong during their normal business hours
“BVI” the British Virgin Islands
“Call Option” an option to purchase the Option Interest granted by GORE and GORE Mining Technology to Yichang Shougang pursuant to the Option Deed and the Acquisition Agreement
“Company” China Primary Resources Holdings Limited 中國基礎資源控股 有限公司, a company incorporated in the Cayman Islands with limited liability and the issued Shares of which are listed on GEM
“Completion” completion of the Acquisition
“Completion Date” the fifth Business Day immediately after all of the conditions contained in the Acquisition Agreement having been fulfilled (or waived as the case may be) and being the day on which completion of the Acquisition takes place
“Completion Date of Subscription” the date falling on the second Business Day following the date on which all of the conditions to the Subscription Agreement having been fulfilled (or waived) and being the day on which completion of the Subscription takes place
- 1 - DEFINITIONS
“connected person(s)” has the meaning ascribed to it under the GEM Listing Rules
“Consideration” the consideration for the Acquisition to be satisfied as to HK$18 million by cash and approximately HK$953 million by the issue of the Preferred Shares pursuant to the terms of the Acquisition Agreement
“Conversion Ratio” the basic conversion mechanism (subject to adjustments) under the Convertible Bonds such that the number of Shares which fall to be issued as at the date when conversion takes place (assuming a full conversion of HK$246,250,000 shall be 1,247,338,197 Shares (i.e., approximately HK$0.20 per Share)) representing 10% of the aggregate of the (i) then actual issued share capital of the Company; and (ii) potential issued share capital of the Company (including without limitation Shares to be issued under the Convertible Bonds, any other convertible notes or notes, options, rights, stock dividends warrants or otherwise), but excluding any further issue of Shares pursuant to any conversion right under any unsecured all cash convertible notes issued by the Company at an actual conversion price of not less than HK$0.40 per Share or such higher conversion price by reasons of consolidation, merger or otherwise of the share capital base or on otherwise just and equitable basis as may be determined by an approved merchant bank
“Conversion Share(s)” new Share(s) which would fall to be issued by the Company upon conversion of the Convertible Bonds
“Convertible Bonds” the 4.5% convertible bonds with principal amount of HK$246.25 million due 2010 to be issued by the Company pursuant to the Subscription Agreement
“Cooperation Agreement” the cooperation agreement entered into between Shougang and Yichang City Government dated 26th June, 2006 in relation to, among other things, the appointment of Xin Shougang as the sole investor and developer of the Mining Sites
“Director(s)” director(s) of the Company
“Disposal Consideration” the aggregate consideration to be received by the Group upon disposal of any interest in Xin Shougang
“Dividends” the dividends to be distributed by Xin Shougang to the Group
- 2 - DEFINITIONS
“EGM” the extraordinary general meeting of Company to be convened and held for the Shareholders to consider and, if thought fit, approve, among other things, the Acquisition, the Preferred Share Class Creation, the allotment and issue of the Preferred Shares and the Preferred Conversion Shares, the entering into of the Option Deed, the issue of the Convertible Bonds and the allotment and issue of the Conversion Shares
“Enlarged Group” the Group upon Completion
“FRP Pipes” fibre glass reinforced plastic pipes
“Future Advance” Future Advance Holdings Limited, a company incorporated in BVI holding approximately 37.6% of the issued Shares as at the Latest Practicable Date
“Future Advance Bond” the convertible bond with principal amount of HK$6,270,065.60 subscribed by Future Advance on 27th April, 2006, pursuant to which Future Advance is entitled to convert the principal amount thereof outstanding into new Shares at the current conversion price of HK$0.02, subject to adjustments
“GEM” the Growth Enterprise Market of the Stock Exchange
“GEM Listing Rules” the Rules Governing the Listing of Securities on GEM
“GORE” Great Ocean Real Estate Limited, a company incorporated in BVI with limited liability which is interested in 35.00% of the registered capital of Xin Shougang as at the Latest Practicable Date
“GORE Mining Technology” 宜昌泰鴻礦山科技有限公司 (Yichang Tai Hong Mining Technology Company Limited (Note 2)), a company established in the PRC with limited liability and a wholly-owned subsidiary of GORE
“Greater China” Greater China Appraisal Limited, the independent qualified valuer engaged by the Company for preparing the valuation report on the properties of the Enlarged Group and the business valuation report on the Mining Sites
“Group” the Company and its subsidiaries
“HKFRS” the Hong Kong Financial Reporting Standards
- 3 - DEFINITIONS
“Hong Kong” Hong Kong Special Administrative Region of the PRC
“Initial Conversion Rate” the initial conversion rate of 1:1 (subject to adjustments) under the terms of the Preferred Shares
“Issue Price” HK$0.34 per Preferred Share, being the issue price of each of the Preferred Shares pursuant to the terms of the Acquisition Agreement
“Last Trading Day” 14th November, 2006, being the last trading day before suspension of trading in the Shares on 15th November, 2006 pending the release of the Announcement
“Latest Practicable Date” 31st August, 2007, being the latest practicable date for ascertaining certain information for inclusion in this circular
“Lehman Brothers” Lehman Brothers Commercial Corporation Asia Limited or its designated affiliates
“Maturity Date” the third anniversary of the date of issue of the Convertible Bonds
“Mining Rights” the rights to operate the Mining Sites
“Mining Sites” the mining sites located at or near Yichang City, Hubei Province, the PRC referred to in the Cooperation Agreement
“MMC” Minarco-MineConsult, the independent technical adviser engaged by the Company to prepare a technical assessment report on the Mining Sites
“Mr. Yu” Mr. Yu Hongzhi, the Chairman and an executive Director
“Mr. Zhang” 張征 (Zhang Zheng (Note 2)), being the sole beneficial owner of GORE
“Optima Capital” Optima Capital Limited (formerly known as VXL Financial Services Limited), a corporation licensed to carry out type 6 (advising on corporate finance) regulated activity under the SFO and the financial adviser to the Company in relation to the Acquisition
“Option Deed” the deed to be entered into between Yichang Shoukong, GORE and GORE Mining Technology in relation to the granting of the Call Option
“Option Interest” 12.72% of the registered capital of Xin Shougang held indirectly and directly by GORE and GORE Mining Technology respectively as at the Latest Practicable Date which are subject to the Call Option - 4 - DEFINITIONS
“parties acting in concert” has the meaning ascribed to it under the Takeovers Code
“PRC” the People’s Republic of China which, for the purpose of this circular, shall exclude Hong Kong, the Macau Special Administrative Region of the People’s Republic of China and Taiwan
“Preferred Conversion Shares” new Shares which may fall to be issued by the Company upon the exercise of the conversion rights attaching to the Preferred Shares at the conversion rate then in effect
“Preferred Share(s)” a new class of share capital of the Company of HK$0.00125 each to be created carrying rights to convert into Preferred Conversion Shares, the principal terms of which are set out in the paragraph headed “Principal terms of the Preferred Shares” in the letter from the Board contained in this circular
“Preferred Share Class the proposed creation of a new class of Preferred Shares and Creation” reclassification of the existing authorised share capital of the Company into Shares and Preferred Shares
“Sale Shares” 22.28% of the registered capital of Xin Shougang held indirectly and directly by GORE and GORE Mining Technology respectively which are the subject of the Acquisition Agreement
“Second Supplemental Deed” the second supplemental deed dated 2nd February, 2007 entered into between Yichang Shoukong and GORE
“SFO” Securities and Futures Ordinance (Chapter 571) of the Laws of Hong Kong
“Share(s)” ordinary share(s) of HK$0.00125 each in the share capital of the Company
“Shareholder(s)” holder(s) of the Share(s)
“Shougang” 首鋼控股有限責任公司 (Shougang Holdings Limited Liability Company (Note 2))
“Stock Exchange” The Stock Exchange of Hong Kong Limited
“Subscription” the subscription of the Convertible Bonds pursuant to the Subscription Agreement
“Subscription Agreement” the conditional subscription agreement dated 12th June, 2007 entered into among the Company as issuer, Future Advance, the controlling Shareholder as warrantor and Lehman Brothers as investor in relation to the issue and subscription of the Convertible Bonds - 5 - DEFINITIONS
“Supplemental Deed” the supplemental deed dated 5th January, 2007 entered into between Yichang Shoukong and GORE
“Takeovers Code” the Hong Kong Code on Takeovers and Mergers
“Term Sheet” the term sheet dated 3rd January, 2007 entered into among the Company, Lehman Brothers and Future Advance in relation to the conditional issue of the Convertible Bonds superseding the non- binding term sheet dated 14th November, 2006 entered into among the same parties
“Third Supplemental Deed” the third supplemental deed dated 11th June, 2007 entered into between Yichang Shoukong and GORE
“Xin Shougang” 新首鋼資源控股有限公司 (Xin Shougang Zi Yuan Holdings Limited (Note 2)), a company established in the PRC with limited liability
“Xin Shougang Group” Xin Shougang and YXS Real Estate Development
“Yichang Shoukong” 宜昌首控實業有限公司 (Yichang Shoukong Industries Co., Limited (Note 2)), a company established in the PRC with limited liability and a wholly-owned subsidiary of the Company
“YXS Precious Metal Mining” 宜昌新首鋼貴金屬礦業有限公司 (Yichang Xin Shougang Precious Metal Mining Limited (Note 2)), a company established in the PRC with limited liability and a 52%-owned subsidiary of the Company
“YXS Real Estate Development” 宜昌新首鋼房地產開發有限公司 (Yichang Xin Shougang Real Estate Development Limited (Note 2)), a company established in the PRC with limited liability and a 65%-owned subsidiary of Xin Shougang
“HK$” Hong Kong dollars, the lawful currency of Hong Kong
“km.” kilometers
“RMB” Renminbi, the lawful currency of the PRC
“%” per cent.
Notes:
1. In this circular, the exchange rate of HK$1.00 to RMB1.00 has been used for reference only.
2. The English translations of Chinese names or words in this circular are included for information purpose only, and should not be regarded as the official English translation of such Chinese names or words.
- 6 - LETTER FROM THE BOARD
(Incorporated in the Cayman Islands with limited liability) (Stock code: 8117)
Executive Directors: Registered office: Mr. Yu Hongzhi (Chairman) Cricket Square Ms. Ma Zheng Hutchins Drive Mr. Chiu Winerthan P.O. Box 2681 Grand Cayman KY1-1111 Independent non-executive Directors: Cayman Islands Mr. Wan Tze Fan Terence Mr. Liu Weichang Head office and principal place Mr. Gao Sheng Yu of business in Hong Kong: Suite 1415, Ocean Centre 5 Canton Road Tsim Sha Tsui Kowloon Hong Kong
5 September 2007
To the Shareholders and, for information only, the holders of the convertible bonds, warrants and options of the Company
Dear Sir or Madam,
VERY SUBSTANTIAL ACQUISITION IN RELATION TO THE ACQUISITION OF A 22.28% INTEREST IN A MINING COMPANY AND ISSUE OF CONVERTIBLE BONDS
INTRODUCTION
On 14th November, 2006, Yichang Shoukong, a wholly-owned subsidiary of the Company, entered into the Acquisition Agreement with GORE, pursuant to which Yichang Shoukong has conditionally agreed to acquire from GORE Mining Technology, a wholly-owned subsidiary of GORE, a 22.28% interest in the registered capital of Xin Shougang at an aggregate consideration of approximately HK$971 million. Xin Shougang is principally engaged in mine resources development, asset management and
- 7 - LETTER FROM THE BOARD provision of investment management consultancy services in Yichang City, Hubei Province, the PRC. Xin Shougang’s principal assets are the exclusive rights to invest, develop and to apply for the mining rights for the Mining Sites located at Yichang City, Hubei Province, the PRC and the 48% interest in YXS Precious Metal Mining in which the Group owns a 52% interest.
In consideration of Yichang Shoukong agreeing to acquire 22.28% interest in the registered capital of Xin Shougang, GORE and GORE Mining Technology will irrevocably and unconditionally grant to Yichang Shoukong the Call Option at no premium. Pursuant to the Option Deed, Yichang Shoukong would have the right to require GORE Mining Technology to sell and transfer and require GORE to procure GORE Mining Technology to sell and transfer the Option Interest, being the remaining 12.72% interests directly held by GORE Mining Technology in Xin Shougang immediately upon Completion, to Yichang Shoukong or its nominee. Upon exercise in full of the rights attaching to the Call Option, Yichang Shoukong (or together its nominee) will be interested in 35.00% in the registered capital of Xin Shougang.
On 12th June, 2007, the Company, as issuer, entered into the Subscription Agreement with Future Advance, the controlling Shareholder as warrantor, and Lehman Brothers, as investor, in respect of the conditional issue of the Convertible Bonds with aggregate principal amount of HK$246.25 million with coupon rate of 4.5% due 2010. The net proceeds from the issue of the Convertible Bonds will be used as working capital required by Xin Shougang subsequent to completion of the Acquisition.
The Acquisition constitutes a very substantial acquisition of the Company under Chapter 19 of the GEM Listing Rules. Both the Acquisition and the issue of Convertible Bonds are subject to the approval by the Shareholders at the EGM.
The purpose of this circular is to provide you with, among other thing, (i) further details of the Acquisition; (ii) details of the issue of the Convertible Bonds; (iii) financial information on the Group, the Enlarged Group and Xin Shougang; (iv) business valuation and technical assessment on the Mining Sites; (v) the notice of the EGM; and (vi) other information as required under the GEM Listing Rules.
THE ACQUISITION AGREEMENT
1) Parties
Vendor: GORE, an investment holding company principally engaged in real estate investment. Save for being a party to the Acquisition Agreement, to the best of the Directors’ knowledge, information and belief having made all reasonable enquiries, GORE and its beneficial owner, Mr. Zhang, are independent of the Company and its connected persons and are not connected persons of the Company. Save for entering into of the Acquisition Agreement, during the 24- month period prior to the date of the Acquisition Agreement, the Group has not entered into any transaction with GORE.
- 8 - LETTER FROM THE BOARD
Purchaser: Yichang Shoukong, a wholly-owned subsidiary of the Company established in the PRC, is an investment holding company. The principal investment of Yichang Shoukong is a 27% interest in YXS Precious Metal Mining, a company principally engaged in mine prospecting and mining of metals and minerals, processing, sale, export and import of mining by-products.
2) Asset to be acquired
The Sale Shares, being 22.28% interest in the registered capital of Xin Shougang. Further information on Xin Shougang is set out in the section headed “Information on Xin Shougang and the Mining Sites” below. In consideration of Yichang Shoukong agreeing to acquire the 22.28% interest in the registered capital of Xin Shougang, GORE and GORE Mining Technology will irrevocably and unconditionally grant to Yichang Shoukong by the Option Deed the Call Option at no premium. Pursuant to the Option Deed, Yichang Shoukong would have the right to require GORE Mining Technology to sell and transfer and require GORE to procure GORE Mining Technology to sell and transfer the Option Interest, being the remaining 12.72% interests directly held by GORE Mining Technology in Xin Shougang immediately after Completion, to Yichang Shoukong or its nominee. Further details of the Call Option are set out in section headed “The Call Option” below.
Upon Completion, the Company will be interested in 22.28% in the registered capital of Xin Shougang. Xin Shougang will become an associated company of the Group and will be equity accounted for in accordance with the HKFRS.
As at the date of the Acquisition Agreement, Xin Shougang is owned as to 65.00% and 35.00% by Shougang and GORE Mining Technology respectively. Immediately upon Completion, Xin Shougang will be owned as to 65.00%, 22.28% and 12.72% by Shougang, Yichang Shoukong and GORE Mining Technology respectively. Xin Shougang is a 48% shareholder of YXS Precious Metal Mining, a subsidiary of the Company. The Company indirectly owns the remaining 52% interest in YXS Precious Metal Mining. Shougang, being a 65% shareholder of Xin Shougang, is therefore a connected person of the Company. To the best of the Directors’ knowledge, information and belief having made all reasonable enquiries, save for the aforesaid relationship, Shougang has no other business relationship with the Group and that save for being a fellow shareholder of Xin Shougang, Shougang has no other business relationship with GORE or GORE Mining Technology.
- 9 - LETTER FROM THE BOARD
Set out below are the simplified shareholding charts of Xin Shougang as at the Latest Practicable Date and immediately upon Completion:
As at the Latest Practicable Date
GORE Future Advance
Shougang 100% 37.6% GORE Mining The Company 65% Technology 35% 100% 100%
Yichang Shoukong Yichang Xin Shougang Fulianjiang Joint Composite Limited
65%48% 27%
25% YXS Real Estate YXS Precious Metal Mining Development
Immediately upon Completion (Note)
Future Advance
Shougang GORE 37.6%
100% The Company 65% GORE Mining Technology 100% 100% 12.72% Yichang Shoukong 22.28% Yichang Fulianjiang Xin Shougang Joint Composite Limited
65% 48% 27%
25% YXS Real Estate YXS Precious Metal Mining Development
Note: The shareholding structure is prepared assuming no conversion of the Preferred Shares and the Future Advance Bond.
- 10 - LETTER FROM THE BOARD
3) Consideration and payment terms
The Consideration is approximately HK$971 million, which shall be satisfied in the following manner upon Completion:
(i) as to HK$18 million, in cash which will be financed by internal resources of the Group; and
(ii) as to the balance of HK$953 million, by the allotment and issue to GORE of 2,802,235,294 Preferred Shares at the Issue Price, credited as fully paid upon Completion. Based on the Issue Price of HK$0.34, the Preferred Shares are valued at approximately HK$953 million. The Preferred Shares are convertible into the Preferred Conversion Shares at the Initial Conversion Rate of 1:1, subject to adjustments. Further details of the Preferred Shares are set out in the section headed “Principal terms of the Preferred Shares” below.
Based on the number of Shares in issue as at the Latest Practicable Date and assuming no Shares will be issued or repurchased, upon full conversion of the Preferred Shares into the Preferred Conversion Shares at the Initial Conversion Rate, the Preferred Conversion Shares represent:
(a) approximately 41.1% of the Shares in issue as at the Latest Practicable Date; and
(b) approximately 29.1% of the Shares in issue as enlarged by the allotment and issue of the Preferred Conversion Shares.
No application will be made for the listing of the Preferred Shares on the Stock Exchange or any other stock exchange. Application will, however, be made to the Stock Exchange for the listing of, and permission to deal in, the Preferred Conversion Shares.
Based on the Initial Conversion Rate of 1:1, the Issue Price of HK$0.34 represents:
(i) a discount of approximately 4.2% to the closing price of HK$0.355 per Share as quoted on the Stock Exchange on the Last Trading Day;
(ii) a premium of approximately 3.0% over the average closing price of HK$0.330 per Share for the last five trading days up to and including the Last Trading Day;
(iii) a premium of approximately 3.3% over the average closing price of HK$0.329 per Share for the last 10 trading days up to and including the Last Trading Day;
(iv) a premium of approximately 1.8% over the average closing price of approximately HK$0.334 per Share for the last 30 trading days up to and including the Last Trading Day; and
(v) a premium of approximately 6.3% over the closing price of HK$0.32 per Share as at the Latest Practicable Date.
- 11 - LETTER FROM THE BOARD
The Consideration, including the Issue Price and the Initial Conversion Rate, was determined after arm’s length negotiations between Yichang Shoukong and GORE taking into consideration (i) the estimated amount of iron and other mineral reserves contained in the Mining Sites as assessed by MMC (further details of the Mining Sites are set out in the section headed “Information on Xin Shougang and the Mining Sites” below) and the attributable interest of 22.28% in Xin Shougang being acquired; (ii) the prevailing market price of the Shares before the release of the announcement of the Company dated 2nd February, 2007; and (iii) the initial terms of the Acquisition Agreement.
4) Conditions precedent
Completion is conditional upon:
(i) GORE and Yichang Shoukong (or its nominee) having obtained all necessary consents and approvals in relation to the Acquisition, including but not limited to completion of business registration and other related procedures required in respect of the sale and purchase of the Sale Shares;
(ii) no breaches or potential breaches of the terms or warranties of the Acquisition Agreement in relation to the facts, circumstances and other matters of GORE;
(iii) the GEM Listing Committee of the Stock Exchange having granted the listing of, and permission to deal in, the Preferred Conversion Shares;
(iv) the Stock Exchange having granted approval to the issue of the Preferred Conversion Shares, if required;
(v) the Shareholders (or the Independent Shareholders, if required) having passed relevant resolutions at the EGM approving the Acquisition and the transactions contemplated thereunder, including the Preferred Share Class Creation, the allotment and issue of the Preferred Shares to GORE, the allotment and issue of the Preferred Conversion Shares to the then holder(s) of the Preferred Shares and the relevant amendments on the articles of association of the Company in relation to the issue of the Preferred Shares;
(vi) the results of the due diligence review on Xin Shougang being satisfactory to Yichang Shoukong;
(vii) Yichang Shoukong having obtained a valuation report and related documents issued by a certified valuer in Hong Kong commissioned by Yichang Shoukong in relation to the valuation of the mining rights to the Mining Sites with a value of no less than HK$5 billion, the form and contents of which are satisfactory to Yichang Shoukong;
(viii) GORE procures other shareholders of Xin Shougang to execute an undertaking to use their best endeavours to procure Xin Shougang to declare or pay dividend or other distributions amounting to not less than 35% of the net profit (after deduction of taxation and appropriation of statutory funds) of Xin Shougang (prepared in accordance with generally accepted accounting principles in the PRC) in each year; and
- 12 - LETTER FROM THE BOARD
(ix) Yichang Shoukong and GORE having duly signed the Option Deed on or before Completion.
Yichang Shoukong (or its nominee) shall be entitled to waive, in its absolute discretion at any time by written notice to GORE, conditions (ii) and (vi) only. Yichang Shoukong has no intention to waive any of the above conditions. Save as disclosed above, all other conditions may not be waived.
GORE and GORE Mining Technology shall use their best endeavours to procure the fulfillment of the above conditions. If any of the above conditions is not satisfied (or waived by Yichang Shoukong (or its nominee), as the case may be) on or before the 330th days from the date of the Acquisition Agreement or other date as may be agreed between the parties to the Acquisition Agreement in writing, the Acquisition Agreement shall lapse and no party thereto shall have any claim of any nature or liabilities thereunder whatsoever against any of the other party under the Acquisition Agreement and be of no further effect save for any antecedent breach. As at the Latest Practicable Date, none of the pre-conditions, except item (vii), have been fulfilled.
5) Other terms of the Acquisition Agreement
There will not be any lock-up period for the Preferred Shares nor the Preferred Conversion Shares.
6) Completion
Completion shall take place on the fifth Business Day immediately after fulfillment and/or waiver (as the case may be) of all of the above conditions precedent on or before the 330th day from the date of the Acquisition Agreement. The Completion Date is expected to be no later than 17th October, 2007.
PRINCIPAL TERMS OF THE PREFERRED SHARES
(1) Number of 2,802,235,294 Preferred Shares to be issued
(2) Issue price and principal HK$0.34 amount of each Preferred Share
(3) Par value of each HK$0.00125 Preferred Share
(4) Voting Holder(s) of the Preferred Shares will not be entitled to vote at any general meeting of the Company.
(5) Transferability The Preferred Shares are freely transferable in integral multiples of 10,000,000 Preferred Shares, unless the aggregate outstanding balance of the number of Preferred Shares, at any time, is less than 10,000,000, in which case the holder(s) of the Preferred Shares shall have the right to transfer the whole (but not any part) of the outstanding balance of the Preferred Shares.
- 13 - LETTER FROM THE BOARD
(6) Dividends Holder(s) of the Preferred Shares shall be entitled to receive a fixed cumulative dividend on an annual basis in arrears in preference to any dividend on the Shares at a rate of 0.5% per annum of the principal amount of the Preferred Shares then outstanding at the year end date. In the event that the dividend on each Share exceeds that of each Preferred Share (at the aforesaid rate of 0.5% per annum), the dividend on each Preferred Share shall be increased to the extent that the dividend on each Preferred Share is equivalent to that of each Share.
(7) Conversion Holder(s) of the Preferred Shares shall have the right to convert, at any time from the date of allotment of the Preferred Shares without payment of any additional consideration, the Preferred Shares into Preferred Conversion Shares at the Initial Conversion Rate of 1:1 (subject to adjustments from time to time pursuant to the terms of the Preferred Shares as a result of certain events, including share consolidation, share subdivision, rights issue and capital distribution, etc.) provided that conversion may only be made to the extent that the number of Preferred Conversion Shares to be converted from the Preferred Shares (if applicable, including any Shares acquired by the parties acting in concert with the holder(s) of the Preferred Shares) shall not be more than 2% (or the creeper percentage as stated in Rule 26 of the Takeovers Code in effect from time to time) of the then issued ordinary share capital of the Company in any 12-month period. Subject to the aforesaid 2% creeper, the Preferred Shares may be converted into Preferred Conversion Shares without any restriction on the timing of conversion. Upon the exercise of the conversion rights attaching to the Preferred Share(s) by its holder(s), the Company will fully comply with the applicable requirements of the Takeovers Code in effect from time to time in respect of mandatory general offer obligation.
The Preferred Conversion Shares, when allotted and issued, will rank pari passu in all respects with all other Shares then in issue and will be entitled to all dividends and other distributions on the record date which is on or after the serving of the notice of conversion. For the avoidance of doubt, in the event that the date of conversion or redemption of the Preferred Shares falls on the record date, the relevant Preferred Shares will be deemed to have been converted into Shares or redeemed, and their holder(s) will not be entitled to dividends on the relevant Preferred Shares still on hand.
The Preferred Conversion Shares will be allotted and issued under a specific mandate of the Company to be approved by the Shareholders at the EGM.
- 14 - LETTER FROM THE BOARD
(8) Redemption Upon the value of the cumulative Dividends reaches HK$485.5 million (equivalent to approximately RMB485.5 million), or the Group has disposed of its interest in Xin Shougang at the Disposal Consideration of more than HK$485.5 million (equivalent to approximately RMB485.5 million) in aggregate without incurring any losses on the disposal or the total of the cumulative Dividends and the Disposal Consideration is more than HK$485.5 million (equivalent to approximately RMB485.5 million) without incurring any losses on the disposal, the Company may at any time redeem in cash not more than half of the Preferred Shares issued (i.e. 1,401,117,647 Preferred Shares) at a price equal to their principal amount plus a premium of 10% per annum together with any accrued and unpaid dividends thereon.
Upon the value of the cumulative Dividends reaches HK$971 million (equivalent to approximately RMB971 million), or the Group has disposed of its interest in Xin Shougang at the Disposal Consideration of more than HK$971 million (equivalent to approximately RMB971 million) in aggregate or the total of the cumulative Dividends and the Disposal Consideration is more than HK$971 million (equivalent to approximately RMB971 million), the Company may at any time redeem in cash all or any number of the then outstanding Preferred Shares at a price as stated above.
(9) Ranking The Preferred Shares shall rank preference to any and other classes of ordinary equity securities of the Company (including dividend distribution, capital distribution, return of capital upon the liquidation, winding up or dissolution of the Company or otherwise).
(10) Listing No application will be made for the listing of the Preferred Shares on the Stock Exchange or any other stock exchange. An application will be made for the listing of, and permission to deal in, the Preferred Conversion Shares to be issued as a result of the exercise of the conversion rights attaching to the Preferred Shares.
THE CALL OPTION
In consideration of Yichang Shoukong agreeing to acquire the 22.28% interest in the registered capital of Xin Shougang, GORE and GORE Mining Technology will irrevocably and unconditionally grant to Yichang Shoukong by the Option Deed the Call Option at no premium. Pursuant to the Option Deed, Yichang Shoukong would have the right to require GORE Mining Technology to sell and transfer and require GORE to procure GORE Mining Technology to sell and transfer the Option Interest, being the remaining 12.72% interests directly held by GORE Mining Technology in Xin Shougang immediately upon Completion, to Yichang Shoukong or its nominee. Yichang Shoukong may exercise the Call Option at any time during the two-year period from the Completion Date.
- 15 - LETTER FROM THE BOARD
The consideration for the Option Interest shall be determined by a qualified valuer, the appointment of whom shall be mutually agreed between Yichang Shoukong, GORE and GORE Mining Technology, upon the exercise of the rights attaching to the Call Option. The source of funding for settlement of the consideration for the Option Interest has not yet been determined by the Company. Upon exercise in full of the rights attaching to the Call Option, Yichang Shoukong (or together with its nominee) will be interested in 35.00% in the registered capital in Xin Shougang and Xin Shougang will be equity accounted for by the Group in accordance with the HKFRS. The entering into of the Option Deed will be subject to Shareholders’ approval at the EGM. The Company will make further announcement(s) and recomply with the disclosure and approval requirements under the GEM Listing Rules as and when appropriate in relation to the exercise of the Call Option.
INFORMATION ON XIN SHOUGANG AND THE MINING SITES
On 26th September, 2005, Shougang entered into a framework agreement with Yichang City Government in relation to the exploration of the Mining Sites at Yichang City, Hubei Province, the PRC. On 18th October, 2005, Xin Shougang was established in the PRC with limited liability and fully paid-up registered capital of RMB50 million (equivalent to approximately HK$50 million). Xin Shougang was established for the purpose of mine resources development, asset management and provision of investment management consultancy services in Yichang City. On 26th June, 2006, Shougang and Yichang City Government entered into the Cooperation Agreement, pursuant to which Xin Shougang was appointed as the sole investor and developer of the Mining Sites. Yichang City Government undertook to assist Xin Shougang in completing the applications for the Mining Rights.
Xin Shougang has obtained mining rights at Chang Yang Haoshopping and is now renewing the mining rights at Qing Gang Ping Village. Based on the Directors’ understanding from the management of Xin Shougang, Xin Shougang is currently applying for, but is yet to obtain, the remaining Mining Rights in accordance with the Cooperation Agreement. No undertaking has been given to Xin Shougang in relation to the granting of all Mining Rights. However, on the basis that Xin Shougang has been named the sole investor and developer of the Mining Sites and will be responsible for applications for the Mining Rights pursuant to the Cooperation Agreement, the Board is confident that Xin Shougang will obtain the Mining Rights for the rest of the Mining Sites. The Company will make further announcement(s) as and when appropriate in relation to the status of the applications by Xin Shougang for Mining Rights.
As at the date of the Acquisition Agreement, the principal assets of Xin Shougang are the exclusive rights to invest, develop and to apply for the mining rights for the Mining Sites located at Yichang City, Hubei Province, the PRC and the 48% interest in YXS Precious Metal Mining, a 52%-owned subsidiary of the Company, which is engaged in mine prospecting and mining of metal and minerals, processing, sale, export and import of mining by-products. Details of YXS Precious Metal Mining have been disclosed in the Company’s circular dated 26th May, 2006.
The Group has engaged MMC, an independent technical adviser, to review relevant aspects of the Mining Sites and Greater China, an independent qualified valuer, to carry out a valuation on the Mining Sites. The valuation report and the technical assessment report are set out in appendices VI and VIII to this circular respectively.
According to the technical report of MMC, the estimated reserves of iron ore, manganese ore and silver vanadium ore in Yichang City amount to 701 million tonnes, 12.6 million tonnes and 28.4 million tonnes respectively.
To the best of the Directors’ knowledge, belief having made all reasonable enquiries, MMC was registered as a separate legal entity without any economic and shareholding relationship with Shougang and is independent of the Company and its associates, and Shougang and its associates. - 16 - LETTER FROM THE BOARD
According to the report of Greater China, the mineral resources in Yichang are extremely rich with 84 kinds of discovered mineral products, about 4% of the discovered mineral products in the PRC and 62% of those in Hubei Province. The main mineral product has so huge and good quality that more than 10 kinds of mineral product reserves are at the forefront. The phosphorus, with high quality grade over 30%, is beyond 950 million tonnes, regarded as the third diggings of the ten largest ones. Graphite ore is the unique phosphorus piece graphite diggings in the middlewest region of the PRC with a reserve of 15,520,000 tonnes, first grade quality and third place of reserve. Yichang is one of the five largest mercury diggings in the PRC. The silver vanadium ore is the rare large compound one, associated with the silver, the molybdenum and so on, extremely valuable minerals. The reserve of the manganese, the iron, the germanium, the peridotite, coal, sylvite, the dolomite, the silver vanadium and so on, 13 kinds of minerals take the first place in the PRC. The working capital for the mining operation is intended to be financed by internal resources of Xin Shougang. In the event that additional funding is required, Xin Shougang will seek additional funding from its shareholders in proportion to their respective shareholding or bank borrowings as appropriate from time to time. According to the accountants’ report of Xin Shougang as set out in Appendix I to this circular, Xin Shougang had no turnover for both the period from 18th October, 2005 (date of incorporation) to 31st December, 2005 and for the year ended 31st December, 2006, and recorded net loss before taxation and after taxation of both approximately RMB26,000 for the period from 18th October, 2005 to 31st December, 2005 and RMB2.1 million for the year ended 31st December, 2006 respectively (equivalent to approximately HK$26,000 and HK$2.1 million respectively). The consolidated losses for the periods were mainly due to the general and administrative expenses incurred for research and development activities. The consolidated net asset value of Xin Shougang as at 31st December, 2006 was approximately RMB68.9 million (equivalent to approximately HK$68.9 million). As at 31st December, 2006, Xin Shougang did not have any capital commitment. For the three months ended 31st March, 2007, Xin Shougang Group had no turnover and recorded loss before taxation of approximately RMB1.8 million (equivalent to approximately HK$1.8 million) and loss after taxation of approximately RMB1.9 million (equivalent to approximately HK$1.9 million). The consolidated net asset value as at 31st March 2007 was RMB67.0 million (equivalent to approximately HK$67.0 million). FAIR VALUE OF THE MINING RIGHTS Greater China, an independent valuer appointed by the Company, has assessed the fair value of the Mining Rights. The fair value of the Mining Rights was determined on a discounted cash flow basis where the profit sharing attributable to the distributors and general and administrative expenses have been subtracted from revenue from the operations in the computation of the cash flow. An income approach was adopted which is based on the income-producing capabilities of the business operations of the business enterprise holding the Mining Rights. According to Greater China, the fair value of the Mining Rights was about RMB9,000,000,000 as of 30th June, 2007. The text of the summary valuation report is set forth in Appendix VI to this circular. The Directors considered that they have made due and careful enquires in determining the fair value of the Mining Rights. Grant Thornton, the Company’s auditors, have reviewed the arithmetical accuracy of the calculations of the cash flow forecast (the “Underlying Forecast”) underlying the asset valuation prepared by the management of the Company for the purpose of the valuation of the Mining Rights. Because the Underlying Forecast is a cash flow model, no accounting policies of the Company have been adopted in its preparation. Based on their review, so far as the arithmetical accuracy of the calculations are concerned, the Underlying Forecast has been properly compiled in accordance with the assumptions made by the management of the Company.
- 17 - LETTER FROM THE BOARD
REASONS FOR THE ACQUISITION The Group is principally engaged in the general trading of FRP Pipes, raw materials and composite materials, and production of FRP Pipes and polyethylene pipes in the PRC. The Directors have also been seeking investment opportunities to broaden the Group’s source of income. In view of the continued economic growth and accelerated industrialisation and urbanisation in the PRC as well as the development in the global economy, natural resources are in demand at all times and the Directors consider that the demand for natural resources will maintain its growth momentum. In view of the prospects of the natural resources businesses, the Company entered into a joint venture agreement with Xin Shougang to form YXS Precious Metal Mining, details of which have been disclosed in the Company’s announcement and circular dated 21st April, 2006 and 26th May, 2006 respectively. As at the Latest Practicable Date, YXS Precious Metal Mining has been formed. In addition, as disclosed in the Company’s announcement dated 5th September, 2006, the Company entered into an agreement for a possible investment by the Group in a joint venture company for the purpose of conducting exploration and development of a coking coal mining site in Australia. The Acquisition together with the formation of YXS Precious Metal Mining and the possible investment in a mining operation in Australia are part of the Group’s strategy to broaden its business scope and earning base as well as to diversify its risks from concentrating on the existing trading and production business. The Company has no intention to change its existing principal activity of trading and production business. In view of the above, the Board considers that the Acquisition is in the ordinary and usual course of business of the Company and the entering into of the Acquisition Agreement is in the interests of the Company and the Shareholders as a whole. The Board also considers the terms of the Acquisition Agreement to be normal commercial terms and fair and reasonable. CHANGES IN SHAREHOLDING STRUCTURE AS A RESULT OF THE ACQUISITION The following table illustrates the Company’s shareholding structure (i) as at the Latest Practicable Date; (ii) immediately upon Completion and assuming no conversion of the Preferred Shares; and, for illustration purpose only; (iii) immediately upon Completion and assuming full conversion of the Preferred Shares at the Initial Conversion Rate; and (iv) assuming full conversion of the Preferred Shares at the Initial Conversion Rate and the Future Advance Bond at the current conversion price of HK$0.02:
(iv) Assuming full conversion (iii) Immediately upon of the Preferred Shares at Completion and assuming the Initial Conversion Rate (ii) Immediately upon full conversion and the Future Advance Completion and of the Preferred Bond at the current (i) As at the Latest assuming no conversion Shares at the Initial conversion price Shareholders Practicable Date of the Preferred Shares Conversion Rate (Note 1) of HK$0.02 (Note 3) Number of Number of Number of Number of Shares % Shares % Shares % Shares %
Future Advance (Note 2) 2,576,194,460 37.6% 2,576,194,460 37.6% 2,576,194,460 26.7% 2,889,697,740 29.0% Mr. Chiu Winerthan 20,000,000 0.3% 20,000,000 0.3% 20,000,000 0.2% 20,000,000 0.2% GORE – – – – 2,802,235,294 29.0% 2,802,235,294 28.1% Public Shareholders 4,250,072,740 62.1% 4,250,072,740 62.1% 4,250,072,740 44.1% 4,250,072,740 42.7%
Total 6,846,267,200 100.0% 6,846,267,200 100.0% 9,648,502,494 100.0% 9,962,005,774 100.0%
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Notes:
1. The shareholding structure is prepared for illustration purpose only and assuming (i) full conversion of the Preferred Shares at the Initial Conversion Rate; (ii) all Preferred Shares are held by GORE or parties acting in concert with it; and (iii) the conversion of the Preferred Shares will not trigger any mandatory general offer obligation under the Takeovers Code or result in the Acquisition being treated as a reverse takeover under the GEM Listing Rules. Based on the above assumptions and assuming no further Shares will be issued or repurchased by the Company, full conversion of the Preferred Shares will take approximately 18 years. Upon the exercise of the conversion rights attaching to the Preferred Share(s) by its holder(s), the Company will fully comply with the applicable requirements of the Takeovers Code in effect from time to time in respect of mandatory general offer obligation.
2. These Shares are held by Future Advance, which is beneficially owned as to 37.5% by China Zong Heng Holdings Limited (which is in turn 100% beneficially owned by Mr. Yu), as to 12.5% by Ms. Ma Zheng who is the sole director of Future Advance, as to 27% by Zhong Nan Mining Group Limited (which is in turn 100% beneficially owned by Mr. Zhang Lei), as to 13% by Mr. Wu Yong Jin and as to the remaining 10% by Ms. Ma Yi. Mr. Yu and Ms. Ma Zheng, being Directors, are connected persons of the Company. Mr. Zhang Lei, Mr. Wu Yong Jin and Ms. Ma Yi are independent third parties of the Company and do not hold any position in the Company.
3. As at the Latest Practicable Date, the Future Advance Bond in principal amount of HK$6,270,065.60 was outstanding which carries conversion rights to convert into 313,503,280 new Shares at the current conversion price of HK$0.02 per Share (subject to adjustments). Future Advance has the intention to convert the Future Advance Bond into new Shares to the extent that such conversion will not trigger a mandatory general offer obligation on the part of Future Advance and parties acting in concert with it under the Takeovers Code while in compliance with the terms of the Future Advance Bond.
Taking into account the terms of the Preferred Shares, in particular the conversion mechanism as described in the section headed “Principal terms of the Preferred Shares” in this letter from the Board, the intention of Future Advance to convert the Future Advance Bond as described in note (3) above and the percentage holding of GORE illustrated above, conversion of the Preferred Shares is not expected to result in a change in control for the Company.
FINANCIAL EFFECTS OF THE ACQUISITION
Following the completion of the Acquisition, Xin Shougang will become an associated company of the Company. Your attention is drawn to the unaudited pro forma financial information of the Enlarged Group set out in Appendix IV to this circular which illustrates the financial effects of the Acquisition as summarised below:
Earnings
For the year ended 31st December, 2006, the audited net loss after taxation of the Group was approximately HK$6.0 million. According to the accountants’ report of Xin Shougang as set out in Appendix I to this circular, the consolidated loss after taxation was approximately RMB2.1 million for the year ended 31st December, 2006.
As set out in the unaudited pro forma consolidated income statement of the Enlarged Group, the Group would equity account for the profit or loss after taxation of Xin Shougang upon Completion. The issue of the Preferred Shares will increase the finance costs of the Enlarged Group by approximately HK$2.4 million per annum. According to the unaudited pro forma
- 19 - LETTER FROM THE BOARD
consolidated income statement of the Enlarged Group, assuming Completion had taken place on 1st January, 2007, the profit for the six months ended 30th June, 2007 would be approximately HK$1,089.0 million which represents principally the excess of the fair value of the Mining Rights attributable to the Group over the Consideration.
Net asset value
As extracted from the annual report of the Company for the year ended 31st December, 2006, the audited consolidated total assets and total liabilities of the Group as at 31st December, 2006 were approximately HK$175.7 million and HK$8.1 million respectively. The audited net asset value attributable to the Shareholders (i.e. excluding minority interest) was approximately HK$163.0 million.
As set out in the unaudited pro forma consolidated balance sheet of the Enlarged Group contained in Appendix IV to this circular, assuming Completion had taken place on 30th June, 2007, the unaudited pro forma consolidated total assets and total liabilities of the Enlarged Group would be approximately HK$2,243 million and HK$214.7 million respectively. The unaudited pro forma consolidated net assets of the Enlarged Group attributable to the Shareholders would be approximately HK$2,028.3 million. The significant increase in net assets is principally contributed by the issue of the Preferred Shares and the fair valuation of the Mining Rights.
Gearing
As extracted from the annual report of the Company for the year ended 31st December, 2006, the gearing ratio of the Group, calculated with reference to the fair value of the liability component of the Future Advance Bond of HK$5.5 million divided by the Shareholders’ funds of HK$163.0 million, was approximately 3.4% at 31st December, 2006.
Based on the unaudited pro forma consolidated balance sheet of the Enlarged Group contained in Appendix IV to this circular, assuming Completion had taken place on 30th June, 2007, the gearing ratio of the Enlarged Group, calculated with reference to the total borrowings (being the estimated fair value of the liability component of the Preferred Shares and the Future Advance Bond) of HK$55.9 million divided by the Shareholders’ funds of HK$2,023.8 million, was approximately 2.7% at 30th June, 2007.
FUNDING REQUIREMENTS
The Group has committed to a capital contribution of RMB30 million on the future development of Xin Shougang and has already initiated funding plans for this. On 3rd January, 2007, the Group, together with Future Advance, entered into the Term Sheet with Lehman Brothers in respect of the conditional issue of the convertible bonds with maximum principal amount of approximately HK$246 million with coupon rate of 4.5% due 2010. The Subscription Agreement was entered into among the same parties on 12th June, 2007. Details of the Term Sheet and the Subscription Agreement have been stated in the Company’s announcements dated 9th January, 2007, 2nd February, 2007 and 13th June, 2007 and are set out in section headed “Issue of Convertible Bonds” below. It is currently expected that for the two years following the date of this circular (assuming Completion of the Acquisition will take place), the Company will have to solicit other potential investors for debt or/and equity investment if it is necessary. However, save as disclosed herein, the Company has not entered into any legally-binding commitments with any potential investors as at the Latest Practicable Date.
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PREFERRED SHARE CLASS CREATION
1) Preferred Share Class Creation
As at the Latest Practicable Date, the authorised share capital of the Company is HK$125 million comprising 100,000,000,000 Shares, of which 6,846,267,200 Shares have been allotted and issued as fully paid. Pursuant to the Preferred Shares Class Creation, a new class of Preferred Shares will be created and the existing authorised share capital of the Company of HK$125 million will be reclassified into Shares of HK$120 million divided into 96,000,000,000 Shares of HK$0.00125 each and Preferred Shares of HK$5 million divided into 4,000,000,000 Preferred Shares of HK$0.00125 each.
Other than the expenses to be incurred in relation to the Preferred Share Class Creation, the implementation thereof will not alter the underlying assets, business operations, management or financial position of the Company or the interests or rights of the Shareholders.
2) Conditions of the Preferred Share Class Creation
The Preferred Share Class Creation is conditional on:
(i) the passing by the Shareholders of a special resolution to approve the Preferred Share Class Creation at the EGM;
(ii) compliance with the relevant legal procedures and requirements under the laws of the Cayman Islands, if any, to effect the Preferred Share Class Creation; and
(iii) the GEM Listing Committee of the Stock Exchange granting the listing of, and permission to deal in, the Preferred Conversion Shares to be issued.
CHANGES IN SHARE CAPITAL
The authorised and issued share capital of the Company as at the Latest Practicable Date were, and upon Completion, will be, as follows:
(a) As at the Latest Practicable Date:
Authorised: HK$
100,000,000,000 Shares 125,000,000
Issued and fully paid:
6,846,267,200 Shares 8,557,834
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(b) Immediately upon Completion (Note):
Authorised: HK$
96,000,000,000 Shares 120,000,000
4,000,000,000 Preferred Shares 5,000,000
Issued and fully paid:
6,846,267,200 Shares 8,557,834
2,802,235,294 Preferred Shares 3,502,794
Note: The table is prepared assuming no conversion of the Preferred Shares.
All Shares in issue rank among themselves, and the Preferred Conversion Shares will rank among themselves, pari passu in all respects including as regards to dividends, voting and return of capital.
THE SUBSCRIPTION AGREEMENT
1) Parties
Issuer: The Company.
Warrantor: Future Advance, a controlling Shareholder and as warrantor providing certain warranties regarding, among other matters, assets, liabilities, taxation, legal and accounting compliance matters and the operations of the Group.
Investor: Lehman Brothers, an international reputable investment bank. Save for being a party to the Term Sheet and the Subscription Agreement, Lehman Brothers is independent of and not connected with the Company and its connected persons and the Group had not had prior transactions or relationship with Lehman Brothers or any of its associates.
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2) Conditions
The Subscription Agreement is subject to the following conditions:
(i) the GEM Listing Committee of the Stock Exchange approving the issue of the Convertible Bonds and granting the listing of and permission to deal in the Conversion Shares;
(ii) the Company having satisfied or obtained any and all relevant statutory and regulatory requirements, approvals and consents in relation to the issue of the Convertible Bonds and the Conversion Shares;
(iii) the Company having obtained approvals from its Shareholders, where necessary, in relation to the issue of the Convertible Bonds and the Conversion Shares;
(iv) the Company having obtained the consents of each holder of any outstanding convertible notes and/or promissory notes and/or warrant instruments issued by the Company, where necessary, in relation to the issue of the Convertible Bonds and the Conversion Shares;
(v) the Company entering into sale and purchase agreement(s) to acquire 22.28% interests in Xin Shougang and with such agreement(s) having been legally and validly completed and securing rights to acquire additional 12.72% interests in Xin Shougang;
(vi) all other requisite consents from banks and financiers in relation to the issue of the Convertible Bonds and the Conversion Shares having been obtained;
(vii) all necessary consents, authorizations, licences, approvals and waivers (if applicable) required under the Subscription Agreement and the Convertible Bonds having been obtained by the Company as the case may be;
(viii) there being no material disruption or adverse change, as determined by Lehman Brothers in its reasonable discretion in good faith, in the financial or capital markets generally that may have a material adverse impact on Lehman Brothers’ ability to consummate the transactions contemplated in the Subscription Agreement;
(ix) there being no breach of the warranties and representations contained in the Subscription Agreement in respect of, among other matters, the assets, liabilities, taxation, legal and accounting compliance matters and the operations of the Company; and
(x) there will not have occurred or become known to Lehman Brothers any material adverse condition or material adverse change in or affecting the business, operations, property, condition (financial or otherwise) of the Group taken as a whole.
The Company shall use its best endeavours to procure the fulfilment of the above conditions by 10th October, 2007 or such later date as may be agreed between the Company and Lehman Brothers. In the event the above conditions are not satisfied in full by then, the Subscription Agreement shall terminate and none of the parties thereto shall have any claim against each other for costs, damages, compensation or otherwise save for antecedent breaches.
- 23 - LETTER FROM THE BOARD
3) Completion of Subscription
Upon compliance and subject to the fulfilment of the conditions set out above, completion of the issue of the Convertible Bonds shall take place on the Completion Date of Subscription or at such other time and place as the Company and Lehman Brothers may agree.
4) Undertakings
Each of the Company and Future Advance undertakes to Lehman Brothers that commencing from the date of the Subscription Agreement and ending on the Maturity Date (or such earlier date when Lehman Brothers exercise all of the conversion rights attaching to the Convertible Bonds), except with the prior consent of Lehman Brothers (such consent shall not be unreasonably withheld or delayed), the Company shall not, and Future Advance shall procure the Company shall not, dispose of, nor enter into any agreement to dispose of or otherwise create any option, rights, interests or encumbrances (including without limitation any pledge or charge) in respect of, any of those interests of Xin Shougang or its holding companies held directly or indirectly by the Company.
Future Advance further undertakes to Lehman Brothers that it, as a Shareholder, shall vote in favour of the transactions contemplated under the Subscription Agreement at the EGM provided, however, that voting is permissible by the Stock Exchange or pursuant to the GEM Listing Rules and to the satisfaction of Lehman Brothers.
PRINCIPAL TERMS OF THE CONVERTIBLE BONDS
The principal terms of the Convertible Bonds are summarised as follows:
Aggregate principal amount: HK$246.25 million.
Coupon: 4.5% per annum, payable semi-annually in arrears.
Conversion: The Bondholder(s) shall have the right to convert on any Business Day on or prior to the Maturity Date, the whole principal amount of each Convertible Bond registered in such Bondholder(s)’ name into Conversion Shares.
The Convertible Bonds may be converted into Conversion Shares at the Conversion Ratio such that the total number of Conversion Shares which may fall to be issued on full conversion of all of the Convertible Bonds at the Conversion Ratio represents 10% of the aggregate of (i) the then issued share capital of the Company and (ii) potential issued share capital (including without limitation Shares issuable under the Convertible Bonds, any other convertible notes or notes, options, rights, stock dividends warrants or otherwise of the Company), but excluding any further issue of Shares pursuant to any conversion right under any unsecured all cash convertible notes issued by the Company at an actual
- 24 - LETTER FROM THE BOARD
conversion price of not less than HK$0.40 per Share or such higher conversion price by reasons of consolidation, merger or otherwise of the share capital base or on otherwise just and equitable basis as may be determined by an approved merchant bank.
As at the Latest Practicable Date, there are 6,846,267,200 Shares in issue and there are 5,627,114,771 new Shares (including new Shares issuable pursuant to conversion of the Preferred Shares which have yet been issued as consideration for the Acquisition and the Conversion Shares as at the Latest Practicable Date) that may be issued upon full conversion of, or exercise of the subscription rights attaching to, all outstanding convertible notes or notes, options, rights stock dividends, warrants or otherwise of the Company. Assuming full conversion of the aggregate principal amount of the Convertible Bonds of HK$246.25 million, the Convertible Bonds may be converted into 1,247,338,197 Conversion Shares.
Conversion Shares: The Conversion Shares will rank pari passu in all respects with the Shares then in issue on the relevant conversion date.
The Conversion Shares will be issued under a special mandate to be obtained from the Shareholders at the EGM.
Redemption on maturity: Unless previously redeemed, repurchased and cancelled or converted, any outstanding Convertible Bonds shall be redeemed at the Repayment Premium (as defined below), plus any accrued and unpaid interest, on the third anniversary of the issue date of the Convertible Bonds.
“Repayment Premium” shall mean the premium payable on repayment of the Convertible Bonds at Maturity Date which amounts to 131.5% of the outstanding principal amount of the Convertible Bonds at the Maturity Date then due and payable unless during 60% of the total trading days during the term of the Convertible Bonds, the closing price of the Shares is above 150% of the conversion price of HK$0.20 per Conversion Share of the Convertible Bonds or any part of the Convertible Bonds have been converted into Conversion Shares, in which case the repayment premium is 100% of any outstanding principal at the Maturity Date.
The Company has no right to make early redemption without the consent of Lehman Brothers.
- 25 - LETTER FROM THE BOARD
Voting rights: Bondholder(s) will not have any right to attend or vote at any general meeting of Shareholders by virtue of them being Bondholder(s).
Listing: The Convertible Bonds will not be listed on any stock exchange. Application will, however, be made to the Stock Exchange for the listing of and permission to deal in the Conversion Shares.
Form of the Convertible Registered. Bonds:
Denomination: HK$5,000,000 per Convertible Bond with one Convertible Bond in denomination of HK$1,250,000 to account for the balance of the principal amount of HK$1,250,000 out of the aggregate principal amount of HK$246,250,000.
Status: The Convertible Bonds constitute general, unconditional, unsecured and unsubordinated obligations of the Company and shall rank equally among themselves and pari passu with all other present unsecured and unsubordinated obligations of the Company except for obligations accorded preference by mandatory provisions of applicable law. Any future obligations of the Company shall be junior and subordinate to the Convertible Bonds.
Transfer: The Convertible Bonds are transferable to any third parties other than a connected person of the Company. Where a transfer is to be made to a connected person of the Company, prior written consent of the Company must be obtained.
The Company undertakes to notify the Stock Exchange immediately upon becoming aware of any dealings in the Convertible Bonds by a connected person of the Company.
Dividend: Unless provided otherwise by applicable laws, rules and regulations on distribution of dividends, each Bondholder will have the right to receive stock or cash dividends or other rights or accretions to the extent of such Bondholder’s conversion and the relative allotment and issue of Conversion Shares are made prior to the relevant date of book closing for such stock or cash dividends or other rights or accretions.
- 26 - LETTER FROM THE BOARD
CHANGES IN SHAREHOLDING STRUCTURE AS A RESULT OF THE SUBSCRIPTION
The following table illustrates the Company’s shareholding structure before and after full conversion of the Convertible Bonds as at the Latest Practicable Date and after full conversion of all outstanding convertible securities:
After full conversion of Before full conversion of After full conversion of all outstanding Shareholders the Convertible Bonds the Convertible Bonds convertible securities Number of Number of Number of Shares % Shares % Shares %
Future Advance (Note 1) 2,576,194,460 37.6% 2,576,194,460 31.8% 2,889,697,740 23.2%
Mr. Yu (Note 2) – – – – 76,000,000 0.6%
Mr. Chiu Winerthan 20,000,000 0.3% 20,000,000 0.2% 20,000,000 0.2%
Sub-total: 2,596,194,460 37.9% 2,596,194,460 32.0% 2,985,697,740 24.0%
Holders of share options:
Ms. Ma Zheng (Note 3) – – – – 54,000,000 0.4%
GORE (Note 4) – – – – 2,802,235,294 22.5%
Lehman Brothers (Note 5) – – 1,247,338,197 15.4% 1,247,338,197 10.0%
Non public Shareholders sub-total: 2,596,194,460 37.9% 3,843,532,657 47.4% 7,089,271,231 56.9%
Public Shareholders:
Holders of warrants (Note 6) – – – – 1,108,038,000 8.9%
Holders of share options (Note 7) – – – – 26,000,000 0.2%
Other public Shareholders 4,250,072,740 62.1% 4,250,072,740 52.6% 4,250,072,740 34.0%
Public Shareholders sub-total: 4,250,072,740 62.1% 4,250,072,740 52.6% 5,384,110,740 43.1%
Total 6,846,267,200 100.0% 8,093,605,397 100.0% 12,473,381,971 100.0%
- 27 - LETTER FROM THE BOARD
Notes:
1. Future Advance is a limited liability company incorporated in BVI. Future Advance is beneficially owned as to 37.5% by China Zong Heng Holdings Limited (which in turn is 100% beneficially owned by Mr. Yu), as to 12.5% by Ms. Ma Zheng who is the sole director of Future Advance, as to 27% by Zhong Nan Mining Group Limited (which in turn is 100% beneficially owned by Mr. Zhang Lei), as to 13% by Mr. Wu Yong Jin and as to the remaining 10% by Ms. Ma Yi. Mr. Yu and Ms. Ma Zheng, being the Directors, are connected persons of the Company. Mr. Zhang Lei, Mr. Wu Yong Jin and Ms. Ma Yi are independent third parties of the Company and do not hold any position in the Company. Future Advance holds the Future Advance Bond in principal amount of HK$6,270,065.60, which carries conversion rights to convert into 313,503,280 Shares at the current conversion price of HK$0.02 (subject to adjustments).
2. Mr. Yu, the indirect controlling shareholder of Future Advance and a Director, has been granted 3,800,000 shares options under the existing share option scheme adopted in compliance with Chapter 23 of the GEM Listing Rules which carry rights to subscribe for 76,000,000 new Shares at the current exercise price of HK$0.053 per new Share.
3. In addition to the 3,800,000 share options held by Mr. Yu (see note 2 above), Ms. Ma Zheng, the sole director of Future Advance and a Director, has also been granted 2,700,000 share options under the existing share option scheme adopted in compliance with Chapter 23 of the GEM Listing Rules which carry rights to subscribe for 54,000,000 new Shares at the current exercise price of HK$0.053 per new Share.
4. These Shares represent new Shares convertible from the Preferred Shares to be issued to GORE as settlement of the consideration for the Acquisition. As at the Latest Practicable Date, none of the said Preferred Shares have been issued.
5. The total number of Shares to which Lehman Brothers are entitled under the Convertible Bonds has taken into account the existing issued share capital of the Company and all outstanding securities which may be convertible into or carry rights to subscribe for new Share. Based on the existing issued share capital and assuming full conversion of the Future Advance Bond (see note 1 above) and exercise in full of all other securities carrying rights to subscribe for new Shares (including warrants and share options and other convertible securities convertible into new Shares (see notes 2 to 4 above and 6 and 7 below), of the Company outstanding as at Latest Practicable Date, the maximum number of new Shares to be issued upon full conversion of the Convertible Bonds is 1,247,338,197, representing 10% of the existing issued share capital of the Company as enlarged by the full conversion of the aforesaid convertible securities.
6. The warrants which carry subscription rights to subscribe for new Shares to which the holders thereof are entitled comprise the following:
(a) 23,654,400 warrants held by Ms. Hu Yu (胡玉女士), an independent third party of the Company carrying subscription rights to subscribe for 473,088,000 new Shares at the current exercise price of HK$0.015 per new Share (subject to adjustments), which were issued pursuant to a private subscription agreement dated 18th August, 2005. The 473,088,000 new Shares represent approximately 6.9% of the issued share capital of the Company as at the Latest Practicable Date. Upon Ms. Hu Yu (胡玉女士) exercises her subscription rights under those warrants in full, she will be regarded as a public Shareholder under the GEM Listing Rules;
- 28 - LETTER FROM THE BOARD
(b) 333,750,000 warrants carrying subscription rights to subscribe for 333,750,000 Shares at the current exercise price of HK$0.265 per new Share (subject to adjustments) had been issued pursuant to a private subscription agreement dated 1st August, 2006 to Mr. Ha Siu Wa. Out of the aggregate 333,750,000 warrants, 13,800,000 warrants have been exercised by, and 13,800,000 new Shares representing approximately 0.2% of the issued share capital of the Company have been allotted and issued to, Mr. Ha Siu Wa and 190,000,000 warrants have been transferred to Ms. Li Chao Hua (see also note 6(c) below) who was an existing Shareholder holding 52,800,000 Shares and to the best of the knowledge, information and belief, Ms. Li Chao Hua is still holding those Shares, representing 0.77% of the issued share capital of the Company as at the Latest Practicable Date. Following the said exercise of the subscription rights and the transfer, Mr. Ha Siu Wa remains a holder of 129,950,000 warrants carrying rights to subscribe for 129,950,000 new Shares, which represent 1.9% of the issued share capital of the Company as at the Latest Practicable Date. Mr. Ha Siu Wa is presently regarded as a public Shareholder under the GEM Listing Rules and will remain to be so upon Mr. Ha Siu Wa exercises the remaining subscription rights to subscribe for 129,950,000 new Shares;
(c) Ms. Li Chao Hua had acquired from Mr. Ha Siu Wa (see also note 6(b) above) 190,000,000 warrants which carry rights to subscribe for 190,000,000 new Shares representing approximately 2.8% of the issued share capital of the Company as at the Latest Practicable Date. At the time of such acquisition, Ms. Li Chao Hua were interested in 105,600,000 Shares and to the best of the knowledge, information and belief, Ms. Li Chao Hua is now holding 52,800,000 Shares, which represent approximately 0.77% of the issued share capital of the Company as at the Latest Practicable Date. Ms. Li Chao Hua is presently regarded as a public Shareholder under the GEM Listing Rules and will remain to be so upon Ms. Li Chao Hua exercises the subscription rights to subscribe for 190,000,000 new Shares; and
(d) 315,000,000 warrants held by Northern Power Group Limited, an independent third party of the Company, which carry subscription rights to subscribe for 315,000,000 new Shares at the current exercise prices of HK$0.28 per Share (subject to adjustments), which were issued pursuant to a private subscription agreement dated 17th August, 2006. The 315,000,000 new Shares represent approximately 4.6% of the issued share capital of the Company as at the Latest Practicable Date. Upon Northern Power Group Limited exercises its subscription rights under those warrants in full, it will be regarded as a public Shareholder under the GEM Listing Rules.
7. In addition to the 3,800,000 share options held by Mr. Yu (see note 2 above) and the 2,700,000 share options held by Ms. Ma Zheng (see note 3 above), there are additionally 1,300,000 shares options outstanding as at the Latest Practicable Date, which are held by the employees of the Company (non connected persons of the Company under the GEM Listing Rules) entitling the holders thereof to subscribe for a total of 26,000,000 new Shares at the current exercise price of HK$0.053 per new Share.
REASONS FOR THE ISSUE OF THE CONVERTIBLE BONDS AND USE OF PROCEEDS
As mentioned above, the Group is principally engaged in general trading of FRP Pipes, raw materials and composite materials and production of FRP Pipes and polyethylene pipes in the PRC. Since the second quarter of 2006, with the view of broadening the Group’s source of income and inasmuch as the consistent demand for natural resources as a result of the continued economic growth and accelerated industrialisation and urbanisation in the PRC as well as the development in the global economy, the Group has entered into various transactions so as to enable itself to tap into the prospering mining business, in particular, the Acquisition, which details have been disclosed in the announcement of the Company dated 9th January, 2007, 2nd February, 2007 and 13th June, 2007 and this circular.
- 29 - LETTER FROM THE BOARD
Given the principal lines of business of the Group and in view of the business pursuits in the mining operations, having a strong financial position is essential for and no doubt advantageous to the Group.
Taking into account the above and to fulfill the binding obligations under the Term Sheet, the Company enters into the Subscription Agreement to raise funds so as to strengthen its working capital position in meeting its financial requirements. Having considered the duration of the Convertible Bonds, the relatively low coupon rate and that it is an investment by Lehman Brothers, an international reputable investment bank, the Directors (including the independent non-executive Directors) consider the issue of the Convertible Bonds provides the Group with financial flexibility and upon conversion, the Company’s shareholder base may be broaden comprising a mixture of strategic and public investors.
In light of the above, the Directors (including the independent non-executive Directors) consider that the terms of the Subscription Agreement (including the terms of the Convertible Bonds) to be fair and reasonable, on normal commercial terms and are in the interests of the Company and Shareholders as a whole.
As disclosed in the Announcement in relation to, among other matters, the Term Sheet, the net proceeds (net of certain expenses and fees) of approximately HK$245 million from the issue of the Convertible Bonds will be used for general working capital required by Xin Shougang. The Company has no intention to deviate from the proposed use of the net proceeds from the issue of the Convertible Bonds.
EGM
The Acquisition constitutes a very substantial acquisition of the Company under Chapter 19 of the GEM Listing Rules. Both the Acquisition and the issue of Convertible Bonds are subject to the approval by the Shareholders at the EGM.
As at the Latest Practicable Date, none of the Shareholders (including Future Advance) is required to abstain from voting at the EGM. Although Future Advance is named as a party to the Subscription Agreement, Future Advance, in the capacity of a controlling Shareholder, is only acting as a warrantor to provide certain warranties regarding, among other matters, the assets, liabilities, taxation, legal and accounting compliance matters and the operations of the Group so as to facilitate the fund raising activity of the Company. The net proceeds raised from the issue of the Convertible Bonds will only be applied as general working capital of Xin Shougang, which is solely for the benefit of the Company and the Shareholders as a whole. Neither Future Advance nor any of its associates has any interests or benefits which the other Shareholders do not enjoy out of the issue of the Convertible Bonds.
A notice convening the EGM to be held at Suite 1415, Ocean Centre, 5 Canton Road, Tsim Sha Tsui, Kowloon, Hong Kong on Tuesday, 2nd October, 2007 at 12:00 p.m. is set out on pages 238 to 266 of this circular. Whether or not you are able to attend the EGM, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon and return the same to the Company’s Hong Kong branch share registrar, Tricor Tengis Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the EGM or any adjourned meeting (as the case may be). Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjourned meeting should you so wish.
- 30 - LETTER FROM THE BOARD
PROCEDURES FOR DEMANDING A POLL AT GENERAL MEETING
According to article 66 of the articles of association of the Company, a resolution put to the vote of a meeting shall be decided on a show of hands unless (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) a poll is demanded:
(a) by the chairman of such meeting; or
(b) by at least three Shareholders present in person or in the case of a Shareholder being a corporation by its duly authorised representative or by proxy for the time being entitled to vote at the meeting; or
(c) by a Shareholder or Shareholders present in person or in the case of a Shareholder being a corporation by its duly authorised representative or by proxy and representing not less than one-tenth of the total voting rights of all Shareholders having the right to vote at the meeting; or
(d) by a Shareholder or Shareholders present in person or in the case of a Shareholder being a corporation by its duly authorised representative or by proxy and holding shares in the Company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all the shares conferring that right; or
(e) if required by the rules of the designated stock exchange, by the chairman of the meeting or any Director or Directors who, individually or collectively, hold proxies in respect of shares representing five per cent. (5%) or more of the total voting rights at such meeting.
RECOMMENDATION
The Directors consider that the terms and conditions of the Acquisition Agreement and the Subscription Agreement are fair and reasonable and the entering into of the Acquisition Agreement and the Subscription Agreement are in the interests of the Company and the Shareholders as a whole. Accordingly, the Directors recommend the Shareholders to vote in favour of the resolutions to be proposed at the EGM to approve the Acquisition Agreement, the Subscription Agreement and the transactions contemplated thereunder.
ADDITIONAL INFORMATION
Your attention is drawn to the additional information set out in the appendices to this circular.
Yours faithfully, for and on behalf of the Board China Primary Resources Holdings Limited Yu Hongzhi Chairman
- 31 - APPENDIX I ACCOUNTANTS’ REPORT OF XIN SHOUGANG
The following is the text of a report, prepared for inclusion in this circular, received from Grant Thornton, the reporting accountants on Xin Shougang.
Certified Public Accountants Member of Grant Thornton International
5 September 2007
The Directors China Primary Resources Holdings Limited Suite 1415, Ocean Centre 5 Canton Road, Tsim Sha Tsui Kowloon, Hong Kong
Dear Sirs,
We set out below our report on the financial information (the “Financial Information”) of 新首鋼 資源控股有限公司 (Xin Shougang Zi Yuan Holdings Limited, “Xin Shougang”) and its subsidiary (collectively referred to as the “Xin Shougang Group”) for the period from 18 October 2005 (being date of establishment of Xin Shougang) to 31 December 2005 and for the year ended 31 December 2006 and the three months ended 31 March 2007 (the “Relevant Periods”), together with the unaudited financial information of Xin Shougang Group including the income statement, cash flow statement and statement of changes in equity for the three months ended 31 March 2006 (the “31 March 2006 Corresponding Information”), prepared for inclusion in the circular (the “Circular”) dated 5 September 2007 issued by China Primary Resources Holdings Limited (the “Company”) in connection with its proposed very substantial acquisition of 22.28% paid-up capital of Xin Shougang (the “Acquisition”), pursuant to a conditional acquisition agreement dated 14 November 2006 and three supplemental deeds, dated 5 January 2007, 2 February 2007 and 11 June 2007, respectively, entered into between 宜昌首控實業有限公司 (Yichang Shoukong Industries Co., Limited), a wholly-owned subsidiary of the Company and Great Ocean Real Estate Limited (“GORE”), a company incorporated in the British Virgin Islands with limited liability.
Xin Shougang was established in the People’s Republic of China (the “PRC”) with limited liability on 18 October 2005 with a registered capital of RMB50 million. The address of Xin Shougang’s registered office and its principal place of business is 中國湖北省宜昌市紅星路5-01-006 號. As at the date of this report, Xin Shougang is 35% owned by 宜昌泰鴻礦山科技有限公司 (Yichang Tai Hong Mining Technology Company Limited, “GORE Mining Technology”), a company established in the PRC with limited liability and wholly-owned by GORE; and 65% by 首鋼控股有限責任公司 (Shougang Holdings Limited Liability Company, “Shougang”). The principal activity of Xin Shougang is mine resources development, asset management and provision of investment management consultancy services in Yichang City. On 26 June 2006, Shougang and Yichang City Government entered into a cooperation agreement, pursuant to which Xin Shougang was appointed as the sole investor and the developer of certain mining sites located at or near Yichang City, Hubei Province, the PRC (the “Mining Sites”). Yichang City Government undertook to assist Xin Shougang in completing the applications for the rights to operate the Mining Sites (“Mining Rights”). As at the date of this report, Xin Shougang has one subsidiary, details of which are as follows:
- 32 - APPENDIX I ACCOUNTANTS’ REPORT OF XIN SHOUGANG
Proportion of nominal value of Principal paid-up capital Name of Registered Paid-up Place of place of held by subsidiary capital capital establishment operation Xin Shougang Nature of business
宜昌新首鋼房地產 RMB10,000,000 RMB3,000,000 The PRC The PRC 65% Property development 開發有限公司 and property (“Yichang Xin management Shougang Real Estate Development Limited, “YXS Real Estate Development”)
All the companies within Xin Shougang Group have adopted 31 December as their year-end date.
The statutory financial statements of Xin Shougang were prepared in accordance with the relevant accounting principles and financial regulations applicable to companies established in the PRC. The statutory auditors of Xin Shougang for the year ended 31 December 2006 was Beijing ZhongruiCheng The United Public Accountants, Beijing office.
No audited financial statements have been prepared for YXS Real Estate Development as it was newly established on 31 December 2006.
For the purpose of this report, we have reviewed all relevant transactions of the companies within Xin Shougang Group since their dates of establishment.
For the purpose of this report, the directors of Xin Shougang have prepared the consolidated financial statements (the “Underlying Financial Statements”) of the Xin Shougang Group for the Relevant Periods and the three months ended 31 March 2006 in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”). We have carried out independent audit procedures on the Underlying Financial Statements of Xin Shougang Group for the Relevant Periods in accordance with Hong Kong Standards on Auditing issued by the HKICPA.
The Financial Information as set out on pages 35 to 62 of the Circular has been prepared based on the Underlying Financial Statements of Xin Shougang Group and in accordance with HKFRSs. For the purpose of this report, we have examined the Underlying Financial Statements of Xin Shougang Group and carried out such additional procedures as are necessary in accordance with the Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the HKICPA.
- 33 - APPENDIX I ACCOUNTANTS’ REPORT OF XIN SHOUGANG
The directors of Xin Shougang are responsible for the preparation of the Underlying Financial Statements which are prepared in accordance with accounting principles generally accepted in Hong Kong and which give a true and fair view. The directors of the Company are responsible for the contents of the Circular in which this report is included. In preparing the Financial Information and the Underlying Financial Statements which give a true and fair view, it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our examination, on the Financial Information and to report our opinion to you.
Opinion
In our opinion, the Financial Information, for the purpose of this report, gives a true and fair view of the state of affairs of the Xin Shougang Group and Xin Shougang as at 31 December 2005, 2006 and 31 March 2007 and of the results and cash flows of the Xin Shougang Group for each of the Relevant Periods.
For the purpose of this report, we have also reviewed the 31 March 2006 Corresponding Information, which are prepared in accordance with accounting principles generally accepted in Hong Kong and for which the directors of Xin Shougang Group are responsible, in accordance with Statement of Auditing Standard 700 “Engagements to review interim financial reports” issued by the HKICPA. Our review consists principally of making enquiries of management and applying analytical procedures to the 31 March 2006 Corresponding Information, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as test of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the 31 March 2006 Corresponding Information.
For the purpose of this report and on the basis of our review of the 31 March 2006 Corresponding Information, which does not constitute an audit, we are not aware of any material modifications that should be made to the unaudited financial information presented for the three months ended 31 March 2006.
- 34 - APPENDIX I ACCOUNTANTS’ REPORT OF XIN SHOUGANG
I. FINANCIAL INFORMATION
CONSOLIDATED INCOME STATEMENTS
From 18 October 2005 (date of establishment) to Year ended For the three months ended 31 December 31 December 31 March 31 March 2005 2006 2007 2006 Notes RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited)
Revenue 5 –––– Other income 6 11 146 514 – Administrative expenses (33) (1,537) (223) –
Operating (loss)/profit (22) (1,391) 291 –
Finance costs 8 – (631) (1,979) – Share of results of an associate – (56) (71) –
Loss before income tax 9 (22) (2,078) (1,759) – Income tax expense 10 (4) (48) (168) –
Loss for the period/year (26) (2,126) (1,927) –
Attributable to:
Equity holders of Xin Shougang (26) (2,126) (1,924) – Minority interests – – (3) –
Loss for the period/year (26) (2,126) (1,927) –
- 35 - APPENDIX I ACCOUNTANTS’ REPORT OF XIN SHOUGANG
CONSOLIDATED BALANCE SHEETS
As at As at As at 31 December 31 December 31 March 2005 2006 2007 Notes RMB’000 RMB’000 RMB’000 Non-current assets Property, plant and equipment 13 ––42 Prepaid land lease payments 14 – – 224,340 Interest in an associate 16 – 4,744 4,673 Deposit and prepayment 17 – 135,014 17,000
– 139,758 246,055
Current assets Other receivables 17 – 16,101 1,320 Cash and cash equivalents 19 10,012 7,756 21,877
10,012 23,857 23,197
Current liabilities Other payables (34) (20) (78) Loans from holding company 20 – (94,645) (96,624) Amount due to holding company 21 – – (33) Provision for tax (4) (52) (220)
(38) (94,717) (96,955)
Net current assets/(liabilities) 9,974 (70,860) (73,758)
Total assets less current liabilities 9,974 68,898 172,297
Non-current liabilities Deferred government grant 22 – – (105,326)
Net assets 9,974 68,898 66,971
EQUITY Equity attributable to equity holders of Xin Shougang Paid-up capital 23 10,000 70,000 70,000 Reserves (26) (2,152) (4,076)
9,974 67,848 65,924 Minority interests – 1,050 1,047
Total equity 9,974 68,898 66,971
- 36 - APPENDIX I ACCOUNTANTS’ REPORT OF XIN SHOUGANG
BALANCE SHEETS
As at As at As at 31 December 31 December 31 March 2005 2006 2007 Notes RMB’000 RMB’000 RMB’000
Non-current assets Property, plant and equipment 13 ––42 Interest in a subsidiary 15 – 1,950 1,950 Interest in an associate 16 – 4,800 4,800 Deposit and prepayment 17 – 135,014 17,000
– 141,764 23,792
Current assets Other receivables 17 – 16,101 1,320 Amount due from subsidiary 18 – – 119,026 Cash and cash equivalents 19 10,012 4,756 18,872
10,012 20,857 139,218
Current liabilities Other payables (34) (20) (78) Loans from holding company 20 – (94,645) (96,624) Amount due to holding company 21 – – (33) Provision for tax (4) (52) (52)
(38) (94,717) (96,787)
Net current assets/(liabilities) 9,974 (73,860) 42,431
Net assets 9,974 67,904 66,223
EQUITY Paid-up capital 23 10,000 70,000 70,000 Reserves (26) (2,096) (3,777)
Total equity 9,974 67,904 66,223
- 37 - APPENDIX I ACCOUNTANTS’ REPORT OF XIN SHOUGANG
CONSOLIDATED CASH FLOW STATEMENTS
From 18 October 2005 (date of establishment) to Year ended For the three months ended 31 December 31 December 31 March 31 March 2005 2006 2007 2006 Notes RMB’000 RMB’000 RMB’000 RMB’000 (unaudited)
Cash flows from operating activities Loss before income tax (22) (2,078) (1,759) – Adjustments for: Interest income (11) (146) (514) – Depreciation of property, plant and equipment – – 1 – Finance costs – 631 1,979 – Share of results of an associate – 56 71 –
Operating loss before working capital changes (33) (1,537) (222) – (Increase)/Decrease in other receivables – (16,101) 14,781 – Increase/(Decrease) in other payables 34 (14) 58 – Increase in amount due to holding company – – 33 –
Net cash generated from/(used in) operating activities 1 (17,652) 14,650 –
Cash flows from investing activities Increase in deposit and prepayment – (1,000) (1,000) – Investment in an associate – (4,800) – – Prepayment for the purchase of land use rights 17(a) – (119,014) – – Purchase of property, plant and equipment – – (43) Interest received 11 146 514 –
Net cash generated from/(used in) investing activities 11 (124,668) (529) –
- 38 - APPENDIX I ACCOUNTANTS’ REPORT OF XIN SHOUGANG
CONSOLIDATED CASH FLOW STATEMENTS (Continued)
From 18 October 2005 (date of establishment) to Year ended For the three months ended 31 December 31 December 31 March 31 March 2005 2006 2007 2006 Notes RMB’000 RMB’000 RMB’000 RMB’000 (unaudited)
Cash flows from financing activities Proceeds from paid-up capital 10,000 60,000 – – Loans from holding company 20 – 79,014 – – Contribution from minority interests – 1,050 – –
Net cash generated from financing activities 10,000 140,064 – –
Net increase/(decrease) in cash and cash equivalents 10,012 (2,256) 14,121 –
Cash and cash equivalents at beginning of the period/year – 10,012 7,756 10,012
Cash and cash equivalents at end of the period/year 10,012 7,756 21,877 10,012
- 39 - APPENDIX I ACCOUNTANTS’ REPORT OF XIN SHOUGANG
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Xin Shougang Group
Equity attributable to the equity holders of Xin Shougang Paid-up Accumulated Minority capital losses interests Total equity RMB’000 RMB’000 RMB’000 RMB’000
Loss for the period – (26) – (26)
Total recognised income and expense for the period – (26) – (26) Increase in paid-up capital 10,000 – – 10,000
At 31 December 2005 and 1 January 2006 10,000 (26) – 9,974
Loss for the year – (2,126) – (2,126)
Total recognised income and expense for the year – (2,126) – (2,126) Increase in paid-up capital 60,000 – – 60,000 Contribution from minority interests – – 1,050 1,050
At 31 December 2006 and 1 January 2007 70,000 (2,152) 1,050 68,898
Loss for the period – (1,924) (3) (1,927)
Total recognised income and expense for the period – (1,924) (3) (1,927)
At 31 March 2007 70,000 (4,076) 1,047 66,971
At 1 January 2006 10,000 (26) – 9,974
Loss for the period – – – –
Total recognised income and expense for the period ––––
At 31 March 2006 (unaudited) 10,000 (26) – 9,974
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CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Continued)
Xin Shougang
Paid-up Accumulated capital losses Total equity RMB’000 RMB’000 RMB’000
Loss for the period – (26) (26)
Total recognised income and expense for the period – (26) (26) Increase in paid-up capital 10,000 – 10,000
At 31 December 2005 and 1 January 2006 10,000 (26) 9,974
Loss for the year – (2,070) (2,070)
Total recognised income and expense for the year – (2,070) (2,070) Increase in paid-up capital 60,000 – 60,000
At 31 December 2006 and 1 January 2007 70,000 (2,096) 67,904
Loss for the period – (1,681) (1,681)
Total recognised income and expense for the period – (1,681) (1,681)
At 31 March 2007 70,000 (3,777) 66,223
At 1 January 2006 10,000 (26) 9,974
Loss for the period – – –
Total recognised income and expense for the period –––
At 31 March 2006 (unaudited) 10,000 (26) 9,974
- 41 - APPENDIX I ACCOUNTANTS’ REPORT OF XIN SHOUGANG
II. NOTES TO THE FINANCIAL INFORMATION
1. BASIS OF PRESENTATION
The Financial Information presented in Renminbi (“RMB”), which is also the functional currency of Xin Shougang.
The Financial Information set out in this report has been prepared in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards and Interpretations issued by the HKICPA.
2. ADOPTION OF NEW OR AMENDED HKFRSs
The HKICPA has issued a number of new and amended HKFRSs which are generally effective for accounting periods beginning on or after 1 January 2007. For the purposes of preparing and presenting the Financial Information and the 31 March 2006 Corresponding Information, Xin Shougang has early adopted all the new HKFRSs throughout the Relevant Periods and for the three months ended 31 March 2006.
Xin Shougang Group has not early adopted the following HKFRSs that have been issued but are not yet effective. The directors of Xin Shougang anticipate that the adoption of such HKFRSs will not result in material financial impact on the Xin Shougang Group’s Financial Information and the 31 March 2006 Corresponding Information.
HKAS 23 (Revised) Borrowing Cost1 HKFRS 8 Operating Segments1 HK(IFRIC) – Int 11 Group and Treasury Share Transactions2 HK(IFRIC) – Int 12 Service Concession Arrangements3
1 Effective for annual periods beginning on or after 1 January 2009 2 Effective for annual periods beginning on or after 1 March 2007 3 Effective for annual periods beginning on or after 1 January 2008
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of preparation
The significant accounting policies that have been used in the preparation of the Financial Information and the 31 March 2006 Corresponding Information are summarised below. The Financial Information and the 31 March 2006 Corresponding Information have been prepared under historical cost basis. The measurement bases are fully described in the accounting policies below.
HKFRS 1 “First-time Adoption of Hong Kong Financial Reporting Standards” has been applied in preparing these Financial Information of Xin Shougang Group. These Financial Information are the first set of financial statements prepared in accordance with HKFRSs by Xin Shougang Group.
The Financial Information and the 31 March 2006 Corresponding Information have been prepared on the going concern basis which assumes the realisation of assets and satisfaction of liabilities in the ordinary course of business notwithstanding that Xin Shougang Group had net current liabilities of approximately RMB70,860,000 and RMB73,758,000 as at 31 December 2006 and 31 March 2007, respectively. In the opinion of the directors of Xin Shougang, liquidity of Xin Shougang Group can be maintained, after taking into consideration of the undertaking made by Shougang subsequent to 31 March 2007, to provide continual financial support to Xin Shougang Group so as to enable Xin Shougang Group to continue its day to day operations as a viable going concern and not to demand any repayment of the debts due from Xin Shougang until such time when the repayment will not affect Xin Shougang’s ability to repay other creditors in the normal course of business. - 42 - APPENDIX I ACCOUNTANTS’ REPORT OF XIN SHOUGANG
Should Xin Shougang Group be unable to continue in business as a going concern, adjustments would have to be made to reduce the value of assets to their recoverable amounts, to reclassify non-current assets as current assets and to provide for any further liabilities which might arise.
It should be noted that accounting estimates and assumptions are used in preparation of the Financial Information and the 31 March 2006 Corresponding Information. Although these estimates are based on management’s best knowledge and judgement of current events and actions, actual results may ultimately differ from those estimates. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the Financial Information, are disclosed in note 4.
(b) Basis of consolidation
The Financial Information incorporates the financial statements of Xin Shougang and its subsidiary for the period from 18 October 2005 (date of establishment of Xin Shougang) to 31 December 2005 and for the year ended 31 December 2006, and the three months ended 31 March 2007.
(c) Subsidiaries
Subsidiaries are entities over which Xin Shougang has the power to control the financial and operating policies so as to obtain benefits from their activities. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether Xin Shougang controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to Xin Shougang. They are excluded from consolidation from the date that control ceases.
Intra-group transactions, balances and unrealised gains on transactions between group companies are eliminated in preparing the Financial Information. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
In Xin Shougang’s balance sheet, subsidiary is carried at cost less any impairment loss. The results of the subsidiary is accounted for by Xin Shougang on the basis of dividends received and receivable at the balance sheet date.
Minority interests represent the portion of the profit or loss and net assets of a subsidiary attributable to equity interests that are not owned by Xin Shougang and are not Xin Shougang Group’s financial liabilities.
Minority interests are presented in Xin Shougang Group’s balance sheet within equity, separately from the equity attributable to the equity holders of Xin Shougang. Profit or loss attributable to the minority interests are presented separately in the consolidated income statement as an allocation of Xin Shougang Group’s results. Where losses applicable to the minority exceeds the minority interests in the subsidiary’s equity, the excess and further losses applicable to the minority are allocated against the minority interests to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses. Otherwise, the losses are charged against Xin Shougang Group’s interests. If the subsidiary subsequently reports profits, such profits are allocated to the minority interests only after the minority’s share of losses previously absorbed by Xin Shougang Group has been recovered.
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(d) Associates
Associates are those entities over which Xin Shougang Group is able to exert significant influence, generally accompanying a shareholding of between 20% and 50% of voting rights but which are neither subsidiaries nor investment in a joint venture. In the Financial Information, interest in an associate is initially recognised at cost and subsequently accounted for using the equity method. Under the equity method, Xin Shougang Group’s interest in the associate is carried at cost and adjusted for the post- acquisition changes in Xin Shougang Group’s share of the associate’s net assets less any identified impairment loss, unless it is classified as held for sale (or included in a disposal group that is classified as held for sale). The consolidated income statements include Xin Shougang Group’s share of the post-acquisition, post-tax results of the associate for the year, including any impairment loss on goodwill relating to the interest in the associate recognised for the year.
When Xin Shougang Group’s share of losses in an associate equals or exceeds its interest in the associate, Xin Shougang Group does not recognise further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the associate. For this purpose, Xin Shougang Group’s interest in the associate is the carrying amount of the investment under the equity method together with Xin Shougang Group’s long-term interests that in substance form part of Xin Shougang Group’s net interest in the associate.
After the application of equity method, Xin Shougang Group determines whether it is necessary to recognise an additional impairment loss on Xin Shougang Group’s interest in its associates. At each balance sheet date, Xin Shougang Group determines whether there is any objective evidence that the interest in associate is impaired. If such indications are identified, Xin Shougang Group calculates the amount of impairment as being the difference between the recoverable amount (see note (i)) of the associate and its carrying amount.
Any excess of Xin Shougang Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in income statement in the determination of Xin Shougang Group’s share of the associate’s profit or loss in which the investment is acquired.
Unrealised gains on transactions between Xin Shougang Group and its associate are eliminated to the extent of Xin Shougang Group’s interest in the associate. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Where the associate uses accounting policies other than those of Xin Shougang Group for like transactions and events in similar circumstances, adjustments are made, where necessary, to conform the associate’s accounting policies to those of Xin Shougang Group when the associate’s financial statements are used by Xin Shougang Group in applying the equity method.
In Xin Shougang’s balance sheet, interests in an associate are stated at cost less any impairment losses. The results of associates are accounted for by Xin Shougang on the basis of dividends received and receivables.
(e) Property, plant and equipment
Property, plant and equipment are stated at acquisition cost less accumulated depreciation and any impairment losses. The cost of an assets comprise purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use, less accumulated depreciation and any impairment losses. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to Xin Shougang Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred.
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The gain or loss arising on retirement or disposal of property, plant and equipment is determined as the difference between the sale proceeds and the carrying amount of the asset and is recognised in the income statement.
Depreciation is provided to write off the cost of office equipment over their estimated useful lives, using the straight-line method, at the 20% per annum.
The assets’ residual values and useful lives are reviewed and adjusted, if appropriate, at each balance sheet date.
(f) Leases
An arrangement, comprising a transaction or a series of transactions, is or contains a lease if Xin Shougang Group determines that the arrangement conveys a right to use a specific asset or assets for an agreed period of time in return for a payment or a series of payments. Such a determination is made based on an evaluation of the substance of the arrangement and is regardless of whether the arrangement takes the legal form of a lease.
Prepaid land lease payments
Prepaid land lease payments are up-front payments made for the leasehold land and land use rights. The payments are stated at cost less amortisation and any impairment losses. Amortisation is calculated on a straight-line basis over the lease terms.
(g) Revenue recognition
Interest income is recognised on a time-proportion basis using the effective interest method.
(h) Borrowing cost
All borrowing costs are expensed as incurred.
(i) Impairment of assets
Property, plant and equipment, interests in a subsidiary and an associate, prepaid land lease payments, deposits and other receivables are subject to impairment testing.
For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). As a result, some assets are tested individually for impairment and some are tested at cash-generating unit level.
All individual assets or cash-generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
An impairment loss is recognised as an expense immediately for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell, and value in use, based on an internal discounted cash flow evaluation.
An impairment loss is reversed if there has been a favourable change in the estimates used to determine the asset’s recoverable amount and only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.
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(j) Financial assets
Xin Shougang Group’s accounting policies for financial assets other than interests in a subsidiary and an associate are set out below.
Financial assets of Xin Shougang Group and Xin Shougang consist of loans and receivables.
All financial assets are recognised when, and only when, Xin Shougang Group becomes a party to the contractual provisions of the instrument. When financial assets are recognised initially, they are measured at fair value, plus, directly attributable transaction costs.
Derecognition of financial assets occurs when the rights to receive cash flows from the investments expire or are transferred and substantially all of the risks and rewards of ownership have been transferred.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are subsequently measured at amortised cost using the effective interest method, less any impairment losses. Amortised cost is calculated taking into account any discount or premium on acquisition and includes fees that are an integral part of the effective interest rate and transaction cost.
Impairment of financial assets
At each balance sheet date, financial assets are reviewed to determine whether there is any objective evidence of impairment. If any such evidence exists, the impairment loss is measured and recognised as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition). The amount of the loss is recognised in income statement of the period in which the impairment occurs.
If, in subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed to the extent that it does not result in a carrying amount of the financial asset exceeding what the amortised cost would have been had the impairment not been recognised at the date the impairment is reversed. The amount of the reversal is recognised in income statement of the period in which the reversal occurs.
(k) Accounting for income taxes
Income tax comprises current tax and deferred tax.
Current income tax assets and/or liabilities comprise those obligations to, or claims from, tax authorities relating to the current or prior reporting period, that are unpaid at the balance sheet date. They are calculated according to the tax rates and tax laws applicable to the tax periods to which they relate, based on the taxable profit for the year. All changes to current tax assets or liabilities are recognised as a component of tax expense in the income statement.
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Deferred tax is calculated using the liability method on temporary differences at the balance sheet date between the carrying amounts of assets and liabilities in the financial statements and their respective tax bases. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are recognised for all deductible temporary differences, tax losses available to be carried forward as well as other unused tax credits, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, unused tax losses and unused tax credits can be utilised.
Deferred tax assets and liabilities are not recognised if the temporary difference arises from initial recognition (other than in a business combination) of assets and liabilities in a transaction that affects neither taxable nor accounting profit or loss.
Deferred tax liabilities are recognised for taxable temporary differences arising on interests in a subsidiary and an associate, except where Xin Shougang Group is able to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred tax is calculated, without discounting, at tax rates that are expected to apply in the period the liability is settled or the asset realised, provided they are enacted or substantively enacted at the balance sheet date.
Changes in deferred tax assets or liabilities are recognised in the income statement, or in equity if they relate to items that are charged or credited directly to equity.
(l) Cash and cash equivalents
Cash and cash equivalents include cash at banks and in hand and demand deposits with banks, less bank overdrafts which are repayable on demand and form an integral part of Xin Shougang Group’s cash management.
(m) Financial liabilities
Xin Shougang Group’s financial liabilities include other payables and loans from holding company and amount due to holding company. They are included in balance sheet line items as other payables, amount due to holding company and loans from holding company.
Financial liabilities are recognised when Xin Shougang Group becomes a party to the contractual provisions of the instrument. All interest related charges are recognised as an expense in finance cost in the consolidated income statement.
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.
Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amount is recognised in the income statement.
Other payables
Other payables are recognised initially at their fair value and subsequently measured at amortised cost, using the effective interest rate method.
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Borrowings
Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest rate method.
Borrowings are classified as current liabilities unless Xin Shougang Group has an unconditional right to defer settlement of the liability for at least 12 months after the respective balance sheet date.
(n) Government grants
Grants from the government are recognised at their fair value where there is a reasonable assurance that the grants will be received and Xin Shougang Group will comply with all attached conditions.
Government grants are included in non-current liabilities as deferred government grants and are recognised as income over the period necessary to match them with the costs they are intended to compensate on a systematic basis.
(o) Segment reporting
In accordance with Xin Shougang Group’s internal financial reporting, Xin Shougang Group has determined that business segments be presented as the primary reporting format and geographical segments as the secondary reporting format.
In respect of geographical segment reporting, revenue are based on the country in which the customer is located and total assets and capital expenditure are based on where the assets are located.
(p) Intangible assets
Intangible assets are recognised initially at cost. After initial recognition, intangible assets are carried at cost less accumulated amortisation and any accumulated impairment losses. Amortisation for intangible assets is provided on straight-line basis over their estimated useful lives.
(q) Related parties
A party is considered to be related to Xin Shougang Group if:
(i) directly, or indirectly through one or more intermediaries, the party:
– controls, is controlled by, or is under common control with, Xin Shougang or Xin Shougang Group;
– has an interest in Xin Shougang that gives it significant influence over Xin Shougang or Xin Shougang Group; or
– has joint control over Xin Shougang or Xin Shougang Group;
(ii) the party is an associate;
(iii) the party is a jointly-controlled entity;
(iv) the party is a member of the key management personnel of Xin Shougang or its parent;
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(v) the party is a close member of the family of any individual referred to in (i) or (iv);
(vi) the party is an entity that is controlled, jointly controlled or significantly influenced by or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (iv) or (v); or
(vii) the party is a post-employment benefit plan for the benefit of employees of Xin Shougang or Xin Shougang Group, or of any entity that is a related party of Xin Shougang or Xin Shougang Group.
4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
Estimates and judgements are continually evaluated and are based on historical experiences and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
Xin Shougang Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:
Impairment of receivables
The management of Xin Shougang Group determines impairment of receivables on a regular basis. This estimate is based on the credit history of its customers and current market conditions. Management reassesses the impairment of receivables at the respective balance sheet dates.
5. REVENUE
Since Xin Shougang Group has not carried on any business during the Relevant Periods and for the three months ended 31 March 2006, there was no revenue being recognised.
6. OTHER INCOME
From 18 October 2005 (date of establishment) to Year ended For the three months ended 31 December 31 December 31 March 31 March 2005 2006 2007 2006 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited)
Interest income from – bank 11 95 514 – – others – 51 – –
11 146 514 –
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7. SEGMENT INFORMATION
No separate analysis of segment information by business or geographical segments is presented as Xin Shougang Group has not carried on any business during the Relevant Periods and the three months ended 31 March 2006. Xin Shougang Group operates within one geographical segment and all its assets are located in the PRC. Accordingly, no geographical segment is presented.
8. FINANCE COSTS
From 18 October 2005 (date of establishment) to Year ended For the three months ended 31 December 31 December 31 March 31 March 2005 2006 2007 2006 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited)
Interest charges on loans wholly repayable within 1 year – 631 1,979 –
9. LOSS BEFORE INCOME TAX
From 18 October 2005 (date of establishment) to Year ended For the three months ended 31 December 31 December 31 March 31 March 2005 2006 2007 2006 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited)
Loss from operating activities is arrived at after charging: Auditors’ remuneration – 10 – – Depreciation of property, plant and equipment – – 1 –
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10. INCOME TAX EXPENSE
PRC enterprise income tax for the Relevant Periods and the three months ended 31 March 2006 has been provided at the rate of 33% on the estimated assessable profits of Xin Shougang and YXS Real Estate Development arising in the PRC. Based on the legal opinion, the government grant as detailed in note 22 is not subject to any enterprise income tax.
Income tax in the consolidated income statement represents:
From 18 October 2005 (date of establishment) to Year ended For the three months ended 31 December 31 December 31 March 31 March 2005 2006 2007 2006 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited)
Current tax Tax for the year/period 4 48 168 –
Reconciliation between income tax expense and accounting loss at applicable tax rate:
From 18 October 2005 (date of establishment) to Year ended For the three months ended 31 December 31 December 31 March 31 March 2005 2006 2007 2006 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited)
Loss before income tax (22) (2,078) (1,759) – Share of results of an associate – 56 71 –
(22) (2,022) (1,688) –
Tax on loss before income tax, calculated at the statutory tax rate of 33% (7) (667) (557) – Tax effect of non-deductible expenses – 98 92 – Tax effect of the deferred expenditure not recognised 11 617 633 –
Income tax expense 4 48 168 –
As at 31 December 2005 and 2006, and the three months ended 31 March 2007 and 2006, Xin Shougang had deferred expenditure of approximately RMB33,000, RMB1,902,000, RMB3,816,000 and RMB33,000 respectively which is available for setting off against future taxable profit of Xin Shougang for 5 years from the month following the commencement of the business operation. Deferred tax asset has not been recognised in respect of the tax effect on the deferred expenditure as Xin Shougang has been loss-making for some time.
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As at 31 December 2005 and 2006, and 31 March 2007 and 2006, no deferred tax liability has been provided as Xin Shougang Group and Xin Shougang did not have any significant temporary differences which give rise to a deferred tax liability.
11. DIRECTORS’ REMUNERATION AND SENIOR MANAGEMENT’S EMOLUMENTS
There were no directors’ emoluments and senior management’s emoluments incurred during the Relevant Periods and the three months ended 31 March 2006. There was no arrangement under which a director waived or agreed to waive any remuneration during the Relevant Periods and for the three months ended 31 March 2006.
During the Relevant Periods and the three months ended 31 March 2006, no emoluments were paid by Xin Shougang Group to the five highest paid individuals, including the directors. There were no emoluments paid as an inducement to join or upon joining Xin Shougang Group or as compensation for loss of office.
12. MINING RIGHTS – Xin Shougang Group and Xin Shougang
In June 2006, 宜昌市人民政府, the local government in Yichang, Hubei Province, the PRC, has granted Xin Shougang exclusive mining rights in certain metal mines within Yichang City in the PRC. Both the mining rights and the government grants are accounted for at nominal amount. Xin Shougang has been authorised by the Ministry of Land and Resources of Hubei Province to undertake underground mining at the metal mine situated at HuoShaoPing, Hubei Province, as at 31 March 2007. In the opinion of the directors, Xin Shougang Group will be able to renew the mining rights with the relevant government authorities continuously and at minimal charges.
13. PROPERTY, PLANT AND EQUIPMENT – Xin Shougang Group and Xin Shougang
Office equipment Total RMB’000 RMB’000
At 18 October 2005, 31 December 2005 and 2006 and 1 January 2007 Cost –– Accumulated depreciation – –
Net book amount – –
Three months ended 31 March 2007 Opening net book amount – – Additions 43 43 Depreciation (1) (1)
Closing net book amount 42 42
At 31 March 2007 Cost 43 43 Accumulated depreciation (1) (1)
Net book amount 42 42
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14. PREPAID LAND LEASE PAYMENTS – Xin Shougang Group
Xin Shougang Group’s interests in land use rights represent prepaid operating lease payments and their net carrying amount are analysed as follows:
As at As at As at 31 December 31 December 31 March 2005 2006 2007 RMB’000 RMB’000 RMB’000
Outside Hong Kong, held on leases of between 10 to 50 years – – 224,340
– – 224,340
As at As at As at 31 December 31 December 31 March 2005 2006 2007 RMB’000 RMB’000 RMB’000
Opening net carrying amount – – – Additions – – 224,340 Annual charges of prepaid operating lease payment – – –
Closing net carrying amount – – 224,340
15. INTEREST IN A SUBSIDIARY – Xin Shougang
As at As at As at 31 December 31 December 31 March 2005 2006 2007 RMB’000 RMB’000 RMB’000
Unlisted investment, at cost – 1,950 1,950
Particulars of the subsidiary at 31 December 2006 and 31 March 2007 are as follows:
Percentage of Place of registered establishment capital held and place of Registered by Xin Name operations capital Paid-up capital Shougang Principal activities
YXS Real Estate Development The PRC RMB10,000,000 RMB3,000,000 65% Property development and property management
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16. INTEREST IN AN ASSOCIATE – Xin Shougang Group and Xin Shougang
Xin Shougang Group Xin Shougang As at As at As at As at As at As at 31 December 31 December 31 March 31 December 31 December 31 March 2005 2006 2007 2005 2006 2007 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Unlisted investment, at cost – 4,800 4,800 – 4,800 4,800
Share of results of an associate – loss before income tax – (56) (127) – – – – income tax expense – – – – – –
Balance at end of year/period – 4,744 4,673 – 4,800 4,800
Particulars of the associate at 31 December 2006 and 31 March 2007 are as follows:
Percentage of Place of paid-up capital establishment and held by Name place of operations Paid-up capital Xin Shougang Principal activities
宜昌新首鋼貴金屬礦業有限公司 The PRC RMB10,000,000 48% Development of coal (Yichang Xin Shougang Precious and metal mining, Metal Mining Limited, trading and “YXS Precious Metal Mining”) investment
The aggregate amounts relating to YXS Precious Metal Mining that have been equity accounted for in Xin Shougang Group’s consolidated financial statements are as follows:
As at As at As at 31 December 31 December 31 March 2005 2006 2007 RMB’000 RMB’000 RMB’000
Total assets – 9,890 9,738 Total liabilities – (6) (1)
Revenue – – – Loss after tax – 117 147
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17. DEPOSIT, PREPAYMENT AND OTHER RECEIVABLES – Xin Shougang Group and Xin Shougang
As at As at As at 31 December 31 December 31 March 2005 2006 2007 RMB’000 RMB’000 RMB’000
Non-current assets Prepayment (note (a)) – 119,014 – Other receivables (note (b)) – 15,000 15,000 Long term deposits (note (c)) – 1,000 2,000
– 135,014 17,000
Current assets Other receivables (note (d)) – 16,101 1,320
Notes:
(a) The balance represents a prepayment for the acquisition of land use rights in the PRC. Subsequent to 31 December 2006, the land use rights certificate was obtained by YXS Real Estate Development on 29 March 2007 and the amount was therefore transferred to prepaid land lease payments.
(b) The balance represents a prepayment for the investment in 黑龍江聖方科技股份有限公司 (“SF Tech”), a company listed in the PRC. As at 31 December 2006 and 31 March 2007, pursuant to agreements signed with certain third parties, Xin Shougang agreed to invest in SF Tech, which is part of the restructuring exercise of SF Tech. The restructing exercise of SF Tech is still subject to the approval from 上市公司重組審核委員會 as at the date of this report.
(c) The balance as at 31 December 2006 represents an amount advanced to a third party company for establishment of a company in the PRC.
During the three months ended 31 March 2007, additional RMB1,000,000 was advanced to that third party company.
Up to the date of this report, the company has not been set up.
(d) The balance as at 31 December 2006 mainly represents an amount lent to a third party company. Such amount is unsecured, interest bearing at 1.5% per month and repayable within one month from the date of advance of 25 December 2006. The amount is subsequently settled during the three months ended 31 March 2007.
The balance as at 31 March 2007 mainly represents an amount lent to the minority shareholder of the subsidiary. Such amount is unsecured, interest free and repayable within one year from the date of advance of 31 December 2006.
18. AMOUNT DUE FROM SUBSIDIARY – Xin Shougang
The amount is unsecured, interest free and repayable on demand. The directors consider the carrying amount approximates its fair value.
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19. CASH AND CASH EQUIVALENTS – Xin Shougang Group and Xin Shougang
As at 31 December 2005 and 2006, and 31 March 2007, the cash and bank balances of Xin Shougang Group and Xin Shougang were denominated in RMB and deposited with banks in the PRC.
20. LOANS FROM HOLDING COMPANY – Xin Shougang Group and Xin Shougang
Included in the balance as at 31 December 2006 and 31 March 2007 was an amount of RMB15,000,000 which is unsecured, with interest bearing at 15% per annum and repayable within the next 10 months from the date of advance on 26 September 2006. This amount represents a loan to Xin Shougang Group for the investment in 黑 龍江聖方科技股份有限公司 as disclosed in note 17(b).
As at 31 December 2006 and 31 March 2007, there was another amount of RMB79,014,000 which is a loan to Xin Shougang Group for the acquisition of land use rights as disclosed in note 14 and note 17(a). The amount is unsecured, interest bearing at 7.5% per annum and repayable within the next 12 months from the balance sheet date.
As at 31 December 2006 and 31 March 2007, the remaining amount of approximately RMB631,000 and RMB2,610,000, respectively represents the total interest charges due to holding company on the abovementioned loans.
As at 31 December 2006 and 31 March 2007, the carrying amounts of short-term borrowings approximate to their fair value.
21. AMOUNT DUE TO HOLDING COMPANY – Xin Shougang Group and Xin Shougang
The amount is unsecured, interest free and repayable on demand. The directors consider the carrying amount approximates its fair value at the balance sheet date.
22. DEFERRED GOVERNMENT GRANT – Xin Shougang Group
Movement of deferred government grant is as follows:
As at As at As at 31 December 31 December 31 March 2005 2006 2007 RMB’000 RMB’000 RMB’000
At 1 January – – – Additions – – 105,326 Recognised in the income statement – – –
At year/period end – – 105,326
In 2007, Xin Shougang Group received government grant of approximately RMB105,326,000 in the form of a forgivable payable on the partial land premium in respect of a piece of land situated in Yichang City, Hubei, the PRC. Xin Shougang Group had obtained proper approval from the relevant government authority for the grant and based on the co-operation agreement signed between the local government in Yichang and Xin Shougang Group. Xin Shougang Group will be responsible for the properties development on that piece of land.
The government grant is amortised in accordance with the useful lives of the properties to be constructed on that piece of land.
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23. PAID-UP CAPITAL – Xin Shougang
As at As at As at 31 December 31 December 31 March 2005 2006 2007 Notes RMB’000 RMB’000 RMB’000
Registered capital:
At beginning of year/period 50,000 50,000 100,000 Increase in registered capital (a) – 50,000 –
At end of year/period 50,000 100,000 100,000
As at As at As at 31 December 31 December 31 March 2005 2006 2007 Notes RMB’000 RMB’000 RMB’000
Paid-up capital:
At beginning of year/period 10,000 10,000 70,000 Increase in paid-up capital (b) – 60,000 –
At end of year/period 10,000 70,000 70,000
Xin Shougang was incorporated on 18 October 2005 with registered capital of RMB50,000,000 and paid up capital of RMB10,000,000.
Notes:
(a) Increase in registered capital
On 6 December 2006, Xin Shougang increased its registered capital from RMB50,000,000 to RMB100,000,000.
(b) Increase in paid-up capital
On 6 December 2006, Xin Shougang increased its paid-up capital from RMB10,000,000 to RMB70,000,000.
The capital paid-up of RMB70,000,000 is for general working capital purpose.
24. NON-CASH TRANSACTION
As disclosed in notes 17(b) and 20, out of the total amount of loans from holding company, an amount of RMB15,000,000 is used directly for the prepayment for investment in 黑龍江聖方科技股份有限公司 on behalf of Xin Shougang Group.
As disclosed in note 22, the government has granted part of the consideration for acquisition of a piece of land of approximately RMB105,326,000 in a form of a forgivable payable.
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25. CAPITAL COMMITMENTS – Xin Shougang Group and Xin Shougang
As at As at As at 31 December 31 December 31 March 2005 2006 2007 RMB’000 RMB’000 RMB’000
Xin Shougang Group Contracted but not provided for (Note (a)) 105,326 – Authorised but not contracted for (Note (b)) – 650,000 650,000
Xin Shougang Contracted but not provided for (Note (c)) – 4,550 4,550
Notes: (a) The balance at 31 December 2006 represents the outstanding commitment on the acquisition of the land use rights in the PRC as detailed in note 14 and note 17(a).
(b) The balance represents the commitment amount in developing a piece of land in Yichang City, Hubei province as detailed in note 22.
(c) The amount as at 31 December 2006 represents the outstanding commitment on the remaining registered capital of the investment in YXS Real Estate Development.
26. OPERATING LEASE COMMITMENTS
Xin Shougang Group and Xin Shougang do not have any significant operating lease commitments as at the respective balance sheet dates.
27. RELATED PARTY TRANSACTIONS
Except as disclosed elsewhere in this report, Xin Shougang Group had the following transactions carried out with related parties during the Relevant Periods and the three months ended 31 March 2006:
From 18 October 2005 (date of establishment) to Year ended For the three months ended 31 December 31 December 31 March 31 March 2005 2006 2007 2006 RMB’000 RMB’000 RMB’000 RMB’000 (unaudited)
Loan interests expense on loans from holding company – 631 1,979 –
Shougang, the holding company, has provided loans to Xin Shougang Group, of which an amount of RMB15,000,000 was loan from holding company for the prepayment for investment in SF Tech, and paid out directly by the holding company as disclosed in notes 17(b) and 20. Details of the loans are disclosed in note 20.
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As at 31 December 2006 and 31 March 2007, the directors of Xin Shougang consider the ultimate holding company of Xin Shougang to be 首鋼集團 (Shougang Group), a company established in the PRC.
28. CONTINGENT LIABILITIES
Xin Shougang Group and Xin Shougang did not have any significant contingent liabilities as at the respective balance sheet dates.
29. RISK MANAGEMENT OBJECTIVES AND POLICIES
Xin Shougang Group is exposed to a variety of financial risks which result from both its operating and investing activities. Xin Shougang Group does not have written risk management policies and guidelines. However, the board of directors meets periodically to analyse and formulate strategies to manage Xin Shougang Group’s exposure to market risk, including changes in interest rates and currency exchange rates. Generally, Xin Shougang Group introduces conservative strategies on its risk management. Xin Shougang Group’s exposure to market risk is kept to a minimum. Most of Xin Shougang Group’s transactions are carried out in RMB and therefore not subject to any foreign currency risk. Xin Shougang Group has not used any derivatives or other instruments for hedging purposes. Xin Shougang Group does not hold or issue derivative financial instruments for trading purposes. The most significant financial risks to which Xin Shougang Group is exposed to are described below.
(a) Interest rate risk
Xin Shougang Group’s policy is to minimise interest rate cash flow risk exposures on long-term financing. All of Xin Shougang Group’s borrowings are therefore at fixed rates. The interest rates and terms of repayment of Xin Shougang Group’s loans from holding company are disclosed in note 20.
(b) Credit risk
All of Xin Shougang Group’s cash and cash equivalents are deposited with reputable banks located in the PRC, the credit risk is considered negligible.
The carrying amounts of other receivables, included in the consolidated balance sheet represent Xin Shougang Group’s maximum exposure to credit risk in relation to its financial assets. No other financial assets carry a significant exposure to credit risk. Xin Shougang Group continuously monitors defaults of other counterparties and incorporates this information into its credit risk controls. Xin Shougang’s management considers that all the above financial assets are of good credit quality for each of the reporting dates under review.
None of Xin Shougang Group’s financial assets are secured by collateral or other credit enhancements.
(c) Fair values
The fair values of Xin Shougang Group’s current financial assets and liabilities are not materially different from their carrying amount because of the immediate or short term maturity of these financial instruments.
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(d) Liquidity
Xin Shougang Group’s liabilities which have contractual maturities are detailed in note 20.
Xin Shougang Group manages its liquidity needs by carefully monitoring scheduled debt servicing payments for long term financial liabilities as well as cash outflows due in day-to-day operations.
As mentioned in note 3(a), Xin Shougang Group’s going concern and liquidity is dependent upon the continuing financial support from Shougang, its holding company. Provided that Shougang is able to meet its commitment to provide financial support to Xin Shougang Group, the directors are satisfied that Xin Shougang Group will be able to meet in full its financial obligations as and when they fall due in the foreseeable future.
(e) Financial result by category of financial instruments
Net gains/(losses) from financial assets and financial liabilities by category of financial instruments are set out below.
From 18 October 2005 (date of establishment) to Year ended For the three months ended 31 December 31 December 31 March 31 March 2005 2006 2007 2006 RMB’000 RMB’000 RMB’000 RMB’000 (Unaudited)
Loans and receivables 11 146 514 –
Financial liabilities measured at amortised cost – (631) (1,979) –
Net result from financial assets and financial liabilities 11 (485) (1,465) –
The amounts presented for loans and receivables represent interest income from bank and other receivables. The net expense arising from financial liabilities measured at amortised cost comprised interest on loans from holding company.
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(f) Summary of financial assets and liabilities by category
The carrying amounts of Xin Shougang Group’s financial assets and liabilities as recognised at the balance sheet dates of the Relevant Periods under review may also be categorised as follows. See notes 3(j) and 3(m) for explanations about how the category of financial instruments affects their subsequent measurement.
As at As at As at 31 December 31 December 31 March 2005 2006 2007 RMB’000 RMB’000 RMB’000
Current assets Loans and receivables – Other receivables – 16,101 1,320 Cash and cash equivalents 10,012 7,756 21,877
10,012 23,857 23,197
Current liabilities Financial liabilities measured at amortised cost – Other payables (34) (20) (78) – Amount due to holding company – – (33) – Loans from holding company – (94,645) (96,624)
(34) (94,665) (96,735)
30. CAPITAL MANAGEMENT
Xin Shougang Group’s objectives when managing capital are:
(a) To safeguard Xin Shougang Group’s ability to continue as a going concern, so that it continues to provide returns and benefits for stakeholders;
(b) To support Xin Shougang Group’s stability and growth; and
(c) To provide capital for the purpose of strengthening Xin Shougang Group’s risk management capability.
Xin Shougang Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns, taking into consideration the future capital requirements of Xin Shougang Group and capital efficiency, prevailing and projected profitability, projected operating cash flows, projected capital expenditures and projected strategic investment opportunities. Xin Shougang Group currently does not adopt any formal dividend policy.
Management regards total equity as capital. The amount of capital as at 31 December 2005, 31 December 2006 and 31 March 2007 amounted to RMB9,974,000, RMB68,898,000 and RMB66,971,000, respectively, which the management considers as optimal having consider the projected capital expenditures and the projected strategic investment opportunities.
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31. SUBSEQUENT EVENTS
Save as disclosed above and elsewhere in this report, no other significant events has taken place subsequent to 31 March 2007.
32. SUBSEQUENT FINANCIAL STATEMENTS
No audited financial statements of Xin Shougang Group, Xin Shougang or YXS Real Estate Development were prepared in respect of any period subsequent to 31 March 2007.
Yours faithfully,
Grant Thornton Certified Public Accountants Hong Kong
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1. SUMMARY OF FINANCIAL INFORMATION ON THE GROUP
Set out below is a summary of the financial information on the Group for the three years ended 31 December 2006 as extracted from the relevant annual reports of the Company. There had been no qualified opinion issued for the three years ended 31 December 2006.
RESULTS
For the year ended 31 December 2006 2005 2004 HK$’000 HK$’000 HK$’000
REVENUE 34,731 24,389 7,038 Other revenue 1,077 27,995 224 Operating expenses (41,383) (28,824) (12,725)
Operating (loss)/profit (5,575) 23,560 (5,463) Finance costs (301) (159) (11)
(Loss)/Profit before income tax (5,876) 23,401 (5,474) Income tax expense (135) (6) (195)
(Loss)/Profit after tax from continuing operations (6,011) 23,395 –
Discontinued operations Profit/(Loss) for the year from discontinued operations 18 (13) –
(Loss)/Profit for the year (5,993) 23,382 (5,669)
Attributable to: Equity holders of the Company (5,938) 23,382 (5,669) Minority interest (55) – –
ASSETS AND LIABILITIES As at 31 December 2006 2005 2004 HK$’000 HK$’000 HK$’000
Total assets 175,662 65,065 8,235
Total liabilities (8,050) (8,733) (4,019)
167,612 56,332 4,216
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2. AUDITED FINANCIAL INFORMATION ON THE GROUP Set out below is a reproduction of the text of the audited financial statements of the Group together with the accompanying notes contained on pages 37 to 95 of the annual report of the Company for the year ended 31 December 2006. CONSOLIDATED INCOME STATEMENT For the year ended 31 December 2006 2006 2005 Notes HK$’000 HK$’000 Continuing operations: Revenue 5 34,731 24,389 Other revenue 7 1,077 27,995 Cost of trading merchandise sold (9,081) (11,733) Raw materials and consumables used (16,979) (11,578) Staff costs, including directors’ remuneration 14 (4,109) (1,884) Depreciation (1,082) (531) Amortisation on land use rights (602) (390) Other operating expenses (9,530) (2,708) Operating (loss)/profit (5,575) 23,560 Finance costs 8 (301) (159) (Loss)/Profit before income tax 9 (5,876) 23,401 Income tax expense 10 (135) (6) (Loss)/Profit after tax from continuing operations (6,011) 23,395 Discontinued operations: Profit/(loss) for the year from discontinued operations 11 18 (13) (Loss)/Profit for the year (5,993) 23,382
Attributable to: Equity holders of the Company 12 (5,938) 23,382 Minority interest (55) – (Loss)/Profit for the year (5,993) 23,382
(Loss)/Earnings per share for (loss)/profit from continuing and discontinued operations attributable to the equity holders of the Company during the year (2005: restated) 13 Basic (HK0.1 cents) HK0.6 cents
Diluted N/A HK0.6 cents
(Loss)/Earnings per share for (loss)/profit from continuing operations attributable to the equity holders of the Company during the year (2005: restated) Basic (HK0.1 cents) HK0.6 cents
Diluted N/A HK0.6 cents
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CONSOLIDATED BALANCE SHEET As at 31 December 2006 2006 2005 Notes HK$’000 HK$’000 ASSETS AND LIABILITIES Non-current assets Property, plant and equipment 16 30,314 26,193 Land use rights 17 29,102 29,133 Deposits 32(a) 18,627 –
78,043 55,326 Current assets Inventories 19 2,539 3,316 Trade receivables 20 1,394 117 Prepayments, deposits and other receivables 5,443 407 Tax refundable 39 9 Cash and cash equivalents 21 88,204 5,890
97,619 9,739
Current liabilities Trade payables 22 (467) (2) Accruals and other payables (2,095) (2,814) Loans from a shareholder 23 – (400)
(2,562) (3,216)
Net current assets 95,057 6,523
Total assets less current liabilities 173,100 61,849
Non-current liabilities Loans from a shareholder 23 – (5,498) Convertible bonds 24 (5,469) – Deferred tax liabilities 25 (19) (19)
(5,488) (5,517)
Net assets 167,612 56,332
EQUITY Equity attributable to equity holders of the Company Share capital 26 8,519 5,914 Reserves 27 154,442 50,418
162,961 56,332 Minority interest 4,651 –
Total equity 167,612 56,332
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BALANCE SHEET As at 31 December 2006
2006 2005 Notes HK$’000 HK$’000
ASSETS AND LIABILITIES Non-current asset Interests in subsidiaries 18 312,390 312,000
Current assets Prepayments, deposits and other receivables 204 – Amounts due from subsidiaries 18 – 30,241 Cash and cash equivalents 21 35,489 1
35,693 30,242
Current liabilities Accruals and other payables (438) (421) Amounts due to subsidiaries 18 (254,140) (313,776) Loans from a shareholder 23 – (400)
(254,578) (314,597)
Net current liabilities (218,885) (284,355)
Total assets less current liabilities 93,505 27,645
Non-current liabilities Loans from a shareholder 23 – (5,498) Convertible bonds 24 (5,469) –
Net assets 88,036 22,147
EQUITY
Share capital 26 8,519 5,914 Reserves 27 79,517 16,233
Total equity 88,036 22,147
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CONSOLIDATED CASH FLOW STATEMENT For the year ended 31 December 2006 2006 2005 Notes HK$’000 HK$’000 Cash flows from operating activities (Loss)/Profit before income tax, including profit/(loss) from discontinued operations (5,858) 23,388 Adjustments for: Depreciation 9 1,987 638 Amortisation on land use rights 9 602 390 Employee share-based compensation 1,531 – Bank interest income 7 (973) (1) Loan interest expenses – 159 Interest on convertible bonds 8 262 – Operating (loss)/profit before working capital changes (2,449) 24,574 Decrease/(Increase) in inventories 777 (3,316) (Increase)/Decrease in trade receivables (1,277) 609 (Increase)/Decrease in prepayments, deposits and other receivables (23,663) 1,072 Increase/(Decrease) in trade payables 465 (395) (Decrease)/Increase in accruals and other payables (719) 2,376 Cash (used in)/generated from operations (26,866) 24,920 Interest received 973 1 Overseas income taxes paid (165) (183) Net cash (used in)/generated from operating activities (26,058) 24,738 Cash flows from investing activities Purchases of property, plant and equipment (5,769) (25,980) Purchases of land use rights – (29,526) Proceeds from disposal of property, plant and equipment 171 – Net cash used in investing activities (5,598) (55,506) Cash flows from financing activities Proceeds from issuance of share capital 100,058 29,568 Proceeds from issuance of share capital – warrants 741 – Shares issue expenses (124) (2,194) Proceeds from issue of warrants 7,785 473 Increase in loans from a shareholder 372 32,468 Repayment of loans from a shareholder – (29,568) Loan interest paid – (159) Capital contributed by minority shareholder of a subsidiary 4,706 – Net cash generated from financing activities 113,538 30,588 Net increase/(decrease) in cash and cash equivalents 81,882 (180) Cash and cash equivalents at beginning of year 5,890 5,179 Effect of foreign exchange rate changes 432 891 Cash and cash equivalents at end of year 21 88,204 5,890
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CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2006
Equity attributable to equity holders of the Company Con- Employee Statutory Share vertible com- Statutory public Accu- Exchange Share premium bonds pensation surplus welfare mulated Warrants translation Minority Total capital account reserve reserve reserve reserve losses reserve reserve interest equity HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Balance at 1 January 2005 2,957 45,080 – – 34 17 (43,873) – – – 4,215 Currency translation (Net income recognised directly in equity) – – – – – – – – 888 – 888 Profit for the year – – – – – – 23,382 – – – 23,382 Transfer to capital reserves – – – – 2,817 1,408 (4,225) – – – – Total recognised income and expense for the year – – – – 2,817 1,408 19,157 – 888 – 24,270 Issuance of rights shares 2,957 26,611 – – – – – – – – 29,568 Rights share issue expenses – (2,194) – – – – – – – – (2,194) Issuance of warrants – – – – – – – 473 – – 473
Balance at 31 December 2005 and 1 January 2006 5,914 69,497 – – 2,851 1,425 (24,716) 473 888 – 56,332 Transfer to statutory surplus reserve – – – – 1,425 (1,425) – – – – – Currency translation (Net income recognised directly in equity) – – – – 481 – – – 1,032 – 1,513 Loss for the year – – – – – – (5,938) – – (55) (5,993) Transfer to capital reserves – – – – 353 – (353) – – – – Total recognised income and expense for the year – – – – 834 – (6,291) – 1,032 (55) (4,480) Capital contributed by minority shareholder of a subsidiary – – – – – – – – – 4,706 4,706 Issuance of new shares 2,602 97,456 – – – – – – – – 100,058 Share issue expenses – (124) – – – – – – – – (124) Issuance of convertible bonds – – 1,063 – – – – – – – 1,063 Employee share-based compensation – – – 1,531 – – – – – – 1,531 Issuance of warrants – – – – – – – 7,785 – – 7,785 Exercise of warrants 3 772 – – – – – (34) – – 741
Balance at 31 December 2006 8,519 167,601 1,063 1,531 5,110 – (31,007) 8,224 1,920 4,651 167,612
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NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006
1. GENERAL INFORMATION
China Primary Resources Holdings Limited (the “Company”) is a limited liability company incorporated in the Cayman Islands, as an exempted company under the Companies Law (2001 Revision) of the Cayman Islands on 5 September 2001. The address of its registered office is Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands and, its principal place of business is in Hong Kong. The Company’s shares are listed on The Growth Enterprise Market (“GEM”) of The Stock Exchange of Hong Kong Limited (the “Stock Exchange”).
Pursuant to a special resolution passed on 29 September 2006, the name of the Company was changed from “China Advance Holdings Limited 中國宏達控股有限公司” to“ China Primary Resources Holdings Limited 中 國基礎資源控股有限公司”.
The principal activity of the Company is investment holding. The activities and other particulars of the principal subsidiaries are set out in note 18 to the financial statements.
The financial statements on pages 37 to 95 have been prepared in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards and Interpretations issued by the Hong Kong Institute of Certified Public Accountants. The financial statements include the applicable disclosure requirements of the Hong Kong Companies Ordinance and the Rules Governing the Listing of Securities on the GEM of the Stock Exchange (“Listing Rules”).
The financial statements for the year ended 31 December 2006 were approved by the board of directors on 23 March 2007.
2. ADOPTION OF NEW OR AMENDED HKFRSs
From 1 January 2006, the Group has adopted all the new and amended HKFRSs which are first effective on 1 January 2006 and relevant to the Group. The adoption of these new and amended HKFRSs did not result in significant changes in both the Group’s and Company’s accounting policies.
2.1 New or amended HKFRSs that have been issued but are not yet effective
The Group has not early adopted the following HKFRSs that have been issued but are not yet effective. The directors of the Company anticipate that the adoption of such HKFRSs will not result in material financial impact on the Group’s financial statements.
Amendment to HKAS 1 “Presentation of Financial Statements” – Capital Disclosures 1 HKFRS 7 “Financial Instruments: Disclosures” 1 HKFRS 8 “Operating Segments” 7 HK(IFRIC) Interpretation 7 “Applying the Restatement Approach under HKAS 29 Financial Reporting in Hyperinflationary Economies” 2 HK(IFRIC) Interpretation 8 “Scope of HKFRS 2” 3 HK(IFRIC) Interpretation 9 “Reassessment of Embedded Derivatives” 4 HK(IFRIC) Interpretation 10 “Interim Financial Reporting and Impairment” 5 HK(IFRIC) Interpretation 11 “Group and Treasury Share Transactions” 6 HK(IFRIC) Interpretation 12 “Service Concession Arrangements” 8
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1 Effective for annual periods beginning on or after 1 January 2007 2 Effective for annual periods beginning on or after 1 March 2006 3 Effective for annual periods beginning on or after 1 May 2006 4 Effective for annual periods beginning on or after 1 June 2006 5 Effective for annual periods beginning on or after 1 November 2006 6 Effective for annual periods beginning on or after 1 March 2007 7 Effective for annual periods beginning on or after 1 January 2009 8 Effective for annual periods beginning on or after 1 January 2008
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
3.1 Basis of preparation
The significant accounting policies that have been used in the preparation of these financial statements are summarised below.
The financial statements have been prepared on the historical cost basis. The measurement bases are fully described in the accounting policies below.
It should be noted that accounting estimates and assumptions are used in preparation of the financial statements. Although these estimates are based on management’s best knowledge and judgement of current events and actions, actual results may ultimately differ from those estimates. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in Note 4.
3.2 Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries (together referred to as the “Group”) made up to 31 December each year.
3.3 Subsidiaries
Subsidiaries are entities (including special purpose entities) over which the Group has the power to control the financial and operating policies so as to obtain benefits from their activities. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are excluded from consolidation from the date that control ceases.
Intra-group transactions, balances and unrealised gains on transactions between group companies are eliminated in preparing the consolidated financial statements. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
In the Company’s balance sheet, subsidiaries are carried at cost less impairment loss. The results of the subsidiaries are accounted for by the Company on the basis of dividends received and receivable at the balance sheet date.
Minority interest represented the portion of the profit or loss and net assets of a subsidiary attributable to equity interests that are not owned by the Group and are not the Group’s financial liabilities.
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Minority interests are presented in the consolidated balance sheet within equity, separately from the equity attributable to the equity holders of the Company. Profit or loss attributable to the minority interests are presented separately in the consolidated income statement as an allocation of the Group’s results. Where losses applicable to the minority exceeds the minority interests in the subsidiary’s equity, the excess and further losses applicable to the minority are allocated against the minority interest to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses. Otherwise, the losses are charged against the Group’s interests. If the subsidiary subsequently reports profits, such profits are allocated to the minority interest only after the minority’s share of losses previously absorbed by the Group has been recovered.
3.4 Foreign currency translation
The consolidated financial statements are presented in Hong Kong Dollars (HK$), which is also the functional currency of the Company.
In the individual financial statements of the consolidated entities, foreign currency transactions are translated into the functional currency of the individual entity using the exchange rates prevailing at the dates of the transactions. At balance sheet date, monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rates ruling at the balance sheet date. Foreign exchange gains and losses resulting from the settlement of such transactions and from the balance sheet date retranslation of monetary assets and liabilities are recognised in the income statement. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.
In the consolidated financial statements, all individual financial statements of foreign operations, originally presented in a currency different from the Group’s presentation currency, have been converted into Hong Kong dollars. Assets and liabilities have been translated into Hong Kong dollars at the closing rates at the balance sheet date. Income and expenses have been converted into the Hong Kong dollars at the exchange rates ruling at the transaction dates, or at the average rates over the reporting period provided that the exchange rates do not fluctuate significantly. Any differences arising from this procedure have been dealt with in the exchange translation reserve in equity.
3.5 Revenue recognition
Revenue comprises the fair value for the sale of goods and rendering of services, net of rebates and discount. Provided it is probable that the economic benefits will flow to the Group and the revenue and costs, if applicable, can be measured reliably, revenue is recognised as follows:
Sale of goods are recognised upon transfer of the significant risks and rewards of ownership to the customer. This is usually taken as the time when the goods are delivered and the customer has accepted the goods.
Revenue from the provision of Game-On-Demand services and Massive Multiplayer Online Game (“MMOG”) services are recognised at the time when the services are provided.
Interest income is recognised on a time-proportion basis using the effective interest method.
3.6 Borrowing costs
All borrowing costs are expensed as incurred.
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3.7 Property, plant and equipment
Buildings held for own use which are situated on leasehold land, where the fair value of the building could be measured separately from the fair value of the leasehold land at the inception of the lease, and other items of plant and equipment are stated at cost less accumulated depreciation and impairment losses.
Depreciation on plant and equipment is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows:
Buildings Over the lease terms Leasehold improvements 4 years or over the lease terms, whichever is shorter Computer equipment 5 years Plant and machinery 10 years Furniture, fixtures and office equipment 5 years Motor vehicles 5 years
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
The gain or loss arising on retirement or disposal is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement.
Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other costs, such as repairs and maintenance are charged to the income statement during the financial period in which they are incurred.
3.8 Impairment of assets
The Group’s property, plant and equipment, land use rights and the Company’s interests in subsidiaries are subject to impairment testing.
All assets are tested for impairment whenever there are indications that the asset’s carrying amount may not be recoverable.
An impairment loss is recognised as an expense immediately for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell, and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of time value of money and the risk specific to the asset.
For the purposes of assessing impairment, where an asset does not generate cash inflows largely independent from those from other assets, the recoverable amount is determined for the smallest group of assets that generate cash inflows independently (i.e. a cash-generating unit). As a result, some assets are tested individually for impairment and some are tested at cash-generating unit level.
Impairment loss is charged pro rata to the assets in the cash generating unit, except that the carrying value of an asset will not be reduced below its individual fair value less cost to sell, or value in use, if determinable.
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An impairment loss is reversed if there has been a favourable change in the estimates used to determine the asset’s recoverable amount and only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.
3.9 Leases
An arrangement, comprising a transaction or a series of transactions, is or contains a lease if the Group determines that the arrangement conveys a right to use a specific asset or assets for an agreed period of time in return for a payment or a series of payments. Such a determination is made based on an evaluation of the substance of the arrangement and is regardless of whether the arrangement takes the legal form of a lease.
(i) Classification of assets leased to the Group
Assets that are held by the Group under leases which do not transfer substantially all the risks and rewards of ownership to the Group are classified as operating leases, with the following exception:
– land held for own use under an operating lease, the fair value of which cannot be measured separately from the fair value of a building situated thereon, at the inception of the lease, is accounted for as being held under a finance lease.
(ii) Operating lease charges as the lessee
Where the Group has the use of assets held under operating leases, payments made under the leases are charged to the income statement on a straight-line basis over the lease terms except where an alternative basis is more representative of the pattern of benefits to be derived from the leased assets.
3.10 Financial assets
The Group’s accounting policies for financial assets other than investments in subsidiaries are set out below.
The Group’s financial assets are classified into loans and receivables.
Management determines the classification of its financial assets at initial recognition depending on the purpose for which the financial assets were acquired and where allowed and appropriate, re-evaluates this designation at every reporting date.
All financial assets are recognised when, and only when, the Group becomes a party to the contractual provisions of the instrument. Regular way purchases of financial assets are recognised on trade date. When financial assets are recognised initially, they are measured at fair value plus directly attributable transaction costs.
Derecognition of financial assets occurs when the rights to receive cash flows from the investments expire or are transferred and substantially all of the risks and rewards of ownership have been transferred. At each balance sheet date, financial assets are reviewed to assess whether there is objective evidence of impairment. If any such evidence exists, impairment loss is determined and recognised based on the classification of the financial asset.
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Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are subsequently measured at amortised cost using the effective interest method, less any impairment losses. Amortised cost is calculated taking into account any discount or premium on acquisition and includes fees that are an integral part of the effective interest rate and transaction cost.
Impairment of financial assets
At each balance sheet date, financial assets are reviewed to determine whether there is any objective evidence of impairment.
If there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition). The amount of the loss is recognised in the income statement of the period in which the impairment occurs.
If, in subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised the previously recognised impairment loss is reversed to the extent that it does not result in a carrying amount of the financial asset exceeding what the amortised cost would have been had the impairment not been recognised at the date the impairment is reversed. The amount of the reversal recognised in the income statement of the period in which the reversal occurs.
3.11 Inventories
Inventories, comprising raw materials, supplies and purchased goods, are carried at the lower of cost and net realisable value. Cost is determined using the first-in, first-out method, and in case of finished goods, comprise direct materials, direct labour and an appropriate proportion of overheads. Net realisable value is the estimated selling price in the ordinary course of business less any applicable selling expenses.
3.12 Accounting for income taxes
Current income tax assets and/or liabilities comprise those obligations to, or claims from, tax authorities relating to the current or prior reporting period, that are unpaid at the balance sheet date. They are calculated according to the tax rates and tax laws applicable to the tax periods to which they relate, based on the taxable profit for the year. All changes to current tax assets or liabilities are recognised as a component of tax expense in the income statement.
Deferred tax is calculated using the liability method on temporary differences at the balance sheet date between the carrying amounts of assets and liabilities in the financial statements and their respective tax bases. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are recognised for all deductible temporary differences, tax losses available to be carried forward as well as other unused tax credits, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, unused tax losses and unused tax credits can be utilised.
Deferred tax assets and liabilities are not recognised if the temporary difference arises from initial recognition of assets and liabilities in a transaction that affects neither taxable nor accounting profit or loss.
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Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, except where the Group is able to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred tax is calculated, without discounting, at tax rates that are expected to apply in the period the liability is settled or the asset realised, provided they are enacted or substantively enacted at the balance sheet date.
Changes in deferred tax assets or liabilities are recognised in the income statement, or in equity if they relate to items that are charged or credited directly to equity.
3.13 Cash and cash equivalents
Cash and cash equivalents include cash at bank and in hand and demand deposits with banks.
3.14 Share capital
Ordinary shares are classified as equity. Share capital is determined using the nominal value of shares that have been issued.
Any transaction cost associated with the issuing of shares are deducted from share premium (net of related income tax benefit) to the extent they are incremental costs directly attributable to the equity transaction.
3.15 Retirement benefit costs and short term employee benefits
Defined contribution plan
The Group operates a defined contribution Mandatory Provident Fund retirement benefits scheme (the “MPF Scheme”) under the Mandatory Provident Fund Schemes Ordinance, for all of its employees in Hong Kong who are eligible to participate in the MPF Scheme. Contributions are made based on a percentage of the employees’ basic salaries and are charged to the income statement as they become payable in accordance with the rules of the MPF Scheme. The assets of the MPF Scheme are held separately from those of the Group in an independent administered fund. The Group’s employer contributions vest fully with the employees when contributed into the MPF Scheme.
The employees of the subsidiaries in the Peoples’ Republic of China, except Hong Kong (the “PRC”) are required to participate in a central pension scheme operated by the local municipal government. Those subsidiaries are required to contribute a certain percentage of their payroll costs to the central pension scheme. The contributions are charged to the income statement as they become payable in accordance with the rules of the central pension scheme.
Short term employee benefits
Employee entitlements to annual leave are recognised when they accrue to employees. Non- accumulating compensated absences are not recognised until the time of leave.
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3.16 Share-based employee compensation
All share-based payment arrangements granted after 7 November 2002 and had not vested on 1 January 2005 are recognised in the consolidated financial statements. The Group operates equity-settled share-based compensation plans for remuneration of its employees.
All employee services received in exchange for the grant of any share-based compensation are measured at their fair values. These are indirectly determined by reference to the share options awarded. Their value is appraised at the grant date and excludes the impact of any non-market vesting conditions.
All share-based compensation is ultimately recognised as an expense in full at the grant date when the share options granted vest immediately, with a corresponding increase in share option reserve. If vesting periods or other vesting conditions apply, the expense is recognised over the vesting period, based on the best available estimate of the number of share options expected to vest. Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. Estimates are subsequently revised, if there is any indication that the number of share options expected to vest differs from previous estimates. No adjustment to expense recognised in prior periods is made if fewer share options ultimately are exercised than originally vested.
3.17 Financial liabilities
The Group’s financial liabilities include trade and other payables, loans from a shareholder and convertible bonds. They are included in balance sheet line items as trade payables, accruals and other payables, loans from a shareholder and convertible bonds, under current or non-current liabilities.
Financial liabilities are recognised when the Group becomes a party to the contractual provisions of the instrument. All interest related charges are recognised as an expense in finance costs in the income statement.
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.
Loans from a shareholder
Loans from a shareholder are recognised initially at fair value, net of transaction costs incurred. Loans from a shareholder are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.
Loans from a shareholder are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.
Convertible bonds
Convertible bonds that can be converted to equity share capital at the option of the holder, where the number of shares that would be issued on conversion and the value of the consideration that would be received at that time do not vary, are accounted for as compound financial instruments which contain both a liability component and an equity component.
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Convertible bonds issued by the Company that contain both financial liability and equity components are classified separately into respective liability and equity components on initial recognition. On initial recognition, the fair value of the liability component is determined using the prevailing market interest rate for similar non-convertible debts. The difference between the proceeds of the issue of the convertible bonds and the fair value assigned to the liability component, representing the call option for conversion of the bond into equity, is included in equity as convertible bonds reserve.
The liability component is subsequently carried at amortised cost using the effective interest method. The equity component will remain in equity until conversion or redemption of the bond.
When the bond is converted, the convertible bonds reserve and the carrying value of the liability component at the time of conversion, is transferred to share capital and share premium as consideration for the shares issued. If the bond is redeemed, the convertible bonds reserve is released directly to retained profits.
Trade and other payables
Trade and other payables are recognised initially at their fair value and subsequently measured at amortised cost, using the effective interest method.
3.18 Government grants
Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants awarded for the purpose of giving immediate financial support to the Group rather than as an incentive to undertake specific expenditure is recognised as income in the period in which the Group qualifies to receive it.
3.19 Segment reporting
In accordance with the Group’s internal financial reporting, the Group has determined that business segments be presented as the primary reporting format and geographical segment as the secondary reporting format.
In respect of business segment reporting, unallocated costs represent corporate expenses. Segment assets consist primarily of property, plant and equipment, inventories, receivables and operating cash. Segment liabilities comprise operating liabilities and exclude items as provision for tax and certain corporate borrowings.
Capital expenditure comprises additions to property, plant and equipment.
In respect of geographical segment reporting, revenue are based on the country in which the customer is located and total assets and capital expenditure are where the assets are located.
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3.20 Related parties
A party is considered to be related to the Group if:
(i) directly, or indirectly through one or more intermediaries, the party:
– controls, is controlled by, or is under common control with, the Company or Group;
– has an interest in the Company that gives it significant influence over the Company or Group; or
– has joint control over the Company or Group;
(ii) the party is an associate;
(iii) the party is a jointly-controlled entity;
(iv) the party is a member of the key management personnel of the Company or its parent;
(v) the party is a close member of the family of any individual referred to in (i) or (iv);
(vi) the party is an entity that is controlled, jointly controlled or significantly influenced by or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (iv) or (v); or
(vii) the party is a post-employment benefit plan for the benefit of employees of the Company or Group, or of any entity that is a related party of the Company or Group.
3.21 Discontinued operations
A discontinued operation is a component of an entity that either has been disposed of, or that is classified as held for sale, and: (a) represents a separate major line of business or geographical area of operations; (b) is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or (c) is a subsidiary acquired exclusively with a view to resale.
4. Critical accounting estimates and judgements
Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:
4.1 Depreciation
The Group depreciated the property, plant and equipment on a straight-line basis over the estimated useful lives of 4 to 50 years, starting from the date on which the assets are placed into productive use. The estimated useful lives reflect the directors’ estimate of the periods that the Group intends to derive future economic benefits from the use of the Group’s property, plant and equipment.
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4.2 Impairment of receivables
The Group’s management determines impairment of receivables on a regular basis. This estimate is based on the credit history of its customers and current market conditions. Management reassesses the impairment of receivables at the balance sheet date.
4.3 Net realisable value of inventories
Net realisable value of inventories is the estimated selling price in the ordinary course of business, less estimated costs of completion and selling expenses. These estimates are based on the current market conditions and the historical experience of selling products of a similar nature. It could change significantly as a result of competitor actions in response to severe industry cycles. Management reassesses these estimations at the balance sheet date to ensure inventory is shown at the lower of cost and net realisable value.
5. REVENUE
Revenue, which is also the Group’s turnover, represents the total invoiced value of goods supplied and income from provision of services. Revenue recognised during the year is as follows:
2006 2005 HK$’000 HK$’000
Continuing operations: Sales of composite materials 14,920 11,854 Manufacturing and sales of PE/FRP pipes 19,811 12,535
Sales of goods 34,731 24,389
Discontinued operations: Game-On-Demand service income – 1 MMOG service income 75 224
Provision of services 75 225
Total Revenue 34,806 24,614
6. SEGMENT INFORMATION
Segment information is presented by way of two segment formats: (i) on a primary segment reporting basis, by business segment; and (ii) on a secondary segment reporting basis, by geographical segment.
The Group’s operating businesses are structured and managed separately, according to the nature of their operations and the products and services they provide. Each of the Group’s business segments represents a strategic business unit that offers products and services which are subject to risks and returns that are different from those of the other business segments. Summary details of the business segments are as follows:
– Manufacturing and sales of Polyethylene (“PE”)/Fibre Glass Reinforced Plastic (“FRP”) pipes
– Sales of raw materials and composite materials (collectively as the “Composite Materials”)
– Game-On-Demand services
– MMOG services
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In determining the Group’s geographical segments, revenues are attributed to the segments based on the location of the customers, and assets are attributed to the segments based on the location of the assets.
There was no intersegment sale and transfer during the year (2005: Nil).
(a) Primary reporting format – Business segments
Continuing operations Discontinued operations Sales of Manufacturing of Total continuing Game-On-Demand Total discontinued Composite Materials PE/FRP pipes operations services MMOG services operations Consolidated 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Revenue from external customers 14,920 11,854 19,811 12,535 34,731 24,389 – 1 75 224 75 225 34,806 24,614 Cost of services provided –––––––(22)(57)(164) (57) (186) (57) (186) Cost of goods sold (9,081) (11,733) (16,979) (11,578) (26,060) (23,311) ––––––(26,060) (23,311) Other operating expenses (2,838) (519) (3,769) (549) (6,607) (1,068) – (28) – (24) – (52) (6,607) (1,120)
Segment results 3,001 (398) (937) 408 2,064 10 – (49) 18 36 18 (13) 2,082 (3) Other operating income 1,077 27,995 Finance costs (301) (159) Unallocated expenses (8,716) (4,445)
(Loss)/Profit before income tax (5,858) 23,388 Income tax expense (135) (6)
(Loss)/Profit for the year (5,993) 23,382
Assets Segment assets – – 66,952 57,511 66,952 57,511 ––––––66,952 57,511 Unallocated assets 108,710 7,554
Total assets 175,662 65,065
Liabilities Segment liabilities – – (467) (2) (467) (2) ––––––(467) (2) Unallocated liabilities (7,583) (8,731)
Total liabilities (8,050) (8,733)
Other information Capital expenditure – – 3,626 54,713 3,626 54,713 ––––––3,626 54,713 Unallocated capital expenditures 2,143 793
Total capital expenditures 5,769 55,506
Depreciation for the year – – 1,506 449 1,506 449 ––––––1,506 449 Unallocated depreciation 481 189
Total depreciation 1,987 638
Amortisation on land use rights – – 602 390 602 390 ––––––602390
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(b) Secondary reporting format – Geographical segments
The Group’s operations are located in two main geographical areas. The following table provides an analysis of the Group’s sales by geographical market, irrespective of the origin of the goods and services.
Continuing Discontinued operations operations Total continuing Hong Kong The PRC operations Hong Kong Consolidated 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Segment revenue: Revenue from external customers – – 34,731 24,389 34,731 24,389 75 225 34,806 24,614
Other segment information: Segment assets – 838 175,662 64,227 175,662 65,065 – – 175,662 65,065 Capital expenditure – 1 5,769 55,505 5,769 55,506 – – 5,769 55,506
7. OTHER REVENUE – continuing operations
2006 2005 HK$’000 HK$’000
Government grants – 27,991 Bank interest income 973 1 Sundry income 104 3
1,077 27,995
8. FINANCE COSTS – continuing operations
2006 2005 HK$’000 HK$’000
Interest charges on – loans from a shareholder 39 159 – convertible bonds (Note 24) 262 –
301 159
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9. (LOSS)/PROFIT BEFORE INCOME TAX – continuing operations
2006 2005 HK$’000 HK$’000
(Loss)/Profit before income tax is arrived at after charging/(crediting): Operating lease charges: – Land and building 554 547 Amortisation of land use rights 602 390 Cost of inventories recognised as expenses 26,060 23,311 Depreciation (Note) 1,987 638 Auditors’ remuneration 443 313 Net exchange (gain)/loss – (5)
Note: Depreciation expense of approximately HK$905,000 (2005: HK$107,000) has been expensed in cost of goods sold.
10. INCOME TAX EXPENSE – continuing operations
Hong Kong profits tax has not been provided as the Group did not generate any assessable profits arising in Hong Kong during the year (2005: Nil).
During the year, taxation on overseas profits has been calculated on the estimated assessable profit for the year at the rates of taxation prevailing in the jurisdiction in which the Group operates.
In accordance with various approval documents issued by the State Tax Bureau and the Local Tax Bureau of the PRC, 宜昌富連江複合材料有限公司, a wholly-owned subsidiary of the Company, established as a wholly foreign-owned enterprise in the PRC, is entitled to an exemption from the PRC state and local corporate income tax for the first two profitable financial years of its operation and thereafter a 50% relief from the state corporate income tax of the PRC for the following three financial years (the “Tax Holiday”). Upon expiry of the Tax Holiday, the usual PRC corporate income tax rate is 33%, comprising a state corporate income tax rate of 30% and a local corporate income tax rate of 3%. No provision for PRC income tax has been made as the subsidiary was exempted from PRC income tax during the year.
2006 2005 HK$’000 HK$’000
Overseas taxation – under provision in prior year 135 6
The Group has tax losses arising in Hong Kong of approximately HK$40,064,000 (2005: HK$35,856,000) and overseas of approximately HK$1,829,000 (2005: HK$1,035,000) that are available for offsetting against future taxable profits of the companies in which the losses arose indefinitely and for 5 years, respectively. Deferred tax assets have not been recognised in respect of these losses as they have arisen in group companies that have been loss-making for some time.
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Reconciliation between tax expense and accounting (loss)/profit, including profit/(loss) from discontinued operations before income tax, at applicable tax rates:
2006 2005 HK$’000 HK$’000
(Loss)/Profit before income tax, including profit/(loss) from discontinued operations before income tax (5,858) 23,388
Tax on (loss)/profit before income tax, calculated at the rates applicable to profits in the tax jurisdiction concerned (782) 3,325 Tax effect of non-deductible expenses 1,135 13,503 Tax effect of non-taxable revenue (876) (17,286) Tax effect of tax losses not recognised 523 458 Under provision in prior year 135 6
Income tax expense 135 6
11. DISCONTINUED OPERATIONS
The Group had agreed to abandon and discontinue the business line of Game-On-Demand services and MMOG services during the year.
An analysis of the result of discontinued operations is as follows:
2006 2005 HK$’000 HK$’000
Revenue 75 225 Expenses (57) (238)
Profit/(Loss) before income tax of discontinued operations 18 (13) Income tax expense – –
Profit/(Loss) for the year from discontinued operations 18 (13)
Operating cash flows 18 (13) Investing cash flows – – Financing cash flows – –
Total cash flows 18 (13)
12. (LOSS)/PROFIT ATTRIBUTABLE TO THE EQUITY HOLDERS OF THE COMPANY
Of the consolidated loss attributable to equity holders of the Company of approximately HK$5,938,000 (2005: profit of approximately HK$23,382,000), a loss of approximately HK$45,165,000 (2005: loss of approximately HK$1,821,000) has been dealt with in the financial statements of the Company.
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13. (LOSS)/EARNINGS PER SHARE
The calculations of the basic and diluted (loss)/earnings per share is based on the following data:
2006 2005 HK$’000 HK$’000
Earnings For continuing and discontinued operations based on the (loss)/profit for the year attributable to the equity holders of the Company (5,938) 23,382
For continuing operations based on the (loss)/profit for the year from continuing operations less results attributable to minority interests (5,956) 23,395
2006 2005 ’000 ’000 (as adjusted)
Number of shares Weighted average number of ordinary shares for the purposes of calculating basic (loss)/earnings per share 6,231,001 3,864,773
Effect of dilutive potential ordinary shares: Warrants 44,411
Weighted average number of ordinary shares for the purposes of calculating diluted earnings per share 3,909,184
Diluted loss per share for the year ended 31 December 2006 has not been disclosed as the warrants, share options and convertible bonds outstanding during the year had an anti-dilutive effect on the basic loss per share for the year.
The weighted average number of shares for the purposes of calculating basic and diluted earnings per share for the year 2005 has been adjusted to reflect the share subdivision in 2006 as detailed in note 26(e) to the financial statements.
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14. EMPLOYEE BENEFIT EXPENSE – continuing operations (including directors’ remuneration)
2006 2005 HK$’000 HK$’000
Wages and salaries 2,529 1,840 Share options granted to directors and employees 1,531 – Pension costs – defined contribution plans 49 44
4,109 1,884
15. DIRECTORS’ REMUNERATION AND SENIOR MANAGEMENT’S EMOLUMENTS – continuing operations
15.1 Executive directors and non-executive directors
Retirement benefit Salaries and scheme Fees allowances contribution Total HK$’000 HK$’000 HK$’000 HK$’000
2006 Executive directors Mr. Chiu Winerthan – 598(a) 12 610 Ms. Ma Zheng – 481(b) – 481 Mr. Yu Hongzhi – 678(b) – 678 Mr. Lang Fulai3 ––––
– 1,757 12 1,769
Independent non-executive directors Mr. Wan Tze Fan Terence 120 – – 120 Mr. Liu Weichang2 –––– Mr. Gao Sheng Yu1 ––––
120 – – 120
Total 120 1,757 12 1,889
Notes:
(a) The amount includes the share option cost of approximately HK$178,000.
(b) The amount represents the share option cost only.
(c) There was no arrangement under which a director waived or agreed to waive any remuneration during the year.
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Retirement benefit Salaries and scheme Fees allowances contribution Total HK$’000 HK$’000 HK$’000 HK$’000
2005 Executive directors Mr. Chiu Winerthan – 360 8 368 Ms. Ma Zheng – – – – Mr. Yu Hongzhi – – – – Mr. Lang Fulai3 ––––
– 360 8 368
Independent non-executive directors Mr. Wan Tze Fan Terence 120 – – 120 Mr. Liu Weichang2 –––– Mr. Zhang Hongru4 106 – – 106 Mr. Zhou Guang Qi4 ––––
226 – – 226
Total 226 360 8 594
Notes:
1 newly appointed during the year ended 31 December 2006
2 newly appointed during the year ended 31 December 2005
3 resigned during the year ended 31 December 2006
4 resigned during the year ended 31 December 2005
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15.2 Five highest paid individuals
The five individuals whose emoluments were the highest in the Group for the year included three (2005: two) directors whose emoluments are reflected in the analysis presented above. The emoluments payable to the remaining two (2005: three) individuals during the year are as follows:
2006 2005 HK$’000 HK$’000
Basic salaries, share options and other benefits 673 1,311 Discretionary bonuses 342 94 Retirement benefit scheme contributions 21 37
1,036 1,442
The emoluments fell within the following bands:
Number of individuals 2006 2005
Emolument bands Nil – HK$1,000,000 2 3
During the year, no emoluments were paid by the Group to the director or any of the five highest paid individuals as an inducement to join or upon joining the Group, or as compensation for loss of office (2005: Nil).
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16. PROPERTY, PLANT AND EQUIPMENT – Group
Furniture, fixtures Leasehold Computer Plant and and office Motor Buildings improvements equipment machinery equipment vehicles Total HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
At 1 January 2005 Cost – 635 739 – 110 – 1,484 Accumulated depreciation – (242 ) (355) – (35 ) – (632 )
Net book amount – 393 384 – 75 – 852
Year ended 31 December 2005 Opening net book amount – 393 384 – 75 – 852 Additions 20,354 – 113 4,833 – 680 25,980 Depreciation (134 ) (211 ) (141) (104 ) (22) (26) (638 ) Exchange difference (1 ) – 2 (1 ) – (1 ) (1 )
Closing net book amount 20,219 182 358 4,728 53 653 26,193
At 31 December 2005 Cost 20,354 635 852 4,833 110 680 27,464 Accumulated depreciation (134 ) (453 ) (496) (104 ) (57 ) (26 ) (1,270 ) Exchange difference (1 ) – 2 (1 ) – (1 ) (1 )
Net book amount 20,219 182 358 4,728 53 653 26,193
Year ended 31 December 2006 Opening net book amount 20,219 182 358 4,728 53 653 26,193 Additions 1,400 – 1,590 2,226 103 450 5,769 Disposals, net – – (24 ) (147 ) – – (171 ) Depreciation (953 ) (124 ) (178) (553 ) (40) (139) (1,987 ) Exchange difference 396 – 9 92 – 13 510
Closing net book amount 21,062 58 1,755 6,346 116 977 30,314
At 31 December 2006 Cost 21,754 635 2,413 6,897 213 1,130 33,042 Accumulated depreciation (1,087 ) (577 ) (669) (642 ) (97 ) (165) (3,237 ) Exchange difference 395 – 11 91 – 12 509
Net book amount 21,062 58 1,755 6,346 116 977 30,314
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17. LAND USE RIGHTS – Group
The Group’s interest in land use rights represent prepaid operating lease payments and their net book value is analysed as follow:
2006 2005 HK$’000 HK$’000
Outside Hong Kong, held on: Leases of between 10 to 50 years 29,102 29,133
Opening net carrying amount 29,133 – Additions – 29,526 Amortisation on land use rights (602) (390) Exchange difference 571 (3)
Closing net carrying amount 29,102 29,133
18. INTERESTS IN SUBSIDIARIES – COMPANY
2006 2005 HK$’000 HK$’000
Unlisted investments, at cost 319,181 318,791 Less: Impairment loss (6,791) (6,791)
312,390 312,000
Amounts due from subsidiaries 71,509 60,466 Less: Provision for impairment (71,509) (30,225)
– 30,241
Amounts due to subsidiaries (254,140) (313,776)
The balances with subsidiaries are unsecured, interest-free and repayable on demand.
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Particulars of the principal subsidiaries as at 31 December 2006 are as follows:
Place of Particulars Percentage of incorporation of issued/ equity attributable Principal Name and operation registered capital to the Company activities Directly Indirectly
e-gameasia.com Limited British Virgin Islands 10,279,450 ordinary shares 100% – Investment holding (“BVI”) of HK$1 each
Billybala Software BVI 1 ordinary share of 100% – Investment holding (BVI) Limited US$0.01 each
宜昌富連江複合材料 The PRC HK$32,380,000 – 100% Trading of merchandise 有限公司 (Note) and manufacturing of PE/FRP pipes
Shoukong Group Limited BVI 20,000,000 ordinary shares 100% – Inactive of US$1 each
Sure Whole Investments BVI 20,000,000 ordinary shares 100% – Inactive Limited of US$1 each
宜昌首控實業有限公司 The PRC HK$60,000,000 – 100% Inactive (Note)
宜昌新首鋼貴金屬礦業 The PRC RMB30,000,000 – 52% Inactive 有限公司 (Note)
Note:
宜昌富連江複合材料有限公司 is a wholly foreign-owned enterprise established in the PRC to be operated for 10 years up to June 2014.
宜昌首控實業有限公司 is a wholly foreign-owned enterprise established in the PRC to be operated for 15 years up to November 2020.
宜昌新首鋼貴金屬礦業有限公司 is a limited liability company established in the PRC to be operated for 15 years up to August 2021.
The above table lists the subsidiaries of the Company which, in the opinion of the directors, principally affected the results for the year or formed a substantial portion of the net assets of the Group. To give details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length.
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19. INVENTORIES – Group
2006 2005 HK$’000 HK$’000
Raw materials 2,337 3,316 Finished goods 202 –
2,539 3,316
20. TRADE RECEIVABLES – Group
The Group’s trading terms with its customers are mainly on credit, except for new customers, where payment in advance is normally required. The credit period is generally for a period of one month, extending up to three months for major customers. Each customer has a maximum credit limit. The Group seeks to maintain strict control over its outstanding receivables and has a credit control department to minimise credit risk. Overdue balances are reviewed regularly by senior management.
The aging analysis of the trade receivables is as follows:
2006 2005 HK$’000 HK$’000
Within 30 days 639 8 31 – 60 days 755 2 61 – 90 days – – Over 90 days – 107
1,394 117
21. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include the following components:
Group Company 2006 2005 2006 2005 HK$’000 HK$’000 HK$’000 HK$’000
Cash at banks and in hand 88,204 5,890 35,489 1
Included in bank and cash balances of the Group is approximately HK$51,016,000 (2005: approximately HK$5,506,000) of bank balances denominated in Renminbi (“RMB”) placed with banks in the PRC. RMB is not a freely convertible currency.
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22. TRADE PAYABLES – Group
The aging analysis of the trade payables is as follows:
2006 2005 HK$’000 HK$’000
31-60 days 453 2 61-90 days 14 –
467 2
23. LOANS FROM A SHAREHOLDER – Group and Company
On 19 January 2004, Future Advance Holdings Limited (“Future Advance”) entered into a share and shareholders’ loan sale agreement (the “Agreement”) with Romson Limited (“Romson”), the immediate holding company of the Company as at 31 December 2003, as detailed in the Company’s announcement dated 30 January 2004 (the “Announcement”).
Pursuant to the Agreement, Future Advance agreed to purchase an aggregate of 313,597,030 ordinary shares of the Company from the Vendors (as defined in the Announcement). Upon the completion of the Agreement, Future Advance became the ultimate holding company of the Company. In addition, Future Advance also agreed to acquire from Romson the shareholders’ loan at a consideration equivalent to the face value of the shareholders’ loan as at the date of completion of the Agreement.
As at 31 December 2005, the loans from Future Advance amounted to HK$5,898,000, out of which HK$2,998,000 was unsecured, interest-free and not repayable within one year from the balance sheet date. HK$2,500,000 of total amount was unsecured, interest bearing at prime rate plus 1% per annum and not repayable within one year from the balance sheet date. The remaining HK$400,000 was unsecured, interest bearing at prime rate plus 1% per annum and repayable within one year from the balance sheet date of 31 December 2005.
During the year, the Company entered into an agreement with Future Advance which agreed to subscribe for convertible bonds of the Company. The entire amount of the loans from a shareholder was applied to set off against the total subscription price of the convertible bonds.
24. CONVERTIBLE BONDS – Group and Company
The convertible bonds were issued to Future Advance on 27 April 2006 with maturity date on 26 April 2009. The bonds are convertible into ordinary shares of the Company at an initial conversion price of HK$0.4 per conversion share (subject to adjustments in accordance with the terms of the convertible bonds) at any time during the period commencing from six months on date following the date of issue of convertible bonds up to maturity date. After the share subdivision effective on 1 August 2006, the conversion price was adjusted to HK$0.02 per conversion share. The convertible bonds can be converted into 313,503,280 shares at a conversion price of HK$0.02.
The Company may at any time before the maturity date redeem the convertible bonds at par. Interest of 1 per cent will be paid annually until the settlement date.
The fair value of the liability component, included in the convertible bonds, was calculated using a market interest rate for an equivalent non-convertible bond. The residual amount, representing the value of the equity conversion component, is included in shareholders’ equity in other reserves, net of deferred taxes.
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The convertible bonds recognised in the balance sheet are calculated as follows:
2006 2005 HK$’000 HK$’000
Nominal value of convertible bond 6,270 – Equity component (1,063) –
Liability component on initial recognition 5,207 – Interest expense (Note 8) 262 –
Liability component at 31 December 5,469 –
The fair value of the liability component of the convertible bonds at 31 December 2006 amounted to approximately HK$5,358,000 (2005: Nil). The fair value was calculated using future cash flows discounted at a rate of 7.426%.
Interest expense on the bonds is calculated using the effective interest method by applying the effective interest rate of 7.474% to the liability component.
25. DEFERRED TAX LIABILITIES
Deferred tax is calculated in full on temporary differences under the liability method using a principal tax rate of 17.5% (2005: 17.5%). There was no movement in the deferred tax liabilities balances during 2006 and 2005, which represent accelerated tax depreciation. No deferred tax asset has been provided in the financial statements of both the Group and the Company as it is not probable that future taxable profit will be available against which these deductible temporary differences can be utilised.
At the balance sheet date, the major components of unrecognised deductible temporary differences are as follows:
Group Company 2006 2005 2006 2005 HK$’000 HK$’000 HK$’000 HK$’000
Difference between depreciation and depreciation allowance 172 161 – – Unutilised tax losses 7,286 6,438 608 303 Convertible bonds (140) – (140) –
7,318 6,599 468 303
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26. SHARE CAPITAL
Number of shares of Number of shares of Number of shares of HK$0.005 each HK$0.025 each HK$0.00125 each Share capital 2006 2005 2006 2005 2006 2005 2006 2005 Notes ’000 ’000 ’000 ’000 ’000 ’000 HK$’000 HK$’000
Authorised: Ordinary shares at beginning of year – 1,000,000 5,000,000 – – – 125,000 5,000 Share consolidation (a) – (1,000,000) – 200,000 – – – – Increase in authorised ordinary shares (b) – – – 4,800,000 – – – 120,000 Share subdivision (e) – – (5,000,000) – 100,000,000 – – –
Ordinary shares at end of year – – – 5,000,000 100,000,000 – 125,000 125,000
Number of shares of Number of shares of Number of shares of HK$0.005 each HK$0.025 each HK$0.00125 each Share capital 2006 2005 2006 2005 2006 2005 2006 2005 Notes ’000 ’000 ’000 ’000 ’000 ’000 HK$’000 HK$’000
Issued and fully paid: Ordinary shares at beginning of year – 591,360 236,544 – – – 5,914 2,957 Share consolidation (a) – (591,360) – 118,272 – – – – Issuance of rights shares (c) – – – 118,272 – – – 2,957 Issuance of new shares (d) – – 104,079 – – – 2,602 – Share subdivision (e) – – (340,623) – 6,812,460 – – – Warrants – proceeds from shares issued (f) – – – – 2,800 – 3 –
Ordinary shares at end of year – – – 236,544 6,815,260 – 8,519 5,914
Notes:
(a) Share consolidation
Pursuant to a special resolution passed on 3 May 2005, five shares of HK$0.005 each in the issued and unissued share capital of the Company were consolidated into one consolidated share of HK$0.025 each. The authorised share capital of the Company remained at HK$5,000,000 but was divided into 200,000,000 shares of HK$0.025 each.
(b) Increase of authorised ordinary shares
Pursuant to a special resolution passed on 3 May 2005, the authorised share capital of the Company was increased from HK$5,000,000 dividend into 200,000,000 ordinary shares of HK$0.025 each to HK$125,000,000 by the creation of a further 4,800,000,000 shares of HK$0.025 each ranking pari passu in all respects with the consolidated shares of HK$0.025 each.
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(c) Issuance of rights shares
A special resolution was passed on 3 May 2005 to approve a rights issue on the basis of one rights share for every one consolidated share of HK$0.025 each held by shareholders on the register of members on 3 May 2005 at an issue price of HK$0.25 per rights share, for the purposes of acquisition of industrial land in Yichang, the PRC. The rights issue resulted in the issue of 118,272,000 shares of HK$0.25 each for a total cash consideration, before share issue expenses, of approximately HK$30 million.
(d) Issuance of new shares
On 16 February 2006, 47,308,800 ordinary shares of HK$0.025 each in the share capital of the Company were issued to six independent third parties, who are independent of each other and are not connected persons of the Company, for cash at a premium of HK$0.29 per share. The issued share capital was then increased from approximately HK$5,914,000 to HK$7,096,000. The reason for this issue was to raise additional funds for the Group’s general working capital and strengthening the financial position of the Company.
On 26 May 2006, the issued share capital of the Company was increased from approximately HK$7,096,000 to HK$8,175,000 by the issue of 43,145,626 ordinary shares of HK$0.025 each for cash at a premium of HK$1.475 per share to three independent third parties (namely Asia Bright International Limited, First South International Limited and Siberian Worldwide Limited), who are independent of each other and are not connected persons of the Company.
On 10 June 2006, the issued share capital of the Company was increased from approximately HK$8,175,000 to HK$8,516,000 by the issue of 13,624,934 ordinary shares of HK$0.025 each for cash at a premium of HK$1.475 per share to Main Concord Development Limited, an independent third party, who is not connected person of the Company. The main reason for issuance of these shares was intended to apply for investment in mining related business projects.
(e) Share subdivision
Pursuant to an ordinary resolution passed on 31 July 2006, one share of HK$0.025 each in the issued and unissued share capital of the Company were subdivided into twenty shares of HK$0.00125 each. The authorised share capital of the Company remained at HK$125,000,000 but was divided into 100,000,000,000 shares of HK$0.00125 each.
(f) Warrants – proceeds from shares issued
On 21 December 2006, part of the warrants issued were exercised for 2,800,000 shares of HK$0.00125 each with an exercise price of HK$0.265 per warrant.
(g) Share options
As at 31 December 2006, the Group maintains share options scheme for employee compensation. All share-based employee compensation will be settled in equity. The Group has no legal or constructive obligation to repurchase or settle the options.
(i) On 28 November 2001, a share option scheme (the “Pre-Scheme”) was approved pursuant to written resolutions of the Company. The purpose of the Pre-Scheme was to recognise the contribution of certain directors and employees of the Group to its growth.
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Any share options granted to a substantial shareholder or an independent non-executive director of the Company, or any of their associates, in excess of 0.1% of the shares of the Company in issue at any time or with an aggregate value in excess of HK$5,000,000, within any 12-month period, are subject to shareholders’ approval in advance in a general meeting.
In addition, any share options granted to any one person in excess of 1% of the shares of the Company in issue at any time within any 12-month period, are subject to shareholders’ approval in advance in a general meeting.
On 28 November 2001, the Company granted pre-IPO share options under the Pre-Scheme to 5 former executive directors and 2 former non-executive directors to subscribe for a total of 33,440,000 shares, representing in aggregate approximately 5.7% of the issued share capital of the Company. No further options will be granted under the Pre-Scheme after the listing of the Company’s shares on the GEM. 50% of the options granted may be exercised after the expiry of 12 months from 13 December 2001, and the remaining 50% of the options granted may be exercised after the expiry of 24 months from 13 December 2001, and in each case, not later than 10 years from the date of the grant of the options. Each grantee has paid HK$1 to the Company as consideration for such grant.
During the year ended 31 December 2004, Future Advance made an offer for all outstanding share options under Rule 13 of the Hong Kong Code on Takeovers and Mergers as Future Advance was interested in approximately 71.27% of the then issued share capital of the Company immediately following the completion of the agreement.
Valid acceptances in respect of 33,440,000 options, which represented all the outstanding options of the Company, under the option offer were received at the close of the offer period on 17 March 2004. All the options tendered were then cancelled and extinguished. Accordingly, no share options were outstanding under the Pre-Scheme as at 31 December 2004.
(ii) On 28 November 2001, a further share option scheme (the “Post-Scheme”) was approved pursuant to a written resolution of the Company. The purpose of the Post-Scheme is to enable the Group to grant options to selected persons as incentives or rewards for their contribution to the Group. The board of directors may, at their discretion, grant options to any full-time employee and any director of the Company or its subsidiaries, including executive, non-executive and independent non-executive directors, to subscribe for shares of the Company. The total number of shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under the Post-Scheme and other schemes by the Company must not exceed 30% of the shares in issue from time to time. A non- refundable nominal consideration of HK$1 is payable by the grantee upon acceptance of an option. The subscription price for shares under the Post-Scheme may be determined by the board of directors at its absolute discretion but in any event will not be less than the higher of: (i) the closing price of the shares as stated in the Stock Exchange’s daily quotation sheets on the date of grant, which must be a business day; and (ii) the average of the closing prices of the shares as stated in the Stock Exchange’s daily quotation sheets for the five business days immediately preceding the date of grant of the relevant option.
Any share options granted to a substantial shareholder or an independent non-executive director of the Company, or any of their associates, in excess of 0.1% of the shares of the Company in issue at any time or with an aggregate value in excess of HK$5,000,000, within any 12-month period, are subject to shareholders’ approval in advance in a general meeting.
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In addition, any share options granted to any one person in excess of 1% of the shares of the Company in issue at any time within any 12-month period, are subject to shareholders’ approval in advance in a general meeting.
The options granted may be exercised at any time or times during a period of not less than 3 years to be notified by the board of directors and in any event no later than 10 years from the date of the grant of the options.
The Post-Scheme remains in force for a period of 10 years with effect from 28 November 2001.
At 31 December 2006, the number of shares in respect of which options had been granted under the scheme was 176 million (2005: Nil), representing 2.58% (2005: Nil) of the shares of the Company in issue at that date.
Details of the share options conditionally granted by the Company pursuant to the Post-Scheme and the options outstanding as at 31 December 2006 were as follows:
Balance Balance Granted as at 31 Period as at during Exercised Lapsed December during which Exercise Date 1 January the year during during 2006* the options price per Grantees granted 2006 ’000 the year the year ’000 are exercisable share*
Mr. Yu Hongzhi 3 April 2006 – 3,800 – – 3,800 3 April 2006 to HK$0.053 (Director) 27 November 2011
Ms. Ma Zheng 3 April 2006 – 2,700 – – 2,700 3 April 2006 to HK$0.053 (Director) 27 November 2011
Mr. Chiu 3 April 2006 – 1,000 – – 1,000 3 April 2006 to HK$0.053 Winerthan 27 November 2011 (Director)
Employees 3 April 2006 – 1,300 – – 1,300 3 April 2006 to HK$0.053 27 November 2011
– 8,800 – – 8,800
* After the share subdivision being effective on 1 August 2006, the exercise price per share was adjusted from HK$1.064 to HK$0.053. The total number of shares of the Company to be issued upon exercise of the 8,800,000 outstanding options will be adjusted from 8,800,000 existing shares of HK$0.025 each to 176,000,000 subdivided shares of HK$0.00125 each.
The fair values of options granted during 2006 were determined using the Black-Scholes-Merton Option Pricing Model. Significant inputs into the calculation included a spot price of HK$1.04 and exercises price of HK$1.064. Furthermore, the calculation takes into account a volatility rate of 85.5% and nil expected dividend yield. Risk-free interest rate was determined at a range from 4.193% to 4.258%. The underlying expected volatility was extracted from Bloomberg based on 390 trading days.
In total, approximately HK$1,531,000 of employee compensation expense has been included in the consolidated income statement for 2006 (2005: Nil), the corresponding amount of which has been credited to employee compensation reserve (note 27). No liabilities were recognised on the equity-settled share- based payment transactions.
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27. RESERVES
Group
Statutory Share Convertible Employee Statutory public Exchange premium bonds compensation surplus welfare Accumulated Warrants translation account reserve reserve reserve reserve losses reserve reserve Total (Note (a)) (Note (b)) (Note (c)) (Note (d)) HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Balance at 1 January 2005 45,080 – – 34 17 (43,873) – – 1,258
Currency translation (Net income recognised directly in equity) – – – – – – – 888 888 Profit for the year – – – – – 23,382 – – 23,382 Transfer to capital reserves – – – 2,817 1,408 (4,225) – – –
Total recognised income and expense for the year – – – 2,817 1,408 19,157 – 888 24,270
Issuance of rights shares 26,611 – – – – – – – 26,611
Rights share issue expenses (2,194) – – – – – – – (2,194)
Issuance of warrants – – – – – – 473 – 473
Balance at 31 December 2005 69,497 – – 2,851 1,425 (24,716) 473 888 50,418
Balance at 1 January 2006 69,497 – – 2,851 1,425 (24,716) 473 888 50,418
Transfer to statutory surplus reserve – – – 1,425 (1,425) – – – –
Currency translation (Net income recognised directly in equity) – – – 481 – – – 1,032 1,513 Loss for the year – – – – – (5,938) – – (5,938) Transfer to capital reserves – – – 353 – (353) – – –
Total recognised income and expense for the year – – – 834 – (6,291) – 1,032 (4,425)
Issuance of new shares 97,456 – – – – – – – 97,456
Shares issue expenses (124) – – – – – – – (124)
Issuance of convertible bonds – 1,063 – – – – – – 1,063
Employee share-based compensation – – 1,531 – – – – – 1,531
Issuance of warrants – – – – – – 7,785 – 7,785
Exercise of warrants 772 – – – – – (34) – 738
Balance at 31 December 2006 167,601 1,063 1,531 5,110 – (31,007) 8,224 1,920 154,442
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Company
Share Convertible Employee premium bonds compensation Accumulated Warrants account reserve reserve losses reserve Total (Note (e)) (Note (d)) HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
At 1 January 2005 32,193 – – (39,029) – (6,836) Premium on issue of rights shares 26,611 – – – – 26,611 Rights share issue expenses (2,194) – – – – (2,194) Issuance of warrants – – – – 473 473 Net loss for the year – – – (1,821) – (1,821)
At 31 December 2005 and 1 January 2006 56,610 – – (40,850) 473 16,233 Premium on issue of new shares 97,456 – – – – 97,456 Shares issue expenses (124) – – – – (124) Issuance of convertible bonds – 1,063 – – – 1,063 Employee share-based compensation – – 1,531 – – 1,531 Issuance of warrants – – – – 7,785 7,785 Exercise of warrants 772 – – – (34) 738 Net loss for the year – – – (45,165) – (45,165)
At 31 December 2006 154,714 1,063 1,531 (86,015) 8,224 79,517
(a) The share premium account of the Group includes: (i) the premium arising from issue of shares of the Company at a premium less share issue expenses; and (ii) the difference between the nominal value of the share capital and share premium of the subsidiaries acquired pursuant to the reorganisation scheme (the “Group Reorganisation”) in preparation for the public listing of the Company’s shares on the GEM of the Stock Exchange over the nominal value of the shares of the Company issued in exchange therefor.
(b) Subsidiaries of the Company established in the PRC are required to transfer 10% of their profit after tax calculated in accordance with the PRC accounting regulations to the statutory surplus reserve until the reserve reaches 50% of their respective registered capital, upon which any further appropriation will be at the directors’ recommendation. Such reserve may be used to reduce any losses incurred by the subsidiaries or be capitalised as paid-up capital of the subsidiaries.
(c) Prior to 1 January 2006, pursuant to the PRC Company Laws, subsidiaries of the Company established in the PRC are required to transfer 5% to 10% of their profit after tax calculated in accordance with PRC accounting regulations to the statutory public welfare reserve. The use of this reserve is restricted to capital expenditure incurred for staff welfare facilities. The statutory public welfare reserve is not available for distribution, except upon liquidation of the subsidiaries.
Starting from 1 January 2006, pursuant to certain amendments of the PRC Company Laws, subsidiaries of the Company are not allowed to establish the statutory public welfare reserve. Thus, the balance of statutory public welfare reserve of the Group was transferred to statutory surplus reserve during the year and the balance of the statutory public welfare reserve as at 31 December 2006 is nil (2005: HK$1,425,000).
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(d) On 4 October 2005, the Company issued 23,654,400 non-listed warrants at the issue price of HK$0.02 per warrant. The warrants will mature in two years from the date of issue. Each warrant entitles the holder thereof to subscribe for one new share at initial exercise price of HK$0.32 per new share, payable in cash and subject to adjustment, at any time from 4 October 2005 to 3 October 2007. Consideration of HK$473,000 was received in respect of warrants during the year 2005. After the share subdivision being effective on 1 August 2006, the exercise price per share was adjusted from HK$0.32 to HK$0.015. Each warrant of the Company shall confer right to subscribe for 20 subdivided shares of HK$0.00125 each.
On 23 August 2006, the Company issued 333,750,000 non-listed warrants at the issue price of HK$0.012 per warrant to Mr. Ha Siu Wa, an independent third party, who is not a connected person of the Company. The warrants will mature in three years from the date of issue. Each warrant entitles the holder thereof to subscribe for one new share at an initial exercise price of HK$0.265 per new share, payable in cash and subject to adjustment. Consideration of HK$4,005,000 was received.
During the year, 2,800,000 warrants has been exercised.
On 18 September 2006, the Company issued 315,000,000 non-listed warrants at the issue price of HK$0.012 per warrant to Northern Power Group Limited, a company incorporated in the British Virgin Islands with limited liability which is wholly-owned by 李海環 who is interested in approximately 0.26% of the issued capital of the Company. The warrants will mature in three years from the date of issue. Each warrant entitles the holder thereof to subscribe for one new share at an initial exercise price of HK$0.28 per new share, payable in cash and subject to adjustment. Consideration of HK$3,780,000 was received during the year.
The reason for the issues was to raise additional funds for the Group’s general working capital.
(e) The share premium account of the Company includes: (i) the premium arising from issue of shares of the Company at a premium less share issue expenses; and (ii) the excess of the then combined net assets of the subsidiaries acquired pursuant to the Group Reorganisation over the nominal value of the Company’s shares issued in exchange therefor. Under the Companies Law (Revision) of the Cayman Islands, the share premium account is distributable to the shareholders of the Company, provided that immediately following the date on which the dividend is proposed to be distributed, the Company will be in a position to pay off its debts as and when they fall due in the ordinary course of business.
28. NON-CASH TRANSACTION
During the year, the Group settled the loans from Future Advance by way of issuance of convertible bonds of approximately HK$6,270,000.
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29. CAPITAL COMMITMENTS
Group
As at 31 December 2006, the Group had the following capital commitments.
2006 2005 HK$’000 HK$’000
Property, plant and equipment – Contracted but not provided for 148 –
Proposed investment in a venture (Note 32(a)) – Contracted but not provided for 971,000 –
Proposed investment in a venture (Note) – Authorised but not contracted for 59,501 –
1,030,649 –
Note: Sure Whole Investments Limited, a direct wholly-owned subsidiary of the Company, entered into heads of agreement with ASIA Resources Investment and Advisory Limited and Kondor Holdings Pty. Ltd. in relation to a possible investment in a joint venture company. Further details of the proposed investment are disclosed in the Company’s announcements dated 5 September 2006 and 22 December 2006.
Company
The Company does not have any significant capital commitments as at 31 December 2006.
30. OPERATING LEASE COMMITMENTS
Group
At 31 December 2006, the total future minimum lease payments under non-cancellable operating leases in respect of land and buildings are payable by the Group as follows:
2006 2005 HK$’000 HK$’000
Within one year 187 439 In the second to fifth years – 137
187 576
The Group leases a number of properties under operating leases. The leases run for an initial period of one to two years, with an option to renew the lease and renegotiate the terms at the expiry date or at dates as mutually agreed between the Group and respective lessors. None of the leases include contingent rentals.
Company
The Company does not have any significant operating lease commitments.
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31. RELATED PARTY TRANSACTIONS
(a) In addition to those related party transactions disclosed elsewhere in these financial statements, the Group entered into the following transactions with related parties during the year:
2006 2005 Notes HK$’000 HK$’000
Loans interest paid to a shareholder (i) 39 159 Convertible bond interest paid to a shareholder (ii) 262 –
Notes:
(i) Future Advance has provided loans to the Group. Details of the loans are described in note 23.
(ii) During the year, the Company issued convertible bonds to Future Advance for approximately HK$6,270,000 (2005: Nil). Details of the convertible bonds are described in note 24.
(b) Compensation of key management personnel
2006 2005 HK$’000 HK$’000
Total remuneration of directors and other members of key management during the year 3,407 594
32. POST BALANCE SHEET EVENTS
(a) On 14 November 2006, 宜昌首控實業有限公司, a wholly-owned subsidiary of the Company, entered into an acquisition agreement with Great Ocean Real Estate Limited (“GORE”), pursuant to which 宜昌首控實業有限公司 has conditionally agreed to acquire from 宜昌泰鴻礦山科技有限 公司, a wholly-owned subsidiary of GORE, 22.28% interest in the registered capital of 新首鋼資 源控股有限公司 for an aggregate consideration of approximately HK$971 million.
On 2 February 2007, 宜昌首控實業有限公司 entered into second supplemental deed with GORE to amend certain terms of the acquisition agreement, in particular the payment terms of the consideration. Pursuant to the second supplemental deed, the consideration would be satisfied by (i) cash of HK$18 million; and (ii) approximately 2,802 million preferred shares, which are convertible into preferred conversion shares at initial conversion rate of 1:1, subject to adjustments. Further details of the post balance sheet event are disclosed in the Company’s announcement dated 2 February 2007.
As at 31 December 2006, an amount of approximately RMB19 million has been paid to 湖北惠臨 律師事務所 as a deposit for the acquisition.
(b) On 3 January 2007, the Company and Future Advance entered into a term sheet with Lehman Brothers Commercial Corporation Asia Limited or its designated affiliates, as investor and arranger, in respect of the conditional issue of convertible bonds of maximum principal amount of approximately HK$246 million with coupon rate of 4.5% due 2010. The net proceeds from the issue of the convertible bonds will be used for general working capital.
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33. RISK MANAGEMENT OBJECTIVES AND POLICIES
The Group is exposed to a variety of financial risks which result from both its operating and investing activities. The Group does not have written risk management policies and guidelines. However, the board of directors meets periodically to analyse and formulate strategies to manage the Group’s exposure to market risk, including changes in interest rates and currency exchange rates. Generally, the Group introduces conservative strategies on its risk management. The Group’s exposure to market risk is kept to a minimum. The Group has not used any derivatives or other instruments for hedging purposes. The Group does not hold or issue derivative financial instruments for trading purposes.
The Group’s financial assets include cash and cash equivalents, deposits, other receivables and trade receivables. The Group’s financial liabilities include trade and other payables, loans from a shareholder and convertible bonds.
(a) Interest rate risk
The interest rates and terms of the Group’s loans from a shareholder and convertible bonds are disclosed in notes 23 and 24 respectively.
(b) Credit risk
All the Group’s cash and cash equivalents are deposited with major banks located in Hong Kong and the PRC.
The carrying amounts of trade receivables and other receivables included in the consolidated balance sheet represent the Group’s maximum exposure to credit risk in relation to its financial assets. No other financial assets carry a significant exposure to credit risk. The Group has no significant concentration of credit risk.
(c) Foreign currency risk
The Group placed approximately HK$51,016,000, denominated in RMB, with banks in the PRC. Furthermore, most of the Group’s purchases and sales are denominated in RMB. The directors believe that the foreign exchange exposure to RMB is not material due to stability of exchange rate between Hong Kong dollar and RMB. Hence, there is no need to make use of financial instrument for hedging purposes.
(d) Fair values
The fair values of the Group’s current financial assets and liabilities are not materially different from their carrying amount because of the immediate or short term maturity of these financial instruments. The fair values of non-current liabilities are not disclosed because the carrying values are not materially different from fair values.
(e) Liquidity
The Group’s policy is to regularly monitor current and expected liquidity requirement to ensure that it maintains sufficient reserves of cash to meet its liquidity requirements in the short and longer terms.
3. UNAUDITED RESULTS
Set out below is the unaudited results of the Group for six months ended 30 June 2007 as extracted from page 3 to 16 of the interim results announcement of the Company published on 3 August 2007.
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CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED)
Three months ended Six months ended 30 June 30 June 2007 2006 2007 2006 Notes HK$’000 HK$’000 HK$’000 HK$’000
Continuing operations: Revenue 2 17,189 8,553 23,153 22,089
Other revenue 3 312 69 503 73
Cost of trading merchandise sold (14,729) (1,066) (19,429) (12,136) Raw materials and consumables used (1,715) (6,090) (3,011) (6,203) Staff costs, including directors’ remuneration (704) (533) (1,279) (1,139) Depreciation (197) (170) (707) (364) Amortisation on land use rights (165) (148) (316) (295) Other operating expenses (2,095) (996) (4,423) (1,807)
Operating (loss)/profit 4 (2,104) (381) (5,509) 218
Finance costs 5 (101) (69) (198) (108)
(Loss)/Profit before income tax (2,205) (450) (5,707) 110
Income tax expense 6 ––––
(Loss)/Profit after tax from continuing operations (2,205) (450) (5,707) 110
Discontinued operations: Profit for the period from discontinued operations 7 –5–9
(Loss)/Profit for the period (2,205) (445) (5,707) 119
Attributable to: Equity holders of the Company (2,150) (445) (5,583) 119 Minority interests (55) – (124) –
(Loss)/Profit for the period (2,205) (445) (5,707) 119
Dividends 8 ––––
- 104 - APPENDIX II FINANCIAL INFORMATION ON THE GROUP
Three months ended Six months ended 30 June 30 June 2007 2006 2007 2006 Notes HK$’000 HK$’000 HK$’000 HK$’000
(Loss)/Earnings per share for (loss)/profit from continuing and discontinued operations attributable to the equity holders of the Company during the period (2006: restated) 9 Basic (HK0.03 cents) (HK0.007 cents) (HK0.08 cents) HK0.002 cents
Diluted N/A (HK0.007 cents) N/A HK0.002 cents
(Loss)/Earnings per share for (loss)/profit from continuing operations attributable to the equity holders of the Company during the period (2006: restated) 9 Basic (HK0.03 cents) (HK0.007 cents) (HK0.08 cents) HK0.002 cents
Diluted N/A (HK0.007 cents) N/A HK0.002 cents
- 105 - APPENDIX II FINANCIAL INFORMATION ON THE GROUP
CONDENSED CONSOLIDATED BALANCE SHEET
30 June 31 December 2007 2006 Notes HK$’000 HK$’000 (Unaudited) (Audited)
ASSETS AND LIABILITIES Non-current assets Property, plant and equipment 31,541 30,314 Land use rights 30,285 29,102 Deposits 19,588 18,627
81,414 78,043
Current assets Inventories 1,580 2,539 Trade receivables 11 239 1,394 Prepayments, deposits and other receivables 349 5,443 Tax refundable 41 39 Cash and cash equivalents 94,801 88,204
97,010 97,619
Current liabilities Trade payables 12 (538) (467) Accruals and other payables (421) (2,095)
(959) (2,562)
Net current assets 96,051 95,057
Total assets less current liabilities 177,465 173,100
Non-current liabilities Convertible bonds 13 (5,604) (5,469) Deferred tax liabilities (19) (19)
(5,623) (5,488)
Net assets 171,842 167,612
EQUITY Equity attributable to equity holders of the Company Share capital 14 8,533 8,519 Reserves 158,782 154,442
167,315 162,961 Minority interests 4,527 4,651
Total equity 171,842 167,612
- 106 - APPENDIX II FINANCIAL INFORMATION ON THE GROUP
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)
Equity attributable to equity holders of the Company Statutory Share Convertible Employee Statutory public Exchange Share premium bonds compensation surplus welfare Accumulated Warrants translation Minority Total capital account reserve reserve reserve reserve losses reserve reserve interests equity HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Balance at 1 January 2006 5,914 69,497 – – 2,851 1,425 (24,716) 473 888 – 56,332 Currency translation (Net expense recognised directly in equity) – – – – – – – – (248) – (248) Profit for the six months ended 30 June 2006 – – – – – – 119 – – – 119 Total recognised income and expense for the six months ended 30 June 2006 – – – – – – 119 – (248) – (129) Issuance of new shares 2,602 97,456 – – – – – – – – 100,058 Share issue expenses – (124) – – – – – – – – (124) Issuance of convertible bonds – – 1,063 – – – – – – – 1,063
Balance at 30 June 2006 8,516 166,829 1,063 – 2,851 1,425 (24,597) 473 640 – 157,200
Balance at 1 January 2007 8,519 167,601 1,063 1,531 5,110 – (31,007) 8,224 1,920 4,651 167,612
Currency translation (Net income recognised directly in equity) – – – – 8 – – – 7,014 – 7,022 Loss for the six months ended 30 June 2007 – – – – – – (5,583) – – (124) (5,707) Total recognised income and expense for the six months ended 30 June 2007 – – – – 8 – (5,583) – 7,014 (124) 1,315 Exercise of warrants 14 3,033 – – – – – (132) – – 2,915
Balance at 30 June 2007 8,533 170,634 1,063 1,531 5,118 – (36,590) 8,092 8,934 4,527 171,842
- 107 - APPENDIX II FINANCIAL INFORMATION ON THE GROUP
CONDENSED CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)
Six months ended Six months ended 30 June 2007 30 June 2006 HK$’000 HK$’000
Net cash inflow/(outflow) from operating activities 1,610 (21,711)
Net cash outflow from investing activities (933) (1,379)
Net cash inflow/(outflow) before financing activities 677 (23,090)
Net cash inflow from financing activities 2,915 100,336
Net increase in cash and cash equivalents 3,592 77,246
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 88,204 5,890
EFFECT OF FOREIGN EXCHANGE RATE CHANGES 3,005 (249)
CASH AND CASH EQUIVALENTS AT END OF PERIOD 94,801 82,887
ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash at bank and in hand 94,801 82,887
94,801 82,887
- 108 - APPENDIX II FINANCIAL INFORMATION ON THE GROUP
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND PRINCIPAL ACCOUNTING POLICIES
The Company was incorporated in the Cayman Islands, as an exempted company with limited liability under the Companies Law (2001 Revision) of the Cayman Islands on 5 September 2001.
The condensed consolidated financial statements have been prepared in accordance with the applicable disclosure requirement of Chapter 18 of the GEM Listing Rules and Hong Kong Accounting Standards (“HKAS”) 34 “Interim Financial Reporting” issued by the Hong Kong Institute of Certified Public Accountants. The financial statements are prepared under the historical cost convention.
The consolidated financial statements incorporated the financial statements of the Company and its principal subsidiaries for the period ended 30 June 2007. All material intercompany transactions and balances within the Group are eliminated on consolidation.
The accounting policies adopted in the condensed consolidated results are consistent with those followed in the preparation of the Group’s annual financial statements for the year ended 31 December 2006.
Adoption of new or amended Hong Kong Financial Reporting Standards
From 1 January 2007, the Group has adopted all the new and amended Hong Kong Financial Reporting Standards (“HKFRSs”) which are first effective on 1 January 2007 and relevant to the Group. The adoption of these new and amended HKFRSs did not result in significant changes in both the Group’s and Company’s accounting policies.
The Group has not early adopted the following HKFRSs that have been issued but are not yet effective. The Directors anticipate that the adoption of such HKFRSs will not result in material financial impact on the Group’s financial statements.
HKAS 23 (Revised) “Borrowing Costs”1 HKFRS 8 “Operating Segments”1 HK(IFRIC) Interpretation 11 “Group and Treasury Share Transactions”2 HK(IFRIC) Interpretation 12 “Service Concession Arrangements”3
1 Effective for annual periods beginning on or after 1 January 2009 2 Effective for annual periods beginning on or after 1 March 2007 3 Effective for annual periods beginning on or after 1 January 2008
- 109 - APPENDIX II FINANCIAL INFORMATION ON THE GROUP
2. REVENUE
Revenue, which is also the Group’s turnover, represents the total invoiced value of goods supplied and income from provision of services. Revenue recognised during the period is as follows:
Three months ended Six months ended 30 June 30 June 2007 2006 2007 2006 HK$’000 HK$’000 HK$’000 HK$’000 (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Continuing operations: Sales of composite materials 15,702 1,097 20,539 14,633 Manufacturing and sales of PE/FRP Pipes 1,487 7,456 2,614 7,456
Sales of goods 17,189 8,553 23,153 22,089
Discontinued operations: Game-On-Demand service income – – – – MMOG service income – 28 – 47
Provision of services – 28 – 47
Total Revenue 17,189 8,581 23,153 22,136
3. OTHER REVENUE – CONTINUING OPERATIONS
Three months ended Six months ended 30 June 30 June 2007 2006 2007 2006 HK$’000 HK$’000 HK$’000 HK$’000 (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Bank interest income 339 64 481 68 Sundry income (27) 5 22 5
312 69 503 73
- 110 - APPENDIX II FINANCIAL INFORMATION ON THE GROUP
4. OPERATING (LOSS)/PROFIT – CONTINUING OPERATIONS
Operating (loss)/profit is arrived at after charging/(crediting):
Three months ended Six months ended 30 June 30 June 2007 2006 2007 2006 HK$’000 HK$’000 HK$’000 HK$’000 (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Interest income (339) (64) (481) (68) Cost of inventories recognised as expenses 16,444 7,156 22,440 18,339 Operating lease charges on land and buildings 172 139 304 274 Depreciation (Note 1) 450 321 1,260 627 Amortisation on land use rights 165 148 316 295 Staff costs, including directors’ emoluments 704 533 1,279 1,139 Contribution to retirement benefit scheme (Note 2) 10 19 22 35 Net exchange loss 1 5 1 5
Notes:
1. Depreciation expense of approximately HK$253,000 and HK$553,000 for the three months and six months ended 30 June 2007 respectively (three months and six months ended 30 June 2006: HK$151,000 and HK$263,000) has been expensed in cost of goods sold.
2. Contribution to retirement benefit scheme for the period is included in “staff costs” above.
5. FINANCE COSTS – CONTINUING OPERATIONS
Three months ended Six months ended 30 June 30 June 2007 2006 2007 2006 HK$’000 HK$’000 HK$’000 HK$’000 (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Interest charges on – loans from a shareholder – – – 39 – convertible bonds 101 69 198 69
101 69 198 108
6. INCOME TAX EXPENSE – CONTINUING OPERATIONS
Hong Kong profits tax has not been provided as the Group did not generate any assessable profits in Hong Kong during the three months and six months ended 30 June 2007 (three months and six months ended 30 June 2006: Nil).
- 111 - APPENDIX II FINANCIAL INFORMATION ON THE GROUP
No profits tax has been provided as the subsidiaries in the People’s Republic of China (the “PRC”) were either entitled to an exemption from the PRC state and local corporate income tax or did not generate any assessable profits in the PRC during the three months and six months ended 30 June 2007 (three months and six months ended 30 June 2006: Nil).
The Group has tax losses arising in Hong Kong of approximately HK$48,994,000 (as at 30 June 2006: HK$39,805,000) and overseas of approximately HK$2,323,000 (as at 30 June 2006: HK$1,239,000) that are available for offsetting against future taxable profits of the companies in which the losses arose indefinitely and for 5 years, respectively. Deferred tax assets have not been recognised in respect of these losses as they have been arisen in subsidiaries that have loss-making for some time.
7. DISCONTINUED OPERATIONS
As stated in the annual report 2006 of the Company, the Group’s management and shareholders agreed to abandon and discontinue the business line of Game-On-Demand services and MMOG services during the year ended 31 December 2006.
An analysis of the result of discontinued operations is as follows:
Three months ended Six months ended 30 June 30 June 2007 2006 2007 2006 HK$’000 HK$’000 HK$’000 HK$’000 (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue – 28 – 47 Expenses – (23) – (38)
Profit before income tax of discontinued operations – 5 – 9 Income tax expense – – – –
Profit for the period from discontinued operations – 5 – 9
Operating cash flows – 5 – 9 Investing cash flows – – – – Financing cash flows – – – –
Total cash flows – 5 – 9
8. DIVIDENDS
The Directors do not recommend the payment of an interim dividend in respect of the six months ended 30 June 2007 (six months ended 30 June 2006: Nil).
- 112 - APPENDIX II FINANCIAL INFORMATION ON THE GROUP
9. (LOSS)/EARNINGS PER SHARE
The calculations of the basic and diluted (loss)/earnings per share is based on the following data:
Three months ended Six months ended 30 June 30 June 2007 2006 2007 2006 HK$’000 HK$’000 HK$’000 HK$’000 (Unaudited) (Unaudited) (Unaudited) (Unaudited)
(Loss)/Earnings
For continuing and discontinued operations based on the (loss)/ profit for the period attributable to the equity holders of the Company (2,150) (445) (5,583) 119
For continuing operations based on the (loss)/profit for the period from continuing operations less results attributable to minority interests (2,150) (450) (5,583) 110
Three months ended Six months ended 30 June 30 June 2007 2006 2007 2006 ’000 ’000 ’000 ’000 (as adjusted) (as adjusted)
Number of shares Weighted average number of ordinary shares for the purposes of calculating basic (loss)/earnings per share 6,818,168 6,081,312 6,816,726 5,639,836
Effect of dilutive potential ordinary shares: Warrants – 397,114 Share options – N/A Convertible bonds – –
Weighted average number of ordinary shares for the purposes of calculating diluted earnings per share 6,081,312 6,036,950
Diluted loss per share for the three months and six months ended 30 June 2007 has not been disclosed as the warrants, share options and convertible bonds outstanding during the period had an anti-dilutive effect on the basic loss per share for the period.
- 113 - APPENDIX II FINANCIAL INFORMATION ON THE GROUP
The weighted average number of shares for the purposes of calculating basic and diluted (loss)/earnings per share for the period 2006 has been adjusted to reflect the share subdivision in 2006.
10. SEGMENT INFORMATION
Business segment
Continuing operations Discontinued operations Manufacturing Total Sales of and sales Total continuing Game-On-Demand discontinued Composite Materials of PE/FRP pipes operations services MMOG services operations Consolidated Six months ended Six months ended Six months ended Six months ended Six months ended Six months ended Six months ended 30 June 30 June 30 June 30 June 30 June 30 June 30 June 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Revenue from external customers 20,539 14,633 2,614 7,456 23,153 22,089 – – – 47 – 47 23,153 22,136 Cost of services provided – – – – – – – – – (36) – (36) – (36) Cost of goods sold (19,429) (12,136) (3,011) (6,203) (22,440) (18,339) – – – – – – (22,440) (18,339) Other operating expenses (1,575) (965) (200) (491) (1,775) (1,456) – (1) – (1) – (2) (1,775) (1,458)
Segment results (465) 1,532 (597) 762 (1,062) 2,294 – (1) – 10 – 9 (1,062) 2,303
Other operating income 503 73 Finance costs (198) (108) Unallocated expenses (4,950) (2,149)
(Loss)/Profit before income tax (5,707) 119 Income tax expense ––
(Loss)/Profit for the period (5,707) 119
11. TRADE RECEIVABLES
The Group’s trading terms with its customers are mainly on credit, except for new customers, where payment in advance is normally required. The credit period is generally for a period of one month, extending up to three months for major customers. Each customer has a maximum credit limit. The Group seeks to maintain strict control over its outstanding receivables and has a credit control department to minimise credit risk. Overdue balances are reviewed regularly by senior management.
The aging of the Group’s trade receivables is analysed as follows:
30 June 31 December 2007 2006 HK$’000 HK$’000 (Unaudited) (Audited)
Within 30 days 239 639 31 – 60 days – 755
239 1,394
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12. TRADE PAYABLES
The aging of the Group’s trade payables is analysed as follows:
30 June 31 December 2007 2006 HK$’000 HK$’000 (Unaudited) (Audited)
Within 30 days 538 – 31 – 60 days – 453 61 – 90 days – 14
538 467
13. CONVERTIBLE BONDS
The convertible bonds were issued to Future Advance Holdings Limited on 27 April 2006 with maturity date on 26 April 2009. The convertible bonds are convertible into ordinary shares of the Company at an initial conversion price of HK$0.4 per conversion share (subject to adjustments in accordance with the terms of the convertible bonds) at any time during the period commencing from six months on date following the date of issue of convertible bonds up to maturity date. After the share subdivision effective on 1 August 2006, the conversion price was adjusted to HK$0.02 per conversion share. The convertible bonds can be converted into 313,503,280 shares at a conversion price of HK$0.02.
The Company may at any time before the maturity date redeem the convertible bonds at par. Interest of 1 per cent will be paid annually until the settlement date.
The fair value of the liability component, included in the convertible bonds, was calculated using a market interest rate for an equivalent non-convertible bond. The residual amount, representing the value of the equity conversion component, is included in shareholders’ equity in other reserves, net of deferred taxes.
The convertible bonds recognised in the balance sheet are calculated as follows:
30 June 31 December 2007 2006 HK$’000 HK$’000 (Unaudited) (Audited)
Nominal value of convertible bond 6,270 6,270 Equity component (1,063) (1,063)
Liability component on initial recognition 5,207 5,207 Interest expense (net of interest paid) 397 262
Liability component at end of period/year 5,604 5,469
Interest expense on the bonds is calculated using the effective interest method by applying the effective interest rate of 7.426% to the liability component.
Interest expense recognised as expense and included in finance costs amounted to approximately HK$198,000 for the six months ended 30 June 2007 (six months ended 30 June 2006: HK$69,000).
The carrying amounts of liability component of convertible bonds approximate to its fair value.
- 115 - APPENDIX II FINANCIAL INFORMATION ON THE GROUP
14. SHARE CAPITAL
Number of shares Nominal value ’000 HK$’000
Authorised: At beginning and end of period Ordinary shares of HK$0.00125 each 100,000,000 125,000
Issued and fully paid: At beginning of period Ordinary shares of HK$0.00125 each 6,815,267 8,519 Exercise of warrants (Note) 11,000 14
At end of period Ordinary share of HK$0.00125 each 6,826,267 8,533
Note:
On 1 August 2006, the conditional warrant placing agreement was entered into between the Company and a subscriber (the “Subscriber”) in relation to a private placing of 333,750,000 non-listed warrants (the “Warrants”) at an issue price of HK$0.012 per Warrant. The Subscriber is an independent and is not connected person of the Company.
The Warrants entitle the Subscriber to subscribe for the new shares at an initial exercise price of HK$0.265 per new share for a period of three (3) years commencing from the date of issue of the Warrants. Each Warrant carries the right to subscribe for one (1) new share.
On 7 June 2007, the issued share capital of the Company was increased from approximately HK$8,519,000 to HK$8,533,000 by part of Warrants issue were exercised for 11,000,000 shares of HK$0.00125 each with exercise price of HK$0.265 per Warrant.
15. COMMITMENTS
Commitment under operating leases
The Group leases its office properties under an operating lease arrangement for a term of three years.
As at 30 June 2007, the total future minimum lease payments under non-cancellable operating leases in respect of land and buildings fall due as follows:
30 June 31 December 2007 2006 HK$’000 HK$’000 (Unaudited) (Audited)
Within one year 720 187 In the second to fifth years 1,289 –
2,009 187
Save as aforesaid, the Group did not have any other significant commitments as at 30 June 2007.
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16. CAPITAL COMMITMENT
Group 30 June 31 December 2007 2006 HK$’000 HK$’000 (Unaudited) (Audited)
Property, plant and equipment – Contracted but not provided for – 148
Proposed investment in a venture (Note a) – Contracted but not provided for 971,000 971,000
Proposed investment in a venture (Note b) – Authorised but not contracted for 59,501 59,501
1,030,501 1,030,649
Notes:
a. On 14 November 2006, 宜昌首控實業有限公司 (Yichang Shoukong Industries Co. Limited)# (“Yichang Shoukong”), a wholly-owned subsidiary of the Company, entered into an acquisition agreement with Great Ocean Real Estate Limited (“GORE”), pursuant to which Yichang Shoukong has conditionally agreed to acquire from 宜昌泰鴻礦山科技有限公司 (Yichang Tai Hong Mining Technology Company Limited)#, a wholly-owned subsidiary of GORE, 22.28% interest in the registered capital of 新首鋼資源控股有限公司 (Xin Shougang Zi Yuan Holdings Limited)# for an aggregate consideration of approximately HK$971 million.
On 2 February 2007, Yichang Shoukong entered into second supplemental deed with GORE to amend certain terms of the acquisition agreement, in particular the payment terms of the consideration. Pursuant to the second supplemental deed, the consideration would be satisfied by (i) cash of HK$18 million; and (ii) approximately 2,802 million preferred shares, which are convertible into preferred conversion shares at initial conversion rate of 1:1, subject to adjustments. Further details of the post balance sheet event are disclosed in the Company’s announcement dated 2 February 2007.
As at 30 June 2007, an amount of approximately RMB19 million has been paid to 湖北惠臨律師事 務所 as a deposit for the acquisition.
b. Sure Whole Investments Limited, a direct wholly-owned subsidiary of the Company, entered into heads of agreement with ASIA Resources Investment and Advisory Limited and Kondor Holdings Pty. Ltd. in relation to a possible investment in a joint venture company. Further details of the proposed investment are disclosed in the Company’s announcements dated 5 September 2006 and 22 December 2006.
Save as aforesaid, the Group did not have any other significant commitments as at 30 June 2007.
- 117 - APPENDIX III FINANCIAL INFORMATION ON THE ENLARGED GROUP
1. MANAGEMENT DISCUSSION AND ANALYSIS
(a) The Group
Set out below is a reproduction of the management discussion and analysis as contained in the annual reports of the Company for the three years ended 31 December 2006 and interim report for the six months ended 30 June 2007.
For the year ended 31 December 2006
OPERATION REVIEW
During the year under review, the Group continued to engage in the general trading of FRP Pipes, raw materials and composite materials and production of FRP Pipes and polyethylene pipes in the PRC. As it was stated in our 2006 interim and third quarterly report, production of FRP pipes was still in preliminary stage and, because of fierce competition and resignation of Mr. Lang Fulai (key man to the FRP pipes project), sales was dropped, but the management in Yichang had taken steps to improve it by (i) enhancing the products’ the quality and controlling the cost and (ii) exploring more sales channels with existing marketing and sales teams. In addition, the management in Yichang also initiated in producing a new product – PE pipes (polyethylene pipes), and two production lines have been installed during the year.
On the other hand, 宜昌新首鋼貴金屬礦業有限公司 (Yichang Xin Shougang Precious Metal Mining Limited)# (“YXS Precious Metal Mining”), a joint venture company with 新首鋼資源控股有限公司 (Xin Shougang Zi Yuan Holdings Limited)# (“Xin Shougang”) had been formed during the year, and its operation will be initiated as early as possible. Besides, the possible investment in a mining operation in Australia is still in progress, and the terms and conditions of the agreement are almost finalizing. In addition, 宜昌首控實業有限公司(Yichang Shoukong Industries Co., Limited)# , a wholly-owned subsidiary of the Group, has made the announcement in relation to the acquisition of a portion of equity interest in Xin Shougang. The terms and conditions of the agreement are subject to the approval of the shareholders of the Company.
FINANCIAL REVIEW
Turnover from continuing operations was approximately HK$34,731,000 and from discontinued operations was approximately HK$75,000, total turnover was approximately HK$34,806,000 for the year under review, which represented an increase of 41% while compared with that of last year. The significant improvement was mainly contributed from the selling of pipes. The audited loss before income tax from continuing operations for the year under review was approximately HK$5,876,000 but it was a profit of approximately HK$23,401,000 in the previous year. The loss attributable to shareholders was approximately of HK$5,938,000. The Board will still adopt the stringent cost control and maintain thin and effective overhead structure and prudently utilise the corporate resources to create wealth for the shareholders.
- 118 - APPENDIX III FINANCIAL INFORMATION ON THE ENLARGED GROUP
BUSINESS OUTLOOK AND PROSPECTS
The production of the PE pipes is initiated, the management now will focus their effort on maintaining the production and operation process of the PE pipes so as to control its cost of production, and we will be put more resources in building up our market reputation and also maintaining our market competition, and at the same time, we will seek ways of improving the FRP pipes’ business. On the other hand, as it was stated by our Chairman, the Board’s another more important tasks are to integrate the mining business and increase the pace of development of YXS Precious Metal Mining and the operation of Xin Shougang.
LIQUIDITY AND FINANCIAL RESOURCES
As at 31 December 2006, the net assets of the Group has approximately increased to HK$167,612,000 (2005: approximately HK$56,332,000) while its total assets were approximately HK$175,662,000 (2005: approximately HK$65,065,000) including cash and bank balances of approximately of HK$88,204,000. With the current ratio of 38.1, the Group remained in a financially liquid position and is able to finance ongoing operation.
FUNDING ACTIVITIES DURING THE YEAR
During the year, the Company had raised funds from the following activities:
1. Subscription of 47,308,800 shares
On 25 January 2006, the Company entered into the subscription agreements with six subscribers (the “Subscribers”) pursuant to which the Subscribers had conditionally agreed to subscribe for and the Company had conditionally agreed to allot and issue, an aggregate of 47,308,800 shares in cash at the subscription price of HK$0.315 per subscription share, the aggregate nominal value of which was HK$1,182,720. The net proceeds of the subscription of approximately HK$14,800,000 had been applied as general working capital of the Group which is the main reason for this issuance of shares. All the Subscribers are independent of each others and are independent third parties not being connected persons (as defined under the GEM Listing Rules) of the Group, with any of the directors, chief executive and other shareholders of the Company or its subsidiaries or any their respective associates. Details of these are stated in the announcements of the Company dated 26 January 2006 and 16 February 2006. The completion of the subscription of new shares took place on 16 February 2006.
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2. Subscription of convertible bond
On 24 February 2006, the Company entered into a subscription agreement with Future Advance Holdings Limited (“Future Advance”) pursuant to which the Company has conditionally agreed to create and issue, and Future Advance has conditionally agreed to subscribe for the convertible bond (“Convertible Bond”) in the principal amount of HK$6,270,065.60 at a total subscription price of HK$6,270,065.60. The Convertible Bond may be converted into conversion shares at an initial conversion price of HK$0.40 per conversion share (subject to adjustments in accordance with the terms of Convertible Bond) during its conversion period. After the share subdivision effective on 1 August 2006, the conversion price was adjusted to HK$0.02 per conversion share. The completion of the subscription of the Convertible Bond took place on 27 April 2006 and the Convertible Bond had been created and issued to Future Advance. The entire amount of approximately HK$6,270,066 had been applied to set off against the total subscription price of HK$6,270,065.60 payable by Future Advance under the subscription agreement. Details of these are stated in the announcements of the Company dated 28 February 2006 and 27 April 2006 and the circular of the Company dated 21 March 2006.
3. Subscription of 56,770,560 shares
On 9 May 2006, the Company entered into the subscription agreements with four subscribers (the “Subscribers”) pursuant to which the Subscribers had conditionally agreed to subscribe for and the Company had conditionally agreed to allot and issue an aggregate of 56,770,560 shares in cash at the subscription price of HK$1.5 per subscription share, the aggregate nominal value of which was HK$1,419,264. The Subscribers are 明亞國際有限公司 (Asia Bright International Limited), 明浩發展有限公司 (Main Concord Development Limited), First South International Limited and Siberian Worldwide Ltd, they are all being independent to each others and each of them is independent third party not connected person (as defined under the GEM Listing Rules) of the Company with any of the directors, chief executive and other shareholders of the Company or its subsidiaries or any of their respective associates. The net proceeds of the subscription of approximately HK$85,000,000 which has been retained by the Group with an intention to apply for investment in mining related business projects, which is the main reason for issuance of these shares. Details of these are stated in the announcements of the Company dated 10 May 2006, 23 May 2006, 26 May 2006 and 12 June 2006. The completion of the subscription of new shares took place on 26 May 2006 and 10 June 2006.
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4. Private placing of 333,750,000 non-listed warrants
On 1 August 2006, the warrant placing agreement was entered into between the Company and Mr. Ha Siu Wa (“Mr. Ha”) in relation to a private placing of 333,750,000 warrants (the “Warrants 1”) (of which 2,800,000 Warrants 1 were exercised on 21 December 2006 and new shares had allotted and issued on 28 December 2006) at an issue price of HK$0.012 per warrant. The Warrants 1 entitle Mr. Ha to subscribe for new shares at an initial exercise price of HK$0.265 per new share for a period of three (3) years commencing from the date of issue of the Warrants 1. Each Warrants 1 carries the right to subscribe for one (1) new share. The net proceeds from the Warrants 1 placing of approximately HK$3,800,000 which has been applied as general working capital of the Group. Details of these are stated in the announcement of the Company dated 1 August 2006 and 23 August 2006. The completion of the Warrants 1 placing took place on 23 August 2006.
5. Private placing of 315,000,000 non-listed warrants
On 17 August 2006, the warrant placing agreement was entered into between the Company and Northern Power Group Limited (“NPGL”) in relation to a private placing of 315,000,000 warrants (the “Warrants 2”) at an issue price of HK$0.012 per warrant. The Warrants 2 entitle NPGL to subscribe for new shares at an initial exercise price of HK$0.28 per new share for a period of three (3) years commencing from the date of issue of the Warrants 2. Each Warrants 2 carries the right to subscribe for one (1) new share. The net proceeds from the Warrants 2 placing of approximately HK$3,600,000 which has been applied as general working capital of the Group. Details of these are stated in the announcement of the Company dated 18 August 2006 and 18 September 2006. The completion of the Warrants 2 placing took place on 18 September 2006.
Except for the above, the Company had no other funds raising activities during the year under review. All the above funds raising activities providing the Company with present and future capital resources, were necessary for the development of the Company.
With the funds raised previously and the internal generated financial resources, the Group has cash and bank balance approximately of HK$88,204,000 as at 31 December 2006, the directors of the Company (the “Directors”) anticipate that the Group have adequate financial resources to meet its ongoing operations.
GEARING RATIO
As at 31 December 2006, the Group had cash of approximately HK$37,188,000 and RMB52,036,000 in its current assets while its current liabilities stood at approximately HK$2,562,000. The Group had long-term loan of approximately HK$5,469,000 as of 31 December 2006 and its shareholders’ funds amounted to approximately HK$162,961,000. In this regard, the Group had a net cash position and its gearing ratio should be approximately 3.4% (long-term loan to shareholder’s funds) as of 31 December 2006.
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EXPOSURE TO FLUCTUATIONS IN EXCHANGE RATES
Sales and payment of the Group are denominated in Hong Kong dollars and Renminbi (“RMB”). No hedging or other alternatives have been implemented. As the exchange of Hong Kong dollars against RMB were relatively stable during the year, the Group’s exposure to currency exchange risk was minimal.
CHARGE ON GROUP ASSETS AND CONTINGENT LIABILITIES
As at 31 December 2006, the Group did not have any significant contingent liabilities and no assets of the Group were pledged (2005: Nil).
SEGMENT INFORMATION
An analysis of the Group’s performance for the year by business and geographical segments is set out in note 6 to the financial statements.
CAPITAL STRUCTURE
The shares of the Company were listed on the GEM of the Stock Exchange on 13 December 2001. There has been no change in the capital structure of the Company since the Company’s listing on that date.
SIGNIFICANT INVESTMENTS
The resolution for the formation of a joint venture company with 新首鋼資源控股有 限公司 (Xin Shougang Zi Yuan Holdings Limited)# (“Xin Shougang”) was duly passed, and the joint venture company －宜昌新首鋼貴金屬礦業有限公司 (Yichang Xin Shougang Precious Metal Mining Limited)# (“YXS Precious Metal Mining”) had been formed and full operation of which is not yet initiated. Save as disclosed above, the Group had no other significant investments for the year ended 31 December 2006.
MATERIAL ACQUISITION AND DISPOSALS OF SUBSIDIARIES AND AFFILIATED COMPANIES/FUTURE PLANS FOR MATERIAL INVESTMENTS
The Company announced that (i) Heads of Agreement in relation to the possible investment in a joint venture company and an exploration permit for coal in Australia was entered into on 5 September 2006, the formal agreement is not yet entered into up to the approval date of this annual report, and (ii) on 14 November 2006, 宜昌首控實業有限公 司 (Yichang Shoukong Industries Co., Limited)# (“Yichang Shoukong”), a wholly-owned subsidiary of the Company, entered into the Acquisition Agreement (“Acquisition”) with Great Ocean Real Estate Limited (“GORE”), pursuant to which Yichang Shoukong has conditionally agreed to acquire from 宜昌泰鴻礦山科技有限公司 (Yichang Tai Hong Mining Technology Company Limited)#, a wholly-owned subsidiary of GORE, 22.28% interest in the registered capital of Xin Shougang for an aggregate consideration of approximately HK$971 million, we are preparing the necessary documents for finalizing the Acquisition but not yet completed.
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Save as disclosed above, there were no material acquisition or disposal of subsidiaries and affiliated companies during the year. The Company has no other future plans for material investments.
EMPLOYEE INFORMATION
As at 31 December 2006, the Group has 4 full-time employees working in Hong Kong and 46 full-time employees working in the PRC respectively. The total of employees’ remuneration, for the year under review amounted to approximately HK$4,109,000. The Group remunerates its employees based on their performance, experience and the prevailing industry practice.
For the year ended 31 December 2005
OPERATION REVIEW
During the year under review, the Group continued to engage in general trading of FRP pipes in the PRC and the provision of internet game services in Hong Kong. On the other hand, the construction of the production plant in Yichang City was completed, and the production was initiated in the third quarters of the year. It was the Board’s closely monitoring the process of the construction progress so that this project was completed earlier than expected, and contribution, in term of turnover, was approximately of HK$12,535,000.
FINANCIAL REVIEW
Turnover was approximately HK$24,614,000 for the year under review, which represented an increase of 250% while compared with that in previous year. The significant improvement was mainly contributed from the selling the FRP pipes. The audited profit before income tax for the year under review was approximately HK$23,388,000 but it was a loss of approximately HK$5,474,000 in the previous year. This great improvement was mainly contributed by recognizing government subsidy of approximately RMB29,391,000 (equivalent to approximately HK$28 million) granted from The Management Committee of Yichang High-Tech Industry Development Zone (宜昌高新技術產業開發區管委會). The profit attributable to shareholders increased to approximately of HK$23,382,000. However, even the business growth is the main concern of the Board, the Board will still adopt the stringent cost control and maintain thin and effective overhead structure and prudently utilize the corporate resources to create wealth for the shareholders.
BUSINESS OUTLOOK AND PROSPECTS
The production of the FRP pipes is initiated, the management now will focus their effort on maintaining the production and operation process of the plant in Yichang City, and more resources will be put on increasing and enhancing the sales of the products.
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On the other hand, in order to diversify and pursue more business opportunities for the shareholders of the Company, as stated in the announcement dated 8 March 2006, the management had entered into a Letter of Intent with Xin Shougang Zi Yuan Holdings Limited, a non-wholly owned subsidiary of Shougang Holding Limited, on 8 March 2006. This arrangement provides the Company the opportunities to involve in the mining business.
LIQUIDITY AND FINANCIAL RESOURCES
As at 31 December 2005, the net assets of the Group has approximately increased to HK$56,332,000 (2004: approximately HK$4,216,000) while its total assets were approximately HK$65,065,000 (2004: approximately HK$8,235,000) including cash and bank balances of approximately of HK$5,890,000. With the current ratio of 3.03, the Group remained in a financially liquid position and is able to finance ongoing operations.
FUNDING ACTIVITIES DURING THE YEAR
During the year, the Company had raised funds from the following activities:
1. Rights Issue (“Rights Issue”)
Regarding the Rights Issue, the basis was one Right Share (the “Rights Share”) for every consolidated share held on the Record Date (i.e. 3 May 2005), as such, there were 118,272,000 Rights Shares issued based on the subscription price of HK$0.25 for each Rights Share, the proceeds was approximately HK$29.6 million. The entire amount of the net proceeds of approximately HK$27.5 million from the Rights Issue (after some expenses for the Rights Issue) was applied for the repayment of a loan from Future Advance Holdings Limited (the “Future Advance”), the controlling shareholder of the Company, which in turn was applied for the settlement of the consideration of the acquisition of a piece of land situated in Yichang City (the “Acquisition”). The Rights Issue is fully underwritten by the Future Advance. Details of these were stated in the circular and the prospectus dated 14 April 2005 and 4 May 2005, respectively.
In order to facilitate the Rights Issue and provide flexibility for equity fund raising in the future, the Company increased its authorised share capital from HK$5,000,000 to HK$125,000,000 by creation of an additional 4,800,000,000 Consolidated Shares (“Capital Increase”). Details of these were stated in the circular dated 14 April 2005.
In addition, in order to create a more meaningful board lot value and improve cost effectiveness in trading in the shares of the Company, the Board of the Directors (the “Board”) implemented the share consolidation (“Share Consolidation”), pursuant to which every five shares were consolidated into one consolidated share (the “Consolidated Share”). On the basis of that, the issued share capital of the Company comprised of 118,272,000 Consolidated Shares of HK$0.025 each. Details of these were stated in the circular dated 14 April 2005.
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On 3 May 2005, an Extraordinary General Meeting (the “EGM”) was held and resolutions were duly passed by poll for approving the Acquisition, Share Consolidation, Capital Increase and the Rights Issue. Details of the EGM results were stated in the announcement dated 3 May 2005.The Rights Issue was completed on 24 May 2005 at 4:00 p.m.
2. Warrant Placing (“Warrants”)
On 18 August 2005, Warrant Placing Agreement was entered into between the Company and 胡玉 (Hu Yu) (the “Subscriber”) in relation to a private placing of 23,654,400 non-listed warrants (hereinafter referred as “Warrants”) at an issue price of HK$0.02 per Warrant, the Warrants entitle the Subscriber to subscribe for New Shares of the Company at an initial exercise price of HK$0.32 per New Share for a period of two years commencing from the date of issue of the Warrants. The net proceeds from the Warrants placing was approximately of HK$350,000 which will be applied as general working capital of the Group. Details of these are stated in our announcements dated 18 August 2005 and 23 September 2005. The Warrants Placing was completed on 4 October 2005.
Except for the above, the Company has no other funds raising activities during the year under review. All the above funds raising activities was necessary for the development of the Company, they provide the Company present and future capital resources.
With the funds raised previously and the internal generated financial resources, the Group has cash and bank balances approximately of HK$5,890,000, the directors of the Company (the “Directors”) anticipate that the Group have adequate financial resources to meet its ongoing operations and present development.
GEARING RATIO
As at 31 December 2005, the Group had cash of approximately HK$384,000 and RMB5,727,000 in its current assets while its current liabilities stood at approximately HK$3,216,000. The Group had long-term loan of approximately HK$5,498,000 as of 31 December 2005 and its shareholders’ funds amounted to approximately HK$56,332,000. In this regard, the Group had a net cash position and its gearing ratio should be approximately 10% (long term loan to total equity) as of 31 December 2005.
EXPOSURE TO FLUCTUATIONS IN EXCHANGE RATES
Sales and payment of the Group are denominated in Hong Kong dollars and Renminbi (“RMB”). No hedging or other alternatives have been implemented. As the exchange of Hong Kong dollars against RMB were relatively stable during the year, the Group’s exposure to currency exchange risk was minimal.
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CHARGE ON GROUP ASSETS AND CONTINGENT LIABILITIES
As at 31 December 2005, the Group did not have any significant contingent liabilities and no assets of the Group were pledged (2004: Nil).
SEGMENT INFORMATION
An analysis of the Group’s performance for the year by business and geographical segments is set out in note 6 to the financial statements.
CAPITAL STRUCTURE
The shares of the Company were listed on the GEM of the Stock Exchange on 13 December 2001. There has been no change in the capital structure of the Company since the Company’s listing on that date.
SIGNIFICANT INVESTMENTS
The resolution for the Acquisition was duly passed, the Company had constructed a manufacturing plant on the land acquired and production of which was initiated then. Save as disclosed, the Group had no other significant investments for the year ended 31 December 2005.
MATERIAL ACQUISITION AND DISPOSALS OF SUBSIDIARIES AND AFFILIATED COMPANIES/FUTURE PLANS FOR MATERIAL INVESTMENTS
The Company announced that a Letter of Intent for the formation of a joint venture company in the PRC, expecting to engage in mining of precious metal in Yichang City, Hubei Province, was entered into on 8 March 2006. The formal agreement is not yet entered into up to the approval date of this annual report. Save as disclosed, there were no material acquisition or disposal of subsidiaries and affiliated companies during the year. The Company has no other future plans for material investments.
EMPLOYEE INFORMATION
As at 31 December 2005, the Group has 4 full-time employees working in Hong Kong and 25 full-time employees working in the PRC respectively. The total of employees’ remuneration, for the year under review amounted to approximately HK$1,884,000. The Group remunerates its employees based on their performance, experience and the prevailing industry practice.
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For the year ended 31 December 2004
OPERATION REVIEW
During the year under review, the Group continued to engage in the provision of arcade game-on-demand service via Internet services and general trading of FRP Pipes, raw materials and composite materials.
The on-line gaming business continued to run under difficult market conditions, but the trading of FRP Pipes, raw materials and composite materials shown that the demands for the products were considerable.
FINANCIAL REVIEW
Turnover was approximately HK$7,038,000 for the year under review, which represented an increase of 87% while compared with that in previous year. The significant improvement was mainly attributed to the management’s effort in exploring new business opportunities in China by involving in trading businesses. Therefore, the audited loss before taxation for the year under review decreased to approximately HK$5,474,000 from approximately HK$9,821,000 in the previous year, the loss attributable to shareholders decreased by 42% to approximately of HK$5,669,000. Loss attributable to shareholders reduces significantly was due to the adoption of stringent cost control and maintain thin and effective overhead structure. The Company will continue to monitor its expense while prudently utilize the corporate resources into new business opportunities that would bring positive returns.
BUSINESS OUTLOOK AND PROSPECTS
The gaming business heavily relies on the content of the game which must be update, creative and innovative, and that requires a lot of financial recourses for its development or acquisition, but results were comparatively remote and uncertain. In order to maximize the shareholders’ return, the management continued to explore business opportunities. Accordingly, the Group entered into a conditional agreement with an independent third party in respect of a proposed acquisition of a piece of land in China, this proposed acquisition constitutes a very substantial acquisition under the GEM Listing Rules. The Company proposed that the Proposed Acquisition would be funded by the Rights Issue. All of these were stated in our announcement dated 26 January 2005, and the further details of transaction will be announced as soon as possible.
LIQUIDITY AND FINANCIAL RESOURCES
As at 31 December 2004, the net assets of the Group has approximately increased to HK$4,216,000 (2003: net liabilities approximately of HK$2,424,000) while its total assets were approximately HK$8,235,000 (2003: approximately HK$3,531,000) including cash and bank balances of approximately of HK$5,179,000. With the current ratio of 7.36, the Group remained in a financially liquid position and is able to finance ongoing operations.
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OTHER FUNDING ACTIVITIES DURING THE YEAR
On 26 March 2004, the Board of Directors announced that the Company had entered into the Placing Agreements on the same date pursuant to which the Company agreed conditionally to issue a total of 88,000,000 new ordinary shares of HK$0.005 each in the issued share capital of the Company at the placing price of HK$0.086 per placing share to the placees who are not connected persons of the Company. The net proceeds from the Placing are estimated to be approximately HK$7 million and will be used as to HK$2.5 million for the repayment of loans and as to HK$4.5 million as the Group’s general working capital. This Placing was completed on 18 May 2004. Please be referred to the Company’s circular dated 16 April 2004 in respect of major transaction – placing of new shares for further details.
On 31 May 2004, the Board of Directors announced that the Company had entered into the four Subscription Agreements (the “Placing”) on the same date, pursuant to which the Company agreed conditionally to issue a total of 63,360,000 new ordinary shares of HK$0.005 each in the issued share capital of the Company at the placing price of HK$0.078 per placing share to the placees who are not connected persons of the Company. The net proceeds from the Placing are estimated to be approximately HK$4.8 million and will be used for future business investment purposes. For further details, please be referred to the announcement dated 31 May 2004. This Placing was completed on 3 August 2004.
GEARING RATIO
As at 31 December 2004, the Group had cash of approximately HK$516,000 and RMB4,955,000 in its current assets while its current liabilities stood at approximately HK$1,003,000. The Group had long-term loan of approximately HK$2,998,000 as of 31 December 2004 and its shareholders’ funds amounted to approximately HK$4,216,000. In this regard, the Group had a net cash position and its gearing ratio should be approximately 71% (long term loan to total equity) as of 31 December 2004.
EXPOSURE TO FLUCTUATIONS IN EXCHANGE RATES
Sales of the Group are denominated in Hong Kong dollars and RMB and payment of royalties for game contents of the Group denominated in United States dollars. No hedging or other alternatives have been implemented. As the exchange of HK dollars against United States dollars and RMB were relatively stable during the year, the Group’s exposure to currency exchange risk was minimal.
CHARGE ON GROUP ASSETS AND CONTINGENT LIABILITIES
As at 31 December 2004, the Group did not have any significant contingent liabilities and no assets of the Group were pledged (31 December 2003: Nil).
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SEGMENT INFORMATION
An analysis of the Group’s performance for the year by business and geographical segments is set in our note 4 to the financial statements.
CAPITAL STRUCTURE
The shares of the Company were listed on the GEM of the Stock Exchange on 13 December 2001. There has been no change in the capital structure of the Company since the Company’s listing on that date.
SIGNIFICANT INVESTMENTS
The Group had no significant investments for the year ended 31 December 2004.
MATERIAL ACQUISITION AND DISPOSALS/FUTURE PLANS FOR MATERIAL INVESTMENTS
There were no material acquisitions or disposals of subsidiaries and affiliated companies during the year ended 31 December 2004. The Company has no plans for material investments or capital assets other than those set out in the Prospectus dated 6 December 2001 and the annual report 2004 and announcement dated 26 January 2005, of which we propose for an acquisition of a piece of land in China.
EMPLOYEE INFORMATION
As at 31 December 2004, the Group has 5 full-time and 2 part-time employees working in Hong Kong and 2 full-time employees working in the PRC respectively. The total of employee remuneration, including that of directors and provident fund contributions, for the year under review amounted to approximately HK$2,070,000. The Group remunerates its employees based on their performance, experience and the prevailing industry practice.
For the six months ended 30 June 2007
BUSINESS REVIEW AND FUTURE OUTLOOK
During the period under review, the Group continued to engage in the general trading of fibre glass reinforced plastic pipes (“FRP Pipes”), raw materials and composite materials and production of FRP Pipes and polyethylene pipes (“PE Pipes”) in the PRC.
Production of Pipes:
The business of PE Pipes is developing steadily. As it was stated in the Company’s first quarterly report dated 10 May 2007, two newly installed production lines for PE Pipes was running smoothly, and therefore, the management of the Group can focus on the planning of the project of the acquisition of equity interest in 新首鋼資源控股有限公司 (Xin Shougang Zi Yuan Holdings Limited)# (“Xin Shougang”).
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On the other hand, the business of FRP Pipes still had no improvements during the period under review, even the management in Yichang was trying to explore more sales channels with existing marketing and sales teams, but the expected results were unable to meet. As it was stated in the Company’s third quarterly report dated 13 November 2006, the fierce competition from the other competitors in China and overseas, and the left of Mr. Lang Fulai, our ex-director and key-man to the establishment of the FRP Pipes project who resigned on 6 March 2006, caused the unexpected negative effects on the FRP Pipes business. Besides, the difficulties in finding the proper ways of resolving it was also out of the expectation of the management. However, the management in Yichang had still sought for the ways of improving it.
Progress of the mining businesses:
A. As stated in the Company’s first quarterly report dated 10 May 2007, the Company are still in the stage of finalising the terms and conditions of the project for the possible investment in a mining operation in Australia. For background information of this possible investment, please refer to the announcement dated 5 September 2006.
B. In respect of the acquisition of equity interest in Xin Shougang, as it was stated in the Company’s announcement dated 29 June 2007, for the purpose of preparing future business plan, a new independent technical adviser was appointed by the Company, and because of this, this new independent technical adviser will take another four weeks to complete their work. Accordingly, the prepared accountants’ report of the target company also needed to be updated in accordance with the GEM Listing Rules and the estimated time for completion of the report will be approximately two months. As more time than expected will be needed to completion of the circular, such as the valuer and the reporting accountants require additional time to prepare their respective reports and financial information for inclusion in the circular, the Company had then applied to the Stock Exchange for a further extension of time to despatch the circular to the shareholders to 30 September 2007.
As at 30 June 2007, the Group continued in a position to develop the abovementioned new production line and mining business while keeping abreast of its core business.
FINANCIAL REVIEW
Total revenue and revenue from the continuing operations was approximately HK$23,153,000 for the period under review, which represented an increase of approximately 5% while compared with that of the corresponding period. The unaudited loss before income tax from continuing operations for the period under review was approximately HK$5,707,000 but it was a profit of approximately HK$110,000 in the corresponding period. The loss attributable to shareholders was approximately of HK$5,583,000. The Board will still adopt the stringent cost control and maintain thin and effective overhead structure and prudently utilize the corporate resources to create wealth for the shareholders.
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LIQUIDITY AND FINANCIAL RESOURCES
With the funds raised previously and the internal resources of the Company, as at 30 June 2007, the Directors anticipate that the Group have adequate financial resources to meet its ongoing operations and development.
EMPLOYEE INFORMATION
As at 30 June 2007, the Group has 4 full-time employees working in Hong Kong and 54 full-time employees working in the PRC respectively. The total of employee remuneration, including remuneration of the Directors, for the six months under review amounted to approximately HK$1,279,000. The Group remunerates its employees based on their performance, experience and the prevailing industry practice.
CAPITAL STRUCTURE
The shares of the Company were listed on the GEM of the Stock Exchange on 13 December 2001. Save as disclosed above, there has been no change in the capital structure of the Company since the Company’s listing on that date.
SIGNIFICANT INVESTMENTS
Save as disclosed, for the period under review, the Group had no significant investments.
MATERIAL ACQUISITION AND DISPOSALS/FUTURE PLANS FOR MATERIAL INVESTMENTS
The Company report that (i) in relation to the possible investment in a joint venture company and an exploration permit for coal in Australia, the formal agreement has not yet entered into up to the approval date of this announcement, and (ii) on 14 November 2006, 宜昌首控實業有限公司 (Yichang Shoukong Industries Co., Limited)# (“Yichang Shoukong”), a wholly-owned subsidiary of the Company, entered into the Acquisition Agreement (“Acquisition”) with Great Ocean Real Estate Limited (“GORE”), pursuant to which Yichang Shoukong has conditionally agreed to acquire from 宜昌泰鴻礦山科技有限公司 (Yichang Tai Hong Mining Technology Company Limited)#, a wholly-owned subsidiary of GORE, 22.28% interest in the registered capital of Xin Shougang for an aggregate consideration of approximately HK$971 million, however, on 2 February 2007, Yichang Shoukong entered into the second supplemental deed (the “Second Supplemental Deed”) with GORE to amend certain terms of the Acquisition Agreement, in particular the payment terms of the consideration. Pursuant to the Second Supplemental Deed, the consideration of approximately HK$971 million would now be satisfied by (i) cash of HK$18 million; and (ii) approximately 2,802 million preferred shares, which are convertible into ordinary shares of HK$0.00125 each of the Company at the initial conversion rate of 1:1, subject to adjustments. We are preparing the circular for the shareholders’ meeting to approve the Acquisition.
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Save as disclosed above, there were no material acquisition or disposal of subsidiaries and affiliated companies during the six months ended 30 June 2007. The Company has no other future plans for material investments.
SEGMENTAL INFORMATION
Details have been set out in note 10 under “Notes to the condensed consolidated financial statements” and further elaborated under “Business review and future outlook” of this section.
CHARGE ON GROUP ASSETS AND CONTINGENT LIABILITIES
During the period under review, the Group did not have any significant contingent liabilities and no assets of the Group were pledged (six months ended 30 June 2006: Nil).
GEARING RATIO
As at 30 June 2007, the Group had cash and cash equivalents of approximately HK$94,801,000 in its current assets while its current liabilities stood at approximately HK$959,000, and the Group had long-term loan of approximately HK$5,604,000 and its shareholders’ funds amounted to approximately HK$167,315,000. In this regard, the Group had a net cash position and its gearing ratio should be approximately 3.3% (long-term loan to shareholders’ funds).
EXPOSURE TO FLUCTUATIONS IN EXCHANGE RATES
Sales and payment of the Group are denominated in Hong Kong dollars and Renminbi (“RMB”). No hedging or other alternatives have been implemented. As the exchange of Hong Kong dollars against RMB were relatively stable during the period under review, the Group’s exposure to currency exchange risk was minimal.
(b) Xin Shougang
Set out below is a management discussion and analysis for the period from 18 October 2005 (the date of incorporation) to 31 December 2006.
Xin Shougang was incorporated in China on October 2005. Xin Shougang is principally engaged in mine resources development, asset management and provision of investment management consultancy services in Yichang City. Xin Shougang’s principal assets are the exclusive rights to invest, develop and to apply for the mining rights for the Mining Sites located at Yichang City, Hubei Province, the PRC and the 48% interest in YXS Precious Metal Mining, which the Group owns 52% interest. Xin Shougang will also invest in Yichang property market. However, since it is newly established, Xin Shougang has not recorded any turnover and recorded a loss of approximately RMB2.1 million since its incorporation to 31 December 2006. Upon completion of the Acquisition, Xin Shougang will become the Group’s associated company, and its financial results will be equity accounted for in the income statements of the Company. Net asset value of Xin Shougang as at 31 March 2007 amounted to approximately RMB67.0 million.
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Xin Shougang had total assets of approximately RMB269.3 million as at 31 March 2007, which included prepaid land lease payments for a parcel of land at Yichang, Hubei Province, the PRC with net carrying value of approximately RMB224.3 million. The said parcel of land was acquired by Xin Shougang on 29 March 2007 and valued by Greater China at RMB225.0 million as at 30 June 2007. Details of the valuation report prepared by Greater China are set out in Appendix V to this circular.
A reconciliation of the net carrying amount of the aforesaid property interests of the Xin Shougang Group as at 31 March 2007 as recorded in its accountants’ report to the valuation of the same property interests as at 30 June 2007 is set out as below:
RMB million
Net carrying amount (being the acquisition costs) of property interests of the Xin Shougang Group as at 31 March 2007 – included in the accountants’ report as prepaid land lease payments as set out in Appendix I to this Circular 224.3
Movement for the three months ended 30 June 2007 – Amortisation on prepaid land lease payments (unaudited) (1.4)
Net carrying amount as at 30 June 2007 (unaudited) 222.9
Valuation surplus 2.1
Valuation as at 30 June 2007 – included in the valuation report as set out in Appendix V to this Circular 225.0
2. FINANCIAL AND TRADING PROSPECT OF THE GROUP
PE pipes production
In 2006, the Group has two production lines of PE pipes installed, and in 2007, the Group will focus on integrating the new production line and exploring more sale channels and planning the further investments in the production scales and capacity while continuing with PE pipes production.
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Mining business
The Group is engaged in the trading and production of FRP pipes, and PE pipes in the PRC. However, the Group is always trying to broaden the Group’s source of income. In view of the continued economic growth and accelerated industrialisation and urbanisation in the PRC as well as the development in the global economy, natural resources are in demand at all times and the Group believed that the demand will maintain its growth momentum. In view of the prospect in natural resources, the Company had taken the following steps in developing in mining business:
a. Entering into a heads of agreement in relation to the possible investment in a joint venture company and an exploration permit for coal in Australia, details of which has been set out in the Company’s announcement dated 5 September 2006 for details;
b. Obtaining the shareholders’ approval for the formation of YXS Precious Metal which was granted the approval of determination of the mineral area scope (“國土資源部劃 定礦區範圍批複”) (the “Approval”) by 中華人民共和國國土資源部. As stated in the Approval, the mineral area scope was approximately of 26.8860 square kilometers and the estimated capacity of vanadium is approximately 25,933 tonnes, and the estimated duration of service is 30 years. Further details have been set out in the Company’s announcement dated 7 July 2006; and
c. In order to strengthen the development in mining business in Yichang, on 14 November 2006, the Group entered into the Acquisition Agreement. Further details have been set out in this circular.
Enhancement of Capital Bases
On 3 January 2007, the Company and Lehman Brothers Commercial Corporation Asia Limited (“Lehman Brothers”) entered into a term sheet in respect of the conditional issue of the convertible bonds (“Convertible Bonds”) of maximum principal amount of approximately HK$246 million with coupon rate of 4.5% due 2010. The issuance of the Convertible Bonds is not yet completed, and is still subject to our shareholders approval and other precedent conditions. It is the Group’s wishes that this issuance can be completed as easily as possible since Lehman Brothers is a well-known international investment bank, and with Lehman Brothers acting as the Group’s future business partners, the Company’s pace of future business development can be enhanced.
In 2007, the Company will focus on integrating the mining business, and, at the same time, with the Group’s advantage of having a business connection with Xin Shougang, the Group will put all its effort to explore the market of its pipes and mineral products, so that these new investments will be contributed, in terms of profits, to the Group as early as possible.
- 134 - APPENDIX III FINANCIAL INFORMATION ON THE ENLARGED GROUP
3. STATEMENT OF INDEBTEDNESS
As at 30 June 2007, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Group had outstanding indebtedness of approximately HK$6,270,000 which represents the principal amount of the convertible bond issued by the Company, which is not transferable. Details of the issue of the said convertible bond are set out in the announcement of the Company dated 28 February 2006. The convertible bond may be converted into ordinary shares of the Company at an initial conversion price of HK$0.40 per Share during its conversion period. The maturity date of the convertible bond is the third anniversary of the date of issue thereof. The convertible bond is interest-bearing at 1% per annum on the outstanding principal amount of the convertible bond.
Save as disclosed above and apart from intra-group liabilities, no companies within the Group have any outstanding mortgages, charges, debentures or other loan capital, bank overdrafts, loans or other similar indebtedness, liabilities under acceptances (other than normal trade bills), acceptance credits, hire purchase or other finance lease commitments, guarantees or other significant contingent liabilities.
As at the Latest Practicable Date, the Directors were not aware of any material change in respect of the indebtedness or other contingent liabilities of the Group since 30 June 2007.
Foreign currency amounts have been, for the purpose of the above indebtedness statement, translated into Hong Kong dollars at the applicable rate of exchange ruling at the close of business on 30 June 2007.
4. WORKING CAPITAL
The Directors, after due and careful consideration, are of the opinion that, taking into account the internal resources available to the Group, the Group will have sufficient working capital for at least twelve months from the date of this circular.
5. MATERIAL ADVERSE CHANGE
As at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position of the Group since 31 December 2006 (being the date to which the latest published audited financial statements of the Company were made up).
- 135 - APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
1. INTRODUCTION
The following is the unaudited pro forma financial information of the Company and its subsidiaries upon completion of the Acquisition prepared in accordance with GEM Listing Rules for the purpose of illustrating the effect of the Acquisition on the financial position of the Group as at 30 June 2007 and the results and cash flows of the Group for the six months ended 30 June 2007. As it is prepared for illustrative purposes only, and because of its nature, it may not give a true picture of the financial position, results and cash flows of the Enlarged Group following the completion of the Acquisition.
The unaudited pro forma consolidated balance sheet of the Enlarged Group is prepared based on the unaudited consolidated balance sheet of the Group as at 30 June 2007 extracted from the published unaudited interim report of the Group as of 30 June 2007 as set out in Appendix II to this Circular and the audited consolidated balance sheet of Xin Shougang and its subsidiary (the “Xin Shougang Group”) as at 31 March 2007 as extracted from the accountants’ report set out in Appendix I to this Circular (translated into HK$ at an exchange rate of RMB0.97 = HK$1) as if the Acquisition had been completed on 30 June 2007.
The unaudited pro forma consolidated income statement and cash flow statement of the Enlarged Group are prepared based on the unaudited consolidated income statement and cash flow statement of the Group for the six months ended 30 June 2007 extracted from the published unaudited interim report of the Group as of 30 June 2007 as set out in Appendix II to this Circular and the audited consolidated income statement and cash flow statement of Xin Shougang Group for the three months ended 31 March 2007 as extracted from the accountants’ report set out in Appendix I to this Circular (translated into HK$ at an exchange rate of RMB0.97 = HK$1) as if the Acquisition had been completed on 1 January 2007.
The accompanying unaudited pro forma financial information of the Enlarged Group is prepared based upon the unaudited historical financial information of the Group as set out in Appendix II and Xin Shougang Group as set out in Appendix I after incorporating the pro forma adjustments described in the accompanying notes. A narrative description of the pro forma adjustments of the Acquisition that are (i) directly attributable to the transactions and not relating to future events or decisions; and (ii) factually supportable, are summarised in the accompanying notes.
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2. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET OF THE ENLARGED GROUP As at 30 June 2007 Pro forma Pro forma adjustments Enlarged The Group 1 2 5 Group HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 ASSETS AND LIABILITIES Non-current assets Property, plant and equipment 31,541 31,541 Land use rights 30,285 30,285 Interest in an associate – 970,760 1,111,839 2,082,599 Deposits and prepayment 19,588 (18,000) 1,588 81,414 2,146,013 Current assets Inventories 1,580 1,580 Trade receivables 239 239 Prepayments, deposits and other receivables 349 349 Tax refundable 41 41 Cash and cash equivalents 94,801 94,801 97,010 97,010 Current liabilities Trade payables (538) (538) Accruals and other payables (421) (421) (959) (959) Net current assets 96,051 96,051 Total assets less current liabilities 177,465 2,242,064 Non-current liabilities Preferred shares – (50,198) (50,198) Convertible bonds (5,604) (5,604) Deferred tax liabilities (19) (157,948) (157,967) (5,623) (213,769) Net assets 171,842 2,028,295
EQUITY Equity attributable to equity holders of the Company Share capital 8,533 8,533 Reserves 158,782 902,562 1,111,839 (157,948) 2,015,235 167,315 2,023,768 Minority interests 4,527 4,527 Total equity 171,842 2,028,295
- 137 - APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
3. UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT OF THE ENLARGED GROUP Six months ended 30 June 2007
Pro forma Pro forma adjustments Enlarged The Group 2 3 4 5 Group HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Revenue 23,153 23,153
Other revenue 503 503
Cost of trading merchandise sold (19,429) (19,429) Raw materials and consumables used (3,011) (3,011) Staff costs, including directors’ remuneration (1,279) (1,279) Depreciation (707) (707) Amortisation on land use rights (316) (316) Other operating expenses (4,423) (4,423)
Operating loss (5,509) (5,509) Finance costs (198) (2,382) (2,580) Share of results of an associate – 1,111,839 (15,209) 1,096,630
(Loss)/Profit before income tax (5,707) 1,088,541
Income tax (expense)/written back – 417 417
(Loss)/Profit for the period (5,707) 1,088,958
Attributable to: Equity holders of the Company (5,583) 1,111,839 (15,209) (2,382) 417 1,089,082 Minority interests (124) (124)
(Loss)/Profit for the period (5,707) 1,088,958
- 138 - APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
4. UNAUDITED PRO FORMA CONSOLIDATED CASH FLOW STATEMENT OF THE ENLARGED GROUP Six months ended 30 June 2007
Pro forma Pro forma adjustments Enlarged The Group 1 Group HK$’000 HK$’000 HK$’000
Net cash inflow from operating activities 1,610 18,000 19,610 Net cash outflow from investing activities (933) (18,000) (18,933)
Net cash inflow before financing activities 677 677
Net cash inflow from financing activities 2,915 2,915
Net increase in cash and cash equivalents 3,592 3,592 Cash and cash equivalents at beginning of period 88,204 88,204 Effect of foreign exchange rate changes 3,005 3,005
Cash and cash equivalents at end of period 94,801 94,801
- 139 - APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
Notes to unaudited pro forma financial information of the Enlarged Group
(1) On 14 November 2006, Yichang Shougang entered into the Acquisition Agreement with GORE, a company incorporated in the British Virgin Islands with limited liability, to purchase 22.28% interest in the registered capital of Xin Shougang at a consideration of approximately HK$971 million, of which (i) HK$18 million will be paid in cash (the “Cash Consideration”); and (ii) approximately HK$953 million will be satisfied by the issue of Preferred Shares of the Company to GORE (the “Shares Consideration”).
Pursuant to the Acquisition Agreement, if the Group requested, GORE will agree to appoint a director nominated by the Group. Accordingly, the Directors of the Company consider the investment in Xin Shougang as an investment in an associate because the Group would have significant influence on Xin Shougang since the date of completion of the Acquisition.
In respect of the Shares Consideration, please refer to “Principal Terms of the Preferred Shares” included in the “Letter from the Board” of the Circular for the details of the principal terms of the Preferred Shares.
The adjustment is to reflect the effect of the Acquisition on the unaudited consolidated balance sheet of the Group as if the Acquisition had taken place on 30 June 2007.
The adjustments for the Shares Consideration contain the following components that are required to be separately accounted for, as if the Preferred Shares were issued on 30 June 2007, in accordance with Hong Kong Accounting Standards (“HKAS”) 32 “Financial Instruments: Disclosure and Presentation” and HKAS 39 “Financial Instruments: Recognition and Measurement”:
(a) Non-current liabilities – Preferred Shares (HK$50,198,000) represents the present value of the liability component of Preferred Shares on initial recognition determined based on the stream of future cash flows discounted at the rate of interest at date of valuation by the market to instruments of comparable credit status and providing substantially the same cash flows, on the same terms, but without the conversion and redemption options. The amount is carried as non-current liability in the unaudited pro forma financial information.
(b) Reserves (HK$902,562,000) represents the residual value of the embedded conversion option to convert the liability into equity of the Company and is included in shareholders’ equity.
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The fair values of each component of the Preferred Shares as if the Preferred Shares were issued on 30 June 2007 are made by reference to the valuation report dated 5 September 2007 prepared by Greater China, of which, the fair value of each component of the Preferred Shares are valued by Greater China as at 29 June 2007 and it is assumed that the fair value of each component of Preferred Shares as at 30 June 2007 and 1 January 2007 are the same as the fair value as at 29 June 2007 in preparing this unaudited pro forma financial information. The fair values of the liability component of the Preferred Shares are valued using discounted cash flow by assuming that:
• Effective interest rates were the interest rates applied at that time by the market to the financial instruments of comparable credit status and providing substantially the same cash flows
• Risk-free interest rate used was the yields of the Hong Kong Exchange Bills and Notes as at 29 June 2007
• Credit rating of the Preferred Shares is B
• The history and financial status of the Company, economic condition and company risk premium were taken into consideration of the credit rating of the Preferred Shares
• There is no change of existing option policy
• There will be no material changes in interest rate and tax rate in the PRC and Hong Kong
• There will be no material changes in the operation of the Company in an on going basis
If there are any transaction costs involved, they would usually be allocated to the components of the Preferred Shares based on the proportion of their respective values.
The fair values of each component of the Preferred Shares to be issued at Completion Date will have to be reassessed based on the fair values at the Completion Date. As a result of the assessment, the fair values of each component of the Preferred Shares may be substantially different from those estimated based on the basis above for the purpose of preparation of the unaudited pro forma financial information of the Enlarged Group.
Cash Consideration of HK$18,000,000 was paid by the Group in cash during the year ended 31 December 2006, as a deposit for the Acquisition.
It is assumed that the dividend on each Share is less than that of each Preferred Share (at the aforesaid rate of 0.5% per annum of the principal amount of the Preferred Shares then outstanding at the year end date), and the dividend on each Preferred Share will be paid annually. Accordingly, no dividend paid out is included in preparation of this unaudited pro forma consolidated cash flow statement.
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(2) Upon completion of the Acquisition, the Company will apply the equity method to account for the investment in an associate in the consolidated balance sheet of the Enlarged Group. In applying the equity method for the purpose of the unaudited pro forma financial information, the identifiable assets, liabilities and contingent liabilities of Xin Shougang Group were measured at their fair values as at 31 March 2007 as if the Acquisition was completed on (i) 30 June 2007 in preparing the unaudited pro forma consolidated balance sheet; and (ii) 1 January 2007 in preparing the unaudited pro forma consolidated income statement and cash flow statement.
HK$’000
Net asset value of Xin Shougang Group as at 31 March 2007 as per Appendix I (RMB66,971,000) 69,042 Valuation of the mining rights granted by the government as per Appendix VI (RMB9,000,000,000) 9,278,351
9,347,393
The Group’s interest in Xin Shougang Group (being 22.28% of HK$9,347,393,000) 2,082,599
Less: Consideration 970,760
The amount of excess of the Group’s interests in the identifiable assets, liabilities and contingent liabilities of Xin Shougang Group credited to the share of results of an associate 1,111,839
The amount of excess of the Group’s interests in the net fair value of the identifiable assets, liabilities and contingent liabilities of Xin Shougang Group (amounted to approximately HK$2,082,599,000) over the purchase consideration (amounted to HK$970,760,000) of approximately HK$1,111,839,000 is recognised in and credited to the share of results of an associate in the unaudited pro forma consolidated income statement.
Pursuant to HKAS 36 “Impairment of Assets”, the interest in an associate will be tested annually for impairment, as well as when there is indication of impairment. As a result of the testing for the impairment, the excess of the Group’s interests in the net fair value of the identifiable assets, liabilities and contingent liabilities of Xin Shougang Group may be different from that estimated based on the basis stated above for the purpose of preparation of the unaudited pro forma financial information. Accordingly, the amount of interest in an associate at Completion Date may be different from that above.
The net fair value of the identifiable assets, liabilities and contingent liabilities of Xin Shougang Group was determined by adjusting the fair value of the mining rights granted by the government (amounted to approximately HK$9,278,351,000/RMB9,000,000,000), from the net assets as at 31 March 2007 (amounted to approximately HK$69,042,000/RMB66,971,000) presented in the accountants’ report as set out in Appendix I to this Circular.
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The fair value of the mining rights is made by reference to the valuation report dated 5 September 2007 prepared by Greater China. The fair value of the mining rights was performed by employing the discounted cash flow method. In applying the discounted cash flow method, it is necessary to determine an appropriate discount rate for the mining rights. Capital Assets Pricing Model is used in evaluating the appropriate discount rate for the mining rights. It is assumed that Xin Shougang has vested mining rights in all the metal mines for a period of not less than 35 years commencing from the issue date of the mining permits for respective metal mines.
For the purpose of preparing the unaudited pro forma consolidated balance sheet of the Enlarged Group upon the completion of the Acquisition, the net fair value of the identifiable assets, liabilities and contingent liabilities of Xin Shougang Group as if the Acquisition was completed on 30 June 2007 is applied in the calculation of the estimated discount on acquisition arising from the Acquisition.
On Completion, the fair value of the consideration and the identifiable assets, liabilities and contingent liabilities of Xin Shougang Group will have to be reassessed based on the fair values at Completion Date. As a result of assessment, the amounts may be different from those estimated based on the basis stated above for the purpose of preparation of the unaudited pro forma financial information. Accordingly, the amount of actual discount on acquisition and interest in an associate at Completion Date may be different from those presented above.
(3) HK$’000
Loss for the three months ended 31 March 2007 of Xin Shougang Group as per Appendix I (RMB1,927,000) 1,987 Amortisation of the mining rights granted by the government over 35 years for 3 months of RMB64,286,000 (being RMB9,000,000,000 (valuation of mining rights as per Appendix VI)/35 years x 3/12) 66,274
Adjusted loss of Xin Shougang Group 68,261
Share of loss of Xin Shougang Group for the three months ended 31 March 2007 (being 22.28% of HK$68,261,000) 15,209
The adjustment for the amount of approximately HK$15,209,000 reflects the sharing of loss of 22.28% interest in Xin Shougang for the three months ended 31 March 2007 of approximately HK$68,261,000 (RMB66,213,000).
The loss of Xin Shougang for the three months ended 31 March 2007 was derived by adjusting the amortisation on the mining rights over 35 years for 3 months based on the fair value as mentioned in note (2) above (amounted to approximately HK$66,274,000/RMB64,286,000), from the loss for the three months ended 31 March 2007 (amounted to approximately HK$1,987,000/RMB1,927,000) presented in the accountants’ report as set out in Appendix I to this Circular. This unaudited pro forma adjustment in respect of adjusting the amortisation on the mining rights from the share of results of associates will have continuing income statement effect to the Enlarged Group.
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(4) The adjustment represents the imputed interest expense for the six months ended 30 June 2007 on the Preferred Shares, assuming effective interest rate of 9.49% per annum (by reference to the valuation report of the Preferred Shares dated 5 September 2007 prepared by Greater China), as if they were issued on 1 January 2007. This unaudited pro forma adjustment will have continuing income statement effect to the Enlarged Group, and the actual amount will vary according to the timing of the whole or any part of the Preferred Shares being converted by GORE and/or redeemed by the Group and the applicable effective interest rates.
(5) Deferred tax liabilities of approximately HK$157,948,000 (being 17.5% of HK$902,562,000 as mentioned in note 1(b) above) are provided as a result for the initial recognition of the issuance of the Preferred Shares. It is charged directly to the carrying amount of the equity component of the Preferred Shares as the temporary difference arises from the initial recognition of the equity component when separated from the liability component.
The amount of HK$417,000 (being 17.5% of HK$2,382,000 as mentioned in note (4) above) represents the subsequent changes in the deferred tax liability and is recognised in the income statement as deferred tax income.
- 144 - APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
5. ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
The following is the text of an Accountants’ Report dated 5 September 2007, prepared for the sole purpose of inclusion in this Circular, received from the independent reporting accountants, Grant Thornton, Certified Public Accountants, Hong Kong, in respect of the unaudited pro forma financial information of the Enlarged Group.
Certified Public Accountants Member of Grant Thornton International
5 September 2007
The Directors China Primary Resources Holdings Limited Suite 1405, Ocean Centre 5 Canton Road, Tsim Sha Tsui Kowloon, Hong Kong
Dear Sirs
We report on the unaudited pro forma financial information (the “Unaudited Pro Forma Financial Information”) of China Primary Resources Holdings Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) which has been prepared by the directors for illustrative purposes only, to provide information about how the proposed acquisition (“Acquisition”) of 22.28% equity interests in 新首鋼資源控股有限公司(Xin Shougang Zi Yuan Holdings Limited) by 宜昌首控 實業有限公司(Yichang Shoukong Industries Co., Limited), a wholly-owned subsidiary of the Company, might have affected the financial information presented, for inclusion in Appendix IV of the Company’s circular dated 5 September 2007 (the “Circular”). The basis of preparation of the unaudited pro forma financial information is set out on pages 136 to 144 of Appendix IV to the Circular in the section headed “Unaudited Pro Forma Financial Information on the Enlarged Group”.
Respective Responsibilities of Directors of the Company and Reporting Accountants
It is the responsibility solely of the directors of the Company to prepare the Unaudited Pro Forma Financial Information in accordance with paragraph 31 of Chapter 7 of the Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (“the GEM Listing Rules”) and with reference to Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).
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It is our responsibility to form an opinion, as required by paragraph 31 of Chapter 7 of the GEM Listing Rules, on the Unaudited Pro Forma Financial Information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the Unaudited Pro Forma Financial Information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.
Basis of opinion
We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 300 “Accountants’ Reports on Pro Forma Financial Information in Investment Circulars” issued by the HKICPA. Our work consisted primarily of comparing the unadjusted financial information with source documents, considering the evidence supporting the adjustments and discussing the Unaudited Pro Forma Financial Information with the directors of the Company. This engagement did not involve independent examination of any of the underlying financial information.
We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Unaudited Pro Forma Financial Information has been properly compiled by the directors of the Company on the basis stated, that such basis is consistent with the accounting policies of the Group and that the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to paragraph 31(1) of Chapter 7 of the GEM Listing Rules.
Our work did not constitute an audit or review made in accordance with Hong Kong Standards on Auditing or Hong Kong Standards on Review Engagements issued by the HKICPA, and accordingly, we did not express any such assurance on the unaudited pro forma financial information.
The Unaudited Pro Forma Financial Information is for illustrative purposes only, based on the judgements and assumptions of the directors of the Company, and because of its hypothetical nature, does not provide any assurance or indication that any event will take place in the future and may not be indicative of:
• the financial position of the Group as at 30 June 2007 or any future date; or
• the results and cash flows of the Group for the six months ended 30 June 2007 or any future periods.
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Opinion
In our opinion:
(a) the Unaudited Pro Forma Financial Information has been properly compiled by the directors of the Company on the basis stated;
(b) such basis is consistent with the accounting policies of the Group; and
(c) the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to paragraph 31(1) of Chapter 7 of the GEM Listing Rules.
Yours faithfully
Grant Thornton Certified Public Accountants Hong Kong
- 147 - APPENDIX V VALUATION REPORT OF PROPERTIES OF THE ENLARGED GROUP
The following is the text of a letter, summary of value and valuation certificate, prepared for the purpose of incorporation in this circular by Greater China, in connection with its valuation as at 30th June, 2007 of the properties of the Enlarged Group.
Room 2703 Shui On Centre 6-8 Harbour Road Wanchai Hong Kong
5 September 2007
The Directors China Primary Resources Holdings Limited Suite 1415 Ocean Centre 5 Canton Road Tsim Sha Tsui, Kowloon Hong Kong
Dear Sirs,
In accordance with your instructions to value the property interests of Xin Shougang Zi Yuan Holdings Limited (“Xin Shougang”) and its subsidiaries (together referred to as “Xin Shougang Group”) in the People’s Republic of China (“the PRC”) and China Primary Resources Holdings Limited (“the Company”) and its subsidiaries (together referred to as “the Group”) in the PRC and Hong Kong, we confirm that we have carried out inspections, made relevant enquires and obtained such further information as we consider necessary for the purpose of providing the market value of such properties as at 30 June 2007 (referred to as the “valuation date”). It is our understanding that this valuation is for acquisition purpose.
This letter which forms part of our valuation report explains the basis and methodology of valuation, and clarifies our assumptions made, titleship of properties and the limiting conditions.
BASIS OF VALUATION
The valuation of such properties is our opinion of the market value which we would define as intended to mean “the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.”
- 148 - APPENDIX V VALUATION REPORT OF PROPERTIES OF THE ENLARGED GROUP
VALUATION METHODOLOGY
Unless stated as otherwise, all properties are valued by the comparison method where comparison based on prices realized or market prices of comparable properties is made. Comparable properties of similar size, character and location are analyzed and carefully weighed against all the respective advantages and disadvantages of each property in order to arrive at a fair comparison of capital values.
For property no. 1, due to the nature of buildings and structures constructed, there are no readily identifiable market comparables to them. We have applied the cost method of valuation in assessing the property. It is a method of using current replacement costs to arrive at the value to the business in occupation of the property as existing at the date of valuation.
This method of valuation, the cost method, is based on an estimate of the market value for the existing use of the land, plus the current gross replacement costs of the improvements, less allowances for physical deterioration and all relevant forms of obsolescence and optimization.
The cost method generally furnishes the most reliable indication of value for property in the absence of a known market based on comparable.
ASSUMPTIONS
Our valuation has been made on the assumption that the owner sells the properties in their existing states without the benefit of any deferred terms contracts, leaseback, joint ventures, management agreements or any similar arrangement which would serve to increase the value of the properties.
For properties classified as Group I and Group II which are held under long term Land Use Rights, we have assumed that the owners of the properties have free and uninterrupted rights to use or transfer the properties for the whole of the unexpired term of the respective Land Use Rights. In our valuation, we have assumed that the properties can be freely disposed of and transferred to third parties on the open market without any additional payment to the relevant government authorities. Unless stated as otherwise, vacant possession is assumed for the properties concerned.
We have assumed that all consents, approvals and licenses from relevant government authorities for the buildings and structures erected thereon have been granted. Also, we have assumed that all buildings and structures fall within the site are held by the owner or permitted to be occupied by the owner.
It is assumed that all applicable zoning and use regulations and restrictions have been complied with unless nonconformity has been stated, defined, and considered in the appraisal report. Moreover, it is assumed that the utilization of the land and improvements is within the boundaries of the site held by the owner or permitted to be occupied by the owner. In addition, we assumed that no encroachment or trespass exists, unless noted in the report.
- 149 - APPENDIX V VALUATION REPORT OF PROPERTIES OF THE ENLARGED GROUP
No environment impact study has been ordered or made. Full compliance with applicable national, provincial and local environmental regulations and laws is assumed. It is also assumed that all required licences, consents, or other legislative or administrative authority from any local, provincial, or national government or private entity or organization either have been or can be obtained or renewed for any use which the report covers.
Other special assumptions of each property, if any, have been stated out in the footnotes of the valuation certificate.
TITLESHIP INVESTIGATION
For the properties classified as Group I and Group II, we have been provided with copies of title documents. However, due to the current registration system of the PRC, no investigations have been made for the legal title or any liabilities attached to the properties.
For the properties classified as Group III and Group IV, we have been provided with copies of tenancy agreements of the properties rented by the Group. However, we have not inspected the original documents to verify ownership or to ascertain the existence of any amendments which do not appear on the copies handed to us.
As far as the property in the PRC are concerned, we have relied upon the legal opinions given by 湖北惠臨律師事務所 (Hubei Huilin Law Firm) (the “PRC Lawyer”) in relation to the legal title to the properties located in the PRC under valuation.
All legal documents disclosed in this report, if any, are for reference only and no responsibility is assumed for any legal matters concerning the legal title to the properties set out in this report.
LIMITING CONDITIONS
We have not carried out detailed site measurements to verify the correctness of the land or building areas in respect of the relevant properties but have assumed that the areas shown on the legal documents provided to us are correct. Based on our experience of valuation of similar properties, we consider the assumptions so made to be reasonable. All documents and contracts have been used as reference only and all dimensions, measurements and areas are approximations.
We have inspected the exterior and, where possible, the interior of the properties. However, no structural survey has been made and we are therefore unable to report as to whether the properties are free from rot, infestation or any other structural defects. No tests were carried out on any of the services.
No soil analysis or geological studies were ordered or made in conjunction with this report, nor were any water, oil, gas or other subsurface mineral use rights or conditions investigated.
Substance such as asbestos, urea-formaldehyde foam insulation, other chemicals, toxic waste or other potentially hazardous materials could, if present, adversely affect the value of the properties. Unless otherwise stated in this report, its existence on the properties was not considered by the appraiser in the development of the conclusion of market value. The stated value estimate is predicated on the
- 150 - APPENDIX V VALUATION REPORT OF PROPERTIES OF THE ENLARGED GROUP assumption that there is no material on or in the properties that would cause such a loss in value. No responsibility is assumed for any such conditions, and the client has been advised that the appraiser is not qualified to detect such substances, quantify their impact on values, or develop the remedial cost.
The market value estimate contained in this report specifically excludes the impact of structural damage or environmental contamination resulting from earthquakes or other causes. It is recommended that the reader of this report consult a qualified structural engineer and/or environmental auditor for the evaluation of possible structural/environmental defects, the existence of which could have a material impact on market value.
We do not investigate any industrial safety, environmental and health related regulations in association with any particular manufacturing process of the Group or Xin Shougang Group. It is assumed that all necessary licenses, procedures and measures were implemented in accordance with government legislation and guidance.
Having examined all relevant documentation, we have relied to a very considerable extent on the information provided and have accepted advice given to us by the Group or Xin Shougang Group on such matters as planning approvals, statutory notices, easements, tenure, occupation, lettings, construction costs, rentals, site and floor areas and in the identification of the property in which the Group or Xin Shougang Group has valid interests. Floor areas of the properties stated herein are ascertained by us by scaling off the registered floor plans of the subject development.
We have had no reason to doubt the truth and accuracy of the information provided to us by the Group or Xin Shougang Group. We were also advised by the Group or Xin Shougang Group that no material factors have been omitted from the information to reach an informed view, and have no reason to suspect that any material information has been withheld.
No allowances have been made in our valuation for any charges, mortgages or amounts owing on the properties valued nor for any expenses or taxation which may be incurred in effecting a sale. Unless otherwise stated, it is assumed that the properties are free of encumbrances, restrictions and outgoings of an onerous nature which could affect their values.
For properties that are located in a relatively under-developed market, the PRC, assumptions are often based on imperfect market evidence. A range of values may be attributable to the properties depending upon the assumptions made. While we have exercised our professional judgment in arriving at the values, report readers are urged to consider carefully the nature of such assumptions which are disclosed in the valuation report and should exercise caution in interpreting the valuation report.
OPINION OF VALUE
Valuation figures of the properties owned by or rented to the Group or Xin Shougang Group are shown in the attached summary of valuation and their respective valuation certificates.
For properties classified as Group III and Group IV which are rented to the Group from independent third parties under tenancy agreements, they have no commercial value due to inclusion of non-alienation clause or otherwise due to lack of substantial profit rent.
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REMARKS
Our valuation has been prepared in accordance with generally accepted valuation procedures and in compliance with the requirements of the Rules Governing the Listing of Securities of The Stock Exchange of Hong Kong Limited.
In valuing the properties, we have complied with the requirements contained in the HKIS Valuation Standards on Properties (1st Edition 2005) published by the Hong Kong Institute of Surveyors and effective from 1 January 2005.
Valuation figures of properties in the PRC and Hong Kong are denominated in Chinese Renminbi and Hong Kong Dollars respectively.
We enclose herewith the summary of valuation and valuation certificates.
This valuation report is issued subject to our General Service Conditions.
Yours faithfully, For and on behalf of GREATER CHINA APPRAISAL LIMITED K. K. Ip BLE LLD Chartered Valuation Surveyor Registered Professional Surveyor Managing Director
Note: Mr. K. K. Ip, who is a chartered valuation surveyor and registered professional surveyor, has substantial experience in valuation of property in the PRC and Hong Kong since 1992.
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SUMMARY OF VALUATION
Market Value as at No. Property 30 June 2007 (RMB)
Group I – Property Interests owned by the Group in the PRC
1. Land, buildings and structures located at 54,000,000 the southern part of Ya Yuan Road at its junction with Jin Ling Road on the west Xiao Ting District (known as part of the Yichang Development Zone) Yichang Hubei Provice The PRC
Sub-total: 54,000,000
Group II – Property Interests owned by Xin Shougang Group in the PRC
2. Land located at Meiziya Village 225,000,000 Xiaoxita Yiling District Yichang Hubei Province The PRC
Sub-total: 225,000,000
Group III – Property Interests rented by the Group in the PRC
3. Nos. 1702, 1703, 1705, 1707 and 1805 on the 17th and 18th Floor No commercial value Wen Sheng Centre Wen Jin Plaza Tin Bui Yi Road Luo Hu District Shenzhen Guangdong Province The PRC
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Market Value as at No. Property 30 June 2007 (RMB)
Group IV – Property Interests rented by the Group in Hong Kong
4. Suite 1415 on 14th Floor No commercial value Ocean Centre Harbour City No. 5 Canton Road Tsim Sha Tsui Kowloon Hong Kong
Sub-total: No commercial value
Total: RMB279,000,000
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VALUATION CERTIFICATE
Group I – Property Interests owned by the Group in the PRC
Market Particulars of value as at No. Property Description and tenure occupancy 30 June 2007 (RMB)
1. Land, buildings The property comprises a parcel As at the date of 54,000,000 of land (the “Land”), 4 buildings and structures (the “Buildings”) and various inspection, the located at the ancillary structures which were property was southern part of completed in 2005. occupied by the Ya Yuan Road The Land is a rectangular Group as plastic pipe at its junction shaped site with an area of production plant. with Jin Ling approximately 213,161.97 square metres. Road on the west Xiao Ting The Buildings, which were built District (known with reinforced concrete and/or steel, have a total gross floor as part of the area of approximately 8,413.32 Yichang square metres. Detailed Development breakdown is as follows: Zone) No. of Gross Yichang Building Storey floor area Hubei Provice (sq.m.) The PRC Factory 1 4,448.00 Office 2 1,429.39 Dormitory 3 1,943.31 Canteen 1 592.62
Total: 8,413.32
The structures comprise boundary walls, pipelines, septic tanks, power distribution room, etc.
The property is held by the Group under a Land Use Rights Certificates for a term expiring on 13 January 2055.
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Notes:
(i) According to a Land Use Rights Certificate dated 28 December 2005 issued by People’s Government of Yichang City, the land use rights of the Land have been granted to 宜昌富連江複合材料有限公司(Yichang Fulianjiang Joint Composite Limited (“Yichang Fulianjiang”)), a wholly owned subsidiary of the Company, for a term expiring on 13 January 2055 for industrial use.
(ii) Pursuant to 4 sets of Building Ownership Certificate, the Buildings are held by Yichang Fulianjiang, a wholly owned subsidiary of the Company.
(iii) Opinions of the PRC Lawyer are summarized as follows:
(a) Yichang Fulianjiang has obtained a Land Use Rights Certificate dated 28 December 2005 by which the land use rights of the Land have been granted to Yichang Fulianjiang for industrial use with land use rights term expiring on 13 January 2055.
(b) Yichang Fulianjiang has obtained 4 sets of Building Ownership Certificate dated 18 November 2005 in respect of the Buildings.
(c) Yichang Fulianjiang is the legal holder of the land use rights of the Land and the building ownership rights of the Buildings. During the term of the land use rights, Yichang Fulianjiang has the right to transfer, lease or mortgage the Land and the Buildings .
(d) No mortgages or other encumbrances over the property are observed.
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Group II – Property Interests owned by Xin Shougang Group in the PRC
Market Particulars of value as at No. Property Description and tenure occupancy 30 June 2007 (RMB)
2. Land located at The property comprises a parcel As at the date of 225,000,000 Meiziya Village of land (the “Land”) with an inspection, the Xiaoxita area of approximately property was vacant. Yiling District 587,726.09 square metres. Yichang Hubei Province The property is held by Xin The PRC Shougang Group under a Land Use Rights Certificate for a term expiring on 28 December 2076 for residential use and 28 December 2046 for commercial use.
Notes:
(i) According to a Land Use Rights Certificate dated 29 March 2007 issued by the People’s Government of Yichang City Yiling District, the land use rights of the Land have been granted to 宜昌新首鋼房地產開發 有限公司 (Yichang Xin Shougang Real Estate Development Company Limited (“YXS Real Estate Development”)), a 65%-owned subsidiary of Xin Shougang, for a term expiring on 28 December 2076 for residential use and 28 December 2046 for commercial use.
(ii) The property was purchased in 2006. The cost of acquisition was approximately RMB224,340,000.
(iii) Opinions of the PRC Lawyer are summarized as follows:
(a) YXS Real Estate Development has obtained a Land Use Rights Certificate dated 29 March 2007 by which the land use rights of the Land have been granted to YXS Real Estate Development for composite use with land use rights terms expiring on 28 December 2076 (residential part) and 28 December 2046 (commercial part).
(b) YXS Real Estate Development is the legal holder of the land use rights of the Land. YXS Real Estate Development has the right to transfer, lease or mortgage the Land.
(c) No mortgages or other encumbrances over the property are observed.
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Group III – Property Interests rented to the Group in the PRC
Market value as at No. Property Description and occupancy 30 June 2007 (RMB)
3. Nos. 1702, 1703, The property comprises 5 office units on the No commercial value 1705, 1707 17th and 18th Floor of a 27-storey (excluding and 1805 on the basement) composite building which was 17th and 18th Floor completed in 1995. Wen Sheng Centre Wen Jin Plaza The total gross floor area of the property is Tin Bui Yi Road approximately 466.57 square metres. Luo Hu District Shenzhen The property is leased to the 霹靂啪喇軟件（深 Guangdong 圳）有限公司 (Billybala Software (Shenzhen) Province Limited), (a 100% owned subsidiary of the The PRC Company) under a tenancy agreement for a term of 6 months commencing on 1 April 2007 and expiring on 30 September 2007 at a monthly rent of RMB11,660 exclusive of utilities charges, cleaning fee and building management fee.
The tenancy is not assignable.
The property is currently occupied by the Group as an office.
(i) Opinions of the PRC Lawyer are summarized as follows:
(a) According to a tenancy agreement entered into between國家物資儲備局深圳辦事處機關服務中 心(China’s State Reserve Bureau Shenzhen Office Corporation Service Centre) as lessor and Billybala Software (Shenzhen) Limited as lessee, the property was leased to the lessee for a term of 6 months from 1 April 2007 to 30 September 2007 at a monthly rent of RMB11,660.
(b) The tenancy agreement is legal and valid.
(c) Billybala Software (Shenzhen) Limited has the legal right to use the property according to the tenancy agreement.
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Group IV – Property Interests rented to the Group in Hong Kong
Market value as at No. Property Description and occupancy 30 June 2007 (RMB)
4. Suite 1415 on The property comprises an office unit on the No commercial value 14th Floor 14th Floor of a 18-storey (excluding basement) Ocean Centre commercial building which was completed in Harbour City 1999. No. 5 Canton Road Tsim Sha Tsui The lettable area of the property is Kowloon approximately 195 square metres. Hong Kong The property is leased to the Group for a term of 3 years commencing on 20 May 2004 and expiring on 19 May 2007 at a monthly rent of HK$34,204.50, exclusive of air-conditioning charge and service charge. The leases were renewed for a term of 3 years commencing on 20 May 2007 and expiring on 19 May 2010 at a monthly rent of HK$57,007.50 exclusive of air- conditioning charge and service charge.
The tenancy is not assignable.
The property is currently occupied by the Group for office use.
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The following is the text of a letter with opinion of value prepared for the purpose of incorporation in this circular by Greater China, in connection with its valuation as at 30th June, 2007 of the Metal Mines.
Room 2703 Shui On Centre 6-8 Harbour Road Wanchai Hong Kong
5 September 2007
The Board of Directors China Primary Resources Holdings Limited Suite 1415 Ocean Centre 5 Canton Road Tsim Sha Tsui, Kowloon Hong Kong
Dear Sirs,
Re: Valuation of the Mining Rights of Various Metal Mines situated in Yichang City, Hubei Province, the People’s Republic of China (the “PRC”)
In accordance with the instructions from China Primary Resources Holdings Limited (referred to as the “Company”), we were instructed to value the mining rights (referred to as the “Mining Rights”) of 20 iron mines, 2 silver vanadium mines and 1 manganese mine (referred to as the “Metal Mines”) all situated in Yichang City, Hubei Province, the PRC. We confirm that we have carried out inspection of some of the Metal Mines, made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing our opinion of the fair value of the Mining Rights as at 30 June 2007 (referred to as the “Valuation Date”).
Basis of Valuation
The Mining Rights have been valued on the basis of “Fair Value” in the premise of continued use which, in our appraisal, reflects the future economic benefit to be derived from the ownership of the Mining Rights on the basis that the holders of the Mining Rights shall have no legal impediment and substantial extra costs to obtain or to renew the mining permit from the PRC Government from time to time until the expiry of the mining rights granted by the Government.
Fair Value in continued use premise is defined as the estimated amount at which an asset might be expected to exchange on the Valuation Date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion and with the buyer and seller contemplating retention of the asset for continuation of current operations and implementation of the business plans in associate with the asset.
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The definition of fair value adopted in this valuation report is similar and/or interchangeable with definitions of the valuation standards below:
Market Value
According to The Hong Kong Business Valuation Forum – Business Valuation Standards, market value is defined as the estimated amount for which an asset (a property) should exchange on the date of valuation between a willing buyer and willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.
Fair Market Value
The International Valuation Glossary defines fair market value as the amount at which property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.
For the purpose of this valuation, the term fair value will be used throughout this valuation report.
Our valuation has been prepared in accordance with the HKIS Valuation Standards on Trade- related Business Assets and Business Enterprise (First Edition 2004) published by the Hong Kong Institute of Surveyors and the Business Valuation Standards (First Printed 2005) published by the Hong Kong Business Valuation Forum, which are generally accepted valuation standards followed by relevant professional practitioners in Hong Kong. These standards contain detailed guidelines on the basis and valuation approaches in valuing assets used in the operation of a trade or business and business enterprises.
Valuation Methodology
In our appraisal, the Income Approach has been adopted. This approach focuses on the income- producing capability of the business operations of the Business Enterprise holding the Mining Rights. Its underlying theory is that the value of an asset can be measured by the present worth of the net economic benefit to be received over the useful life of the asset. In our opinion, this approach is the most appropriate in valuing the Mining Rights since a rational buyer normally will purchase it only if the present value of the expected economic benefits is at least equal to the purchase price. Based on this principle, the Income Approach estimates the future economic benefits and discounts these benefits to its present worth using a discount rate appropriate for the risks associated with realizing those benefits.
More specifically, we have employed the Discounted Cash Flow (“DCF”) Method to arrive at our opinion of value. This method would necessitate the subtraction, from revenue from the operations, the profit sharing attributable to the distributors and general and administrative expenses in the computation of cash flow.
In applying the discounted cash flow method, it is necessary to determine an appropriate discount rate for the Mining Rights. The discount rate represents an estimate of the rate of return required by a third party investor for an investment of this type. The rate of return expected from an investment by an investor relates to perceived risk. Risk factors relevant in our selection of an appropriate discount rate include:
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1. Interest rate risk, which measures variability of returns caused by changes in the general level of interest rates.
2. Purchasing power risk, which measures loss of purchasing power over time due to inflation.
3. Liquidity risk, which measures the ease with which an instrument can be sold at the prevailing market price.
4. Market risk, which measures the effects of the general market on the price behavior of securities.
5. Business risk, which measures the uncertainty inherent in projections of operating income.
6. Foreign exchange risk, which measures the possible influence that changes in currency exchange rates might have on the value of the investment.
Consideration of risk also involves elements such as quality of management, degree of liquidity, and other factors affecting the rate of return acceptable to a given investor in a specific investment. An adjustment for risk is an increment added to a base rate to compensate for the extent of risk believed to be involved in the investment.
We have used the Capital Assets Pricing Model (the “CAPM”) in evaluating the appropriate discount rate for the investment in the Business Enterprise based on the following calculation:
Required Return on Capital = Risk Free + Nominal Beta x Risk Premium
The parameters used in determining the discount rates as at the Valuation Date are shown as below:
Indicated Risk Free Rate ≈ 3.11% Market Return ≈ 12.52% Risk Premium ≈ 9.41% Estimated Unlevered Beta ≈ 1.1
In developing the beta for CAPM, several listed companies with similar business nature were selected as comparable companies, which include Tibet Mineral Develop Co. Ltd, Qinghai Jinrui Mineral Develop Ltd in the PRC, Mount Gibson Iron Ltd. in Australia and Axmin Inc. in Africa and Sesa Goa Ltd. in India.
The discount rate formulated by CAPM at approximately 13.461% was then adjusted upward by 2% to allow for lack of marketability for valuing the Mining Rights as the subject asset is privately held and is usually worth less than an otherwise comparable shareholding in a publicly held company.
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Legal Documents in Relation to the Mining Rights
We have been provided with extracts of legal documents relating to the Mining Rights. All documents are disclosed herewith for reference only and no responsibility on legal aspect is assumed in this valuation report.
As provided in the Project Co-operation Agreement entered into between the Municipal Government of Yichang City (宜昌市人民政府) and Shougang Holdings Limited (首鋼控股有限公司) on 26 June 2006, Xin Shougang Zi Yuan Holdings Limited (新首鋼資源控股有限公司) (referred to as “Xin Shougang”) was granted the exclusive mining rights in all iron mines within Yichang City (save for those iron mines of which the mining rights have been granted to third parties before 1 September 2005). A Business Licence (Registration No. 4205011101004) was issued in the name of Xin Shougang on 18 October 2005 with an authorized operating period spanning on between 18 October 2005 and 17 October 2055 and a permitted scope of businesses of investing, developing, operating, management and advisory on mining.
Pursuant to two mining permits, Xin Shougang has been authorized by the Ministry of Land and Resources of Hubei Province to undertake underground mining at the iron mines situated at Changyang Qinggangping (長陽縣青崗坪) and Changyang Haoshaoping (長陽縣火燒坪). Details of the mine exploitation permits (採礦許可証) are as follows:
Permit Number : 4200000511676 Name of Metal Mine : Xin Shongang Zi Yuan Holdings Limited Changyang Qinggangping Iron Mine (青崗坪鐵礦) Annual Output : 1,000,000 tons Mining Area : 3.91 square kilometers Valid Period : from December 2005 to December 2006
Permit Number : 4200000711731 Name of Metal Mine : Xin Shongang Zi Yuan Holdings Limited Changyang Haoshaoping Iron Mine (火燒坪鐵礦) Annual Output : 600,000 tons Mining Area : 5.0087 square kilometers Valid Period : from 24 May 2007 to 24 May 2009
Our valuation has been made on the basis that Xin Shougang shall have no extra costs of substantial amount and legal impediment in obtaining or renewing mine exploitation permit(s) for all of the Metal Mines throughout the mining period which is assumed to be not less than 35 years from the issue of first mine exploitation permit for respective metal mines of Xin Shougang.
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Assumptions
Our appraisal included on-site inspection of those Metal Mines that are accessible under the existing physical condition, discussions with the management of Xin Shougang in relation to the history and nature of the mining operations; a review of the information provided by the management in connection with the strategy of and the plan of action to be taken to implement the business plan. We have assumed that such information, opinions and representation provided to us are true and accurate. Before arriving at our opinion of value, we have considered the following major factors:
i. the physical conditions where the Metal Mines are situated;
ii. the nature of the Mining Rights and future operating strategies to be employed in operating the Metal Mines as provided by Xin Shougang; and
iii. the metal reserve, nature and quality of ore and costs of exploitation of the Metal Mines as advised by a mining expert namely Minarco-MineConsult (referred to as the “Mining Expert”) engaged by the Company.
In view of the general environment and the particular situation in which the Metal Mines are to be operated, the following assumptions have been adopted in our appraisal in order to sufficiently support our concluded value of the Mining Rights:
i. there will be no major change in the existing political, legal and economic conditions in the PRC in which the Metal Mines are to be operated;
ii. there will be no major change in the current taxation law in the PRC, that the rates of tax applicable to Xin Shougang remain unchanged and that all applicable laws and regulations will be complied with by Xin Shougang;
iii. the interest rates and exchange rates will not differ materially from those presently prevailing;
iv. the Mining Rights are free from any encumbrance and liability including but not limited to mortgage, charge, land premium, relocation compensation and development costs;
v. Xin Shougang shall have uninterrupted rights to operate the Metal Mines throughout its mining right period subject to no land premium, mining right premium or any payment to the PRC Government of substantial amount;
vi. Xin Shougang has obtained all necessary permits and approvals to carry out mining and business operations in the Metal Mines; and
vii. the Mining Rights in all the Metal Mines are vested with Xin Shougang for a period of not less than 35 years commencing from the issue date of the mine exploitation permits for respective Metal Mines.
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Limiting Conditions
We have accepted such information as the nature of mining rights, mining area and in the identification of the Metal Mines from the Company. We have had no reason to doubt the truth and accuracy of the information provided to us by the instructing party. We were also advised by the Company that no material factors have been omitted from the information to reach an informed view, and have no reason to suspect that any material information has been withheld.
We have not carried out detailed site measurement to verify the correctness of the mining areas of the Metal Mines but have assumed that the areas shown on the legal documents provided to us are correct. Based on our experience of valuation of similar assets in the PRC, we consider the assumptions so made to be reasonable. All documents and agreements have been used as reference only and all dimensions and areas are approximations.
For this valuation, we have conducted site inspections of some of the Metal Mines but no structural survey has been conducted. Our valuation has been made on the basis that the underground conditions and services of the Metal Mines are satisfactory and that no extraordinary expenses or delays will be incurred during the development of the mining sites.
No allowance has been made in our valuation for any charges, mortgages, outstanding land and mining right payment or amounts owing on the Metal Mines nor for any expenses or taxation which may be incurred in effecting a sale. It is assumed that the Metal Mines are free from encumbrances, restrictions and outgoings of an onerous nature which could affect their values.
Economic Conditions of the PRC
The PRC’s present economy is almost ten times larger than that of 1978 and it is expected to grow persistently at a rate of 10% in the forthcoming years onward. Two important dimensions of this strong economic growth are the proliferating middle class and a rising income gap, particularly the gap between the coastal areas and the inland. The coastal areas have been benefited by the growing foreign trades particularly Pearl River Delta and the Yangtze Delta, the area from Shanghai up the Yangtze River and a little bit in the northeast. These areas have been the major participants in international trades, with a big demand for manpower. Hence, incomes in those areas have gone up rapidly.
Another important aspect of the PRC’s economic growth is its foreign trade. The country is now the third-largest global trader. Its total foreign trade volume in 2005 was $1.4 trillion. In 1978, when reform began, the country’s total trade was only around $20 billion being the 30th-largest global trader. In the first nine months of 2006 its foreign trade was up by 25 percent. In 2007 the PRC will overtake the U.S. in terms of exports, and in 2007 or 2008 the country is expected to become the second-largest trading economy.
Another aspect of the PRC’s integration into the world economy is large inflows of foreign direct investment (FDI), between the first rank and the third rank on the list. Cumulative FDI into the country is about $650 billion, far more than into any other emerging market economy, some of which opened up to FDI decades before it. Of equal interest, remembering when CNOOC tried to buy Unocal in 2005,
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Chinese companies are starting to invest outward. The biggest and most notable successful transaction was Lennovo’s purchase of IBM’s PC business, which vaulted it into the very top ranks of global PC companies. More recently, the PRC is making substantial investments in natural resources abroad, primarily in petroleum but also in iron ore and other minerals and metals that it is importing. It is investing substantial amounts, especially in Latin America, Africa, the Middle East, and some of the Central Asian republics. In short, China’s “global footprint” has expanded dramatically.
Several major factors are considered attributable to the strong economic performance of the PRC.
First, in the economic domain, the country has become predominantly a market-driven economy. Before the implementation of the open door policy, there was no national distribution system. Most consumer goods were still rationed. Today, virtually everything in China is sold at a market-determined price. Of course, like any other market economy, the prices of necessities and utilities such as electric power, water, etc. are still controlled by the regulators.
Second, the markets are very competitive. One reason is the openness of the PRC’s economy, the fact that imports are very large relative to the size of the domestic economy. Even in industries with few suppliers, for most buyers, there’s always the alternative of importing. So the openness of the country’s economy has been a discipline on domestic prices, most of which have converged toward international prices as a consequence of the high levels of imports. The value of imports in 2005 was equal to 30% of its GDP. In Japan, for example, imports only constitutes about 10% of its GDP; for the U.S., it’s somewhere around 17%.
Another aspect of openness that creates these competitive domestic markets goes back to FDI or the extent of how important are the foreign firms in any economy in terms of their contribution to output. In the large manufacturing sector, the foreign companies in the PRC in the forms of joint ventures or wholly-foreign owned companies, etc. produce roughly one-third of its aggregate output. In the EU, where they have been promoting cross-border integration, capital flows, and mergers and acquisitions, the average industrial output produced by foreign companies is 25%. Hence, the PRC is ahead of the EU in the importance of foreign companies producing domestically. For the U.S., the extent is about one- fifth. Singapore is higher, but the PRC’s is a high share for a large, continental-sized economy.
The PRC’s openness means that over time, Chinese companies have had to compete successfully internationally. They are competing not only with imports, but also with foreign firms that have moved their operations to the country.
A third growth factor is the high savings rate. In any economy, growth is ultimately determined by two factors: how much it invests and how efficient it is at investing. These govern the productivity gains a country achieves over time. The PRC has a very high investment rate. Not just households, but also companies and the government, save a lot. The country saves about 50% of what is produced, the highest of any country in the world. Its rate is almost twice that of India and several times the rate in the U.S. The great majority of these savings is invested; some is used to invest in foreign financial assets. So they are able to build their capital stock.
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The PRC will increasingly be a market economy. The manufacturing sector is the largest part of the economy, but a large services sector is also being marketized. One thing driving that is that, under its 2001 commitment to come into the World Trade Organization, the PRC agreed to open up its services sector. At the end of 2006, foreign banks were able to compete on an equal basis with domestic banks, and there was increased competition in insurance, securities, asset management, and tele-communications.
We should see more competition and further expansion of the role of international trade. Tariff levels are now extremely low – the average tariff in the Chinese tariff schedule is slightly under 10 percent, and the country exempts so many of its imports from actually paying tariffs, much comes in duty free. Actual tariff collections relative to the value of imports are only 2 percent. That contribution of the external sector to competition in the domestic economy will continue, as will the savings rate until about 2015, when the country’s population is anticipated to begin to age fairly rapidly. If what has happened in most other economies happens there, many people who have been saving a lot will retire and spend down their savings, so even if the savings rate at every age stays the same, the national savings rate will fall.
The PRC is definitely both a challenge and an opportunity for the world; on balance, the latter outweighs the former. The rapid economic growth of the PRC has led to an expansion in the infrastructural developments, manufacturing of machines, equipment and automobiles. Iron and steel is an indispensable material of these industries, the robust growth of these industries will have significant favorable impact on demand for iron.
Use of Iron Ore
Iron and steel is used in a huge array of modern products. Cars, tractors, bridges, trains (and their rails), tools, skyscrapers, guns, ships – even the common steel can – all depend on iron and steel to make them strong at an inexpensive way.
Iron is an useful substance for several reasons:
• relatively speaking, and especially when compared to wood or copper, iron is extremely strong.
• iron is relatively easy to bend and shape using simple tools.
• iron can handle heat and can be used to make heat objects such as engines.
• iron can magnetized, making it useful in the creation of electric motors and generators.
• Iron is plentiful – 5 percent of the Earth’s crust is iron, and in some areas it concentrates in ores that contain as much as 70 percent iron.
• It is relatively easy to refine iron using simple tools.
The only real problem with iron and steel is rust. But you can control rust with paint, galvanizing, chrome plating or sacrificial anodes.
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Iron Ore is one of the vital components for making iron. It is simply rock that happens to contain a high concentration of iron. One thing that gave certain countries an edge between the 15th and 20th centuries was the availability of iron ore deposits. For example, England, the United States, France, Germany, Spain and Russia all have good iron ore deposits. Powdered iron can be used in:
• metallurgy products, magnets, high-frequency cores, auto parts, catalyst. Radioactive iron (iron 59)
• medicine, tracer element in biochemical and metallurgical research
• Iron blue in paints, printing inks, plastics, cosmetics (eye shadow), artist colors, laundry blue, paper dyeing, fertilizer ingredient, baked enamel finishes for autos and appliances, industrial finishes
• Black iron oxide: as pigment, in polishing compounds, metallurgy, medicine, magnetic inks, in ferrites for electronics industry
The following are common forms of iron ore:
• Hematite – Fe2O3 – 70 percent iron
• Magnetite – Fe3O4 – 72 percent iron
• Limonite – Fe2O3 + H2O – 50 percent to 66 percent iron
• Siderite – FeCO3 – 48 percent iron
Usually, minerals such as silica are mixed into rocks.
Raw ore, after selection as fine ore shall have iron content as high as 65% which can then be processed into lumb ore of golfball sized pieces having higher iron content than fine ore.
During ironmaking, iron ore, coke, heated air and limestone or other fluxes are fed into a blast furnace. The heated air causes the coke combustion, which provides the heat and carbon sources for iron production. Limestone or other fluxes may be added to react with and remove the acidic impurities, called slag, from the molten iron. The limestone-impurities mixtures float to the top of the molten iron and are skimmed off after melting is complete.
Sintering products may also be added to the furnace. Sintering is a process in which solid wastes are combined into a porous mass that can then be added to the blast furnace. These wastes include iron ore fines, pollution control dust, coke breeze, water treatment plant sludge, and flux. Sintering plants help reduce solid waste by combusting waste products and capturing trace iron present in the mixture. Sintering plants are not used at all steel production facilities.
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The liquid iron typically flows into a channel and indentations in a bed of sand. Once it cools, this metal is known as pig iron. To create a ton of pig iron, it is started with 2 tons of ore, 1 ton of coke and half-ton of limestone. The fire consumes 5 tons of air. The temperature reaches almost 3000 degrees F (about 1600 degrees C) at the core of the blast furnace. Pig iron contains 4 percent to 5 percent carbon and is so hard and brittle that it is almost useless. One of following two things can be done with pig iron:
• melt it, mix it with slag and hammer it to eliminate most of the carbon (down to 0.3 percent) and create wrought iron. Wrought iron is the stuff a blacksmith works with to create tools, horseshoes and so on. When you heat wrought iron, it is malleable, bendable, weldable and very easy to work with.
• produce steel.
Steel is iron that has most of the impurities removed. Steel also has a consistent concentration of carbon throughout (0.5 percent to 1.5 percent). Impurities like silica, phosphorous and sulfur weaken steel tremendously, so they must be eliminated. The advantage of steel over iron is greatly improved strength.
The open hearth furnace is one way to create steel from pig iron. The pig iron, limestone and iron ore go into an open hearth furnace. It is heated to about 1600 F (871 C). The limestone and ore forms a slag that floats on the surface. Impurities, including carbon, are oxidized and float out of the iron into the slag. When the carbon content is right, you have carbon steel.
Another way to create steel from pig iron is the Bessemer process.
Most modern steel plants use what’s called a basic oxygen furnace to create steel. The advantage is that it is a rapid process – about 10 times faster than the open hearth furnace.
A variety of metals might be alloyed with the steel at this point to create different properties. For example, the addition of 10 percent to 30 percent chromium creates stainless steel, which is very resistant to rust. The addition of chromium and molybdenum creates chrome-moly steel, which is strong and light.
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Market of Iron Ore in PRC
According to the industry report released by the China’s Iron and Steel Association, the PRC will be the world’s biggest importer of iron this year, with imports expected to rise by 30 million tons to 355 million tons in 2007, despite the fact that the overall global demand is expected to remain stable this year. However, the import growth rate is declining from the peak of 30% recorded in 2003. Major mines of the PRC produced 296 million tons of iron ore in the first seven months of 2006 as set out the following table.
Production of Iron Ore in the PRC during the period from January and July 2006 (’0,000 tons) Total output Total Output between Jan between Jan Area and Jul 2006 and Jul 2005 Change in %
Beijing 950.88 1009.26 -5.8 Tianjin 0 0 0 Hebei 11714.34 7611.35 53.9 Shanxi 1572.75 1313.4 19.7 Inner Mongolia 2210.97 1578.17 40.1 Liaoning 5378.37 4356.78 23.4 Jilin 378.81 293.54 29 Heilongjiang 27.31 18.77 45.5 Shanghai 0 0 0 Jiangsu 317.64 295.92 7.3 Zhejiang 79.02 73.88 7 Anhui 761.33 641.36 18.7 Fujian 387.56 302.67 28 Jiangxi 145.92 106.32 37.2 Shandong 850.57 585.2 45.3
Total output Total Output between Jan between Jan Area and Jul 2006 and Jul 2005 Change in %
Henan 231.29 173.82 33.1 Hubei 557.26 520.56 7.1 Hunan 359.75 164.3 119 Guangdong 554.6 398.15 39.3 Guangxi 34.13 13.18 159 Hainan 226.15 263.9 -14.3 Chongqing 84.08 52.35 60.6 Sichuan 1385.75 960.67 44.2 Guizhou 27.28 27.13 0.6 Yunnan 507.76 322.01 57.7 Tibet 199.14 178.4 11.6 Shanxi 305.2 325.91 -6.4 Gansu 18.25 15.33 19 Total 29597.49 21880.54 35.3
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Many have argued that iron ore prices, which increased by 70% in 2005 and 19% in 2006, are irrationally high. In the first nine months, price drops in imported iron ore was seen. The average price during the said period was US$62.7 per ton, 7.2 per cent lower year-on-year. The growing production of domestic iron ore has replaced imported iron ore to a certain extent and has exerted pressure on global iron ore prices. The country’s largest steelmaker, the Baosteel Group Corporation, has settled the iron ore price for 2007, an increase of 9.5 percent year-on-year, with the major iron ore producers, including Brazilian Companhia Vale do Rio Doce (CVRD). Many iron ore consumers is diversifying its sources of iron ore by increasing imports from India and increasing production at home to minimize dependence on iron ore from Australia and Brazil. Investment banks, including Morgan Stanley and Daiwa, predicted the prices of iron ore will go up 5 to 10 % while Citigroup and UBS expect the price to decrease by 5 to 10%. Generally speaking, long-term iron ore prices of the coming years are not expected to have great volatility as seen in the past few years.
International Prices of Iron Ore (US$/ton)
F ine Ore P ric e (US $/ton)
90 80 70 60 50
US $ 40 Fine Ore 30 Price (US $/ton) 20 10 0
5 98 1976 1979 1982 1 1988 1991 1994 1997 2000 2003 2006 Year
Sources: CVRD, Wall Street Journal, US Steel and other steel producers
Prices for iron ore in the PRC continue to increase. The current ex-works price for 66% Fe concentrates in northeastern Liaoning province is about RMB560-570/wet metric tonne including 13% VAT, comparing with that of RMB520-560/wmt by the end of last year. In neighbouring Hebei province, some prices have shot up for delivered concentrates to give a wider range of RMB745-800/dry metric tonne (including 13% VAT), from about RMB745/dmt at the end of last year. The market is feeling that supply of iron ore concentrates is becoming tighter and iron ore consumers have to face more intense competition for purchasing and many are is considering increasing their purchase price later this month in order to secure their supply. It is expected that ex-works price for 66% Fe concentrates will increase to RMB780/dmt (including 13% VAT) in view of the strong demand, up by RMB20/dmt from the early January’s level of RMB760/dmt.
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Towards those iron ore importers in the PRC, the Government has imposed stricter controls and rules including but not limited to the threshold of registration capital of iron ore import enterprises which has been lifted up to RMB20 million and the enterprises should have sound credit ratings, storage capacity and are well-equipped with pollutant disposal facilities to meet the country’s environment standards.
Market of Raw Steel in PRC
According to Xinhua economic analysts, the PRC’s steel industry is expecting a comparatively optimistic outlook this year. Demand in both domestic and international markets are expected to be strong and outputs of crude steel which hit a staggering of 420 million tons in 2006 is forecasted to reach 462 million tons in 2007, an increase of 10 percent year-on-year.
Improving steel output technologies, upgraded quality and competitiveness on international content enabled the domestic steelmakers take a record high of 95.8 percent of the domestic market share by the end of 2006, up 2.82 percentage points over 2005. Domestic output of crude steel amounted to 381.5 million tons during the first 11 months of 2006, up 18.4 percent over the same period of previous year. It is estimated that the PRC would export 40 million tons of steel in 2006, up 95 percent year-on-year but shall have a substantive decline in 2007 to 33 million tons. Imports of steel in 2006 is estimated to hit 18.5 million tons, a decline of 7.3 million tons or 28.4 percent, and may further slide to 17.6 million tons in 2007. The PRC is a net exporter of steel. The country’s crude steel consumption grew 4.59% in October 2006 to 33.73 million tons, and the steel consumption increased by 16.99 percent to 38.73 million tons in November of the same year. It is foreseen that overproduction in steel industry should be curbed and high value-added steel products such as special steel products encouraged while consumption of resources would be reduced.
The PRC’s steel industry, which enjoyed robust growth over the past years, is expected to see a slower growth pace in the next few years as predicted by the industry in view of the country’s continuous macro control policies which aimed to rein in the country’s overheated economy, predicting that China’s fixed assets investment would unlikely surpass the 29.8 percent growth rate achieved in the first half of 2006 in the coming few years. The possible slowing fixed assets investment means that the country’s demand for steel would enter a “”slow-growth” period, and the nation’s steel consumption is likely to drop below 10 percent, compared with record 25.7 percent in 2003 and 10.7 percent in 2004.
Latest statistics from the National Bureau of Statistics showed the prices of steel and wire dropped month on month by 4.1 percent and 0.2 percent respectively in October 2006. The price of hot-rolled steel fell by around RMB150 yuan per ton. Besides, many analysts warned that the country’s booming steel exports would retroact other countries to impose anti-dumping measures against the PRC’s steel products. However the anti-dumping measures will not greatly impact the PRC’s steel export in the long run because its steel products are competitive on the international market in terms of production cost.
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Market of Silver Vanadium and Manganese
Vanadium (V2O5) is used to strengthen steel and the high demand in the PRC and India has seen it reach a market price of Rmb120 to Rmb150 per kilogram. Vanadium is commonly found associated with titanium, both being used in lightweight alloys in the aerospace and transport industries.
Manganese is essential to iron and steel production by virtue of its sulfur-fixing, deoxidizing, and alloying properties. Steelmaking, including its ironmaking component, has accounted for most manganese demand, presently in the range of 85% to 90% of the total demand. Among a variety of other uses, manganese is a key component of low-cost stainless steel formulations and certain widely used aluminium alloys. It is also added to gasoline in order to reduce engine knocking. Manganese(IV) oxide (manganese dioxide) is used in the original type of dry cell battery. Manganese dioxide is also used as a catalyst. Manganese is used to decolorize glass (removing the greenish tinge that presence of iron produces) and, in higher concentration, make violet-colored glass. Manganese oxide is a brown pigment that can be used to make paint and is a component of natural umber. Potassium permanganate is a potent oxidizer and used in chemistry and in medicine as a disinfectant. Manganese phosphating is used for rust and corrosion preventation on steel. Manganese is currently selling at a price of US$1,450 per ton.
Description of the Metal Mines
Yichang, the transitional place from mountainous area of the western part of Hubei Province to the Jianghan Plain, locates in the junction of the upper reaches and the middle reaches, lies in the west of Hubei province, on the east of Jingzhou level-country city and Jingmen level-country city, on the west of Tujia municipality of western part of Hubei, on the north of Xiangfan level-country city and Shenlongjia forest area, on the south of Shimen level-country city in Hunan province. It has been noted as the gateway to the Three Gorges and the throat linking Hubei province and Sichuan province. The river runs over 237 km in Yichang. Going upstream can arrive in Chongqing passing form Three Gorges while going downstream can arrive in Shanghai through Wuhan and Nanjing.
Yichang administers 5 counties, 3 county-level cities, 5 urban districts and 1 development zone, including Dangyang county-level city, Yidu county-level city, Zhijiang county-level city, Yuanan county, Xingshan county, Zigui county, Changyang county, Xiling district, Wujiagang district, Dianjun district, Xiaoting district, Yiling district and Yichang high-tech develop industry zone.
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Administrative Districts of Yichang City
Xingshan
Zigui
Wufeng
Yichang City
Changyang Yidu
The mineral resource in Yichang is extremely rich with 84 kinds of discovered mineral product, about 4 percentage of the discovered mineral product in our country and 62% of that in Hubei province. The main mineral product has so huge and good quality that more than 10 kinds of mineral product reserve are at the forefront. The phosphorus, with high quality grade over 30%, is beyond 950 million, regarded as the third diggings of the ten largest ones. Graphite ore is the unique phosphorus piece graphite diggings in Middlewest of the PRC with a reserve of 15,520,000 tons, first grade quality and third place of reserve.
Yichang is one of the fifth largest mercury diggings in the PRC. The silver vanadium ore is the rare large compound one, associated with the silver, the molybdenum and so on the extremely valuable minerals; The reserve of the manganese, the iron, the germanium, the peridotite, coal, sylvite, the dolomite, the silver vanadium and so on 13 kinds of minerals take the first place in the PRC.
As provided in the Project Co-operation Agreement entered into between the Municipal Government of Yichang City (宜昌市人民政府) and Shougang Holdings Limited Liability Company (首鋼控股有限 責任公司) on 26 June 2006, Xin Shougang was granted the exclusive mining rights in all iron mines within Yichang City (save for those iron mines of which the mining rights have been granted to third parties before 1 September 2005). As confirmed by the Company, a total of 20 iron mines, 2 silver vanadium mines and 1 manganese as listed out in the table below were granted to Xin Shougang. As mentioned is the technical assessment report prepared by Minarco-MineConsult , the mineral reserves of the Mining Rights are set out as follows:
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Iron Mineral Reserves
No. Mine Location Iron Rock Reserve (x 1000 Tons)
1 Yiling District Guang Zhuang Iron Mine 84,838 宜昌市夷陵區官莊鐵礦 2 Xingshan Huangliang Ping Xin Tan 194 Iron Mine Zhou Jia Po Mining Section 194 興山縣黃糧坪~新灘鐵礦周家坡礦段 3 Zigui Huang Liang Ping – Xin Tie Pu Ping Mining Section 222 秭歸縣黃糧坪~新灘鐵鋪坪礦段 4 Zigui Yang Liu Chi Iron Mine 23,879 秭歸縣楊柳池鐵礦 5 Zigui Bai Yan Shan Iron Mine 8,896 秭歸縣白燕山鐵礦 6 Zigui Bai Mao Ling Iron Mine 6,286 秭歸縣白廟嶺鐵礦 7 Zigui Yang Jia Xin Cun and Xia Kou Ju Chi Yan Iron Mine 3,794 秭歸縣楊家新村及峽口鋸齒岩鐵礦 8 Changyang Haoshaoping 161,849 長陽縣火燒坪鐵礦 9 Changyang Mao Ping Iron Mine 4,144 長陽縣茅坪鐵礦 10 Changyang Shi Ban Po Iron Mine 41,846 長陽縣石板坡鐵礦 11 Changyang Fu Jia Yan Iron Mine 7,633 長陽縣付家堰鐵礦 12 Changyang Qinggang Ping Iron Mine 74,798 長陽縣青崗坪鐵礦 13 Changyang Tian Jia Ping Iron Mine 25,941 長陽縣田家坪鐵礦 14 Changyang Maan Shan Iron Mine 32,000 長陽縣馬鞍山鐵礦 15 Wu Feng Shi Yai Ping Iron Mine 9,630 五峰縣石崖坪鐵礦 16 Wu Feng Long Jiao Ba Iron Mine 138,625 五峰縣龍角壩鐵礦 17 Wu Feng Huang Liang Ping Iron Mine 33,000 五峰縣黃糧坪鐵礦 18 Wu Feng Xie Jia Ping Iron Mine 20,141 五峰縣謝家坪鐵礦 19 Wu Feng Ruan Jia Ping Iron Mine 12,640 五峰縣阮家坪鐵礦 20 Yidu City Cong Mu Ping Iron Mine 10,828 宜都市松木坪鐵礦
Total 701,183
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Non-ferrous Metal Mineral Reserves
V2O5 Ore Silver Metal Manganese No. Mine Location Reserve Reserve Ore Reserve (Tons) (Tons) (Tons)
1 Changyang Xiangjialing Silver Vanadium Mine 4,954,000 435 Nil 長陽縣向家岭銀釩礦 2 Changyang Gucheng Manganese Mine Nil Nil 12,600,000 長陽縣古城錳礦 3 Xingshan Beigaoyuan Silver Vanadium Mine 23,401,000 1,863 Nil 興山縣白果園銀釩礦
Total 28,355,000 2,298 12,600,000
Opinion of Fair Value
In view of all relevant circumstances, we are of the opinion that the Fair Value of the Mining Rights as at 30 June 2007 free of all encumbrances, is in the amount of RMB9,000,000,000 (RENMINBI YUAN NINE BILLION ONLY).
Unless otherwise stated, all monetary sums stated in this report are in Renminbi (RMB).
Our general service conditions are attached herewith.
Yours faithfully, for and on behalf of Greater China Appraisal Limited K. K. Ip Tse Wai Leung Registered Business Valuer of HKBVF Registered Business Valuer of HKBVF MRICS, MHKIS and RPS (GP) MFin BSc MRICS MHKIS RPS(GP) Managing Director Assistant Vice President
Mr. K. K. Ip, a member of The Royal Institution of Chartered Surveyors (RICS), a member of The Hong Kong Institute of Surveyors (HKIS), a Registered Professional Surveyor in General Practice and Registered Business Valuer of The Hong Kong Business Valuation Forum (HKBVF), has substantial experience in property, plant and machinery, business enterprise and intellectual property valuations for various purposes in Greater China Region since 1992.
Mr. Tse Wai Leung is a member of the Royal Institution of Chartered Surveyors (RICS), a member of The Hong Kong Institute of Surveyors (HKIS), a Registered Professional Surveyor in General Practice and a Registered Business Valuer under The Hong Kong Business Valuation Forum (HKBVF) and has over 14 years’ experience in valuations of property, plant and machinery, business enterprise and intellectual property in Hong Kong, Macau and the PRC.
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(A) REPORT FROM GRANT THORNTON
Certified Public Accountants Member of Grant Thornton International
5 September 2007
The Directors China Primary Resources Holdings Limited Suite 1415, Ocean Centre 5 Canton Road, Tsim Sha Tsui Kowloon, Hong Kong
Dear Sirs
We have examined the arithmetical accuracy of the calculations of the discounted cash flow forecast underlying the business valuation on 新首鋼資源控股有限公司 (“Xin Shougang”) as of 5 September 2007 (hereinafter referred to as the “Underlying Forecast”) which is regarded as a profit forecast under paragraph 29(2) of Appendix 1B of the Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (the “GEM Listing Rules”). The Underlying Forecast is set out in Appendix VI “Business valuation report on the mining sites” to the circular of China Primary Resources Holdings Limited (the “Company”) dated 5 September 2007 (the “Circular”).
Responsibilities
The directors of the Company (the “Directors”) are responsible for the preparation of the Underlying Forecast and the reasonableness and validity of the assumptions based on which the Underlying Forecast are prepared (the “Assumptions”).
It is our responsibility to form an opinion, based on our work on the arithmetical accuracy of the calculation of the Underlying Forecast and to report our opinion solely to you, as a body, solely for the purpose of reporting under paragraph 29(2) of Appendix 1B of the GEM Listing Rules and for no other purpose. We accept no responsibility to any other person in respect of, arising out of, or in connection with our work. Because the Underlying Forecast relate to cash flows, no accounting policies of the Company have been adopted in its preparation. The Assumptions include hypothetical assumptions about future events as detailed in Appendix VI to the Circular and management actions that cannot be confirmed and verified in the same way as past results, and these assumptions may or may not occur. Even if the events and actions anticipated do occur, actual results are still likely to be different from the Underlying Forecast and the variation may be material. Accordingly, we have not reviewed, considered or conducted any work on the reasonableness and the validity of the Assumptions and do not express opinion whatsoever thereon.
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Basis of opinion
We conducted our work in accordance with Hong Kong Standard on Assurance Engagements 3000 “Assurance Engagements Other Than Audits or Reviews of Historical Financial Information” issued by the Hong Kong Institute of Certified Public Accountants. We have examined the arithmetical accuracy of the calculations of the Underlying Forecast. Our work has been undertaken solely to assist the Directors in evaluating whether the Underlying Forecast, so far as the arithmetical accuracy of the calculations are concerned, has been properly compiled in accordance with the Assumptions made by the Directors. Our work does not constitute any valuation of Xin Shougang.
Opinion
In our opinion, so far as the arithmetical accuracy of the calculations are concerned, the Underlying Forecast has been properly compiled in accordance with the Assumptions made by the Directors.
Yours faithfully
Grant Thornton Certified Public Accountants Hong Kong
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(B) REPORT FROM OPTIMA CAPITAL LIMITED
Unit 3618, 36th Floor, Bank of America Tower 12 Harcourt Road, Central, Hong Kong
5th September, 2007
The Borad of Directors China Primary Resources Holdings Limited Suite 1415 Ocean Centre 5 Canton Road Tsimshatsui, Kowloon Hong Kong
Dear Sirs,
We refer to the valuation prepared by Greater China Appraisal Limited (“Greater China”) in relation to the fair value of the mining rights (the “Mining Rights”) of 20 iron mines, 2 silver vanadium mines and 1 manganese mine (the “Fair Value”) owned by Xin Shougang Zi Yuan Holdings Limited in Yichang City, Hubei Province, the PRC. The report of Greater China is included in appendix VI to a circular dated 5th September, 2007 (the “Circular”) issued by China Primary Resources Holdings Limited (the “Company”).
We note that the Fair Value, which has been developed based on the discounted cash flow analysis, is regarded as profit forecast under Chapter 19 of the Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited.
We note that the Fair Value is developed based on, among others, the cash flow forecast of the Mining Rights (the “Underlying Forecast”) and the estimated discount rate which is determined based on the estimated weighted average cost of capital derived from certain comparable companies with operations in the PRC and some other countries, and adjusted for risk premium.
We have discussed with the management of the Company and Greater China regarding the basis and assumptions of the valuation, and have reviewed the letter issued by Grant Thornton dated 5 September 2007 as set out in Appendix VII to the Circular regarding whether the Underlying Forecast, so far as the arithmetical accuracy of the calculations are concerned, has been properly compiled in accordance with the assumptions made by the Directors.
On the basis of the foregoing and all the information comprising the Fair Value and the arithmetical accuracy of the calculations reviewed by Grant Thornton, we are of the opinion that the Fair Value, for which the management of the Company is solely responsible, has been made after due and careful enquiry.
Yours faithfully, For and on behalf of Optima Capital Limited Mei H. Leung Chairman
- 179 - APPENDIX VIII TECHNICAL ASSESSMENT REPORT ON THE MINING SITES
The Directors China Primary Resources Holdings Limited Suite 1415, Ocean Centre, 5 Canton Road, Tsim Sha Tsui, Kowloon, Hong Kong
July 25, 2007
RE: INDEPENDENT TECHNICAL ADVISERS REPORT
Dear Sirs,
Minarco-MineConsult (“MMC”) has been engaged by China Primary Resources Holdings Limited (“CPRH” or “the Company”) to carry out an Independent Technical Report (“ITR”) of the exploration assets (“Relevant Assets”) belonging to Xin Shougang Zi Yuan Holdings Limited (“Xin Shougang” or “the Company”).
MMC understands that Shougang Holdings Limited Liability Company signed an agreement with Yichang City Government to develop 23 mining assets around the Yichang area of Hubei Province. To progress this development , a company called Xin Shougang was formed. China Primary Resources Holdings Limited is purchasing an equity stake in Xin Shougang.
The assets reviewed (“Relevant Assets”) include twenty three separate exploration projects as follows:
• Baiguoyuan Silver Vanadium Project;
• Xiangjialiang Silver Vanadium Project;
• Changyangyuan Gucheng Manganese Project; and
• Twenty Iron Ore Projects (including Guang Zhuang Project, Huangliang Ping Xintan Project Zhoujiapo, Huangliang Ping Project Tiepuping, Yangliuchi Project, Baiyanshan Project, Baimaoling Project, Yangjiaxincun and Xiakoujuchiyan Project, Huoshaoping Project, Maoping Project, Shibanpo Project, Fujiayan Project, Qinggangping Project, Tianjiaping Project, Ma’anshan Project, Shiyaiping Project, Longjiaoba Project, Huangliangping Project, Xiejiaping Project, Ruanjiaping Project and Songmuping Project).
The following report, the Independent Technical Advisors Report, has been prepared by MMC in connection with the ITR conducted by MMC on the Relevant Assets. The report sets out the process and conclusions of MMC’s review and MMC consents to its inclusion as required as part of purchasing an equity stake in Xin Shougang.
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MMC has conducted its review and preparation of the report in accordance with the requirements of Chapter 18 of the Listing Rules of the Stock Exchange of Hong Kong. The report is also in compliance with the “Australasian Code for Reporting Mineral Resources and Ore Reserves” (2004 edition published by the Joint Ore Reserves Committee “JORC”) of the Australasian Institute of Mining and Metallurgy, Australian Institute of Geoscientists and the Minerals Council of Australia (the “JORC Code”); for determining resources and reserves.
MMC carried out a detailed review of mineral resources (within the limitations of the information provided) and has prepared comparison tables which outline how the existing resource estimates prepared under the Chinese Resource Reporting Code compare with the JORC Code. MMC has also taken account of all relevant information supplied by Xin Shougang, representatives of the Company and the Local Bureau of Land and Resources.
MMC operates as an independent technical consultant providing resource evaluation, mining engineering and mine valuation services to the resources and financial services industries. This report was prepared on behalf of MMC by technical specialists, details of whose qualifications and experience are set out in Annexure A.
MMC has been paid, and has agreed to be paid, professional fees for its preparation of this report. However, none of MMC or its directors, staff or sub-consultants who contributed to this report has any interest in:
• The Company; or
• The Relevant Assets; or
• The outcome of the Initial Offering.
The review was based mainly on information provided by CPRH, Xin Shougang and the local Bureau of Land and Resources, either directly from the data room or from project sites and other offices. The report is based on information made available to MMC before July 9, 2007.
The work undertaken is a technical review of the information provided as well as that obtained during such inspections as MMC considered appropriate to prepare the report. It specifically excludes all aspects of legal issues, commercial and financing matters, product marketing, land titles and agreements, excepting such aspects as may directly influence technical, operational or cost issues.
In MMC’s opinion, the information provided by CPRH, Xin Shougang and the local Bureau of Land and Resources was reasonable and nothing discovered during the preparation of the report suggested that there was any significant error or misrepresentation in respect of that information.
MMC has independently assessed the Relevant Assets by reviewing pertinent data, including Mineral Resources, Ore Reserves, mine development issues, feasibility studies, environmental issues and future plans (where available) relating to productivity, production, operating costs and capital expenditures. All opinions, findings and conclusions expressed in the report are those of MMC and its specialist advisors.
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MMC concludes from this review that:
• The Baiguoyuan Project, with 23 Mt @ 0.93% Vanadium and 79 g/t Silver, represents significant Mineral Resources with relatively high Vanadium and Silver grades. Mineral Resource estimates have used a cut off grade of 0.3% Vanadium and 40g/t for Silver.
• The Xiangjialing Project, with 5 Mt @ 1.3% Vanadium and 87 g/t Silver, represents significant Mineral Resources with high grade Vanadium and Silver grades. Mineral Resource estimates have used a cut off grade of 0.3% Vanadium. The cut off grade for Silver is 40g/t.
• Comparative Australian deposits of Vanadium are Windamarra Western Australia with 55.4 Mt @ 0.46% Vanadium with high grade zones of 1.45% Vanadium. Comparative Silver mines in Australia are Century 78 Mt @ 32 to 43 g/t and Rosebery @ 8.9Mt @ 136 to 164 g/t.
• The Changyang Gucheng Manganese deposit with 5 Mt @ 17.7% Manganese, represents small to mid size Mineral Resources with moderate grades of Manganese and relatively high phosphorus >0.6%. Mineral Resource estimates have used a cut off grade of 15% total Mn and a minimum thickness of 0.7m.
• Comparative Australian deposits of Manganese are the world class (25% of world supply), GEMCO (BHP Billiton) mine at Groote Eyland Northern Territory, with Mineral Resources of 169 Mt and Ore Reserves of 94 Mt @ 48% Mn (Pyrolusite MnO2). Other Manganese deposits in China are the Ferro-Manganese (Rhodochrosite Ore) at Wafangzi in Liaoning Province.
• At this stage no detailed engineering assessment has been completed on the potential exploitation of the Silver or Vanadium projects, but given the high grade of the deposits there appears to be significant potential for them to be exploited using large scale opencut mining techniques. MMC understand however that a preliminary development plan has been prepared.
• The majority of the twenty three exploration projects are still in the early exploration phase (except Huoshaoping) and as yet have not completed detailed engineering assessment for their development and potential exploitation.
• Based on the information reviewed, there appears to be an opportunity for initial opencut mining of shallow Mineral Resources at a number of the exploration targets.
• The 20 Iron Ore deposits contain a combined total of 701 Mt of Mineral Resources at an average grade of 40% contained Iron.
• This is medium Iron grade by Chinese standards and with appropriate processing technologies, the grade can be upgraded to make it suitable for sale as a powder product. The Iron Ore projects look like they will be most suited to potential exploitation using underground mining techniques.
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• The most advanced of the Iron Ore deposits is the Huoshaoping Iron Ore Exploration Project which has had more detailed engineering assessment completed than the other projects. This project has been identified as the first project for potential development. A high level feasibility assessment has been completed for the project which looks at it operating at an annual ore capacity of 2.6 Mtpa to produce 1.07 Mtpa of final powder product with an average iron grade of 57%. This project will utilise underground mining techniques to exploit the deposit.
• Current Resource estimations for the Huoshaoping Project identify a potential Mineral Resource of 170 Mt of medium grade iron content. Using simple analysis and a number of rule of thumb assumptions, the feasibility study estimates that up to 87 Mt of this may be extractable.
• The Iron Ore Projects generally contain high levels of phosphorous which if added to a blast furnace in the steel making process can make steel brittle. Xin Shougang are working on small scale studies to address this issues which to date have shown positive results. MMC suggests that if the phosphorous removal technology can be successfully implemented, the final ore powder product may be able to be sold competitively around China.
• Mineral Resource estimates have been prepared for the majority of the exploration licences. These estimates have been prepared using typical Chinese exploration and resource reporting standards (see Annexure B). The majority of the resource classification classified Mineral Resources to a comparative JORC standard of Indicated status.
• Ore Reserve reporting to a level satisfactory to meet Chinese official reporting standards has not yet been completed for any of the projects. This is primarily because the projects are still in the exploration phase, and no detailed engineering has been completed to look at mining design issues, minerals processing, marketing and financial viability. Given the quality of exploration (by Chinese standards), further engineering work may result in a significant portion of the Minerals Resources being upgrade to Ore Reserves.
• High level forecast operating cost estimates have been prepared for the Huoshaoping Iron Ore Project. Due to the preliminary nature of the engineering assessment, these operating cost assumptions are based on high level estimates and not on detailed engineering. The reliability of these current estimates can be improved following further engineering assessment.
• MMC understands that the owner of the assets has signed a co-operation agreement with Yichang City Government for the development of the 23 mining assets. As part of this agreement, MMC understands that the Government warrants supporting the development of the projects by way of various fee waivers, preferential land use agreements, subsidised infrastructure as well as assistance with power and water supply, roads and telecommunications.
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• Xin Shougang have prepared an Environmental Impact Statement and a Safety Assessment for the construction of the Huoshaoping Mine and associated processing facility. This study has concluded that the underground mine and associated processing facilities will have no material impact on the environment.
MMC considers that in particular the Vanadium and Silver projects appear to be relatively high grade (by international standards) and have significant development potential as large profitable operations. The Iron Ore projects are lower grade but with Government support, further exploration and detailed engineering assessment, a number of the exploration targets may ultimately be developed into profitable operations.
MMC consents to the inclusion of this report in the Company’s Stock Exchange Circular.
Yours faithfully David Meldrum General Manager Minarco-MineConsult
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1 INTRODUCTION
1.1 BACKGROUND
The current owner of the exploration assets, Xin Shougang, has recently completed a number of initiatives in order to facilitate the development of the assets: The most important of these are as follows:
• Signing of a Cooperation Agreement between Yichang City Government and Shougang Holdings Limited Liability Company to develop the 23 mining assets. This agreement requires that Haoshaoping Iron Ore deposit is to be developed first. This document further outlines the Governments support for the projects which includes various fee waivers, preferential land use agreements, subsidised infrastructure as well as assistance with power and water supply, roads and telecommunications.
• Shougang Holdings Limited engaged Shougang Geological Exploration and Research Institute to complete an independent review to assess the potential economic viability of the projects. The results of this work (from a technical perspective) are largely summarised in the following key documents:
• Resource and Reserve technical report of Iron Ore projects
• Resource and Reserve technical report of Manganese projects
• Resource and Reserve technical report of Silver Vanadium projects
Note: It is understood that Headmen Company (an independent consultant) was engaged by Shougang Holdings Limited Liability Company to complete commercial development studies of the above projects.
• Resource tables were generated by the National Land and Resources Department of Hubei Province.
• Finally, in early 2007, a feasibility study (as well as the supporting environmental and safety documentation) was prepared for the development of Huoshaoping Iron Ore Mine.
1.2 SCOPE OF WORK
The key areas on which the MMC technical team focused included the following:
• Mineral Resources and Ore Reserves, including quantity and quality of drilling, reliability of historic data, adequacy of resource estimation methods, calculation of cut off grades, relevance of geospatial methods utilised;
• appropriateness of mining methods and mine design;
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• appropriateness of ore processing and technology;
• comment on environmental and safety issues;
• comment on capital cost estimates;
• general comments related to mine development/ore processing; and
• comment on regional and local infrastructure;
1.3 SITE VISIT
A site visit to the Huoshaoping Iron Ore Project was undertaken on June 28, 2007. The site is located in a mountainous rural region a little over 3 hours drive from Yichang City. Once outside of the city limits the drive to the site was on a sealed, winding, narrow road. Some adits from previous exploration work and Iron Ore outcrops were sighted during the visit. MMC’s technical team spent a total of two days in Yichang district reviewing information, visiting sites and interviewing management.
Details of the qualification and experience of the key personnel involved in this site visit and preparation of this report are given in Annexure A.
1.4 PROJECT LOCATIONS
The exploration projects are all located in the mountainous south west region of Hubei Province, all within a 100 km radius of Yichang City. The project locations are shown in Figure 1.1.
1.5 LIMITATIONS AND EXCLUSIONS
The review was based on various reports and tabulations, translated to English. The data reviewed did not include scaled maps, cross sections (except for Huoshaoping), geological plans or locations of “points of observation”, (drilling and trenching) or detailed sample and assay data.
The report is based mainly on information provided by CPRH, Xin Shougang and the Local Bureau of Land and Resources either directly from the mine/project sites and other offices, or from reports by other organisations whose work is the property of the mine or CPRH. CPRH has not advised MMC of any material change, or event likely to cause material change, to the operations or forecasts since the date of asset inspections.
The work undertaken for this report is that required for a technical review of the information coupled with such inspections as the Team considered appropriate to prepare this report. It specifically excludes all aspects of legal issues, commercial and financing matters, land titles, agreements, excepting such aspects as may directly influence technical, operational or cost issues.
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1.6 INHERENT MINING RISK
Mining, and in particular underground mining, is carried out in an environment where not all events are predictable.
Whilst an effective management team can identify the known risks and take measures to manage and mitigate those risks, there is still the possibility for unexpected and unpredictable events to occur. It is not possible therefore to totally remove all risks or state with certainty that an event that may have a material impact on the operation of a mine will not occur.
See MMC’s Summary Risk Assessment in Annexure D.
0 125 250
kilometres Mongolia
N SHAANXI
Beijing
HENAN CHINA Shiyan Tongliao
Laohekou Zhushan Xiangjialing Silver- Zaoyang Vanadium Project Xiangfan
Zigui Iron Guangshui 500km Project HUBEI CHINGQING Baiguoyauan Silver- Jingmen Vanadium Project Xiaogan Yichang Iron Jianshi Yichang Project Tianmen Wuhan
Enshi Shashi Wantan Changyangyuan Gucheng Xiantao Huangshi Manganese Project Shishou Changyang Iron Xianning Project Puqi Wufeng Iron Project
HUNAN JIANGXI
FIGURE 1.1
CHINA PRIMARY RESOURCES HOLDINGS LIMITED Project Locations Plan Project No : 3145M
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1.7 INFORMATION REVIEWED
The information and documentation reviewed by MMC as part of this review is summarised Table 1.1.
Table 1.1 – Information Reviewed
Mine Electronic Documents Date Author
all 23 projects Technical Assessment Report (Valuation) June, 2007 Greater China Appraisal Limited all 23 projects Resource and Reserve Statement July, 2006 National Land and Resources Department of Hubei Province Huoshaoping & Licence and Approvals May, 2007 Qinggangping Fe Mine Business Plan of Iron Ore Mine Jan. 2007 Headmen International Ag-Va Mine Business Plan of Silver-Vanadium Mine Mar, 2007 Headmen Company Mn Mine Business Plan of Manganese Mine Mar, 2007 Headmen Company Fe Mine R&R Technical Report of Iron ore Projects Mar, 2007 Geological Institute of Shougang Geology Exploration Academy Ag-Va Mine R&R Technical Report of Silver-Vanadium Mine Mar, 2007 Geological Institute of Shougang Geology Exploration Academy Mn Mine R&R Technical Report of Manganese Mine Mar, 2007 Geological Institute of Shougang Geology Exploration Academy all 23 projects Cooperative Agreement Between Yichang City June, 2006 Yichang City Government and Government and Shougang Holdings Limited Co Shougang Holdings Limited Co
Hardcopy Documents
Huoshaoping Safety Pre-assessment Report of the Processing April, 2007 Hubei Safety Science Institute of Plant of Huoshaoping Iron Ore Project National Land and Resources Huoshaoping Safety Pre-assessment Report of the Tailings Dam April, 2007 Hubei Safety Science Institute of of Huoshaoping Iron Ore Project National Land and Resources Huoshaoping Safety Pre-assessment Report of the Underground April, 2007 Hubei Safety Science Institute of Mining Project of Huoshaoping Iron Ore Project National Land and Resources Huoshaoping Environmental Impact Report of the Processing April, 2007 Wuhan Engineering University Plant of Huoshaoping Iron Ore Project of 600,000 tpa Huoshaoping Environmental Impact Report of Mining and April, 2007 Wuhan Engineering University Processing Project of Huoshaoping Iron Ore Project of 600,000 tpa Huoshaoping Geological Environmental Impact Report of Oct, 2006 Hubei Exi Geological Engineering Huoshaoping Iron Ore Project Exploration Institute Huoshaoping Feasibility Study Report of Huoshaoping Jan, 2007 Beijing Capital Steel Design Iron Ore Project Institute Huoshaoping Summary of Geological Exploration Report of Mar, 1956 Hubei Provincial Bureau Huoshaoping Iron Ore Project of Geology
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Mine Hardcopy Documents Date Author
Huoshaoping Summary Report of Additional Geological Oct, 1961 Team 601 of Metallurgic and Exploration of Huoshaoping Iron Ore Project Geological Exploration Company, Metallurgy Industry Bureau Huoshaoping Report of Additional Geological Exploration during July, 1966 Team 607 of Metallurgic and 1965-1966 of Huoshaoping Iron Ore Project Geological Exploration Company, Metallurgy Industry Bureau Hardcopy Maps
Huoshaoping Topographic and Geological Map (2 maps) Oct, 2006 Geological Exploration Team of Yichang City, Hubei Province Huoshaoping Floor Contour and Resource & Reserve Verification Oct, 2006 Geological Exploration Team of and Calculation Plan Yichang City, Hubei Province Huoshaoping Topography & Geology, and Sampling Area Map Nov, 2005 Central – South Research (2 maps) Institute of Metallurgical Geology Huoshaoping Fe3 Reserve Calculation Map (3 maps) Nov, 2005 Central – South Research Institute of Metallurgical Geology Huoshaoping Cross Section of Exploration Line Oct, 2006 Geological Exploration Team of (22maps, line 2 to 23) Yichang City, Hubei Province
MMC understands that there exists information for the other projects including: Preliminary feasibility assessment, drilling information, geological maps, resources and reserve statements and hydrological maps. This information is currently held by Hubei Geological Exploration And Research Institute and as agreed by Shougang Holdings Limited and Yichang City Government will be released to Shougang Holdings Limited when further development work progresses.
2 SILVER VANADIUM PROJECTS
The deposits contain mineralisation of both Silver (Ag) and Vanadium oxide (V2O5). The most important industrial use of Vanadium oxide is in the manufacture of sulphuric acid and ferro-Vanadium metal.
Alloys containing Vanadium are stronger and lighter, and are finding expanding use in construction and transport industries. Vanadium’s principal use is as a strengthening addition in carbon steel and high strength steel used in structural applications such as gas and oil pipelines, reinforcing bars in building and construction, tool steel and automotive use. Titanium aluminium Vanadium alloys are used in aircraft components, high speed air frames, rocket motor casings and gas turbines.
There are two project areas, Baiguoyuan and Xiangjialing and both contain significant Mineral Resources of relatively high grade Vanadium and Silver. These stratiform deposits have ore horizons of between 1.5 m to 3.5 m thick and dip at moderate angles from outcrop to >350m cover. There is on opportunity for opencut mining of ore reserves in the shallow areas from outcrop.
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2.1 BAIGUOYUAN SILVER VANADIUM PROJECT
The Baiguoyuan Silver-Vanadium project is located near Baiguoyuan Village in Xingshan County of Hubei. It is approximately 100km from Yichang city.
The project is bounded by the Hougou Canal to the east and the Yangping River to the west. The north and south limits are bounded by fault zones. The total area of the project is 9.8 square km.
The Baiguoyuan Project includes three Silver-Vanadium deposits, Baiguoyuan, Anjiahe and Maochoping. They are located to the south of in an open synclinal structure with an axis NE (40 degrees). The Baiguoyuan and Anjiahe deposits (separated by a river) are on the SE limb dipping at 3 degrees to the NW. The Maochoping deposit is located on the SW limb dipping NW at a shallow angle.
2.1.1 Local Geology
The Silver-Vanadium deposits are located within Lower Cambrian age, interbedded black shale, mudstone and dolomite. The geology is stratiform and regular without significant variation in thickness and grade. The continuity of geological horizons is only affected by minor faulting.
2.1.2 Ore Deposits
Two mineralised horizons have been identified within the three deposit areas as follows:
• AV2: the upper horizon, has Vanadium mineralisation with minor Silver.
– Thickness average is 4m
– This is a minor ore horizon (Vanadium <0.7% which has not been included in estimates of Mineral Resources.
• AV1: the lower horizon, has Vanadium mineralisation with Silver and minor selenium.
– Thickness ranges from 1.9m to 3.6m.
– This is the main ore horizon with higher grades of Vanadium, >0.8% and Silver > 100g/t .
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2.1.3 Exploration History
Exploration was carried out between 1980 to 1983. Exploration included, trenching, pitting and drilling. A total of 39 drillholes were completed. The grid spacing of “points of observation” included drilling, trenching and pitting. The drilling and grid spacing for each of the areas was as follows:
• Baiguoyuan: 22 holes, Data grid 400m x 200m
• Maochoping: 9 holes, Data grid 600m x 200m
• Aniahe: 8 holes, Data grid 400m x 200m
• There are adits in the shallow outcrops of each of the areas.
In MMC’s opinion, these data spacings are reasonable for subhorizontal, stratiform deposits with continuous horizons. MMC have relied on the “competency” of the Exploration geologists for geological understanding and the level of geological confidence provided by data spacing, i.e.; “points of observation”.
2.1.4 Resource and Reserves
Estimates of Mineral Resources have been made by manual polygonal methods. There has been no geological modelling using 3D mining software.
Estimates of Mineral Resources are shown in Table 2.1. These were checked manually from reported dimensions and density. Scaled plans and cross sections were not available for manual validation by measurement.
Table 2.1 – Baiguoyuan Silver Vanadium Resource Estimates
Dimensions Mineral Resources Grade Indicated Depth Thickness Density Inferred (Mt) Measured Total Vanadium Silver Gold Selenium Area Range (m) Avg (m) (t/bcm) (Mt) (2S22) (Mt) (Mt) V % Ag g/t Au g/t Se %
Baiguoyuan 0 to 348 3.5 2.7 10.9 10.9 0.99 106.7 0.15 0.0079 Anjiahe 0 to 342 1.9 2.7 2.9 2.9 0.96 21.1 Maochoping 0 to 295 3.6 2.7 9.6 9.6 0.86 66.8
Total 23.4 0.93 79.6
Note: Competent Persons – from Chinese Geological Institute Exploration: Hubei Provincial Bureau of Geology and Mineral Resources Estimates: Peoples Republic of China Research Institute Density: Assumed from reported Xiangjialing Project Silver Grades: not validated
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2.1.5 Mineral Grade
The Baiguoyuan Project, with 23 Mt @ 0.93 %V and 79 g/t Ag, represents significant Mineral Resources with relatively high grade Vanadium and Silver grades. Mineral Resource estimates have used a cut off grade of 0.3% Vanadium and 40g/t for Silver.
Comparative Australian deposits of Vanadium are Windamarra WA with 55.4 Mt @ 0.46% Vanadium with high grade zones of 1.45% V. Comparative Silver mines in Australia are Century QLD with 78 Mt @ 32 to 43 g/t Ag and Rosebery TAS with 8.9Mt @ 136 to 164 g/t Ag.
2.1.6 Exploitation and Economic Potential
The depth of cover is reported from zero “outcrop” to greater than 300m. This indicates that there are potential open-cut areas. A depth of cover plan and strip ratio plan would provide a sound basis for rapid assessment of conceptual mine plans.
2.1.7 Risks and Opportunities
The risks and opportunities for this project can generally be described as follows:
• Minor faulting with displacements of 5 metres has been identified and will impact on the continuity of mining horizons.
• Satisfactory validation of Silver grades could not be completed as there were conflicting estimates between exploration reports, and resource and reserve tables.
• Mineral Resource estimates have only been reported for the lower horizon AV1. There are likely to be additional potential resources, “exploration targets” within AV2 and extensions to AV1.
• Preliminary geological modelling of stratiform layers and grade would be a relatively easy task. This would improve geological confidence and provide a sound basis for rapid estimates and further conceptual mining options.
• The most significant opportunity is potential opencut ore reserves. Potential opencut mineral resources to 60 m depth (considered by MMC as an indicative highwall cutoff) could represent in the order of 5 Mt.
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2.2 XIANGJIALING SILVER VANADIUM PROJECT
The Xiangjialing Silver-Vanadium project is located near Gaojiayan Village in Changyang County of Hubei. It is approximately 40km from Yichang city. The project is bounded by the Meizixi Stream to the east and the Zhangjiapo Hills to the west. The project area measures approximately 3.6km from east to west and 1.2km from north to south.
The Xiangjialing Project includes two Silver-Vanadium deposits, Xiangjialing and Hujiawan divided by a major fault. They are on the south limb of an anticlinal structure with a moderate dip to the south.
2.2.1 Local Geology
The Silver-Vanadium deposits are similar to the Baiguoyuan Project, located within Lower Cambrian age, interbedded black shale, mudstone and dolomite. The geology is stratiform and regular without significant variation in thickness and grade. The continuity of geological horizons is only affected by minor faulting. There are 15 identified faults, with a higher occurrence in the western part of the Xiangjialing deposit. Dips to the south increase from the shallow area at 14 degrees to 32 degrees in the deeper parts of the deposit.
2.2.2 Ore Deposits
The mineralised horizons appear to be within similar geology to the Baiguoyuan Project,. The “sub-Baiguoyuan Layer” may be corellatable with AV1 in the Baiguoyuan Project. This mineralised horizon has clearly defined roof and floor.
Two types of mineralisation have been identified within the horizon as follows:
• Simple layering: black shaly mudstone with minor laminations of dolomite
• Complex layering: Interbedded black shaly mudstone with dolomite and dolomite with minor laminations of black shale
In the Xiangjialing Deposit mineralisation has an average thickness of 1.5m. Grade characteristics are split by the F4 fault with the north having a more complex style and Vanadium rich and the south having the simple style with higher Silver grades.
In the Hujiawan Deposit mineralisation has an average thickness of 2.4m. Grade characteristics are split by the F2 fault with the north having a more complex style and Vanadium rich and the south having the simple style with higher Silver grades.
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2.2.3 Exploration History
Exploration was carried out between 1980 and 1983. Exploration included, trenching, pitting and drilling.
The number and location of “points of observation” ie; drilling and trenching has not been reported. However the grid spacing for the shallow areas is 100m x 200m and deeper areas is 800m x 200m. Exploration in Xiangjialing South has a higher level of confidence than the northern area with the more complex layering in the mineralised horizon.
In Minarco’s opinion, these data spacings are reasonable for subhorizontal, stratiform deposits with continuous horizons. MMC has relied on the “competency” of the Exploration geologists for geological understanding, and the level of geological confidence provided by data spacing, i.e.; “points of observation”.
2.2.4 Resource and Reserves
Estimates of Mineral Resources have been made by manual polygonal methods. There has been no geological modelling using 3D mining software.
Estimates of Mineral Resources are shown in Table 2.2. These have been validated manually from reported dimensions and density. Scaled plans and cross sections were not available for manual validation by measurement.
Table 2.2 – Xiangjialing Silver Vanadium Resource Estimates
Dimensions Mineral Resources Grade Indicated Depth Thickness Density Inferred (Mt) Measured Total Vanadium Silver Gold Selenium Area Range (m) Avg (m) (t/bcm) (Mt) (2S22) (Mt) (Mt) V % Ag g/t Au g/t Se %
Xiangjialing 0 to 340 1.8 2.66 3.2 3.2 1.32 96.1 0.0082 Hujiawan 0 to 360 1.9 2.71 1.8 1.8 1.26 73.1 0.0052
Total 5.0 5.0 1.30 87.8
Note: Competent Persons – from Chinese Geological Institute Exploration: Hubei Provincial Bureau of Geology and Mineral Resources Estimates: Peoples Republic of China Research Institute Density: from reports
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2.2.5 Mineral Grade
The Xiangjialing Project, with 5 Mt @ 1.3 %V and 87 g/t Ag, represents significant Mineral Resources with high grade Vanadium and Silver grades. Mineral Resource estimates have used a cut off grade of 0.3% V. The cut off grade for Silver is 40g/t.
Comparative Australian deposits of Vanadium are Windamarra WA with 55.4Mt @ 0.46% Vanadium with high grade zones of 1.45% V. Comparative Silver mines in Australia are Century QLD with 78Mt @ 32 to 43 g/t Ag and Rosebery TAS with 8.9Mt @ 136 to 164 g/t Ag.
2.2.6 Exploitation and Economic Potential
The depth of cover is reported from zero “outcrop” to greater than 300m. This indicates that there are potential open-cut areas. A depth of cover plan and strip ratio plan would provide a sound basis for rapid assessment of conceptual mine plans.
2.2.7 Risks and Opportunities
The risks and opportunities for this project can generally be described as follows:
• Minor faulting has been identified and will impact on the continuity of mining horizons.
• The “complex” ore horizons will impact on ore recovery.
• The steeper dips will impact on ore recovery.
• Preliminary geological modelling of stratiform layers and grade would be a relatively easy task. This would improve geological confidence and provide a sound basis for rapid estimates and further conceptual mining options.
• The most significant opportunity is potential opencut ore reserves. Potential opencut mineral resources to 60m depth (considered by Minarco as an indicative highwall cutoff) could represent the order of 1 Mt.
3 MANGANESE ORE PROJECT
The Changyang Gucheng Manganese deposit is located 16km to the north-west of Changyang County City, in the Shihong District of Hubei province. The deposit measures 4 km long from east to west, and is 2-2.5 km long from north to south.
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The Manganese deposit contains mineralisation of banded “Rhodochrosite”, a mineral of
Manganesecarbonate (MnCo3), and minor laminations of “Pyrolusite”, a mineral of Manganese oxide
(MnO2). The characteristic of Rhodochrosite is that it has a compact inter-growth with calcite (CaCo3).
Rhodochrosite, is a pink carbonate related to calcite. Rhodochrosite is an attractive mineral used for ornamental display or as a gemstone. Rhodochrosite is a less common ore of Manganese. The more common Manganese ore is Pyrolusite (MnO2).
Manganese is one of the most widely used alloy elements in the world, essential to the manufacturing of steel. Manganese is also used in the manufacture of some batteries, ceramics, agricultural chemicals, fuel, welding materials, foundry equipment and some electrical components.
There is one deposit at Changyang Gucheng, with reasonable Mineral Resources of Manganese, predominantly Rhodochrosite (MnCo3), The stratiform deposit of approximately 15m thick, has one main ore horizon of between 1.3m to 3.5m thick and dips at between 3 to 15 degrees from outcrop to >400m cover. There is an opportunity for opencut mining of ore reserves in the shallow areas from outcrop.
3.1 LOCAL GEOLOGY
The Changyang Gucheng Manganese deposit is located within Lower Cambrian age, interbedded black mudstone and Manganese carbonate and Manganese oxide. The geology is stratiform and lenticular. Faulting is minimal and unlikely to impact on the continuity of ore horizons. The deposit dips to the north at between 3 to 15 degrees, averaging 5 degrees in the mineralised horizons.
3.2 ORE DEPOSITS
The Changyang Gucheng Manganese deposit contains mineralisation of banded
Rhodochrosite, a mineral of Manganese carbonate (MnCo3), and minor laminations of Pyrolusite, a
mineral of Manganese oxide (MnO2). For the purposes of grade reporting it is assumed by MMC, that Mn % is total Mn from both Rhodochrosite and Pryolusite.
Mineralised layers ranging between 0.15m to 2.0m are interbedded within black, silty mudstone layers ranging between 0.05m to 0.75m over a total geological section of 15m. The deposit thickens northwards and thin towards the west.
Exploration has identified three sections within the 15m geological section “Gucheng Manganese Ore System” as follows:
• Upper Section – “lean” averaging <2.0m thick and <18% total Mn.
• Middle Section – “industrial” averaging 3.0m thick and averaging 18.6% total Mn. This is the main ore horizon which has higher grade intervals of approximately 1.7m averaging >20% total Mn.
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• Lower Section – “lean” averaging <3.0m thick with a low grade of <11.5% total Mn.
3.3 EXPLORATION HISTORY
Exploration has continued over several programmes from the 1960s until 1980. Exploration has included drilling, trenching and pitting. The Chinese exploration team consider the geological status (confidence) to be “advanced exploration”.
The number and location of “points of observation” i.e.; drilling and trenching has not been reported. However delineation parameters with a grid size of 200m x 200m has been reported.
In MMC’s opinion, the grid spacing is reasonable for sub horizontal, stratiform deposits with lenticular horizons. MMC have relied on the “competency” of the Exploration geologists for geological understanding and the level of geological confidence provided by data spacing, i.e., “points of observation”.
3.4 RESOURCE AND RESERVES
Estimates of Mineral Resources have been made by manual polygonal methods. There has been no geological modelling using 3D mining software. Estimates of Mineral Resources are shown in Table 2.3. These have been validated manually from reported dimensions and density. Scaled plans and cross sections were not available for manual validation by measurement. In situ quantities with grades of <18% total Mn have been reported as Exploration Targets.
Table 2.3 – Manganese Resource Estimates
Dimensions Mineral Resources Grade Indicated Depth Thickness Density Inferred (Mt) Measured Total Total Phosphorus Area Range (m) Avg (m) (t/bcm) (Mt) (122b) (Mt) (Mt) Mn % P %
Changyangyuan Gucheng 0 to 428 2.87 5.1 5.1 20.7 0.67
Note: Competent Persons – from Chinese Geological Institute Exploration: Provincial Bureau of Geology and Mineral Resources Estimates: PRC Research Institute Total Manganese is mainly Rhodochrosite and minor Pyrolusite Density Rhodochrosite: 2.87 t/bcm from reports Density Pyrolusite: 1.97 t/bcm from reports
Exploration targets include additional quantities of approximately 7.5 Mt @ < 18% Mn.
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3.5 MINERAL GRADE
The Changyang Gucheng Manganese deposit of 5Mt @ 17.7% Mn, represents small to mid size Mineral Resources with moderate grades of Manganese and relatively high phosphorus >0.6%. Mineral Resource estimates have used a cut off grade of 15% total Mn and a minimum thickness of 0.7m.
Comparative Australian deposits of Manganese are the world class (25% of world supply), GEMCO (BHP Billiton) mine at Groote Eyland Northern Territory, with Mineral Resources of
169Mt and Ore Reserves of 94Mt @ 48% Mn (Pyrolusite MnO2). Other Manganese deposits in China are the Ferro-Manganese (Rhodochrosite Ore) at Wafangzi in Liaoning Province.
3.6 EXPLOITATION AND ECONOMIC POTENTIAL
The depth of cover is reported from zero “outcrop” to greater than 400m. This indicates that there are potential open-cut areas. A depth of cover plan and strip ratio plan would provide a sound basis for rapid assessment of conceptual mine plans.
The relatively high phosphorus will impact on Ore Reserve estimates. A review of the trend of phosphorous may indicate potential to selectively mine lower phosphorus ore.
The processing and extraction of Rhodochrosite ores is not common outside China and further review is required to determine reasonable estimates of metal recovery.
3.7 RISKS AND OPPORTUNITIES
The risks and opportunities for this project can generally be described as follows:
• The lenticular characteristics and variability of thickness and continuity of the mineralised bands will have the most sensitivity on Mineral Resource estimates.
• The relatively high phosphorus will impact on Ore Reserve estimates. A review of the trend of phosphorous may indicate potential to selectively mine lower phosphorus ore.
• Preliminary geological modelling of stratiform layers and grade would be a relatively easy task. This would improve geological confidence and provide a sound basis for rapid estimates and further conceptual mining options.
• The most significant opportunity is potential opencut ore reserves. Potential opencut mineral resources to 60 m depth (considered by MMC as an indicative highwall cutoff) could represent the order of 0.8 Mt.
• Other opportunities are the upgrading of 7.5 Mt of “exploration targets”, to Indicated Resources.
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4 IRON ORE PROJECTS
4.1 INTRODUCTION
There are a total of 20 Iron Ore projects which are owned by Xin Shougang. Some of these projects have undergone detailed exploration (by Chinese Standards), whilst other projects are still in the early exploration phase.
The Iron Ore Deposits are within Upper Devonian Age, metamorphosed marine sediments.
Mineralisation is mainly Hematite (also haematite) a mineral of iron oxide (Fe2O3) and minor
(<5%) Siderite, a mineral of iron carbonate (FeCO2). Reports include characteristics of Hematite, as “oolitic” or “colloidal” which refer to the cementing of iron typical in limestone type deposits. The term “ferrous coquina” refers to the cementing of shelly (coquina) sediments by iron minerals in these deposits by “oolitic” Hematite.
Iron ore grades are moderate ranging from 33% to 48% Fe with high Phosphorous at 0.5% to 1.5% P and low Sulphur <0.2% S. Iron Ore is the primary ore for Iron and Steel making. The impurity of Phosphorous (P) has a deleterious impact on Steel manufacture, making the product brittle.
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The total Mineral Resource estimates for these 20 separate exploration licences is 701Mt. The Chinese Mineral Resource classification classifies the majority of this estimate into the 2S22 category. If the JORC and Chinese Codes are compared directly, then this classification broadly equates to Indicated Status under the JORC Code. A summary of the current identified Mineral Resources (Chinese Standard) of Iron Ore deposits is given in Table 4.1.
Table 4.1 – Iron Ore Deposits – Mineral Resources
City/ Mineral Resource (kt) County Project Name 122b 2M11 2M22 2S21 2S22 Total
Yichang Guan Zhuang Iron Project 49 84,789 84,838 Xingshan Huangliangping Xintan Iron 194 194 Project – Zhoujiapo Section Zigui Huangliangping Xintan Iron 222 222 Project – Tiepuping Section Zigui Yangliuchi Iron Project 23,879 23,879 Zigui Baiyanshan Iron Project 8,896 8,896 Zigui Baimiaoling Iron Project 6,286 6,286 Zigui Yangjiaxincun and 3,794 3,794 Xiakoujuchiyan Iron Project Changyang Huoshaoping Iron Project 16,423 145,426 161,849 Changyang Maoping Iron Project 4,144 4,144 Changyang Shibanpo Iron Project 1,933 39,913 41,846 Changyang Fujiayan Iron Project 7,633 7,633 Changyang Qinggangping Iron Project 74,798 74,798 Changyang Tianjiaping Iron Project 25,941 25,941 Changyang Ma’anshan Iron Project 32,000 32,000 Wufeng Shiyaping Iron Project 9,630 9,630 Wufeng Longjiaoba Iron Project 138,625 138,625 Wufeng Huangliangping Iron Project 33,000 33,000 Wufeng Xiejiapingping Iron Project 20,140 20,140 Wufeng Ruanjiaping Iron Project 12,640 12,640 Wufeng Songmuping Iron Project 1,423 9,405 10,828
Total 49 1,423 9,405 18,356 671,950 701,183
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Typical ore grade for each of the exploration licences has been summarised for the major elements, Iron (Fe), Sulphur (S), Phosphorous (P) and Silica (SiO2). In general all the projects contain high to very high levels of phosphorous. Without a technology to remove the phosphorous, it is likely that all of the projects would have difficulty marketing the final product. Iron levels are typically medium grade (by Chinese Standards) and in all cases require processing (concentration or beneficiation) prior to marketing. A summary of the typical raw ore specifications is given in Table 4.2.
Table 4.2 – Iron Ore Deposits – Grade
City/ Total Fe SiO2 County Project Name (%) S (%) P (%) (%)
Yichang Guan Zhuang Iron Project 38.72 0.112 0.424 11.62 Xingshan Huangliangping Xintan Iron Project 48.77 0.1 NA 15.57 – Zhoujiapo Section Zigui Huangliangping Xintan Iron Project 36.35 0.1 NA NA – Tiepuping Section Zigui Yangliuchi Iron Project 38.32 0.0431 0.937 22.72 Zigui Baiyanshan Iron Project 42.25 0.035 1.1 14.09 Zigui Baimiaoling Iron Project 33.13 0.0695 1.386 31.49 Zigui Yangjiaxincun and Xiakoujuchiyan 36.53 0.037 1.046 NA Iron Project Changyang Huoshaoping Iron Project 37.85 0.069 0.9 9.12 Changyang Maoping Iron Project 42.26 0.025 0.825 21.00 Changyang Shibanpo Iron Project 40.61 0.081 0.82 NA Changyang Fujiayan Iron Project 39.07 0.06 0.846 26.72 Changyang Qinggangping Iron Project 43.70 0.026 0.845 10.83 Changyang Tianjiaping Iron Project 37.80 0.18 0.722 NA Changyang Ma’anshan Iron Project 39.44 0.047 1.44 17.80 Wufeng Shiyaping Iron Project 43.44 0.063 0.915 12.16 Wufeng Longjiaoba Iron Project 40.95 0.139 0.796 12.26 Wufeng Huangliangping Iron Project 47.53 NA NA NA Wufeng Xiejiapingping Iron Project 37.77 0.067 0.564 17.66 Wufeng Ruanjiaping Iron Project 43.19 0.035 0.8 17.50 Wufeng Songmuping Iron Project 43.19 0.035 0.99 NA
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The Iron Ore deposits generally contain between one and five separate ore horizons (but in cases as many as ten). The ore horizons are generally thin (typically 1 to 2 metres), moderate to steeply dipping, stratiform, making them suitable only for exploitation using underground mining methods. The typical characteristics of each of the 20 Iron Ore deposits are summarized in Table 4.3.
Table 4.3 – Iron Ore Deposits – Orebody Characteristics
City/ Orebody Length Thickness Dip County Project Name Strata No. (m) (m) Angle Depth
Yichang Guan Zhuang Iron Project Fe3 2 4,000 1.1 10˚-30˚ 0-280 Xingshan Huangliangping Fe1, Fe2 1 280 1.65 40˚-50˚ Xintan Iron Project – Zhoujiapo Section Zigui Huangliangpin Fe3 1 300 1.65 40˚-50˚ Xintan Iron Project – Tiepuping Section Zigui Yangliuchi Iron Project Fe1, Fe2 2 4,650 1.51-1.97 29˚-32˚ 0-760 Zigui Baiyanshan Iron Project Fe3 6 1,970 1.42 37˚ Zigui Baimiaoling Iron Project Fe1 5 1,280 1.3-1.88 19˚-44˚ Zigui Yangjiaxincun and Fe1 Fe2 5 1,200 1.5-2.8 20˚ Xiakoujuchiyan Iron Project Changyang Huoshaoping Iron Project Fe3 1 12,800 2.4 20˚-30˚ 0-700 Changyang Maoping Iron Project Fe1-Fe4 2 600 2.33 20˚ 0-260 Changyang Shibanpo Iron Project Fe3,Fe4 1 8,060 1.61 20˚-72˚ 0-870 Changyang Fujiayan Iron Project Fe3,Fe4 1 5,300 1.42-2.79 20˚-41˚ 0-500 Changyang Qinggangping Iron Fe3,Fe4 2 12,300 2.2-2.8 25˚-35˚ 0-600 Project Changyang Tianjiaping Iron Project Fe3 1 5,000 0.78-1.5 10˚ 400-450 Changyang Ma’anshan Iron Project Fe3,Fe4 2 4,350 0.4-3.25 20˚-55˚ 0-600 Wufeng Shiyaping Iron Project Fe2 3 3,500 2.29 27˚ Wufeng Longjiaoba Iron Project Fe3,Fe4 3 18,000 1.05-3.99 24˚-34˚ Wufeng Huangliangping Fe2-Fe4 1 3,400 1.2 10˚-45˚ Iron Project Wufeng Xiejiapingping Iron Fe2-Fe4 2 3,000 0.99-1.43 16˚-35˚ 0-320 Project Wufeng Ruanjiaping Iron Project Fe2 1 4,000 0.93-1.25 5˚-25˚ 0-140 Wufeng Songmuping Iron Project Fe4 10 650 1.68 11˚-13˚
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4.2 CHANGYANG HUOSHAOPING PROJECT
The most advanced of the 20 projects (Iron Ore deposits) in the Yichang area, the Huoshaoping project, has been identified as the first project for potential development. MMC understands from discussion with management that the agreement between Shougang Holdings Limited Liability Company and Yichang City Government gives preferred terms to Shougang Holdings Limited Liability Company for the development of these projects.
The Changyang Huoshaoping Iron Ore deposit is located in Huoshaoping Village, Changyang County of Hubei Province. The deposit is approximately 13km long from east to west and varies from 1 to 2.5 km long from north to south. The Huoshaoping project is currently being assessed for development and numerous high level conceptual studies have been developed.
The balance of Section 4 is devoted to discussion of the Huoshaoping Project only.
4.3 LOCAL ENVIRONMENT
The project is located in a very mountainous area, characterised by steep valleys, large escarpments, deep rivers and high mountain peaks. The topography of the site ranges from 1300 metres 1900 metres. The climate is very wet, with average annual rainfall typically between 1029 and 1986mm and an average of 1638mm. The steep terrain and high rainfall make logistics substantially more challenging than in flatter regions of China.
4.4 LOCAL GEOLOGY
The Huoshaoping Iron Ore deposit is located within Upper Devonian age, metamorphosed calcareous sediments. The geology is stratiform and regular. Three fault zones have been identified. Two with minor displacements are unlikely to impact on the continuity of ore horizons. There is one significant fault zone a displacement of 26 to 118m.
The Iron Ore deposit is a part of a larger syncline structure that outcrops at the north west and extends towards the south east. The dip is relatively steep and consistent at 20 to 30 degrees to the south east. The depth of cover varies from 70 to 95m towards the north of the deposit to 300 to 700m towards the south of the deposit.
It is reported that groundwater is mainly from vertical rock fractures and that there are no hydro connections between various hydro zones.
4.5 ORE DEPOSITS
Exploration has identified four mineralised horizons within the 55m to 72m Upper Devonian age stratigraphy as follows in stratigraphic order (top to bottom).
• Fe 4 – top, thin with variable thickness. Hematite & Siderite
• Fe 3 – main Orebody thickness 2.4m (average). Hematite
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• Fe 2 – thin with variable thickness. Hematite
• Fe 1 – bottom, thin with variable thickness. Hematite, minor Siderite
The ore horizons are relatively thin with variable thickness and consist of thin iron beds which are interlaminated with shale. The roof and floor lithology of the main ore zone Fe3, is typically muddy limestone, calcareous shale and thin layer limestone. The roof and floor material is much softer than the ore horizon.
The main orebody, Fe3, varies in thickness from 1.5 m to 3.4 m (average 2.4m). There is a dirt band towards the bottom of the ore zone which makes the bottom 0.4m of ore difficult to recover.
A typical stratigraphic section is provided in Figure 4.1.
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F P S O S E E R Y Thickness (m) E R R M M A R I I T B Log Lithology A O E I O O Thinnest Thickest Average D S N L
M T E R L D limestone; shale S I O A O A T d 0.10 8.15 4-5 Z S W Y 1 O S E Y I I E C C R L O N G T A N F O R M A limestone; chert T 100.5- I 79.7 123.6 O 118.0 N P l X 22 I U A P Y A P O E S E R C T I O N 3.15 9.00 4-8 limestone; shale carboniferous shale; claystone; T 1.08 10.80 5-7 L A sandstone; pyrite grains O N N G S H T A A N limestone + chert + pyrite grains; N 21.30 40.60 30-38 W P l calcareous shale F A 21 O N R M S A E T C 0.0 6.50 4-5 limestone + marcasite grains; limestone + dolomite; I T O I N O 10.10 16.90 14-16 calcareous silica rich shale; limestone; carboniferous shale N
P E R M I A M N A O K O P m U 1 P & A Q 246.30 I + 166.40 444.50 - L L 312.30 A O X E W I E limestone O R A P q 1 Z F O O I R C M A T I O N
shale; pyrite grains 0.40 4.00 1.0-15 0.30 4.30 0.5-0.9 sandstone; quartz sandstone; claystone LIANG P l shale; coal bed; pyrite grains; sandstone; claystone 1 0.30 2.40 0.8-14 SHAN 1.40 28.90 3-8 quartz sandstone; sandstone; coal bed C A H R U limestone; quartz sandstone; sandstone B 1.80 47.40 30-37 O U A N P N C h I P G 2 F E E L 8.80 29.90 18-25 dolomite; quartz sandstone; sandstone R R O O N U 1.60 24.80 5-10 dolomite; limestone S G 0.00 6.70 1-2.5 limestone; sandstone X 0.00 22.40 3-9 shale; sandstone; quartz sandstone; siderite (Fe4) I E 0.20 16.00 7.5 dolomite; limestone J D x U I 3 5.70 23.70 14-18 limestone; shale; dolomite N P G 0.90 19.10 2.5-3.5 limestone; hematite; shale D P S E I 0.40 6.80 3-4 shale; sandstone; limestone; quartz sandstone; hematite (Fe3) E R H 0.40 12.70 7-9.5 shale; sandstone; limestone; quartz sandstone; hematite (Fe2) V U A D 11.3- shale; quartz sandstone; pyrite grains; sandstone; O 3.30 25.3 N E D h 16.3 hematite (Fe1); siderite G N 3 N J G I shale; quartz sandstone; pyrite grains; claystone; I 8-11 sandstone; hematite; limonite A A N M Y I U G 35-40 quartz sandstone; ferrous quartz sandstone; sandstone; D N U D D y pyrite; claystone; muscovite; shale T A 2 8-10 L A N E I SHA SILURIAN MIDDLE S s shale; quartz sandstone MAO 2
Target Ore Zone
FIGURE 4.1
CHINA PRIMARY RESOURCES HOLDINGS LIMITED Typical Stratigraphic Section Project No : 3145M
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4.6 EXPLORATION HISTORY
Exploration of the 20 Iron Ore deposits in the Yichang Area was over several programmes from the 1950s until 1980. A geological survey of the Huoshaoping Iron Ore deposit commenced in 1961.
The number and location of “points of observation” i.e., drilling and trenching has not been reported. However drill spacing appears to be approximately 300m on cross sections. Deeper drilling did not always intersect the full stratigraphic section of the Iron Ore horizons. The Chinese exploration team consider the geological status (confidence) to be “explored”.
In MMC’s opinion, drill spacing is reasonable for identifying thin stratiform deposits. However this spacing and depth of drilling may not be sufficient to define the variability of thin ore horizons. MMC has relied on the “competency” of the Exploration geologists for geological understanding and the level of geological confidence provided by data spacing, i.e., “points of observation”.
4.7 RESOURCE AND RESERVES
Estimates of Mineral Resources have been made by manual polygonal methods. There has been no geological modelling using 3D mining software. Estimates of Mineral Resources are shown in Table 4.4. These have been validated manually from reported dimensions and density. Scaled plans and cross sections were available for manual validation by measurement.
Table 4.4 – Mineral Resource Estimates
Iron Ore Deposits Dimensions Mineral Resources Grade Depth Thickness Density Inferred Indicated Measured Total Total Phosphorus Area Range (m) Avg (m) (t/bcm) (Mt) (Mt)(2S21) (Mt) (Mt) Fe % P %
Huoshaoping 0 to 700 2.4 3.52 162 162 38.2 0.77
Note: Competent Persons – from Chinese Geological Institute Exploration: Yichang geological exploration team, Hubei province Estimates: Peoples Republic of China Research Institute Density: range from 3.2 to 3.8t/bcm
In MMC’s opinion, the Huoshaoping Iron Ore Deposit has scaled plan and cross sections to estimate Mineral Resources with reasonable confidence. However, the variability of thickness of the Iron Ore horizon Fe3 presents the greatest sensitivity of estimates. Deeper Iron Ore horizons are also, not well defined. The reported density of Iron Ore is high compared to high grade Iron Ores (60%). These factors may downgrade the geological confidence of Indicated Resources.
No Ore Reserves have been defined at this stage as the project is still in the feasibility stage.
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4.8 MINERAL GRADE
Stratiform deposit with thin lenticular ore bands. Low to medium grade iron with relatively high phosphorous. The grade of the ore body ranges from 28 to 48% Fe, with an average grade of about 38.25%. The Fe grade could not be validated as there were various grades reported from different sources. The phosphorus content averages 0.77%.
Comparative Australian deposits of Iron Ore are the world class Hematite (Fe2O3) deposits of the Pilbara WA Mt Mt Whaleback (BHP Billiton) and Tom Price (RioTinto) with Mineral Resources of >1,000 Mt @ >60% Fe. These high grade deposits “supergene” have been enriched by secondary “metasomatic” mineralisation. The source and primary rocktypes, banded iron formation (BIF) have Fe grades <40%, which are very similar to the Chinese sedimentary Iron Ores.
4.9 EXPLOITATION AND ECONOMIC POTENTIAL
The relatively thin ore horizon, steep dips and deep cover indicate that most of the deposit is more suitable to potential underground methods. However, there may be some potential to contour mine “outcrop” ore. The depth of cover is reported from zero “outcrop” to greater than 700m. The northern area is reported to have shallower cover (70m). However cross sections indicate some shallow or outcrop areas.
The relatively high phosphorus will impact on Ore Reserve estimates. A review of the trend of Phosphorous may indicate potential to selectively mine lower phosphorus ore.
4.10 RISKS AND OPPORTUNITIES
The variability of thickness of the Fe3 ore horizon and lack of data at depth will have the most sensitivity on Mineral Resource estimates.
The reported density of Huoshaoping Iron Ore @ 3.5 t/bcm is high compared to high grade Iron Ores. Moderate Fe grades of the order of 40% Fe are expected to be of the order of 3.0 t/bcm. Mineral Resource estimates may be overstated by 15%. A review and validation of insitu density of the Iron Ores is urgently required.
The relatively high phosphorus will impact on Ore Reserve estimates. A review of the trend of Phosphorous may indicate potential to selectively mine lower phosphorus ore. Preliminary geological modelling of stratiform layers and grade would be a relatively easy task. This would improve geological confidence and provide a sound basis for rapid estimates and further conceptual mining options.
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4.11 MINING POTENTIAL
At this stage, only high level assessment work has been completed with respect to potential mining strategies. This high level assessment has looked at a number of possible underground mining strategies, including methods generally only used in underground coal mines. The results and strategies proposed in the current feasibility study are discussed in the following section.
4.11.1 Feasibility Study Conclusions
The most recent assessment of technical extractability was prepared in January 2007, by the Design Institute of Capital Iron and Steel Company. This report looks at targeting and annual ore capacity of 2.6 Mtpa using underground longwall mining techniques.
Some of the other key factors determined by this study are as given in Table 4.5.
Table 4.5 – Feasibility Study Conclusions
Item Unit Value
Annual Ore Production Capacity ktpa 2,600 Annual Product Production (57% Grade) ktpa 1,071 Total Resources Mt 124.2 Mineable Reserves Mt 86.9 Total Mine life Years 41 Assumed Resource Recovery Rate % 70% Dilution % 15% Processing Recovery (Contained Iron) % 72.36% Total Manpower persons 1,035 Total Capital Investment Million RMB 1,580
The determination of the above factors has largely been made using a ‘rule of thumb’ approach based on standard design principles used in China.
A large portion of the deposit is contained in thin layers often less than 1 metre in total thickness.
4.11.2 Mine Development Plan
The feasibility report looks at a staged development plan with trial production taking place over a three year period at a rate of 600 Ktpa of ore. After this initial three year period, production is expected to ramp up to full scale of 2,600 Ktpa of ore. The three year trial production period will assist in helping refine mining techniques, train workers and find solutions to any major production difficulties encountered with the mining technique selected. MMC understands that the Company are considering plans for further expansion.
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4.11.3 Mining Strategy
The feasibility study proposes to access the ore body via an adit from which all development of the mine will then originate. This is a common method of access and is not an unreasonable assumption provided ground conditions allow the long term maintenance of the adit for access.
Mining operations will follow the ore zones along strike and down dip.
The proposed mining method is by longwall mining. The longwall mining technique is a well developed and tested underground coal mining method in China. It is, however, unusual to apply this mining method to an underground metal mine given the difference in hardness of the material being excavated (coal is very soft compared with Iron Ore).
The feasibility study looks at using an 80 metre long face, excavating between 1.4 and 3.2 metres of total thickness depending on the ore body. A total of three similar faces will be operated in parallel each aiming to achieve 850 Ktpa of ore production. The reason this non conventional mining technique has been considered is because the ore zones are generally overlain by a soft weak roof predominately consisting of muddy limestone, carboniferous shale and thin limestone, making it unsuitable in traditional underground metal mining techniques where the roof is required to remain intact following ore extraction.
The feasibility report however notes that given the roof conditions, even a longwall mining method will face production difficulties, and roof support will be an ongoing challenge for the mine.
The characteristic of the ore body is that it is relatively competent and thin in some areas, whilst surrounded by a relatively less competent roof and floor. This characteristic may make the deposit difficult to mine regardless of mining method as blasting will be necessary. Blasting in an environment where the ore is hard, the country rock is soft will likely present significant challenges as follows:
• Excessive dilution from the relatively weak roof;
• The weak roof may be further weakened and result in goaf creep possibly causing the loss of equipment such as hydraulic roof supports;
• Equipment at the face may suffer from blast damage;
The annual face production rates of 850 Ktpa are regularly achieved in underground fully mechanised longwall coal mining faces where shearers are used to cut the coal rather than drill and blast techniques. Drill and blast (semi mechanised) coal longwall faces of similar dimensions to that proposed above, typically achieve annual production rates of between 150,000 and 400,000 tonnes per year depending on mining conditions.
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Achievement of 850 Ktpa off a single drill and blast longwall face operating in hard rock, with soft, weak roof and floor conditions, represents a significant operational challenge. MMC understand that this type of mining technique is not regularly used in China for exploitation of this sort of deposit and certainly not on such a large scale. Furthermore to MMC’s understanding this sort of mining method is not used by any of the major Iron Ore producing countries worldwide.
This mining method should be viewed with significant caution for this type of deposit, and achievement of targeted production rates represents a significant challenge.
Further work is required for a clearer understanding of the proposed longwall mining methodology. The characteristics of the deposit are such that if the longwall face supports are able to support the roof long enough for controlled caving without significant weight coming onto the supports and dilution of the ore from a weak roof is minimised then this may be a suitable method of mining.
A typical orebody cross section is given in Figure 4.2.
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4.11.4 Infrastructure and Services
Water
The water supply for mining, processing, fire fighting and domestic use will be sourced from the Houzikou Channel. It is planned to situate a pumping station on the eastern side of the Houzikou to transfer water to a half way point between the pumping station and the off take. A booster pump station will be installed to transfer water to its final destination.
Transportation
Various methods for transportation of Iron Ore concentrate were considered. These include, shipping by river, exclusive mine railway line and road transport.
The mining area is located some 15 km from the river. The river is over 300 m in width and is able to support 500 tonne class cargo ships. However, the river locks which are yet to be completed will only hold 300 tonne class ships. There will still be a need to construct a road from the mining area to the river dock and then a stockpile or transfer storage area for the iron concentrate by the river.
Towards the north of the mining area, a new Yichang – Wanzhou railroad is currently under construction and is scheduled to be completed by late 2007. Thus, if an exclusive mine railway line is to be constructed, it will be connected to the Yichang – Wanzhou railroad to the north. The topography in the north is mountainous and may make the railroad investment cost prohibitive.
Huoshaoping is approximately 32 km from National Highway 318 and then the Yiwan railroad is another 12 km away. To make use of this combination of road and rail transport, the 32 km of country roads needs to be upgraded to allow the trafficking of Iron Ore concentrate.
Electricity
It is not immediately clear from the Feasibility Report as to whether electricity would be generated on site or sourced from the local power supply grid.
4.12 ORE PROCESSING
The type of ore found in the Huoshaoping mining area has historically been difficult to exploit due to the high levels of phosphorous contained in the ore. The phosphorous in the ore is difficult to remove and when used in steel making, makes the steel brittle and unusable.
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Recently Xin Shougang has invested both time and money into finding a solution to remove the phosphorous and therefore make the ore saleable. Xin Shougang have allegedly identified a technology which can ensure that phosphorous contents meet the requirements for feed to their own steel plants. MMC understands that the technology has been tested successfully in an experimental plant. No detailed information has been provided on the details of this technology but MMC suggests that if it works, it will represent a significant advance for the iron and steel industry.
Based on the results of the feasibility report, the primary processing plant (not including the phosphorous removal) will use conventional crush, grind, and flotation techniques to liberate the target minerals.
The feasibility study assumes that ore will have an average iron grade of 33% with phosphorous of 0.8% to produce a fines product of 57% grade with an overall metallurgical recovery of 70%.
MMC considers that these general assumptions on productivity and metallurgical recovery appear reasonable.
The feasibility report suggests that the cost of processing to remove phosphorous will increase the overall costs of Iron Ore processing, but no detail is given on the specifics.
4.13 TAILINGS DISPOSAL
Tailings disposal is possibly the biggest potential environmental issue associated with the development of this project. The feasibility study proposes that tailings will be transported as slurry to a tailings disposal area. This area will be located at the eastern side of the plant in the dry valley of eastern Yangjialin. The valley is described as being very steep making it suitable for damming and water storage.
The tailings are expected to contain around 20.5% Iron and 1.05% Phosphorous.
4.14 CAPITAL AND OPERATING COSTS
The feasibility study assessment has been conducted on a high level basis relying primarily on industry ‘rules of thumb’ for key operating and capital cost assumptions. No detailed site specific engineering works have been performed to determine current cost estimates. These rules of thumb have looked at typical capital costs on a per tonne of annual installed capacity basis. This number has then been multiplied by the desired annual production to achieve an estimate of total capital.
High level preliminary operating costs have been reasonably estimated by reference to costs at similar underground mining operations as well as rule of thumb estimates.
For these reasons both the capital and operating cost estimates should be considered conceptual in nature, and would be subject to review when more detailed investigation is undertaken.
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4.15 ENVIRONMENTAL AND SAFETY
Health and safety standards in China and other developing countries tend to lag significantly behind developed countries. Greenfields projects being newly developed in China have the opportunity to be designed and to implement safety management systems which reflect world’s best practice. The same applies for environmental standards.
Wuhan Engineering University conducted an Environmental Impact Study on behalf of Xin Shougang for the mine and processing plant projects in accordance with the then Environmental Impact Evaluation Guidelines.
The conclusions of the Environmental Impact Study were that underground mining would not affect land use materially. There needs to be a plan in place to dispose of waste from the processing plant and it needs to be implemented (in accordance with regulation GB18599-2001 General Industrial Solid Waste Storage Disposal Pollution Control) to minimise the impact on the environment. The Study also notes that at the conclusion of mining the processing plant site needs to be rehabilitated.
A Safety Study was conducted by the Hubei Safety Science Institute of National Land and Resources. There was a risk analysis carried out and measures for mitigating the risks were tabled. Hydraulic/water in rush was identified as the greatest risk and preventative measures (operational and management plans) need to be in place to mitigate this potential hazard. The conclusions of the report were that the mining company needs to conduct a mine safety analysis and appoint qualified mine design personnel. It also concludes that there are potential risks but the risks are acceptable.
ANNEXURE A – QUALIFICATIONS AND EXPERIENCE
David Meldrum – General Manager of Minarco-MineConsult – Bachelor of Engineering (Mining Hons) – Graduate Diploma in Applied Finance – First Class Mine Managers Certificate of Competency – Member of Australasian Institute of Mining and Metallurgy (Chartered Professional) – Fellow of Financial Services Institute of Australasia.
Mr. David has a First Class Mine Managers Certificate of Competency with over 25 years experience associated with the mining industry within Australia and overseas. During this period he has undertaken all levels of technical studies and audits of current and prospective operations in Australia, China, New Zealand, South Africa and Indonesia. Apart from providing advice to numerous financiers, Mr. David has finance industry experience having been an Investment Banker and having carried out studies for both lenders and investors.
Mr. David concentrates on providing technical and commercial advice to both the mining and finance industries. This work includes advising clients on the sale and/or purchase of mining projects and has involved development of business strategies to maximise the value of the opportunities. Mr. David also has extensive experience in reserve estimation.
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Andrew Ryan – Manager Consulting – China (Minarco-MineConsult) – Bachelor of Engineering, Mining – University of New South Wales – Member of Australasian Institute of Mining and Metallurgy – Associate of Financial Services Institute of Australasia
Mr. Andrew has worked with MMC over the past six years and has been actively involved in all areas of mining consulting. Most recently, in 2005 Mr. Andrew moved to Beijing as MMC’s Chinese Business Manager (Technical) responsible for the establishment and growth of MMC’s China business. During this time Andrew has been involved with and/or project managed numerous mining related assignments in China. This work has included the project management of due diligence studies, valuation reports, opportunity assessments, conceptual development studies, and feasibility assessments for both domestic and international clients. The projects that these studies have focused on have covered a variety of minerals including coal, Iron Ore, gold and molybdenum.
Yin Wong BE (Mining) – Manager Mining China
Mr. Yin has a diverse experience in mining ranging from mine planning, drilling and blasting, mining technology, mining consulting and managing exploration programs. He has worked in various resources and locations including Iron Ore in the Pilbara region of Australia, underground and open cast coal mining in the Hunter Valley of Australia, mine monitoring technology in Australia; open cast coal mining in East Kalimantan in Indonesia and exploration in Central Kalimantan in Indonesia. The majority of Mr. Yin’s experience has been in coal mining in Australia and Indonesia.
Bill Knox – Executive Consultant – BSc (Geology), Member of Australasian Institute of Mining and Metallurgy
Mr. Bill joined MineConsult in 1993 as an associate and is based in the Sydney office. Mr. Bill’s areas of expertise include resource and reserve assessment, geological modeling and mine design using Gemcom software, feasibility studies, operational management and grade/quality control. He has held site positions from Mine Geologist to Mine Superintendent and Head Office positions in business planning and development. Recent operations work has included alliance management of a large opencut coal mine in NZ on behalf of Solid Energy and the mining contractor, which included developing a planning process and dispute resolution. Technical experience has included resource modeling on coal projects in the Hunter Valley, Indonesia, Bangladesh and Zimbabwe as well as a number of gold, base metal and quarry projects. Other work has concentrated on coal resource/reserve audits of procedures and reporting standards of major coal operations in Australia and Indonesia for presentations to corporate management and resource funding institutions. The range of commodities experience in operations and feasibilities studies includes coal, poly-metallics, gold, oil shale, diamonds and quarries. With reference to the Australasian Code for Reporting of Identified Mineral Resources and Reserves, he is considered a competent person to validate statements for Coal Resources and Reserves.
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ANNEXURE B – RESOURCE AND RESERVE CLASSIFICATION
International Standards and the JORC Code for Resources
Chinese Resource Reporting Standards
In 1999, with a view to creating a standard that was comparable with international resource reporting standards, The Chinese National Land and Resource Department introduced its own national standard for the Classification of Resources/Reserves for Solid Fuels and Mineral Commodities (GB/T 17766-1999).
This code was to replace the previous code (China GB 13908-1992 – General rules for Geological Exploration of Solid Ore Resources) and was based upon the United Nations international code (UN Economic and Society Committee, UN document ENERGY/WP.1/R.70). Some elements of the American resource reporting standards were included and modifications made to suit Chinese conditions. All new resource estimates are reported under this new code and old estimates either re-estimated or converted to the new system.
The previous Chinese standard (GB 13908-1992) divided resources into four categories (A, B, C and D) which were loosely comparable to the JORC – (December 2004) classifications of Measured (A- B), indicated (B-C) and Inferred (D). The standard was more prescriptive than JORC in that it specified minimum borehole spacings (see Table B1) for each category, along with implied levels of geological confidence.
Table B1 – Borehole spacing for Old Chinese Resource Classification Code (1992) and Comparison
Codes Classification Classification (Chinese (Chinese JORC Minimum Borehole/ Reserve Code) Reserve Class) UN Code (Dec 2004) Drill Line Spacing
A 111 – 121 < 100 m B 121 – 122 331 Measured ≤100x100m C 122 – 2M22 332 Indicated ≤100-->200x100m D 122 333 Inferred >200 m
This code was essentially a geological classification (Mineral Resources), taking little account of the deposits economics or the level of mining studies that had been carried out on it. The new code (see Figure C2) attempts to address this by using a three component system (EFG) that considers the deposit economics (E), the level of mining feasibility studies that have been carried out (F) and the level of geological confidence (G) using a numerical ranking.
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This system produces a three digit code for a deposit that reflects these three variables. For example a deposit classified as a 121 is economically viable (1), has had pre-feasibility studies carried out (2) and is well understood geologically (1). Various suffixes are used to distinguish Basic Reserves – essentially JORC Mineral Resources – (121b) from Extractable Reserves (Ore Reserves) (121) and to identify the assumed economic viability (S or M). Certain categories are not allowed, for example pre- feasibility or feasibility level studies cannot be conducted on Inferred Resources, therefore 123 and 113 are invalid classifications. Also Extractable Reserves are not estimated for marginally economic (or lesser) deposits so the (b) suffix is considered redundant. The term Intrinsically Economic indicates that while the deposit may be economic, insufficient studies have been carried out to clearly determine its status.
A tabulation of this concept is shown in Table B2.
Figure B2 – New Chinese Resource/Reserve Classification Matrix (1999)
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Table B2 – New Chinese Resource/Reserve Categories (1999)
Geological Confidence Identified Mineral Resource Undiscovered Economic Resource Viability Measured (1) Indicated (2) Inferred (3) Reconnaissance (4)
Economic (1) Basic Reserve Resource – 111b Proved Extractable Reserve – 111 Basic Reserve Basic Reserve Resource 121b Resource -122b Probable Extractable Probable Extractable Reserve – 121 Reserve -122 Marginally Resource Economic (2M) 2M11 Resource Resource 2M21 2M22 Sub-marginally Resource Economic (2S) 2S11 Resource Resource 2S21 2S22 Intrinsically Resource 331 Resource 332 Resource 333 Resource 334 Economic (3)
Note: First digit reflects Economic viability; 1= Economic; 2M=Marginally Economic; 2S= Sub-marginally Economic; 3=Intrinsically Economic; 4=Economic interest undefined. Second digit reflects Feasibility assessment stage, 1=Feasibility; 2=Pre-feasibility; 3=Geological study. Third digit reflects Geological assurance, 1=Measured, 2=Indicated, 3=Inferred, 4=Reconnaissance. b=Basic Reserve (prior to recovery factors, mining losses and dilution) – JORC Resource.
Unlike the old code, the new code does not specify required borehole spacings for each category. In the case of metals there is an accompanying Chinese Professional Standard (DZ/T 0214-2002) that lays out rules for determining the level of geological confidence.
International Standards and the JORC Code for Resources
Two main styles of resource reporting codes exist internationally. These are the American style (USA and much of South America) and the JORC style (Australia, South Africa, Canada, UK). This is further complicated by the listing and reporting requirements of different stock exchanges. It is generally true that a resource estimation that complies with the JORC Code (or one of its sister codes) will meet the standards of most international investors.
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The New Chinese Code is a blend of the old Chinese Code and the codes in current use today, including JORC and the current United Nations (UN) standard, with some additional local components added.
JORC is a non-prescriptive code, in that it does not lay out specific limits for resource classification in terms of such things as borehole spacing. Instead it emphasises the principles of Transparency, Materiality and the role of the Competent Person. Whilst some guidelines do exist (e.g. the Australian Guidelines for the Estimation of Coal Resources and Reserves) they are not mandatory and classification is left in the hands of the Competent Person. When combined with its Professional Standards (which are effectively mandatory), the Chinese Code is much more prescriptive but does not include the role of the Competent Person.
An examination of the details of the Chinese Code suggests that in terms of broad categorisation, the levels of geological confidence ascribed to Measured and Indicated resources are quite similar in both the codes. The range of borehole spacings, thickness cut-offs and quality limitations that are enforced by the Chinese system would generally result in the same resource classification under the JORC Code.
ANNEXURE C – GLOSSARY OF TERMS
The key terms used in this report include:
• assets means any of the 23 exploration licences under consideration
• associated minerals are minerals which are found with the primary mineral of interest, and form in
• CPRH refers to China Primary Resources Holdings Limited
• CIF (Cost Insurance and Freight) is a trade term requiring the seller to arrange for the carriage of goods by sea to a port of destination, and to provide the buyer with the necessary documentation to receive the goods from the carrier
• concentrates are the products of ore processing plants which contain higher concentrations of the target minerals suitable for smelting,
• crush means to break, pound, or grind (stone or ore, for example) into small fragments or powder
• flotation is a selection method for to the recovery of minerals using reagents to create a froth that collects target minerals
• grade is the percentage of useful elements or their components, in ores
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• grind means to crush, pulverize, or reduce to powder by friction, especially by rubbing between two hard surfaces
• HKSE stands for Hong Kong Stock Exchange
• JORC stands for Joint Ore Reserves Committee
• JORC Code refers to the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves 2004 edition, which is used to estimate Mineral Resources and Ore Reserves, and is published by JORC of the Australasian Institute of Mining and Metallurgy, the Australian Institute of Geoscientists and the Minerals Council of Australia
• ITR stands for Independent Technical Report
• lb stands for pound, a unit of weight equal to 453.592 grams
• LTI stands for Lost Time Injury
• m stands for metres
• Marketable Reserves means saleable reserves as defined under the JORC Code
• MMC refers to Minarco-MineConsult
• mine production is the total raw production from any particular mine
• mining rights means the rights to mine mineral resources and obtain mineral products in areas where mining activities are licensed
• Mt stands for million tonnes
• Mtpa means million tonnes per annum
• open pit is a method of surface mining in which massive, usually metallic mineral deposits are removed by cutting benches in the walls of a broad, deep funnel-shaped excavation
• ore is a naturally occurring solid material from which a metal or valuable mineral can be extracted profitably
• ore processing is the process through which physical or chemical properties, such as density, surface reactivity, magnetism and colour, are utilized to separate the useful components of ores from useless stones, which are then concentrated or purified by means of flotation, magnetic selection, electric selection, physical selection, chemical selection, reselection, and combined methods
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• raw ore is ore that has been mined and crushed in an in-pit crusher, but has not been processed further
• Recoverable Reserves refers to a subset of the sum of Proved and Probable Reserves as defined by the JORC Code
• RC stands for Reverse Circulation drilling which is a method of exploratory drilling used to evaluate and test drill targets
• RMB stands for Chinese Renminbi Currency Unit; 103 RMB means 1,000 RMB
• ROM stands for run-of-mine, being material as mined before beneficiation
• tonne refers to metric tonne
• tpa stands for tonnes per annum
• tpd stands for tonnes per day
• VALMIN Code refers to the code and guidelines for technical assessment and or valuation of mineral and petroleum assets and mineral and petroleum securities for independent expert reports
• ¥ is the symbol for the Chinese Renminbi Currency Unit
Note: Where the terms Competent Person, Inferred, Measured and Indicated Resources are used in this report, they have the same meaning as in the JORC Code.
ANNEXURE D – SUMMARY RISK ASSESSMENT
Risk Analysis Outline
The report addresses risks throughout each of the relevant, geology, processing, exploitation and environment and safety sections as they relate to the specific section in discussion. This additional Summary Risk Assessment has been provided to give a more general assessment of risks on a broader level as they relate to the assets as a whole. This section is expected to supplement the discussion of risk conducted in previous sections of the report and not as a replacement.
This section looks at material risks to the achievement of the forecast production and resulting cash flows. The risk analysis does not endeavour to identify and quantify all risks as the list would be extensive. However, the analysis focuses on key, or material, risks and their mitigants.
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Any assessment of risk should consider that mining is carried out in an environment where not all events are predictable. Whilst an effective management team can, firstly, identify the known risks, and secondly, take measures to manage and mitigate these risks, there is still the possibility for unexpected and unpredictable events to occur. It is therefore not possible to totally remove all risks or state with certainty that an event that may have a material impact on the operation of a mine, will not occur.
The risks have been ranked in accordance with the guidelines outlined in AS 4360:1999 Risk Management with the classifications outlined in Table D1.
Table D1 – Qualitative Risk Analysis Matrix
Consequences Likelihood Insignificant Minor Moderate Major Catastrophic
A (almost certain) S S H H H B (likely) M S S H H C (moderate) L M S H H D (unlikely) L L M S H E (rare) L L M S S
Risks can be classified from low through to high based on general definitions such as are listed below.
H – High Risk: This implies that there is an immediate danger of failure of a critical project parameter, which if uncorrected, will have a material effect (for example >15 percent) on the project cash flow and performance and could potentially in the worse case lead to loss of life, property, and all production up to and including total project loss or failure.
S – Significant Risk: This implies that there is a danger of failure of a critical project parameter, which if uncorrected, may have a material effect (for example 10 to 15 percent) on the project cash flow and performance unless mitigated by some corrective action.
M – Moderate Risk: Implies a summation of factors, if uncorrected, could have a significant effect (>10 percent) on the project cash flow and performance unless mitigated by some corrective action.
L – Low Risk: Implies that if some factors are uncorrected, it will have little or no effect on project production rates or project economic performance.
General Mining Risks
Historically mining has always been seen as a relatively high risk activity. Whilst there have been many technological advances that help reduce the risks associated with mining, there are still some instances where failure to anticipate the dynamics of quite often complex mining systems has resulted in the loss of production and sometimes in the worst cases, resulting in the loss of life or property.
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In reviewing the Projects, MMC has endeavoured to analyse areas where there is perceived technical risk to the operation, particularly where the risk component could materially impact the projected production, operating costs and revenues. This assessment is in many areas subjective due to data constraints associated with this type of high level review, however qualitative review and consideration of any other non-measurable operational risks of the operations is still important.
Resources and Reserves
From an economic and production viewpoint, the occurrence of commodities such as industrial minerals and industrial or precious metals and the associated concentrations of these materials cannot always be reliably predicted. Estimations of the tonnes, grade and overall metal content of a deposit are generally unlikely to be precise, as the calculations used to derive resource and reserve quantities are based on interpolation of what should ideally be representative samples from drilling or channel sampling which, even at close sample spacing, may in total only describe the mineral distribution characteristics of a small part the whole orebody.
There is always a potential error inherent in the extrapolation of sample data when estimating the tonnages and concentrations of mineral or metal commodities within any given rock mass. Significant errors in calculation may occur if the mineral cementations are highly variable or unpredictable due to factors such as complex geology and where for example faulting or folding of rock strata disrupt linear continuity.
Careful review of past production and reserves can confirm the reasonableness of past resource and reserve estimates, but generally, only close attention is paid to factors such as mining recovery and ore loss during the mining process. As a result, such reconciliation reviews may not always confirm the accuracy of resources and reserves with respect to future predictions.
Level Event Likelihood Consequence of Risk Mitigant
Actual resource and/or reserve Unlikely Moderate Moderate Comprehensive tonnage varies significantly exploration program. from the tonnage estimated by the resource model
Level Event Likelihood Consequence of Risk Mitigant
Actual resource and/or reserve Unlikely Moderate Moderate Comprehensive grade varies significantly exploration program from the grade estimated supported by positive by the resource model mining reconciliation
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It should be also noted that when considering the mining project reserves base, the operating revenues used to help determine this are greatly affected by factors such as variations in operating costs, costs of consumables, variations in metal prices and fluctuating exchange rates. Some of the uncertainties relating to these factors can be mitigated or removed though hedging contracts, forward sales, and long term supply contracts.
Given that the extraction behaviour of materials and mineral commodities during the actual mining and processing stages can never be wholly predicted, it is generally understood that estimations with respect to project operating costs and project capital will similarly be affected.
Ideally the resources and reserves of mining projects at the planning stage should be estimated to within a level of accuracy of 10 to 15 percent to that of the final project realization.
Mining
The assessment of the proposed longwall mining method is based on high level discussion and without sighting any mine development plans, ventilation plans or dewatering plans. Comments are therefore subject to change as the engineering studies progress and the development of the mine becomes clearer.
The longwall mining technique is a well developed and tested underground coal mining method in China. It is, however, unusual to apply this mining method to an underground metal mine given the difference in hardness of the material being excavated (coal is very soft compared with Iron Ore).
On the upside, if it is possible to support the roof long enough for controlled caving behind the longwall face supports without significant weight coming onto the supports or significant dilution of the ore from a weak roof then longwall mining may be the most suitable method of mining for the specific ground conditions.
Level Event Likelihood Consequence of Risk Mitigant
Mining difficulties Likely Major Moderate Further studies into the experienced lead to proposed longwall substantially lower mining method and production levels being surrounding rock achieved characteristics.
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The mining industry worldwide has experienced significant increases in mining costs over the past two to three years. This increase has been observed across the board and has resulted in fundamental increases to the profitability and economic viability of many mining operations. MMC considers that the risk is commensurate with other similar mining operations. MMC also considers that as a joint co operation venture with the Yichang City Government there are a number of opportunities to control increases in operating costs. MMC therefore considers the risk of substantial operating cost increases to be moderate.
Level Event Likelihood Consequence of Risk Mitigant
Substantial increases in Unlikely Moderate Moderate Opportunity to work with operating costs government to smooth out potential hikes in operating costs.
Primary Processing
The primary processing technique utilised to extract liberate iron utilises technology and processes which are both widely used and technically simple. MMC therefore considers such risks to be moderate.
Level Event Likelihood Consequence of Risk Mitigant
Target mineral recovery Unlikely Moderate Moderate Technology and process levels not achieved by technique employed is processing equipment used widely.
MMC understands that Xin Shougang has invested both time and money into finding a solution to remove the phosphorous and therefore make the ore saleable. Xin Shougang have allegedly identified a technology which can ensure that phosphorous contents meet the requirements for feed to their own steel plants. MMC understands that the technology has not yet been proved for a large capacity plant, but the technical feasibility work completed to date suggests that scale up should be achievable. MMC considers that there is a moderate risk that the process to remove phosphorus cannot be scaled up.
Level Event Likelihood Consequence of Risk Mitigant
Inability to scale up process Unlikely Moderate Moderate Further technical to remove phosphorus improvement programs to optimise plant performance and the incorporation of Kiruna’s technology.
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Production Targets
The proposed production targets for the future are challenging based on a mining method (longwall mining) that is not usually associated with underground metalliferous mining. MMC considers that there is a moderate risk that forecast production will not be met.
Level Event Likelihood Consequence of Risk Mitigant
Production targets not being Likely Major Moderate Further studies into the met proposed longwall mining method and surrounding rock characteristics.
Environment and Safety
The two key environmental risk areas relate to major failures of either one of the tailings dams or slag (waste) dumps.
Level Event Likelihood Consequence of Risk Mitigant
Major tailings dam failure Rare Major Significant All dams need to be resulting in significant constructed in environmental damage accordance with national safety and environment guidelines.
Tailings dam failure presents a risk to operations via loss of production and risks to the environment and safety due to mass movement down-valley and into water courses. The risk is managed by ensuring appropriate design, construction and maintenance of tailings dams and regular review and inspection of these structures.
Level Event Likelihood Consequence of Risk Mitigant
Failure of major slag dumps Rare Moderate Moderate All dumps need to be resulting in significant constructed in environmental damage accordance with national safety and environment guidelines.
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Slag dump failure represents a risk to operations via temporary loss of production and risks to the environment and safety due to mass movement down-valley and into water courses. The risk is similarly managed by ensuring appropriate design, construction and management of slag dumps, regular inspection of these emplacement structures and rehabilitation incorporating revegetation and drainage management.
Level Event Likelihood Consequence of Risk Mitigant
Safety Event occurs which Rare Moderate Moderate Mine will need an results in multiple fatalities approved safety program in place when in operation.
Numerous safety risks are associated with mining and processing operations and these are well understood in the international minerals industry. MMC considers that these risks are not excessive or significantly different to any other well managed operations in the minerals industry and are unlikely to present any material risks for ongoing operations. Safety systems and practices need to be in place (as stipulated by the Safety Study) which satisfy the necessary Government requirements and are continually being developed to manage risks.
Transport
It is proposed to process the ore into a concentrate prior to transportation to its final destination. The final method of transportation has yet to be determined but there are a number of choices available. The transport risk is mitigated by the number of different transport options which are available to move the concentrate. MMC considers the transport risk to be low.
Level Event Likelihood Consequence of Risk Mitigant
Difficulty in transporting Rare Minor Low Mine has a number of concentrate to its final options available for destination transportation
Final products are sold in a highly concentrated form and as such there are minimal volumes of material that actually need to be transported. As such, MMC considers that transport risks associated are low.
Level Event Likelihood Consequence of Risk Mitigant
Difficulty in transporting final Rare Minor Low Final products are sold in products to end markets a highly concentrated form requiring minimal vehicle movements
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Infrastructure and Utilities
The key infrastructure that the mine relies on including roads, power and water related infrastructure are yet to be put in place but the Co operative Agreement with the Yichang City Government support the project will mitigate that risk.
MMC considers infrastructure and utilities risk to be low.
Level Event Likelihood Consequence of Risk Mitigant
Extended production delays Rare Minor Low Key infrastructure for the caused by long term power mine is mitigate by the outage or water supply issues Co Operative Agreement with the Yichang City government to support the project.
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1. RESPONSIBILITY STATEMENT
This circular, for which the Directors collectively and individually accept full responsibility, includes particulars given in compliance with the GEM Listing Rules for the purpose of giving information with regard to the Group. The Directors, having made all reasonable enquiries, confirm that, to the best of their knowledge and belief:
(a) the information contained in this circular is accurate and complete in all material respects and is not misleading;
(b) there are no other matters the omission of which would make any statement in this circular misleading; and
(c) all opinions expressed in this circular have been arrived at after due and careful consideration and are founded on bases and assumptions that are fair and reasonable.
2. DISCLOSURE OF INTERESTS
(a) Directors’ and chief executives’ interests and short positions in the securities of the Company and its associated corporations
As at the Latest Practicable Date, the interests and short positions of the Directors and the chief executives of the Company in the Shares, underlying Shares or debentures of the Company and its associated corporations (within the meaning of Part XV of the SFO) which were required (a) to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they were taken or deemed to have under such provisions of the SFO); or (b) pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (c) pursuant to Rules 5.46 to 5.67 of the GEM Listing Rules relating to securities transactions by the Directors, to be notified to the Company and the Stock Exchange, were as follows:
(i) Long positions in Shares
Number of Shares held Approximate Number of percentage Name of Directors Type of interests Shares of interests
Mr. Yu Hongzhi Interest in controlled 2,576,194,460 37.6% corporation (Note)
Mr. Chiu Winerthan Beneficial 20,000,000 0.3%
Note:
These Shares are held by Future Advance. Future Advance is beneficially owned as to 37.5% by China Zong Heng Holdings Limited (which in turn is 100% beneficially owned by Mr. Yu) and as to 12.5% by Ms. Ma Zheng who is an executive Director and the sole director of Future Advance.
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(ii) Long positions in underlying Shares or debentures of the Company
Number of Approximate Name of Type of Description underlying percentage Directors interests of securities Shares of interests
Mr. Yu Hongzhi Interest in Convertible bond 313,503,280 4.6% controlled (Note 1) corporation
Beneficial Share option 76,000,000 1.1% (Note 2)
Ms. Ma Zheng Beneficial Share option 54,000,000 0.8% (Note 2)
Notes:
1. On 27th April, 2006, by an instrument dated the same date, the Company created and issued in favour of Future Advance the Future Advance Bond pursuant to a subscription agreement dated 24th February, 2006 entered into between the Company and Future Advance. Details of which have been set out in the announcement of the Company dated 28th February, 2006. These Shares represent the maximum number of new Shares, which may be converted from the Future Advance Bond held by Future Advance as at the Latest Practicable Date. Mr. Yu is therefore deemed to be interested in these underlying Shares under the SFO as well.
2. On 3rd April, 2006, a total of 7,500,000 share options were conditionally granted as to 3,800,000 share options to Mr. Yu, as to 2,700,000 share options to Ms. Ma Zheng and as to 1,000,000 share options to Mr. Chiu Winerthan (on 23 August 2007, all share options held by Mr. Chiu Winerthan were exercised) pursuant to a share option scheme adopted on 28th November, 2001 by a written resolution of the then Shareholders which confers discretionary power to the Directors to grant options to any eligible persons (including the full-time employees and any Director) as defined in the share option scheme. Details of the share options granted have been set out under the heading “Share Option” in the Company’s 2006 annual report. As a result of the share subdivision becoming effective on 1st August, 2006, each option granted has been adjusted to the effect of conferring the right to subscribe for 20 subdivided shares of the Company (i.e. 20 ordinary shares of nominal value of HK$0.00125 each). All share options then granted became unconditional when the listing approval dated 26th September, 2006 in respect of the Shares which may fall to be allotted and issued upon the exercise of the share options granted to Mr. Yu was obtained from the Listing Committee of the Stock Exchange.
Save as disclosed above, as at the Latest Practicable Date, none of the Directors nor the chief executives of the Company had or was deemed to have any interests or short positions in the Shares, underlying Shares or debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) which were required (a) to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they were taken or deemed to have under such provisions of the SFO); or (b) pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (c) pursuant to Rules 5.46 to 5.67 of the GEM Listing Rules relating to securities transactions by the Directors, to be notified to the Company and the Stock Exchange.
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(b) Persons who have an interest or short position which is discloseable under Divisions 2 and 3 of Part XV of the SFO and substantial Shareholders
So far as is known to any Directors or chief executives of the Company, as at the Latest Practicable Date, the following person (not being a Director or chief executive of the Company) had, or was deemed to have, interest or short position in the Shares or underlying Shares which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or, who were expected, directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any member of the Group:
(i) Long positions in Shares
Approximate percentage Type of Number of of issued Name of Shareholders interests the Shares held share capital
Future Advance Beneficial 2,576,194,460 37.6%
China Zong Heng Holdings Limited Interest in controlled 2,576,194,460 37.6% (“China Zong Heng”) corporation (Note 1)
APAC Resources Limited Beneficial (Note 2) 862,912,520 12.6% 亞太資源有限公司
Notes:
1. These Shares are held by Future Advance. Future Advance is the only substantial Shareholder which is beneficially owned as to 37.5% by China Zong Heng (which in turn is 100% beneficially owned by Mr. Yu), as to 12.5% by Ms. Ma Zheng who is the sole director of Future Advance, as to 27% by Zhong Nan Mining Group Limited (which in turn is 100% beneficially owned by Mr. Zhang Lei), as to 13% by Mr. Wu Yong Jin and as to the remaining 10% by Ms. Ma Yi.
2. On 29 May 2007, a wholly-owned subsidiary of APAC Resources Limited 亞太資源有限 公司 entered into the sale and purchase agreement with three existing Shareholders for the acquisition of a total of 862,912,520 Shares. As at the Latest Practicable Date, the acquisition has not been completed.
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(ii) Long positions in underlying Shares or debentures of the Company
Number of Approximate Name of Type of Description of underlying percentage Shareholders interests derivatives Shares of interests
Future Advance Beneficial Convertible bond 313,503,280 4.6% (Note 1)
China Zong Heng Interest in controlled Convertible bond 313,503,280 4.6% corporation (Note 1)
胡玉女士 Beneficial Warrants 473,088,000 6.9% (Ms. Hu Yu)# (Note 2)
Lehman Brothers Beneficial Convertible bonds 1,247,338,197 10.0% Holdings Inc. (Note 3)
GORE Beneficial Preferred Shares 2,805,235,924 41.0% (Notes 4 & 5)
Mr. Zhang Zheng Corporate Preferred Shares 2,805,235,924 41.0% (張征先生) (Notes 4 & 5)
Notes:
1. These Shares are held by Future Advance. Future Advance is the only substantial Shareholder which is beneficially owned as to 37.5% by China Zong Heng (which in turn is 100% beneficially owned by Mr. Yu) and as to 12.5% by Ms. Ma Zheng who is the sole director of Future Advance.
2. On 18 August 2005, 胡玉女士 (Ms. Hu Yu)#, a private investor of the Company, entered into a warrant placing agreement with the Company pursuant to which 胡玉女士 (Ms. Hu Yu) # is entitled to subscribe for 23,654,400 Shares at an initial exercise price of HK$0.32 per share within a period of two years commencing from the date of issue of the warrants which was 4th October, 2005. Due to the share subdivision effective on 1st August, 2006, each warrant has been adjusted to the effect of conferring right to 胡玉女士 (Ms. Hu Yu)# the right to subscribe for 20 subdivided share of the Company and the exercise price was adjusted to HK$0.015 per subdivided share of the Company on the close of the business on 31st July, 2006.
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3. The underlying Shares are held by Lehman Brothers, which ultimate beneficial owner is Lehman Brothers Holdings Inc.. The total number of Shares to which Lehman Brothers are entitled under the Convertible Bonds has taken into account the existing issued share capital of the Company and all outstanding securities which may be convertible into or carry rights to subscribe for new Share. Based on the existing issued share capital and assuming full conversion of the Future Advance Bonds and exercise in full of all other securities carrying rights to subscribe for new Shares (including warrants and share options and other convertible securities convertible into new Shares (including and assuming the Preferred Conversion Shares having been issued)) outstanding as at Latest Practicable Date, the maximum number of new Shares to be issued upon full conversion of the Convertible Bonds is 1,247,338,197, representing 10% of the existing issued share capital of the Company as enlarged by the full conversion of all of the aforesaid convertible securities.
4. These underlying Shares are held by GORE, a company incorporated in BVI with limited liability, and Mr. Zhang Zheng (張征), is the sole beneficial owner of GORE. The Preferred Shares to be issued carry conversion right entitling GORE to convert them into Preferred Conversion Shares at the Initial Conversion Rate of 1:1, subject to adjustments.
5. The Convertible Bonds to be issued to Lehman Brothers and the Preferred Shares to which GORE is entitled have not yet been issued as at the Latest Practicable Date. The issue of the Convertible Bonds and the Preferred Shares are subject to a number of conditions, which have been set out in the section headed “Letter from the Board” in this circular.
Save as disclosed above, as at the Latest Practicable Date, the Directors and chief executives of the Company were not aware of any other person (other than the Directors and the chief executives of the Company) who had, or was deemed to have, interest or short position in the Shares or underlying Shares (including any interest in options in respect of such capital), which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who was expected, directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any member of the Group.
3. DIRECTORS’ INTERESTS IN CONTRACTS AND ASSETS
As at the Latest Practicable Date, so far as the Directors are aware of, none of themselves, employees or the management shareholders (as defined in the GEM Listing Rules) of the Company or their respective associates had any interest in a business which competes or may compete with the business of the Group or any other conflicts of interest with the Group.
As at the Latest Practicable Date, none of the Directors had any interest, direct or indirect, in any assets which have been, since 31st December, 2006 (being the date to which the latest published audited financial statements of the Company were made up), (i) acquired or disposed of by; (ii) leased to; (iii) proposed to be acquired or disposed of by; or (iv) proposed to be leased to, any member of the Group.
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Other than the Subscription Agreement Dated 24th February, 2006 entered into between the Company and Future Advance in relation to the subscription of the Future Advance Bond in the principal amount of HK$6,270,065.60 by Future Advance and the instrument entered into by the Company relating thereto, there is no contract or arrangement entered into by any member of the Group subsisting at the Latest Practicable Date in which any Director is materially interested and which is significant to the business of the Group.
4. SERVICE CONTRACTS
Mr. Chiu Winerthan, an executive Director, has renewed his service contract with the Company for a term of two years from 1st April, 2007 and subject to termination by either party giving not less than three months’ written notice. As the term of the service contract of Mr. Chiu Winerthan is less than three years in duration and the period of notice to be given for terminating his service contract is not more than one year, such service contract is exempt from the shareholders’ approval requirement under Rule 17.90 of the GEM Listing Rules.
Save as disclosed herein, there is no other service contract or management agreement between any of the Directors and any member of the Group nor is there any such contract or agreement proposed (excluding contracts expiring or terminable by the employer within one year without payment of compensation other than statutory compensation).
5. EXPERTS AND CONSENTS
The following are the qualifications of the experts who have been named in this circular or have given opinions or advice which are contained in this circular:
Name Qualification
Grant Thornton Certified public accountants
Greater China Independent qualified valuer
MMC Independent technical advisers
Optima Capital a licensed corporation to carry on business in type 6 regulated activity (advising on corporate finance) under the SFO
Each of Optima Capital, Grant Thornton, Greater China and MMC has given and has not withdrawn its written consent to the issue of this circular with the inclusion herein of its letter(s) and/or references to its name in the form and context in which they respectively appear.
As at the Latest Practicable Date, none of Optima Capital, Grant Thornton, Greater China and MMC has any shareholding, directly or indirectly, in any member of the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.
As at the Latest Practicable Date, none of Optima Capital, Grant Thornton, Greater China and MMC has any direct or indirect interests in any assets which had been, since 31st December, 2006 (being the date to which the latest published audited consolidated financial statements of the Company were made up), (i) acquired or disposed of by; (ii) leased to; (iii) proposed to be acquired or disposed of by; or (iv) proposed to be leased to, any member of the Group.
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6. LITIGATION
As at the Latest Practicable Date, no member of the Group was engaged in any litigation or arbitration of material importance and no litigation or claim of material importance was known to the Directors to be pending or threatened by or against any member of the Group.
7. AUDIT COMMITTEE
The Company established an audit committee with written terms of reference in compliance with Rules 5.28 to 5.29 of the GEM Listing Rules. The primary duties of the audit committee are to review and supervise the financial reporting process and internal control system of the Group. The audit committee chaired by Mr. Wan Tze Fan Terence (“Mr. Wan”), comprises two other members. Mr. Liu Weichang (“Mr. Liu”) and Mr. Gao Sheng Yu (“Mr. Gao”), who are independent non-executive Directors and their biographies are as follows:
Mr. Wan, aged 42, joined the Group in March 2004. Mr. Wan holds a bachelor degree in commerce and a master degree in business administration. Mr. Wan has over 16 years of experience in accounting and financial management. He had worked for international accounting firms and listed companies in Hong Kong. He is a fellow member of Hong Kong Institute of Certified Public Accountants and a Certified Practicing Accountants of CPA Australia. Currently, he is the financial controller and company secretary of a company listed on the main board of the Stock Exchange.
Mr. Liu, aged 48, joined the Group in May 2005. Mr. Liu holds a degree from Shenzhen University. He has over 23 years’ experience in the field of corporate management. Mr. Liu is a director and standing deputy general manager of Shenzhen China Travel Service (Cargo) Hong Kong Ltd. At the same time, he is a director of Shenzhen CTS (Hong Kong) Transportation Ltd.
Mr. Gao, aged 71, joined the Group in February 2006. He is an adviser of Guangdong Nuclear Power Joint Venture Co., Limited and Yangjiang nuclear power plant. Mr. Gao has over 45 years’ working experience in operating and constructing power plants in the PRC. He is a professorship senior engineer and graduated from Xi An Electric Power College (西安電力學校) and then studied at Tsinghua University majoring in Power Plant and Grid System (發電廠電網及系統專業).
8. MATERIAL CONTRACTS
The following contracts (not being contracts made in the ordinary course of business) have been entered into by members of the Group within the two years preceding the date of this circular which are or may be material:
(a) six subscription agreements all dated 25th January, 2006 entered into by the Company separately with six independent third parties for the subscription of an aggregate of 47,308,800 Shares at a subscription price of HK$0.315 per Share;
(b) the subscription agreement dated 24th February, 2006 entered into between the Company and Future Advance in relation to the subscription of the Future Advance Bond in the principal amount of HK$6,270,065.60 by Future Advance;
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(c) the co-operation agreement dated 18th April, 2006 entered into among Xin Shougang, Yichang Shoukong and Yichang Fulianjiang Joint Composite Limited in respect of the establishment of YXS Precious Metal Mining;
(d) the articles of association of YXS Precious Metal Mining dated 18th April, 2006 entered into among Xin Shougang, Yichang Shoukong and Yichang Fulianjiang Joint Composite Limited in respect of the establishment of YXS Precious Metal Mining;
(e) four subscription agreements all dated 9th May, 2006 entered into by the Company separately with four independent third parties for the subscription of an aggregate of 56,770,560 Shares at a subscription price of HK$1.5 per Share;
(f) the warrant placing agreement dated 1st August, 2006 entered into between the Company and Mr. Ha Siu Wa for the placing of 333,750,000 warrants (of which an aggregate of 13,800,000 warrants have been exercised on 21st December, 2006 and 4th June, 2007) by the Company to Mr. Ha Siu Wa entitling the latter to subscribe for up to 333,750,000 Shares (of which an aggregate of 13,800,000 Shares have been allotted and issued on 28th December, 2006 and 7th June, 2007) at the current exercise price of HK$0.265 per Share within three years commencing from 23rd August, 2006, being the date on which the warrants were issued;
(g) the warrant placing agreement dated 17th August, 2006 entered into between the Company and Northern Power Group Limited for the placing of 315,000,000 warrants by the Company to Northern Power Group Limited entitling the latter to subscribe for up to 315,000,000 Shares at the current exercise price of HK$0.28 per Share within three years commencing from 18th September, 2006, being the date on which the warrants were issued;
(h) the heads of agreement dated 5th September, 2006 entered into between Sure Whole Investments Limited, ASIA Resources Investment and Advisory Limited and Kondor Holdings Pty. Ltd. in relation to the possible investment by the Group of up to 65% of the entire issued share capital of a joint venture company to be incorporated for the purpose of conducting exploration and development of coal at a mining site located in Australia;
(i) the term sheet dated 3rd January, 2007 entered into among the Company, Lehman Brothers and Future Advance in relation to the conditional issue of the Convertible Bonds superseding the non-binding term sheet dated 14th November, 2006 entered into among the same parties;
(j) the Acquisition Agreement including the Supplemental Deed, the Second Supplemental Deed and the Third Supplemental Deed; and
(k) the Subscription Agreement.
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9. GENERAL
(a) The registered office of the Company is at Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands, and its head office and principal place of business in Hong Kong is at Suite 1415, Ocean Centre, 5 Canton Road, Tsim Sha Tsui, Kowloon, Hong Kong.
(b) The compliance officer of the Company is Mr. Chiu Winerthan.
(c) The company secretary and qualified accountant of the Company is Mr. Chan Wai. He is a member of both the Hong Kong Institute of Certified Public Accountants and the Association of Chartered Certified Accountants.
(d) The Hong Kong branch share registrar of the Company is Tricor Tengis Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong.
(e) The English texts of this circular and the accompanying form of proxy shall prevail over their respective Chinese texts.
10. DOCUMENTS AVAILABLE FOR INSPECTION
Copies of the following documents are available for inspection during normal business hours at the Company’s principal place of business in Hong Kong from the date of this circular up to and including the date of the EGM:
(a) the memorandum and articles of association of the Company;
(b) copy of each of the material contracts referred to in the paragraph headed “material contracts” in this appendix;
(c) the accountants’ report of Xin Shougang, the text of which is set out in Appendix I to this circular;
(d) the accountants’ report of the unaudited pro forma financial information of the Enlarged Group as set out in Appendix IV to this circular;
(e) the valuation report of properties of the Enlarged Group as set out in Appendix V to this circular;
(f) the business valuation report on the Mining Sites as set out in Appendix VI to this circular;
(g) the letter from the reporting accountants as set out in Appendix VII to this circular;
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(h) the technical assessment report on the Mining Sites as set out in Appendix VIII to this circular;
(i) the letters of consent referred to in the paragraph headed “experts and consents” in this appendix;
(j) the annual reports of the Company for the two years ended 31st December, 2005 and 2006 and the interim report 2007 of the Company;
(k) the letter from Optima Capital as set out in Appendix VII to this circular; and
(l) the circular of the Company issued after 31st December, 2006.
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(Incorporated in the Cayman Islands with limited liability) (Stock code: 8117)
NOTICE OF EXTRAORDINARY GENERAL MEETING
NOTICE IS HEREBY GIVEN that an extraordinary general meeting (the “EGM”) of the shareholders of China Primary Resources Holdings Limited (the “Company”) will be held at Suite 1415, Ocean Centre, 5 Canton Road, Tsim Sha Tsui, Kowloon, Hong Kong on Tuesday, 2nd October, 2007 at 12:00 p.m. for the purpose of considering and, if thought fit, passing with or without amendments, the following resolutions no. 1, 2 and 3 as ordinary resolutions and resolutions no. 4 and 5 as special resolutions of the Company:
ORDINARY RESOLUTIONS
(1) “THAT subject to the passing of resolution no. 3 below as an ordinary resolution and resolutions no. 4 and 5 as special resolutions and subject further to the fulfillment of the conditions as set out in the sale and purchase agreement (the “Acquisition Agreement”) dated 14th November, 2006 entered into between 宜昌首控實業有限公司 (Yichang Shoukong Industries Co., Limited) (“Yichang Shoukong”), a wholly-owned subsidiary of the Company, and Great Ocean Real Estate Limited (“GORE”) (as supplemented by three supplemental deeds dated respectively 5th January, 2007, 2nd February, 2007 and 11th June 2007 (the “Supplemental Deeds”)) in relation to the sale and purchase of 22.28% interest in the registered capital of 新首鋼資源控股有限公司 (“Xin Shougang”) (a copy of the Acquisition Agreement (including the Supplemental Deeds) has been produced to the EGM and marked “A” and signed by the chairman of the EGM for the purpose of identification):
(a) the Acquisition Agreement, including the Supplemental Deeds, and the transactions contemplated thereby be and are hereby approved, confirmed and ratified in all respects;
(b) the proposed creation of a new class of Preferred Shares (as defined in resolution no. 3) (the “Preferred Share Class Creation”) be and is hereby approved in all respects;
(c) the proposed allotment and issue of 2,802,235,294 Preferred Shares pursuant to the Acquisition Agreement (as supplemented by the Supplemental Deeds) and any new Ordinary Shares (as defined in resolution no. 3) which may fall to be allotted and issued upon the exercise of the conversion rights attaching to the Preferred Shares to GORE be and are hereby approved;
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(d) the proposed entering into of the deed (the “Option Deed”) (a copy of the latest draft of the Option Deed has been produced to the EGM and marked “B” and signed by the chairman of the EGM for the purpose of identification) among Yichang Shoukong, GORE and 宜昌泰鴻礦山科技有限公司 (“GORE Mining Technology”) in relation to GORE and GORE Mining Technology granting Yichang Shoukong an option to purchase, additionally, 12.72% interest in the registered capital of Xin Shougang and the transactions contemplated thereby be and are hereby approved in all respects; and
(e) any one or more directors of the Company (the “Directors”) be and are hereby generally authorised to do all such acts and things and execute such documents (including the affixation of the common seal of the Company) and take all steps which, in his/her (or their) opinion may be necessary, desirable or expedient to implement and/or give effect to the terms of, and all transactions contemplated under the Acquisition Agreement (as supplemented by the Supplemental Deeds) for and on behalf of the Company, including the Preferred Share Class Creation, the allotment and issue of the Preferred Shares and any Ordinary Shares which may fall to be allotted and issued upon the exercise of the conversion rights attaching to the Preferred Shares, the entering into of the Option Deed, and to approve any changes and amendments thereto as the Director(s) may consider necessary, desirable or expedient.”
(2) “THAT subject to the fulfillment or waiver of the conditions set out in the subscription agreement (the “Subscription Agreement”) dated 12 June 2007 entered into among the Company, Future Advance Holdings Limited and Lehman Brothers Commercial Corporation Asia Limited (the “Investor”) in respect of the issue of up to HK$246,250,000 in principal amount 4.5% convertible bonds due 2010 by the Company to the Investor or its, designated affiliate(s) or nominee(s) (the “Bonds”) (a copy of the Subscription Agreement having been produced to the EGM and marked “C” and signed by the chairman of the EGM for the purpose of identification),
(i) the Subscription Agreement and the transactions contemplated thereunder be and are hereby approved, confirmed and ratified in all respects;
(ii) the issue and the creation of the Bonds to the Investor or its, designated affiliate(s) or nominee(s) by the Company be and are hereby approved in all respects;
(iii) the allotment and issue of the new Ordinary Shares (the “Conversion Shares”) upon exercise of the conversion rights attaching to the Bonds at an initial conversion price of HK$0.20 per Conversion Share (subject to adjustments) be and is hereby approved in all respects; and
(iv) any one or more Directors be and are hereby authorised to do all such acts and things as he/she/they consider necessary or expedient in connection with and to give effect to the issue of the Bonds and the Conversion Shares upon exercise of the conversion rights attaching to the Bond.”
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(3) “THAT the authorised share capital of HK$125,000,000 be re-classified from 100,000,000,000 ordinary shares of HK$0.00125 each to (a) 96,000,000,000 ordinary shares of HK$0.00125 each (the “Ordinary Shares”) and (b) 4,000,000,000 redeemable convertible cumulative preferred shares of HK$0.00125 each (the “Preferred Shares”). The Ordinary Shares shall have the same rights and restrictions attached thereto as are attached to the Ordinary Shares immediately prior to the re-classification of the share capital of the Company and the Preferred Shares shall have the rights and restrictions as set out in Article 9A of the articles of association of the Company following the passing of special resolution no. 5 below.”
SPECIAL RESOLUTIONS
(4) “THAT subject to the passing of resolution no. 1 above as ordinary resolution, the existing Memorandum of Association of the Company (the “MoA”) be amended as follows:
By deleting Clause 8 in its entirety and substituting therefor the following new Clause 8:
“8. Unless otherwise determined by the Members in accordance with the Articles of Association, the authorised share capital of the Company shall be HK$125,000,000 divided into two classes being: (a) 96,000,000,000 ordinary shares of HK$0.00125 each (the “Ordinary Shares”); and (b) 4,000,000,000 redeemable convertible cumulative preferred shares of HK$0.00125 each (the “Preferred Shares”), with power for the Company insofar as is permitted by law to redeem or purchase any of its shares and to increase or reduce the said capital subject to the provisions of the Companies Law (revised) and the Articles of Association and to issue any part of its capital, whether original, redeemed or increased with or without any preference, priority or special privilege or subject to any postponement of rights or to any conditions or restrictions and so that unless the conditions of issue shall otherwise expressly declare every issue of shares whether stated to be preference or otherwise shall be subject to the powers hereinbefore contained.””
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(5) “THAT subject to the passing of resolutions no. 1 and 3 above as ordinary resolutions and resolution 4 above as special resolution, the existing Articles of Association of the Company (the “Articles”) be amended as follows:
(a) Article 3(1)
By deleting Article 3(1) in its entirety and substituting therefor the following new Article 3(1):
“3(1) Unless otherwise determined by the Members in accordance with these Articles, the share capital of the Company shall be divided into two classes comprising of: (a) ordinary shares of HK$0.00125 each (the “Ordinary Shares”); and (b) redeemable convertible cumulative preferred shares of HK$0.00125 each (the “Preferred Shares”) subject to the terms, rights and restrictions set out in Article 9A of the Articles.”
(b) Article 9A
By inserting the following new Article 9A immediately following Article 9:
“9A Redeemable Convertible Cumulative Preferred Shares
(1) Definitions
For the purpose of this Article 9A, the following terms shall have the following meanings:
“Acquisition Agreement” the agreement dated 14 November 2006 entered into between 宜昌首控實業有限 公司 and Great Ocean Real Estate Limited in relation to the acquisition of 22.28% of the registered capital of Xin Shougang held indirectly and directly by Great Ocean Real Estate Limited and 宜昌泰鴻礦山科技有 限公司 respectively and as supplemented by three supplemental deeds dated 5 January 2007, 2 February 2007 and 11 June 2007 entered into by 宜昌首控實業 有限公司 and Great Ocean Real Estate Limited;
“approved merchant bank” an independent reputable merchant bank or other reputable financial institution in Hong Kong selected by the directors of the Company;
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“Business Day” a day (other than Saturday, Sunday and public or statutory holiday) on which licensed banks in Hong Kong are open for business during their normal business hours;
“Companies Law” the Companies Law, Cap. 22 (Law 3 of 1961, as consolidated and revise) of the Cayman Islands;
“Conditions” the conditions specified in clause 3.2 of the Acquisition Agreement;
“Conversion Event” the conversion of Preferred Shares by a Preferred Shareholder pursuant to Article 9A(5)(a);
“Conversion Period” in relation to any Preferred Shares, the period commencing on the Issue Date until all Preferred Shares have been converted into Ordinary Shares;
“Conversion Price” the conversion price for Preferred Shares as determined in accordance with Article 9A(5)(c);
“Conversion Rate” the rate for conversion of the Preferred Shares into Ordinary Shares as determined in accordance with Article 9A(5)(c);
“Conversion Right” the right of Preferred Shareholders to convert their Preferred Shares into Ordinary Shares;
“Disposal Consideration” the aggregate consideration to be received by the Group upon disposal of any interest in the registered capital of Xin Shougang;
“Dividend” in relation to each Preferred Share, a fixed cumulative dividend on an annual basis payable in arrears to its holders in preference to any dividend on the Ordinary Shares at the rate of 0.5% per annum on the Principal Amount outstanding at the year end date of the Company and in the event the dividend on each Ordinary Share exceeds that of each Preferred Share, the dividend on each Preferred Share shall be increased to the extent the dividend on each Preferred Share is equivalent to that of each Ordinary Share;
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“GEM” the Growth Enterprise Market of the Hong Kong Stock Exchange;
“Group” the Company and its subsidiaries; and the expression “member of the Group” shall be construed accordingly;
“HK$” Hong Kong dollars, the lawful currency of Hong Kong;
“Hong Kong” the Hong Kong Special Administrative Region of the PRC;
“Hong Kong Stock The Stock Exchange of Hong Kong Exchange” Limited;
“Issue Date” the date of allotment and issue of the Preferred Shares;
“Issue Price” HK$0.34 per Preferred Share;
“Ordinary Shares” ordinary shares of HK$0.00125 each in the authorised share capital of the Company or, if there has been a sub-division, consolidation, re-classification or re- construction of the ordinary share capital of the Company, such ordinary shares forming part of the ordinary equity share capital of the Company of such other nominal amount as shall result from any such sub-division, consolidation, re- classification or re-construction;
“PRC” the People’s Republic of China but excluding Hong Kong, Macau Special Administrative Region of the People’s Republic of China and Taiwan;
“Preferred Shares” the unlisted non-voting redeemable convertible cumulative preferred shares of par value of HK$0.00125 each in the authorised share capital of the Company, the rights of which are set out in Article 9A;
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“Preferred Shareholder(s)” a person or person(s) registered from time to time in the register of members of the Company as holder(s) of any Preferred Share(s);
“Principal Amount” the Issue Price;
“Redemption Notice” a notice in writing to be served by the Company to the Preferred Shareholder(s) pursuant to Article 9A(6)(b) for the redemption of the Preferred Shares;
“Shares” shares in the share capital of the Company (being the Ordinary Shares and the Preferred Shares), respectively
“Takeovers Code” the Hong Kong Code on Takeovers and Mergers;
“trading day” any day on which the Hong Kong Stock Exchange is open for business of dealing in securities and on which the Ordinary Shares are traded on the Hong Kong Stock Exchange;
“Xin Shougang” 新首鋼資源控股有限公司 (transliterated as Xin Shougang Zi Yuan Holdings Limited), a company established in the PRC with limited liability; and
“Xin Shougang Dividend” the dividends to be distributed by Xin Shougang to its then equity holders.
(2) Dividend
(a) Each Preferred Share shall confer on the holder thereof the right to receive out of the funds of the Company available for distribution and resolved to be distributed the Dividend, in priority to the Ordinary Shares in the capital of the Company from time to time in issue.
(b) The Dividend shall be cumulative annually in arrears payable on dates as resolved by the board of directors of the Company and shall accrue from day to day and shall be calculated on the basis of the actual number of days that lapsed in a year of 365 days. Any Dividend that has accrued prior to the date of conversion or redemption (as the case may be) but remains unpaid on the date of conversion or redemption (as the case may be) shall be payable upon the date of conversion or redemption (as the case may be).
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(c) No dividend shall be paid to the holders of the Ordinary Shares unless and until:
(i) any outstanding Dividend has been paid in full; and
(ii) all Preferred Shares which have fallen due for redemption have been redeemed.
(d) Notwithstanding the generality of the foregoing and subject to Articles 9A(5) and (6) below, in any conversion or redemption of Preferred Shares, the Preferred Shareholder(s) shall be entitled to a pro rata portion of such Dividend that has accrued thereon up to the date immediately prior to the service of a notice in writing to convert Preferred Shares or the payment date of the redemption amount (as the case may be).
(3) Return of Capital
On a return of capital on liquidation, winding-up or dissolution of the Company or otherwise (but not on conversion or redemption of Preferred Shares or any repurchase by the Company of Preferred Shares or Ordinary Shares), the assets and funds of the Company available for distribution among the members of the Company shall, subject to applicable laws, be applied in the following priority:
(a) Firstly, to the Preferred Shareholder(s), the Principal Amount per Preferred Share together with the amount of any outstanding Dividend accruing on the Preferred Shares up to and including the date of the return of capital.
(b) If the assets and funds of the Company available for distribution shall be insufficient to provide for full payment to the holders of the Preferred Shares in accordance with Article 9A(3)(a), the Company shall make payment on the Preferred Shares on a pro rata basis.
(c) Thereafter, the balance of such assets and funds of the Company available for distribution among the members of the Company shall belong to and be distributed rateably among the holders of the Ordinary Shares and other classes of shares of the Company currently in issue or to be created in the future in the capital of the Company. The Preferred Shareholder(s) shall not have the right to participate in such surplus assets.
(4) Voting
Preferred Shareholder(s) shall not be entitled to vote at any general meeting of the Company.
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(5) Conversion
(a) Optional conversion. Provided conversion of Preferred Shares may only be made to the extent that the number of Ordinary Shares to be converted from the Preferred Shares (if applicable, including any Ordinary Shares acquired by parties acting in concert (as defined in the Takeovers Code in effect from time to time) with the Preferred Shareholder(s)) shall not be more than 2% (or the creeper percentage as stated in Rule 26 of the Takeovers Code in effect from time to time) of the then issued ordinary share capital of the Company in any 12-month period, the Preferred Shares shall be convertible at the option of the Preferred Shareholder, at any time during the Conversion Period and without the payment of any additional consideration therefor, into such number of fully- paid Ordinary Shares as determined in accordance with the then effective Conversion Rate. Notwithstanding the generality of the foregoing in respect of any conversion of Preferred Shares, the Preferred Shareholder(s) shall be entitled to a pro rata portion of such Dividend that has accrued thereon up to the date immediately prior to the service of a notice in writing on the Company to require the Company to convert such Preferred Shares into Ordinary Shares.
(b) Number of Ordinary Shares upon conversion. The number of Ordinary Shares to which a holder of Preferred Shares shall be entitled upon conversion following a Conversion Event shall be the number obtained by multiplying the Conversion Rate then in effect by the number of Preferred Shares being converted.
(c) Conversion Rate. The Conversion Rate of each Preferred Share shall be determined by dividing the Principal Amount of each Preferred Share by the Conversion Price in effect at the time of conversion, provided that the Conversion Rate shall not be less than the then subsisting par value of an Ordinary Share into which such Preferred Share is convertible. The Conversion Price shall initially be the Principal Amount, subject to adjustment in accordance with Article 9A(7).
(d) Mechanism for conversion.
(i) Any Preferred Shareholder who wishes to convert its Preferred Shares pursuant to Article 9A(5)(a) shall deliver to the Company at its principal place of business in Hong Kong written notice that he/she/it elects to convert such number of Preferred Shares as specified in the notice. The notice shall be deemed to have been sufficiently served within 5 Business Days of posting if sent by registered post.
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(ii) The relevant Preferred Shareholder shall deliver to the Company at its principal place of business in Hong Kong the certificate(s) evidencing the Preferred Shares to be converted within 5 Business Days from the date of service of the notice of conversion given by such Preferred Shareholder pursuant to Article 9A(5)(d)(i).
(iii) Upon delivery of the certificate(s) evidencing the Preferred Shares to be converted by the holder thereof to the Company, the Company shall promptly and, in any event no later than 10 Business Days after the date of receipt of such certificate(s):
(a) issue and deliver to such holder (a) certificate(s) for the number of Ordinary Shares into which the Preferred Shares are converted in the name as shown on the certificate(s) evidencing the Preferred Shares so surrendered to the Company; or
(b) cause to be credited into the relevant Preferred Shareholder’s brokers’ account such number of Ordinary Shares into which the Preferred Shares are converted,
(e) Fractional Shares. No fraction of an Ordinary Share shall be issued upon conversion of the Preferred Shares. Any sum in respect of fractional entitlement shall be ignored by the holder(s) of the Preferred Shares and shall be retained by the Company for its own benefit.
(f) Sufficient authorised share capital. The Company shall ensure that at all times there is sufficient number of unissued Ordinary Shares in its authorised share capital to be issued in satisfaction of the Conversion Rights pursuant to Article 9A(5)(a).
(g) Entry into register of members. Upon the issue of the Ordinary Shares into which the Preferred Shares are converted, the Company shall enter such member of the Company in its register of members in respect of the relevant number of Ordinary Shares arising from such conversion, and the Preferred Shares which have been converted into Ordinary Shares shall be treated as cancelled.
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(6) Redemption
(a) Event of Redemption.
(i) Upon the value of the cumulative Xin Shougang Dividend reaches HK$485.5 million, or the Group has disposed of its interest in Xin Shougang at the Disposal Consideration of more than HK$485.5 million in aggregate without incurring any losses on the disposal or the total of the cumulative Xin Shougang Dividend and the Disposal Consideration is more than HK$485.5 million without incurring any losses on the disposal, the Company may at any time redeem in cash not more than half of the Preferred Shares issued at a price equal to their Principal Amount plus a premium of 10% per annum together with any accrued and unpaid Dividend thereon and the Company shall pay such amount to the Preferred Shareholder on dates as may be resolved by the board of directors of the Company; and
(ii) Upon the value of the cumulative Xin Shougang Dividend reaches HK$971 million, or the Group has disposed of its interest in Xin Shougang at the Disposal Consideration of more than HK$971 million in aggregate or the total of the cumulative Xin Shougang Dividend and the Disposal Consideration is more than HK$971 million, the Company may at any time redeem in cash all or any number of the then outstanding Preferred Shares at a price as stated in Article 9A(6)(a)(i) above.
(b) Mechanism for Redemption. Upon the happening of the events of redemption as provided in Article 9A(6)(a), the Company may by serving Redemption Notice to the Preferred Shareholder(s) redeem such amount of the Preferred Shares as may be specified in the Redemption Notice subject to Article 9A(6)(a). The Preferred Shareholder(s) shall within 3 Business Days from receipt of the Redemption Notice deliver to the Company the certificate(s) of the Preferred Shares to be redeemed and the Company shall cancel the same forthwith. If any certificate so delivered to the Company includes any Preferred Shares not falling to be redeemed on the Redemption Notice, the Company shall without charge issue a certificate for the balance of any unredeemed Preferred Shares to the holder or holders thereof.
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(7) Conversion adjustments
(a) The Conversion Price shall from time to time be adjusted in accordance with the following relevant provisions so that if the event giving rise to any such adjustment shall be such as would be capable of falling within more than one of Article 9A(7)(a)(i) to (vii) inclusive, it shall fall within the first of the applicable clauses to the exclusion of the remaining clauses:
(i) if and whenever the Ordinary Shares by reason of any consolidation or sub-division or reclassification become of a different nominal amount, the Conversion Price in force immediately prior thereto shall be adjusted by multiplying it by the revised nominal amount and dividing the result by the former nominal amount. Each such adjustment shall be effective from the close of business in Hong Kong on the day immediately preceding the date on which the consolidation or sub-division or reclassification becomes effective;
(ii) if and whenever the Company shall:
(a) issue (other than in lieu of a cash dividend) any Ordinary Shares credited as fully paid by way of capitalisation of profits or reserves (including any share premium account); or
(b) issue Ordinary Shares paid out of distributable profits or reserves and/or share premium accounts issued in lieu of the whole or any part of a cash dividend, being a dividend which the holders of the Ordinary Shares concerned would or could otherwise have received but only to the extent that the market value of such Ordinary Shares exceeds 110% of the amount of dividend which holders of the Ordinary Shares could elect to or would otherwise receive in cash and which would not have constituted a capital distribution (as defined in Article 9A(7)(b)) (for which purpose the “market value” of an Ordinary Share shall mean the average of the closing prices published in the Hong Kong Stock Exchange’s Daily Quotation Sheet for one Ordinary Share for 5 trading days ending on the last trading day immediately preceding the last day on which holders of Ordinary Shares may elect to receive or (as the case may be)
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not to receive the relevant dividend in cash); then the Conversion Price in force immediately prior to such issue shall be adjusted by multiplying it by the aggregate nominal amount of the issued Ordinary Shares immediately before such issue and dividing the result by the sum of such aggregate nominal amount and the aggregate nominal amount of the Ordinary Shares issued in such capitalisation. Each such adjustment shall be effective (if appropriate, retroactively) from the commencement of the day next following the record date for such issue;
(iii) if and whenever the Company shall make any capital distribution to holders (in their capacity as such) of Ordinary Shares (whether on a reduction of capital or otherwise) or shall grant to such holders rights to acquire for cash assets of the Company or any of its subsidiaries, the Conversion Price in force immediately prior to such distribution or grant shall be adjusted by multiplying by the following fraction:
A – B A
where:
A = the closing price published in the Hong Kong Stock Exchange in respect of one Ordinary Share on the trading day immediately preceding the date on which the capital distribution or, as the case may be, the grant is publicly announced or (failing any such announcement) immediately preceding the date of the capital distribution or, as the case may be, of the grant; and
B = the fair market value on the day of such announcement or failing any such announcement, the date of the capital distribution or the grant, as the case may be, as determined in good faith by an approved merchant bank, of the portion of the capital distribution or of such rights which is/are attributable to one Ordinary Share,
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Provided that:
(a) if, in the opinion of the relevant approved merchant bank, the use of the fair market value as aforesaid produces a result which is significantly inequitable, it may instead determine (and in such event the above formula shall be construed as if B meant) the amount of the closing price published in the Hong Kong Stock Exchange’s Daily Quotation Sheet of one Ordinary Share which should properly be attributed to the value of the capital distribution or rights; and
(b) this Article 9A(7)(a)(iii) shall not apply in relation to the issue of Ordinary Shares paid out of profits or reserves and issued in lieu of a cash dividend. Each such adjustment shall be effective (if appropriate, retrospectively) from the commencement of the day following the record date for the capital distribution or grant;
(iv) If and whenever the Company shall offer to all holders of Ordinary Shares new Ordinary Shares for subscription by way of rights, or shall grant to all holders of Ordinary Shares any options or warrants to subscribe for new Ordinary Shares, at a price per new Ordinary Share which is less than 90% of the market price at the date of the announcement of the terms of the offer or grant (whether or not such offer or grant is subject to the approval of the holders of Ordinary Shares or other persons), the Conversion Price shall be adjusted by multiplying the Convention Price in force immediately before the date of the announcement of such offer or grant by the following fraction:
G + H G + I
where:
G = the number of Ordinary Shares in issue immediately before the date of such announcement;
H = the number of Ordinary Shares which the aggregate of the two following amounts would purchase at such market price:
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(a) the total amount (if any) payable to the rights, options or warrants being offered or granted; and
(b) the total amount payable for all of the new Ordinary Shares being offered for subscription or comprised in the rights, options or warrants being granted; and
I = the aggregate number of Ordinary Shares being offered for subscription or comprised in the rights, options or warrants being granted.
Such adjustment shall become effective (if appropriate, retroactively) from the commencement of the day next following the record date for the relevant offer or grant.
(v) (a) If and whenever the Company or any of its subsidiaries shall issue wholly for cash any securities which by their terms are convertible into or exchangeable for or carry rights of subscription for new Ordinary Shares, and the total Effective Consideration per new Ordinary Share initially receivable for such securities is less than 90% of the market price at the date of the announcement of the terms of issue of such securities (whether or not such issue is subject to the approval of the holders of Shares of other persons), the Conversion Price shall be adjusted by multiplying the Conversion Price in force immediately prior to such issue by the following fraction:
J + K J + L
where:
J = the number of Ordinary Shares in issue immediately before the date of the issue of such securities;
K = the number of Ordinary Shares which the total Effective Consideration receivable for such securities would purchase at such market price; and
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L = the maximum number of new Ordinary Shares to be issued upon full conversion or exchange of, or the exercise in full of the subscription rights conferred by, such securities at their relative initial conversion or exchange rate or subscription price.
Such adjustment shall become effective (if appropriate, retroactively) from the close of business on the Business Day immediately preceding whichever to the earlier of the date on which the issue is announced and the date on which the issuer of the relevant securities determines the conversion or exchange rate or subscription price in respect of such securities.
(b) If and whenever the rights of conversion or exchange or subscription attaching to any such securities as are mentioned in Article 9A(7)(a)(v)(a) are modified so that the total Effective Consideration per new Ordinary Share initially receivable for such securities shall be less than 90% of the market price at the date of announcement of the proposal to modify such rights of conversion or exchange or subscription, the Conversion Price shall be adjusted by multiplying the Conversion Price in force immediately prior to such modification by the following fraction:
M + N M + O
where:
M = the number of Ordinary Shares in issue immediately before the date of such modification;
N = the number of Ordinary Shares which the total Effective Consideration receivable for such securities at the modified conversion or exchange rate or subscription price would purchase at such market prices; and
O = the maximum number of new Ordinary Shares to be issued upon full conversion or exchange of, or the exercise in full of the subscription rights conferred by, such securities at their relative modified conversion or exchange rate or subscription price.
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Such adjustment shall become effective as at the date upon which such modification shall take effect. A right of conversion or exchange or subscription shall not be treated as modified for the foregoing purposes where it is adjusted to take account of rights or capitalisation issues and other events normally giving rise to adjustments of conversion, exchange or subscription terms.
(c) For the purposes of Article 9A(7)(a)(v):
(i) the “total Effective Consideration” receivable for the securities issued shall be deemed to be the aggregate consideration receivable by the issuer for such securities for the issue thereof plus the additional minimum consideration (if any) to be received by the issuer and/or the Company (if not the issuer) upon (and assuming) the full conversion or exchange thereof or the exercise in full of the subscription rights attaching thereto; and
(ii) the “total Effective Consideration per new Ordinary Share” initially receivable for such securities shall be such aggregate consideration divided by the maximum number of new Ordinary Shares to be issued upon (and assuming) the full conversion or exchange thereof at the initial conversion or exchange rate or the exercise in full of the subscription rights attaching thereto at the initial subscription price, in each case, without any deduction of any commissions, discounts or expenses paid, allowed or incurred in connection with the issue thereof.
(vi) If and whenever the Company shall issue wholly for cash any Ordinary Shares at a price per Ordinary Share which is less than 90% of the market price at the date of the announcement of the terms of such issue, the Conversion Price shall be adjusted by multiplying the Conversion Price in force immediately prior to the date of such announcement by the following fraction:
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P + Q P + R
where:
P = the number of Ordinary Shares in issue immediately before the date of such announcement;
Q = the number of Ordinary Shares which the aggregate amount payable for such issue would purchase at such market price; and
R = the number of Ordinary Shares allotted pursuant to such issue. Such adjustment shall become effective on the date of the issue.
(vii) If and whenever the Company makes an offer or invitation to holders of Ordinary Shares to tender for sale to the Company any Ordinary Shares or if the Company shall purchase any Ordinary Shares or securities convertible into Ordinary Shares or any rights to acquire Ordinary Shares (excluding any such purchase made on the Hong Kong Stock Exchange or any recognized stock exchange, being a stock exchange recognized for this purpose by the Securities and Futures Commission in Hong Kong or equivalent authority and the Hong Kong Stock Exchange) and the board of directors of the Company considers that it may be appropriate to make an adjustment to the Conversion Price, at that time the board of directors of the Company shall appoint an approved merchant bank to consider whether, for any reason whatsoever as a result of such purchases, an adjustment should be made to the Conversion Price fairly and appropriately to reflect the relative interests of the persons affected by such purchases by the Company and, if the approved merchant bank shall consider in its opinion that it is appropriate to make an adjustment to the Conversion Price, an adjustment to the Conversion Price shall be made in such manner as the approved merchant bank shall certify to be, in its opinion, appropriate. Such adjustment shall become effective (if appropriate, retroactively) from the close of business in Hong Kong on the Business Day next preceding the date on which such purchases by the Company are made.
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(b) For the purposes of Article 9A(7)(a):
“announcement” shall include the release of an announcement to the press or the delivery or transmission by telephone, telex, facsimile transmission or otherwise of an announcement to the Hong Kong Stock Exchange, “date of announcement” shall mean the date on which the announcement is first so released, delivered or transmitted and “announce” shall be construed accordingly;
“capital distribution” shall (without prejudice to the generality of that phrase) include distributions in cash or specie, and any dividend or distribution charged or provided for in the accounts for any financial period shall (whenever paid and however described) be deemed to be a capital distribution, provided that any such dividend shall not automatically be so deemed if:
(i) it is paid out of the net profits (less losses) attributable to the holders of Ordinary Shares for all financial periods after that ended 31st of December 2006 as shown in the audited consolidated profit and loss account of the Company and its subsidiaries for each such financial period; or
(ii) to the extent that (i) above does not apply, the rate of that dividend, together with all other dividends on the class of capital in question charged or provided for in the accounts for the financial period in question, does not exceed the aggregate rate of dividend on such class of capital charged or provided for in the accounts for the last preceding financial period. In computing such rates, such adjustments may be made as are in the opinion of the approved merchant bank appropriate to the circumstances and shall be made in the event that the lengths of such periods differ materially;
“issue” shall include allot;
“market price” means the average of the closing prices published in the Hong Kong Stock Exchange’s Daily Quotation Sheet for one Ordinary Share for the 5 trading days ending on the last trading day immediately preceding the day on or as of which such price is to be ascertained PROVIDED THAT if at any the during the said 5 trading days, the Share shall have been quoted ex- dividend and during some other part of that period, the Ordinary Shares shall have been quoted cum-dividend, then:
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(i) if the Ordinary Shares to be issued do not rank for the dividend in question, the quotations on the dates on which the Ordinary Shares shall have been quoted cum-dividend shall for the purpose of this definition be deemed to be the amount thereof reduced by an amount equal to the amount of that dividend per Ordinary Share; and
(ii) if the Ordinary Shares to be issued rank for the dividend in question, the quotations on the dates on which the Ordinary Shares shall have been quoted ex-dividend shall for the purpose of this definition be deemed to be the amount thereof increased by an amount equal to the amount of that dividend per Ordinary Share; and PROVIDED FURTHER THAT if the Ordinary Shares on each of the said five trading days have been quoted cum-dividend in respect of a dividend which has been declared or announced but the Ordinary Shares to be issued or purchased do not rank for that dividend, the quotations on each of such dates shall for the purpose of this definition be deemed to be the amount thereof reduced by an amount equal to the amount of that dividend per Ordinary Share;
“Shares” includes, for the purposes of Ordinary Shares comprised in any issue, distribution, offer or grant pursuant in Articles 9A(7)(a)(ii), (iii), (iv), (v) and (vi) above, any such shares of the Company as, when fully paid, shall be Ordinary Shares;
“rights” includes rights in whatsoever form issued.
(c) if the Conversion Price is adjusted with effect (retroactively or otherwise) from a date on or before the date on which the names of the Preferred Shareholders whose Preferred Shares are converted into Ordinary Shares pursuant hereto or such other persons as they may direct are entered into the register of holders of Ordinary Shares of the Company and such Preferred Shareholders’ entitlement were arrived at on the basis of unadjusted Conversion Price, the Company shall procure that such number of Ordinary Shares which would have been required to be issued on conversion of such Preferred Shares if the relevant adjustment had been given effect to as at the date of conversion shall be allotted and issued to such Preferred Shareholders or such other persons as they may direct.
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(d) The provisions of Article 9A(7)(a) shall not apply to:
(i) an issue of fully-paid Ordinary Shares upon the exercise of any conversion rights attached to securities convertible into Ordinary Shares that exist at the date of issue of the Preferred Shares;
(ii) an issue of Ordinary Shares or other securities of the Company or any subsidiary wholly or partly convertible into, of carrying rights to acquire, Ordinary Shares to the directors or employees or the Company or any of its subsidiaries pursuant to an employee share option scheme adopted by the Company, and
(iii) an issue by the Company of Ordinary Shares or by the Company or its subsidiary of securities wholly or partly convertible into or carrying rights to acquire Ordinary Shares, in any such case in consideration or part consideration for the acquisition of any other securities, assets or business.
(e) Notwithstanding the provisions of Article 9A(7)(a), in any circumstances where the directors of the Company shall consider that an adjustment to the Conversion Price provided for under the said provisions should not be made or should be calculated on a different basis or that an adjustment to the Conversion Price should be made notwithstanding that no such adjustment is required under the said provisions or that an adjustment should take effect on a different date or at a different time from that provided for under the provisions, the Company may appoint an approved merchant bank, to consider whether for any reason whatever the adjustment to be made (or the absence of adjustment) would or might not fairly and appropriately reflect the relative interests of the persons affected thereby and, if the approved merchant bank shall consider this to be the case, the adjustment shall be modified or nullified or an adjustment made instead of no adjustment in such manner including without limitation, making an adjustment calculated on a different basis and/or the adjustment shall take effect from such other date and/or time as shall be certified by the approved merchant bank to be in its opinion appropriate.
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(f) Any adjustment to the Conversion Price shall be made to the nearest one-hundredth cent so that any amount under half a one- hundredth cent shall be rounded down and an amount of half a one-hundredth cent or more shall be rounded up and in no event shall any adjustment (otherwise than upon the consolidation of Ordinary Shares into shares of a larger nominal amount or upon a repurchase of Ordinary Shares) involve an increase in the Conversion Price.
(g) No adjustment shall be made to the Conversion Price in any case in which the amount by which the same would be reduced in accordance with the foregoing provisions would be less than the nominal value of a Preferred Share.
(h) Where the result of any act or transaction of the Company the result of which, having regard to the provisions of this Article 9A(7), would be to reduce the Conversion Price to below the nominal amount of a Share, no adjustment to the Conversion Price shall be made pursuant to any of the relevant provisions of this Article 9A(7) shall be made unless (i) the articles of association of the Company shall be in such form, or shall have been altered or added to in such manner, as may be necessary or appropriate to enable the following provisions of this Article 9A(7)(h) and the provisions of Article 9A(8) to be implemented, (ii) implementation of such provisions is not prohibited by and is in compliance with the provisions of the Companies Law, and (iii) the Company, shall have established and shall thereafter (subject as provided in Article 9A(8)) maintain in accordance with the provisions of Article 9A(8) the Conversion Right Reserve referred to therein.
(i) Whenever the Conversion Price is adjusted, the Company shall give notice to the Preferred Shareholder(s) that the Conversion Price has been adjusted (setting forth the event giving rise to the adjustment, the Conversion Price in effect prior to such adjustment, the adjusted Conversion Price and the effective date thereof).
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(8) Reduction of the Conversion Price to below the nominal value of a Share
(a) If, so long as any of the Conversion Rights shall remain exercisable, at any time after the articles of association of the Company shall be in such form, or shall have been altered or added to, as provided in Article 9A(7)(h) and the following provisions of this Article 9A(8) are not prohibited by and are implemented in compliance with the provisions of the Companies Law, the Company does any act or engages in any transaction to which the provisions of Article 9A(7)(h) relate, then in compliance with the provisions of that Article, the following provisions shall apply:
(i) As from the date of such act or transaction, the Company shall establish and thereafter (subject as provided in this Article 9A(8)) maintain in accordance with the provisions of this Article 9A(8)(a) a reserve (the “Conversion Right Reserve”) the amount of which shall at no time be less than the sum which for the time being would be required to be capitalized and applied in paying up in full the nominal amount of the additional Ordinary Shares required to be allotted and issued credited as fully paid up pursuant to Article 9A(8)(a)(iii) on the exercise in full of all the Conversion Rights outstanding (and any other conversion or subscription rights outstanding in respect of Ordinary Shares under any other securities of the Company) and shall apply the Conversion Right Reserve in paying up in full such additional Ordinary Shares as and when the same are allotted.
(ii) The Conversion Right Reserve will not be used for any purpose other than that specified above unless all other reserves of the Company (other than share premium account) have been extinguished and will then only be used to make good losses of the Company if and so far as is required by law.
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(iii) Upon the exercise of the Conversion Rights represented by any Preferred Shares, the relevant Conversion Rights shall be exercisable in respect of a nominal amount of Ordinary Shares equal to the Principal Amount of such Preferred Shares (or, as the case may be, the portion thereof in respect of which the Conversion Rights are then exercised) and, in addition, there shall be allotted in respect of such Conversion Rights to the exercising Preferred Shareholder(s) credited as fully paid such additional nominal amount of Ordinary Shares as is equal to the difference between:
(aa) the Principal Amount of such Ordinary Shares (or, as the case maybe, the portion thereof in respect of which the Conversion Rights are then exercised); and
(bb) the nominal amount of Ordinary Shares in respect of which such Conversion Rights would have been exercisable, having regard to the provisions of Article 9A(7), had it been possible for such Conversion Rights to represent the right to convert into Ordinary Shares at less then par, and immediately upon such exercise so much of the sum standing to the credit of the Conversion Right Reserve as is required to pay up in full such additional nominal amount of Ordinary Shares shall be capitalized and applied in paying up in full such additional nominal amount of Ordinary Shares (other than a fraction of an Ordinary Share) and the relevant number of Ordinary Shares shall forthwith be allotted credited as fully paid to the exercising Preferred Shareholder(s).
(iv) If upon the exercise of Conversion Rights represented by any Preferred Share the amount standing to the credit of the Conversion Right Reserve is not sufficient to pay up in full such additional nominal amount of Ordinary Shares equal to such difference as aforesaid to which the exercising Preferred Shareholder(s) are entitled, the directors of the Company shall apply any profits or reserves then, or thereafter becoming, available (including, to the extent permitted by law, the share premium account) for such purpose until such additional nominal amount of Ordinary Shares is paid up and the relevant number of Ordinary Shares are allotted as aforesaid and until then no dividend or other distribution shall be paid or made on the Ordinary Shares then in issue. Pending such payment out of the Conversion Right Reserve and the available profits and
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reserves of the Company and allotment the exercising Preferred Shareholder(s) shall be issued by the Company with a certificate evidencing his/her/its right to the allotment of such additional nominal amount of Ordinary Shares. The rights represented by any such certificate shall be in registered form and shall be transferable in whole or in part in units of one Ordinary Share in the like manner as the Ordinary Shares for the time being are transferable, and the Company shall make such arrangements in relation to the maintenance of a register therefore and other matters in relation thereto as the directors of the Company may think fit, and adequate particulars thereof shall be made known to each relevant exercising Preferred Shareholder(s) upon the issue of such certificate.
(b) Ordinary Shares allotted pursuant to the provisions of this Article 9A(8) shall rank pari passu in all respects with other Ordinary Shares allotted on the relevant exercise of the Conversion Rights represented by the Preferred Shares concerned.
(c) Notwithstanding anything contained in Article 9A(8)(a), no fraction of any Ordinary Share shall be allotted on exercise of the Conversion Rights and the provisions of Article 9A(5)(e) shall apply. For this purpose, if the provisions of Article 9A(8)(a)(iii) apply on the occasion of the exercise of the Conversion Rights represented by any Preferred Share, then for the purpose of determining whether any (and if so what) fraction of an Ordinary Share arises:
(i) if the amount standing to the credit of the Conversion Right Reserve is sufficient (when aggregated with the Principal Amount of such Preferred Share or, as the case may be, the portion thereof payable upon exercise in part of the Conversion Rights represented by such Preferred Share) to enable the issue of the full nominal amount of Ordinary Shares in respect of which the Conversion Rights represented by such Preferred Share are then being exercised, any fractions that would arise on the basis of (separately) the Principal Amount (or, as the case may be, the portion thereof as aforesaid) relating to such Preferred Share and the capitalization of an amount standing to the credit of the Conversion Right Reserve shall be aggregated; and
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(ii) if contrary to (i) above is the case, the provisions of Article 9A(5)(e) and the foregoing provisions of this Article 9A(8)(c) shall not be applied until the full nominal amount of the Ordinary Shares which may fall to be issued on exercise in full of the Conversion Rights represented by such Preferred Share is issued (and at that point the Principal Amount relating to such Preferred Share and the amount, or all the amounts, capitalized as provided in Article 9A(8)(a) shall be aggregated and the fraction to which the provisions of Article 9A(5)(e) and the foregoing provisions of this Article 9A(8)(c) shall apply shall be the amount of any fraction of a Share then resulting).
(d) A certificate or report by the auditors of the Company from time to time as to whether or not the Conversion Right Reserve is required to be established and maintained and if so the amount thereof so required to be established and maintained, as to the purposes for which the Conversion Right Reserve has been used, as to the extent to which it has been used to make good losses of the Company, as to the number of Ordinary Shares required to be allotted to exercising Preferred Shareholder(s) credited as fully paid and as to any other matter concerning the Conversion Right Reserve shall (in the absence of manifest error) be conclusive and binding upon the Company and all the Preferred Shareholders and shareholders and all persons claiming through or under them respectively.
(9) Ranking of the Preferred Shares
The Preferred Shares shall rank in preference to any and all other classes of ordinary equity securities of the Company currently in issue or to be created in the future in the capital of the Company.
(10) Payments
(a) Payment of all amounts in respect of the Preferred Shares under the terms and conditions thereof shall be made on the due dates into such bank account as the holder of the relevant Preferred Shareholder(s) may notify the Company by at least 7 days’ prior notice in writing from time to time. All payments made by the Company in respect of the Preferred Shares pursuant to the terms and conditions of this Article 9A(10) shall be made in HK$ in immediately available funds.
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(b) If the due date for payment of any amount in respect of the Preferred Shares is not a Business Day, the Preferred Shareholder(s) will be entitled to payment on the next following Business Day in the same manner together with interest accrued in respect of any such delay.
(c) The Company shall be entitled to withhold from all payments of principal by the Company any amounts required to be withheld under the applicable law, rule and regulations for or on account of any present or future taxes, duties, assessments or governmental charges of whatever nature (including without limitation, deduction or withholding on account of taxation on the overall turnover, income, taxation income or capital gain of the Preferred Shareholders) imposed or levied by or on behalf of Hong Kong or other jurisdiction or any authority thereof or therein having the power to tax. If the Company is so required to make such withholdings or deductions, payment of the net amount after such deduction or withholdings to the Preferred Shareholder(s) will constitute full discharge of the Company’s obligations to make such payments.
(11) Transferability
(a) The Preferred Shares are freely transferable in integral multiples of 10,000,000 Preferred Shares, unless the aggregate outstanding balance of the number of the Preferred Shares, at any time, is less than 10,000,000 Preferred Shares, in which case the holder(s) of the Preferred Shares shall have the right to transfer the whole (but not any part) of the outstanding balance of the Preferred Shares, by instrument of transfer in any usual or common form or in any other form which may be approved by the directors of the Company.
(b) The Company shall maintain a register accordingly which shall contain details of conversion and/or cancellation and of sufficient identification details of all Preferred Shareholders. Instrument of transfer of Preferred Shares must be executed by both the transferor and the transferee and shall be delivered together with the certificate(s) evidencing the Preferred Shares to be transfer and such other documents as the Company may reasonably require if the instrument of transfer is executed by some other person on behalf of the transferee to the Company. The Company shall forthwith cancel the certificate(s) evidencing the Preferred Shares transferred and within 10 Business Days of receipt of such documents issue to the transferee a new certificate(s) evidenceing the Preferred Shares transferred and if applicable, issue a new certificate(s) evidencing the balance of the Preferred Shares not transferred to the transferor.
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(c) The provisions of the Company’s articles of association from time to time in force relating to the registration, transfer and transmission of Ordinary Shares and the register of members shall, mutatis mutandis, apply to the registration, transfer and transmission of the Preferred Shares and the register of Preferred Shareholders, save that the Company shall not be obliged (but may if the directors of the Company so resolve) to maintain any register of Preferred Shareholders at any place outside Hong Kong. The directors of the Company may at any time resolve to cancel any overseas branch register of Preferred Shareholders resolved to be established by them so long as a register of Preferred Shareholders is maintained in Hong Kong.
(12) Preferred Shares Certificates
(a) On issue of the Preferred Shares, every Preferred Shareholder will be entitled to a definitive certificate in form as may be resolved by the directors of the Company.
(b) The definitive certificates of the Preferred Shares will be issued under the Common or Securities Seal of the Company or under a facsimile seal adopted for that purpose and signed by two directors or by a director and the secretary of the Company (such signatures need not be autographic but may be affixed by mechanical means or printed thereon).
(c) Issue and delivery of the Preferred Shares shall be completed on the issue and delivery of the certificate(s) of the Preferred Shares to the relevant Preferred Shareholder (or its representative) by, or by the order of, the Company and completion of the register of Preferred Shareholders by or on behalf of the Company. The Company will pay any stamp, issue, registration, documentary or other similar taxes and duties, including interest and penalties, payable in Hong Kong in respect of the creation and original issue of the Preferred Shares.
(d) If any certificate of Preferred Shares is mutilated, defaced, destroyed, stolen or lost, it may be replaced upon payment by the claimant of such costs as may be incurred in connection therewith and on such terms as to evidence and indemnity as the Company may reasonably require and on payment of such fee not exceeding HK$50 as the Company may determine. Mutilated or defaced certificates of Preferred Shares must be surrendered before replacements will be issued.”
By order of the Board China Primary Resources Holdings Limited Yu Hongzhi Chairman
Hong Kong, 5th September 2007 - 265 - NOTICE OF EGM
Registered office: Head office and principal place Cricket Square of business in Hong Kong: Hutchins Drive Suite 1415, Ocean Centre P.O. Box 2681 5 Canton Road Grand Cayman KY1-1111 Tsim Sha Tsui Cayman Islands Kowloon Hong Kong
Notes:
1. A member entitled to attend and vote at the EGM is entitled to appoint one or more proxy to attend and, subject to the provisions of the articles of association of the Company, to vote on his/her/its behalf. A proxy need not be a member of the Company but must be present in person at the EGM to represent the member. If more than one proxy is so appointed, the appointment shall specify the number and class of shares in respect of which each such proxy is so appointed.
2. A form of proxy for use at the EGM is enclosed with the circular of the Company dated 5th September 2007. Whether or not you intend to attend the EGM in person, you are encouraged to complete and return the enclosed form of proxy in accordance with the instructions printed thereon. Completion and return of a form of proxy will not preclude a member from attending in person and voting at the EGM or any adjournment thereof, should he/she/ it so wish.
3. In order to be valid, the form of proxy, together with a power of attorney or other authority, if any, under which it is signed, or a certified copy of such power or authority must be deposited at the Company’s Hong Kong branch share registrar, Tricor Tengis Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong, not less than 48 hours before the time appointed for holding the EGM or any adjournment thereof.
4. In the case of joint holders of shares, any one of such joint holders may vote at the EGM, either personally or by proxy, in respect of such share as if he/she/it was solely entitled thereto, but if more than one of such joint holders are present at the EGM personally or by proxy, that one of the said persons so present whose name stands first on the register of members of the Company in respect of such shares shall alone be entitled to vote in respect thereof.
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